Assessee Can’t Be Penalised U/s 271(1)(c) Of Income-tax Act For Merely Raising Plausible Claim: Bombay High Court

The Bombay High Court has held that the assessee cannot be penalised under section 271(1)(c) of the Income-tax Act for merely raising a plausible claim.

The bench of Chief Justice Alok Aradhe and Justice Sandeep V. Marne set aside a Rs. 12.82 lakh penalty imposed by the Income Tax Department, ruling that the footwear manufacturer’s claim for bonus deduction, though ultimately rejected, was made in good faith and did not amount to concealment or furnishing of inaccurate particulars.

The bench ruled that the penalty could not be justified in the absence of malafide intention or false statements by the company.

The court stated that “the claim raised by the Assessee for claiming deduction...was a plausible claim” and that mere disallowance of such a claim does not automatically attract penalty provisions under the law.

The case, dating back to the Assessment Year 1984–85, centered around a claim by Carona Ltd. for ₹22.21 lakh towards ad-hoc bonus expenses, which the company sought to deduct under the mercantile system of accounting. Although the bonus was negotiated and paid after the relevant financial year, Carona maintained that the liability had crystallized during the accounting year and was therefore deductible.

Initially, the Income Tax Officer disallowed the deduction and imposed a penalty under Section 271(1)(c) of the Income Tax Act, citing concealment of income. While the Commissioner of Income Tax (Appeals) had set aside the penalty in 1994, the Income Tax Appellate Tribunal reversed that decision in 2002, restoring the penalty. This prompted Carona to file an appeal in the High Court.

The court also relied on several Supreme Court precedents, including the landmark Reliance Petroproducts case, reinforcing the principle that incorrect claims do not automatically imply concealment unless there is clear evidence of deliberate misstatement.

The court criticized the ITAT for calling Carona's claim “baseless,” pointing out that the company had disclosed all relevant facts and merely interpreted tax provisions differently. “The Assessee cannot be penalized for having raised a plausible claim,” the court observed.

Case Details

Case Title: M/s. Carona Limited Versus Deputy Commissioner of Income Tax

Case No.: INCOME TAX APPEAL NO. 512 OF 2003

Date: 20 June 2025

Counsel For Petitioner: Aarti Sathe with Ms. Aasavari Kadam

Counsel For Respondent: Shilpa Goel