No penalty under Section 271(1)(c) for bonafide claims or deleted additions.

By | September 25, 2026
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No penalty under Section 271(1)(c) for bonafide claims or deleted additions.

Issue

  1. Whether penalty under Section 271(1)(c) can be levied when disallowances (such as for ERS provisions, cash discount reserves, or bonus payments) were based on full disclosures made under a bonafide belief, or when quantum additions were deleted on merits/arithmetical grounds, or involved debatable DTAA taxability issues.

Facts

  • Assessment Years: AY 2004-05 and AY 2005-06.
  • Provision for ERS: The assessee claimed a deduction for Executive Retirement Scheme (ERS) provisions on a bonafide belief with defined methodology. The Assessing Officer (AO) disallowed it as an contingent liability and levied penalty under Section 271(1)(c) without recording a specific charge (concealment vs. inaccurate particulars).
  • Cash Discount Reserve: The assessee consistently made provisions for cash discounts for March sales. The AO disallowed it as an contingent liability and levied penalty, even though the CIT(A) directed deduction on actual payment basis.
  • Bonus Claims: Bonus was provided and claimed as salary under employment agreements. Unpaid bonus was disallowed under Section 43B and penalised by the AO despite full disclosure and bonafide contractual claim.
  • Overseas Branch Profits: Profits of Sri Lanka and Bangladesh branches were disclosed in financials but excluded from Indian taxable income, claiming treaty protection in source countries. The AO levied penalty on addition of these profits.
  • Transfer Pricing Adjustment: The CIT(A) deleted the Transfer Pricing (TP) addition on merits, but arithmetical errors during appeal effect led the AO to levy penalty.
  • MODVAT Excise Duty (Section 145A): Addition of MODVAT credit to closing stock was made, creating a timing difference which was revenue-neutral.

Decision

  • ERS Provision Penalty Set Aside: Merely relying on quantum addition without recording a specific charge under Section 271(1)(c) does not justify penalty, especially when full facts were disclosed under a bonafide belief. [Paras 12 and 13] [In favour of assessee]
  • Cash Discount Penalty Set Aside: Mere rejection of a claim in quantum proceedings is not a valid ground for levying penalty when the claim had a reasonable basis and nexus to sales. [Para 22] [In favour of assessee]
  • Bonus Claim Penalty Set Aside: Rejection of a bonafide claim made under contractual employment terms does not automatically trigger Section 271(1)(c) penalty. [Paras 29 and 30] [In favour of assessee]
  • Foreign Branch Profits Penalty Set Aside: Issues involving debatable interpretation of DTAA provisions where income was offered to tax overseas do not warrant penalty. [Paras 41 and 42] [In favour of assessee]
  • TP Adjustment Penalty Deleted: When the primary quantum addition is deleted on merits, consequential penalty cannot survive. [Para 49] [In favour of assessee]
  • MODVAT Adjustment Penalty Deleted: Revenue-neutral adjustments creating only timing differences do not establish concealment or furnishing of inaccurate particulars. [Paras 59 and 60] [In favour of assessee]

Key Takeaways

  1. Specific Charge Requirement: Assessing Officers must explicitly record whether the penalty is for “concealment of income” or “furnishing inaccurate particulars”; failure to specify invalidates Section 271(1)(c) orders.
  2. Disallowance vs. Concealment: Merely because a legal or deduction claim is disallowed or rejected by the Revenue in quantum proceedings does not automatically lead to a penalty if the claim was bonafide and fully disclosed.
  3. Consequential Nature of Penalty: Once the underlying quantum addition is deleted on merits, the corresponding penalty under Section 271(1)(c) loses its legs and must be set aside.
  4. Debatable Issues & Timing Differences: Neither genuine legal debates (e.g., DTAA interpretations) nor revenue-neutral timing adjustments (e.g., Section 145A MODVAT adjustments) constitute tax evasion or concealment.
IN THE ITAT MUMBAI BENCH ‘F’
Deputy Commissioner of Income-tax
v.
Johnson & Johnson (P.) Ltd
Pawan Singh, Judicial Member
and Vikram Singh Yadav, Accountant Member
IT Appeal Nos. 2443 and 2489 (Mum) of 2026
C. O. Nos. 174 and 178 (Mum) of 2026
[Assessment years 2004-05 and 2005-06]
AUGUST  31, 2026
Nishant Somaiya, (CIT DR) for the Appellant. Pranay Gandhi and Nikhil Tiwari, CAs for the Respondent.
ORDER
Vikram Singh Yadav, Accountant Member.- These are appeals filed by the Revenue and the cross-objections filed by the assessee against the respective orders of Learned Commissioner of Income Tax (Appeals)-National Faceless Appeal Centre (NFAC), Delhi [‘Ld.CIT(A)’], both dated 30.12.2025, pertaining to Assessment Year (AY) 2004-05 and 2005-06. Since common issues are involved, all these matters were heard together and are being disposed off by way of this consolidated order.
2. With the consent of both the parties, appeal of the Revenue in ITA No. 2443 for A.Y. 2004-05 is taken up as the lead case, where the grounds of appeal read as under:
“1. “Whether on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) erred in deleting the penalty levied by AO under section 271(1)(c) of the Act on account of disallowance of provision for Executive Retirement Scheme amounting to Rs. 1,69,36,243/-“.
2. “Whether on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) erred in deleting the penalty levied by AO under section 271(1)(c) of the Act on account of disallowance of Reserve for Cash Discount amounting to Rs. 31,88,141/-“.
3. “Whether on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) erred in deleting the penalty levied by AO under section 271(1)(c) of the Act on account of disallowance of provision for bonus amounting to Rs.23,54,373/
4. “Whether on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) erred in deleting the penalty levied by AO under section 271(1)(c) of the Act on account of addition of profits attributable to Sri-Lanka branch of the Appellant amounting to Rs. 6,73,60,613/-“.
3. Briefly, the facts of the case are that the assessment proceedings were completed u/s. 143(3) of the Act, vide order dated 28.11.2006 and penalty proceedings u/s 271(1)(C) were separately initiated. Thereafter, the assessee carried the matter in appeal before the ld. CIT(A) who vide his order dated 29.11.2016 allowed partial relief to the assessee and thereafter, a fresh show cause u/s. 274 r.w.s. 271 of the Act dated 08.03.2018 was issued as to why the penalty should not be levied u/s. 271(1)(c) of the Act in respect of addition/disallowances sustained by the ld. CIT(A) and thereafter, considering the submissions filed by the assessee but not finding the same acceptable, the Assessing Officer levied penalty amounting to Rs. 3,23,00,000/- u/s. 271(1)(c) of the Act. The assessee thereafter carried the matter in appeal before the ld. CIT(A), who has since deleted the levy of penalty and against the said order, the Revenue is in appeal before us and the assessee in its cross objection has supported the order and the findings of the ld. CIT(A).
4. In ground no. 1, the Revenue has challenged the action of the ld. CIT(A) in deleting the levy of penalty u/s. 271(1)(c) on account of disallowance of provision for Executive Retirement Scheme (ERS) amounting to Rs. 1,69,36,243/-.
5. In this regard, the facts of the case are that during the course of assessment proceedings, the Assessing Officer observed that the assessee has debited a sum of Rs. 1,69,36,243/- as provision to the Profit & Loss Account for Executive Retirement Scheme and the assessee was asked to explain as to why the said amount should not be brought to tax, being a contingent liability. In response, the assessee submitted that the ERS applicable to key employees of the company is aimed at rewarding them for their loyal and faithful service and also to encourage them to continue serving the company faithfully in future too. During a particular previous year, where the company is satisfied with the performance of the employee, it will grant units to the employee maturing over a number of years and the company immediately enters into a legally enforceable agreement with the employee for the same. It was further submitted that the value of the units are determined every year based on a combination of Asset Value Method and Earning Power Method and the company provides for liability in respect of matured portion of the units in the accounts for the respective years based on present value method and accordingly, a provision of Rs. 1,69,36,234/- has been made for the impugned assessment year. Without prejudice, it was submitted that the payment made under such disallowance/provision may be allowed on the basis of payments actually being made during the previous year, amounting to Rs. 32,32,765/-. The submissions so filed by the assessee were not found acceptable to the Assessing Officer. As per the Assessing Officer, the assessee has failed to substantiate its claim, and a similar claim made in the earlier assessment year was offered by the assessee itself for taxation or was disallowed and confirmed by the ld. CIT(A). It was held that the provision for Executive Retirement Scheme is an unascertained contingent liability, which is dependent upon the happening of a certain contingency in future, and therefore, the same cannot be allowed as a deduction from the profits of the year and therefore, the amount of Rs. 1,69,36,234/- was brought to tax and added to the assessee’s total income. The assessee, thereafter, carried the matter in appeal before the ld. CIT(A), who has allowed the deduction of ERS on actual payment basis.
6. During the course of penalty proceedings, the Assessing Officer referred to the findings in the quantum proceedings and the findings of the ld. CIT(A), wherein he has directed the AO to allow deduction of ERS on actual payment basis as against provision claimed by the assessee, and accordingly held that the ld. CIT(A) has upheld the disallowance of provision made by the AO and in view of the same, the amount of Rs. 1,69,36,234/- is evaded by the assessee, and penalty under Section 271(1)(c) is attracted.
7. Aggrieved with action of AO in levying penalty, the assessee carried the matter in appeal before the ld. CIT(A). Taking into consideration the findings of the AO and the submissions of the assessee, the ld. CIT(A) has returned a finding stating that all material facts were disclosed by the assessee, and there was no intention to conceal any particulars. It was held that the claim of deduction was merely a matter of opinion, and on this ground itself, no penalty is levied. Secondly, the ld. CIT(A) held that nowhere in the assessment order, he find any satisfaction recorded by the Assessing Officer as to concealment by the assessee. Further, he held that it is an established principle that penalty under Section 271(1)(c) cannot be levied on a debatable issue and reliance was placed on the Hon’ble Supreme Court decision in the case of CIT v. Reliance Petroproducts (P.) Ltd.  322 ITR 158 (SC), wherein it was held that merely on the ground that the claim of the assessee was not accepted, cannot tantamount to furnishing of inaccurate particulars of income and considering the same, the penalty was held not sustainable, and the same was deleted. Against the said findings, the Revenue is in appeal before us.
8. During the course of hearing, the ld. DR submitted that the Assessing Officer, after examining the claim during assessment proceedings, recorded a categorical finding that the provision represented an unascertained liability and was not allowable under the provisions of the Act. The ld. DR submitted that the assessee failed to substantiate the admissibility of the claim and accordingly, penalty proceedings were initiated and concluded after considering the assessee’s explanation. The ld. CIT(A), while deciding the appeal, deleted the penalty primarily on the ground that all facts had been disclosed, the issue was debatable and reliance could be placed upon judicial precedents including the decision in Reliance Petroproducts (P.) Ltd. (supra). The ld. DR further submitted that the ld. CIT(A) failed to appreciate that mere disclosure of a claim does not automatically immunize an assessee from penalty where the claim itself is found to be legally unsustainable and the Assessing Officer has recorded proper satisfaction regarding furnishing of inaccurate particulars. The ld. DR submitted that the Assessing Officer examined the explanation in detail and recorded reasons for rejecting the same before levying penalty. The ld. DR further submitted that the deletion of penalty merely by treating the issue as debatable is therefore not justified. Accordingly, the findings of the ld. CIT(A) deserve to be reversed and the penalty as levied by the Assessing Officer be restored.
9. In his submissions, the ld. AR supported the order and the findings of the ld. CIT(A), and it was submitted that during the course of assessment proceedings, the assessee has explained the basis of arriving at the provision figure and has also submitted a sample copy of the agreement entered into with the employees and it was accordingly submitted that it was a case of an ascertained liability and even though the ld. CIT(A) has held that the same be allowed on payment basis, the same cannot be the basis for levy of penalty. It was submitted that merely denial of claim cannot tantamount to furnishing of inaccurate particulars of income and reliance was placed on the decision of the Hon’ble Supreme Court in the case of Reliance Petroproducts (P.) Ltd. (supra) and the decision of the Coordinate Bench in assessee’s own case for AY 2001-02 ACIT v. Johnson & Johnson Ltd. [IT Appeal Nos. 3454 & 3521/Mum/2008, dated 28-06-2013]. It was submitted that, in any case, no satisfaction has been recorded for initiation of penalty on this addition in the assessment order, and therefore, in the absence of recording requisite satisfaction for initiation of penalty, the penalty cannot be upheld. It was further submitted even while passing the penalty order, no specific finding has been recorded in terms of whether the penalty is levied for concealment of particulars of income or furnishing in accurate particulars of income.
10. We have heard the rival contentions and perused the material available on record. The issue under consideration relates to levy of penalty under section 271(1)(c) in respect of disallowance of provision for executive retirement scheme provided by the assessee in its books of accounts and claimed for tax purposes. At the outset, from the perusal of the penalty order, we find that the Assessing Officer has referred to the findings of the ld. CIT(A) in the quantum proceedings and has held that since the ld. CIT(A) has upheld the disallowance, in view of the same, the amount of Rs. 1,69,36,234/- is evaded by the assessee and penalty under section 271(1)(c) is attracted.
11. It is a settled legal proposition that the penalty provisions have to be strictly construed and unless the case of the assessee strictly falls within the meaning of either concealment of particulars of income or furnishing of inaccurate particulars of income, no penalty can be levied on the assessee, and each of these two charges carry their respective significance and have to be understood in the context of the specific facts of each case. Further, it is also a settled legal proposition that merely the fact that the additions have been confirmed in the quantum proceedings cannot be a basis for levy of penalty under section 271(1)(c) in absence of satisfaction of the requisite conditions so laid down which needs to be strictly construed.
12. In the instant case, we find that there is no specific finding recorded by the Assessing Officer in terms of specific charge against the assessee as to whether it is a case of concealment of particulars of income or furnishing of inaccurate particulars of income, and going merely by the fact that in the quantum proceedings, the additions have been upheld by the ld. CIT(A), he has gone ahead and levied the penalty. On this ground itself, the penalty so levied deserves to be set aside.
13. Further, we find that the ld. CIT(A) has recorded a finding that all material facts were disclosed by the assessee and the claim was made by the assessee on a bonafide belief that it has incurred a legally enforceable liability towards its employees and the quantification thereof has been done based on defined methodology. During the course of hearing, the ld AR again reiterated that where the company is satisfied with the performance of its employees, it grant units to the employee maturing over a number of years and the company immediately enters into a legally enforceable agreement with its employees and the value of the units are determined based on a combination of Asset Value Method and Earning Power Method and the company provides for liability in respect of matured portion of the units in the accounts for the respective years based on present value method and accordingly, a provision of Rs. 1,69,36,234/- has been made for the impugned assessment year. We therefore find that the assessee has a reasonable basis for claiming the said provision as an ascertainable liability for executive retirement scheme. The fact that the said claim has not been accepted by the Assessing Officer holding the same as contingent liability and thereafter upheld by the ld. CIT(A), the same cannot be a basis for levy of penalty under section 271(1)(c) of the Act as it is a matter of appreciation of facts already on record merely from a different perspective and in the process, not appreciating the perspective held by the assessee. In this regard, one can draw support from the decision of the Hon’ble Supreme Court in case of Reliance Petroproducts (P.) Ltd. (supra) wherein it was clearly held that merely because the assessee has claimed the expenditure, which claim was not accepted or was not found acceptable to the Revenue, that by itself would not attract the penalty under section 271(1)(c) of the Act, and merely making of a claim which is not sustainable in law by itself will not amount to furnishing inaccurate particulars of income. In light of the same, we do not find any infirmity in the order of the ld. CIT(A) and the same is hereby confirmed, and the ground of appeal so taken by the Revenue is dismissed.
14. In ground no. 2, the Revenue has challenged the action of the ld. CIT(A) in deleting the penalty on account of disallowance of Reserve for cash discount amounting to Rs. 31,88,145/-.
15. In this regard, the relevant facts of the case are that during the course of assessment proceedings, the Assessing Officer observed that the assessee company has made a provision for cash discount amounting to Rs. 31,88,141/- and a show cause was issued to the assessee as to why the same should not be disallowed, being provision for contingent liability. In response, the assessee company submitted that it offers discount to its customers as an incentive if they pay earlier than the due date of payment and the same is a normal business practice followed by the company and the provision made in the accounts is towards the sales made in the month of March, 2004, whose payments are due after 31.03.2004, and the same is a pure business expenditure, as giving cash discount is common business practice, hence the provision should be allowed. The submissions so filed by the assessee were considered, but not found acceptable to the Assessing Officer. As per the Assessing Officer, the reserve for cash discount is an unascertained contingent liability, which is dependent upon the happening of a certain contingency in future, and the same cannot be allowed as a deduction from the business income of the current year and hence, the same was disallowed. The assessee carried the matter in appeal before the ld. CIT(A). The ld. CIT(A), following the decision of the Tribunal, directed the AO to allow deduction of cash discount on actual payment basis.
16. Thereafter, during the course of penalty proceedings, the Assessing Officer referred to the findings in the quantum proceedings as well as the findings of the ld. CIT(A) and stated that since the ld. CIT(A) has upheld the disallowance of provision of cash discount, and in view of the same, the amount of Rs. 31,88,141/- is evaded by the assessee, and thus, penalty under Section 271(1)(c) is attracted.
17. Aggrieved with action of AO in levying penalty, the assessee carried the matter in appeal before the ld. CIT(A). Taking into consideration the findings of the AO and the submissions of the assessee, the ld. CIT(A) has recorded his findings and held that the AO levied penalty under Section 271(1)(c) in respect of provision for cash discount, and the said provision has been made in normal course of business, consistently following the practice of offering earlier payment discount to its customers. It was held that the provision related to sales made in March 2004, the payment for which were due after the year-end, full disclosure was made in the books of accounts, and detailed explanation was furnished during assessment proceedings. It was accordingly held that from the facts on record, it is evident that the disallowance arose due to difference of opinion regarding the timing of allowability of expenditure, and not on account of any concealment of income or furnishing of inaccurate particulars by the assessee. All material facts were fully and truly disclosed, and the claim was made bonafide based on past experience and accepted business practice and the issue stands covered by the decision of the Coordinate Bench in assessee’s own case for A.Y. 2001-02, vide order dated 12.06.2013 and following the same, the penalty so levied by the Assessing Officer was deleted. Against the said findings, the Revenue is in appeal before us.
18. During the course of hearing, the ld. DR submitted that the Assessing Officer held that the assessee had furnished inaccurate particulars in relation to the said claim and accordingly levied penalty. However, the ld. CIT(A), while deciding the appeal, deleted the penalty by observing that the issue involved merely a difference of opinion regarding the timing of allowability of expenditure and by relying upon earlier orders passed in the assessee’s own case. The ld. DR submitted that the ld. CIT(A) has overlooked the specific findings recorded by the Assessing Officer regarding the inadmissibility of the claim. The issue cannot automatically be regarded as outside the scope of section 271(1)(c) merely because the assessee relies upon a particular accounting practice or an earlier decision. The ld. DR further submitted that once the claim has been found to be inadmissible after due examination and the assessee failed to justify the same, the ingredients for levy of penalty stood satisfied. The ld. DR submitted that the order of the ld. CIT(A), therefore, deserves to be set aside.
19. In his submissions, the ld. AR relied on the findings of the ld. CIT(A). It was submitted even while passing the penalty order, no specific finding has been recorded in terms of whether the penalty is levied for concealment of particulars of income or furnishing in accurate particulars of income. Further, our reference was made to the findings of the Coordinate Bench in the assessee’s own case for A.Y. 2001-02, wherein the Coordinate Bench has deleted the levy of penalty on account of disallowance for cash discount. It was submitted that the matter is squarely covered by the decision of the Coordinate Bench in earlier year and the same has rightly been followed by the ld CIT(A) while deleting the penalty.
20. We have heard the rival contentions and perused the material available on record. The issue under consideration relates to levy of penalty under section 271(1)(c) in respect of disallowance of reserve for cash discount provided by the assessee in its books of accounts and claimed for tax purposes. At the outset, from the perusal of the penalty order, we find that the Assessing Officer has referred to the findings of the ld. CIT(A) in the quantum proceedings and has held that since the ld. CIT(A) has upheld the disallowance, the amount of Rs. 31,88,141/- is evaded by the assessee and penalty under section 271(1)(c) is attracted.
21. In this case as well, we find that there is no specific finding recorded by the Assessing Officer in terms of specific charge against the assessee as to whether it is a case of concealment of particulars of income or furnishing of inaccurate particulars of income, and going merely by the fact that in the quantum proceedings, the additions have been upheld by the ld. CIT(A), he has gone ahead and levied the penalty. On this ground itself following the settled legal proposition discussed earlier, the penalty so levied deserves to be set aside.
22. Further, we find that the ld. CIT(A) has recorded a finding that all material facts were disclosed by the assessee and the claim was made by the assessee on the bona fide belief that the provision relates to sales made in the month of March 2004, payment for which were due after the year end and full disclosure was made in the books of accounts, and the fact that the said provision has been made in normal course of business consistent with past experience and accepted business practice. We therefore find that the assessee has a reasonable basis for claiming the said provision as the necessary nexus with the sales effected during the month of march 2004 has been established. The fact that the said claim has not been accepted by the Assessing Officer and thereafter by the ld. CIT(A) in the quantum proceedings, the same cannot be a basis for levy of penalty under section 271(1)(c) of the Act and one can draw support from the decision of the Hon’ble Supreme Court in case of Reliance Petroproducts (P.) Ltd. (supra) wherein it was held that merely because the assessee has claimed the expenditure, which claim was not accepted or was not acceptable to the Revenue, that by itself would not attract the penalty under section 271(1)(c) of the Act, and merely making of a claim which is not sustainable in law by itself will not amount to furnishing inaccurate particulars of income. In light of the same, we do not find any infirmity in the order of the ld. CIT(A) and the same is hereby confirmed, and the ground of appeal so taken by the Revenue is dismissed.
23. In ground no. 3, the Revenue has challenged the action of the ld. CIT(A) in deleting the levy of penalty on account of disallowance of provision for bonus amounting to Rs. 23,54,373/-.
24. In this regard, the facts of the case are that during the course of assessment proceedings, basis disclosure in terms of the notes to the computation of income, the Assessing Officer issued a show cause as to why the provision for bonus should not be disallowed since the same was unpaid and not allowable as per the provisions of Section 43B of the Act. In response, the assessee company referred to the provisions of Section 43B and 36(1)(ii) of the Act and it was submitted that the bonus as envisaged by the aforesaid provision only relates to the bonus payable under the Payment of Bonus Act, 1965. However, the bonus provided by the company in books of accounts are not payable under the Payment of Bonus Act, 1965 but are payable as per the agreement of employment and hence, the payment is made in the form of salary as per the agreement and not bonus as per the Payment of Bonus Act, 1965. The submissions so filed were not found acceptable. As per the Assessing Officer, the bonus is specifically to be claimed on payment basis. However, the company intends to claim the unpaid bonus on the ground that it is not bonus but salary which is not correct and therefore, the unpaid bonus of Rs. 23,54,373/- was brought to tax in the hands of the assessee company. The assessee thereafter carried the matter in appeal before the ld. CIT(A), who has upheld the findings of the Assessing Officer.
25. Thereafter, during the course of penalty proceedings, the Assessing Officer referred to the findings in the quantum proceedings and the findings of the ld. CIT(A), wherein the assessee’s contention that Section 43B is not applicable to the payment of bonus not covered by the Payment of Bonus Act, 1965 is not acceptable as the same is not as per law and accordingly, since the ld. CIT(A) has upheld the decision of the Assessing Officer, the amount of Rs. 23,54,373/- is evaded and penalty u/s. 271(1)(c) is attracted.
26. Aggrieved with action of AO in levying penalty, the assessee carried the matter in appeal before the ld. CIT(A). Taking into consideration the findings of the AO and the submissions of the assessee, the ld. CIT(A) has returned a finding stating that the assessee provided for bonus of Rs. 78,45,113/- of which Rs. 54,90,740/- was paid before the return due date. It was held that claiming bonus as salary under employment agreements, the assessee deducted the unpaid balance of Rs. 23,54,373/- which the AO disallowed u/s. 43B. It was held by the ld. CIT(A) that as the claim of aforesaid expenses is discernible from the return of income, Profit & Loss Account, balance sheet, it does not amount to concealment of income or furnishing inaccurate particulars of income. Further, the issue stand covered by the decision of Coordinate Bench in assessee’s own case for A.Y. 2001-02 and 2008-09 wherein on identical facts, penalty was deleted. And following the same, the penalty so levied by the Assessing Officer was deleted. Against the said finding, the Revenue is in appeal before us.
27. During the course of hearing, the ld. DR submitted that the Assessing Officer examined the claim during assessment proceedings and found that the assessee had claimed deduction contrary to the statutory provisions governing allowability of such expenditure. The explanation furnished by the assessee was examined in detail but was not accepted and penalty proceedings were initiated accordingly. The ld. DR submitted that the ld. CIT(A), however, deleted the penalty by observing that the issue was debatable and by relying upon decisions rendered in the assessee’s own case for earlier assessment years. The ld. DR further submitted that the ld. CIT(A) failed to appreciate that the Assessing Officer had recorded proper satisfaction after considering the explanation furnished by the assessee. The deletion of penalty solely on the basis of earlier orders without independently appreciating the facts and findings recorded for the assessment year under consideration is unsustainable. The ld. DR submitted that the ld CIT(A)’s order deleting penalty therefore deserves to be reversed.
28. In his submissions, the ld. AR relied on the order and the findings of the ld CIT(A). It was submitted that while passing the penalty order, no specific finding has been recorded in terms of whether the penalty is levied for concealment of particulars of income or furnishing in accurate particulars of income. Further, reliance was placed on the decision of Coordinate Bench in assessee’s own case for A.Y. 2001-02 (supra) and 2008-09 (ITA No. 3781/Mum/2016 & 4253/Mum/2016 dated 20/12/2019) wherein, on similar facts, the department’s appeal was dismissed.
29. We have heard the rival contentions and perused the material available on record. The issue under consideration relates to levy of penalty under section 271(1)(c) in respect of disallowance of provision for bonus provided by the assessee in its books of accounts and claimed for tax purposes. At the outset, from the perusal of the penalty order, we find that the Assessing Officer has referred to the findings of the ld. CIT(A) in the quantum proceedings and has held that since the ld. CIT(A) has upheld the disallowance, in view of the same, the amount of Rs. 23,54,373/- is evaded by the assessee and penalty under section 271(1)(c) is attracted. In the instant case, we therefore find that there is no specific finding recorded by the Assessing Officer as to whether it is a case of concealment of particulars of income or furnishing of inaccurate particulars of income, and going merely by the fact that in the quantum proceedings, the additions have been upheld by the ld. CIT(A), he has gone ahead and levied the penalty. On this ground itself, following the legal proposition discussed earlier, the penalty so levied deserves to be set aside.
30. Further, we find that the ld. CIT(A) has recorded a finding that all material facts were disclosed by the assessee and the claim was made by the assessee on the bonafide belief that the payment of bonus was in the form of salary was as per the contractual arrangement with its employees and not strictly as per the Payment of Bonus Act, 1965 and therefore, not subject to disallowance u/s 43B of the Act. The fact that the said claim has not been accepted by the Assessing Officer and thereafter by the ld. CIT(A), the same cannot be a basis for levy of penalty under section 271(1)(c) of the Act and one can draw support from the decision of the Hon’ble Supreme Court in case of Reliance Petroproducts (P.) Ltd. (supra) wherein it was held that merely because the assessee has claimed the expenditure, which claim was not accepted or was not acceptable to the Revenue, that by itself would not attract the penalty under section 271(1)(c) of the Act, and merely making of a claim which is not sustainable in law by itself will not amount to furnishing inaccurate particulars of income and the decisions of the Coordinate Benches in assessee’s own case for A.Y 2001-02 and 2008-09 where the penalty on similar ground has been deleted. In light of the same, we do not find any infirmity in the order of the ld. CIT(A) and the same is hereby confirmed, and the ground appeal so taken by the Revenue is dismissed.
31. In ground no. 4, the Revenue has challenged the action of ld. CIT(A) in deleting the penalty on account of addition of profits attributable to Sri-Lanka branch of the assessee amounting to Rs. 6,73,60,613/-.
32. In this regard, the relevant facts of the case are that during the course of assessment proceedings, the Assessing Officer observed that in the computation of total income, the profits of Sri-Lanka branch has not been considered by the assessee company on the ground that income arising in Sri-Lanka is not taxable in India and reliance was placed on the Hon’ble Madras High Court decision in case of CIT v. Lakshmi Textile Exporters Ltd.  [2000] 245 ITR 521 (Madras), Hon’ble Karnataka High Court decision in case of CIT v. R.M. Muthaiah  202 ITR 508 (Karnataka) and Hon’ble Madras High Court in case of CIT v. Vr. S.R.M. Firm [1994] 208 ITR 400 (Madras). In this regard, a show cause was thereafter issued to the assessee. In response, the assessee referred to the aforesaid decisions and submitted that since the company has a permanent establishment in Sri-Lanka and the income arising from the business activity carried out in Sri-Lanka is taxable in Sri-Lanka. Further, it was submitted that the company has not claimed a deduction u/s. 80HHC on such business carried out in Sri-Lanka. The submissions so filed by the assessee were considered but not found acceptable. As per the Assessing Officer, the facts and circumstances of the cases relied upon by the assessee and the facts of the instant case are at variance. The subject matter of discussion was the income which was arising purely on account of either a facility created for providing certain services to the principal or it was because of exploitation of a landed property situated at Malaysia. So, the very genesis of this income was outside the territorial boundaries of India. Here, in the assessee case, the facts are entirely different. This is not the first time that the assessee company has exported goods to Sri-Lanka. In the previous year also, the goods manufactured by the assessee company had been exported to Sri-Lanka. In those years, maybe the assessee company was not having any branch in Sri-Lanka and in the year under consideration, the only difference is that the assessee company has created a branch in Sri Lanka. On that very basis, they are claiming that income is not taxable which cannot be accepted. As per the Assessing Officer, there is no denial of the fact that the goods have been manufactured in India as in the previous year, that the decision regarding export to Sri-Lanka and the consideration thereof has been taken in India and in the circumstances at the most, the assessee case can be categorized as transfer of goods to branch office and that the entire facility has been created with the help of funds employed by the assessee company alone. In these circumstances, the assessee claim was not allowed and the entire profit of Rs. 6,73,60,613/- was added to the total income. At the same time, deduction u/s. 80HHC was considered as per Rules. Further, in appeal before the ld CIT(A), though the assessee took a ground against the said findings of the AO, however, the assessee did not press this ground as the alternate claim for tax credit for taxes paid in Sri-Lanka was allowed by the ld. CIT(A).
33. Thereafter, during the penalty proceedings, the AO referred to the findings in the quantum proceedings and stated that since the ld. CIT(A) has upheld the decision of the AO, the amount of Rs. 6,73,60,613/-is sought to be evaded by the assessee and thus, penalty u/s. 271(1)(c) is attracted on this issue.
34. Aggrieved with action of AO in levying penalty, the assessee carried the matter in appeal before the ld. CIT(A). Taking into consideration the findings of the AO and the submissions of the assessee, the ld. CIT(A) has returned a finding that the AO levied penalty u/s. 271(1)(c) of the Act in respect of exclusion of profits amounting to Rs.6,73,60,613/- earned by the Sri-Lanka branch. It was noted by the ld CIT(A) that the assessee had disclosed the profits of the Sri-Lanka branch in its profit & loss account and thereafter excluded the same in the computation of income on the bonafide belief that such profits were taxable only in Sri-Lanka in terms of Articles 5 and 7 of the India – Sri Lanka Double Taxation Avoidance Agreement, the branch constituting a Permanent Establishment. The ld. CIT(A) held that the appellant had also offered the said income to tax in Sri-Lanka and during quantum proceedings, credit for taxes paid in Sri-Lanka was granted by the AO. The ld. CIT(A) further held that the addition made by the Assessing Officer, thus arose out of a difference of opinion on the interpretation and applicability of the tax treaty provisions. Merely because the assessee did not press the ground in quantum proceedings, after acceptance of the alternative plea of foreign tax credit, it cannot be inferred that the assessee had concealed income or furnished inaccurate particulars. Further, the ld. CIT(A) held that the issue is squarely covered by the decision of the Coordinate Bench in the assessee’s own case for A.Y 2008-09 vide order dated 20.12.2019 in ITA Nos.3781/Mum/2016 and 4253/Mum/2016, wherein on identical facts, the Coordinate Bench held that the issue of taxability of foreign branch profits is debatable and that no penalty u/s.271(1)(c) is leviable where the claim is made under a bonafide belief and all material facts are duly disclosed. The ld. CIT(A) following the same and in the absence of any distinguishing facts for the year under consideration, held that the levy of penalty u/s. 271(1)(c) in respect of profits of the Sri-Lanka branch amounting to Rs.6,73,60,613/- is not justified and deleted the penalty levied u/s.271(1)(c) of the Act. Against the said findings of the ld. CIT(A), the Revenue is in appeal before us.
35. During the course of hearing, the ld. DR submitted that the Assessing Officer recorded detailed findings during the penalty proceedings that the assessee had excluded such profits from taxable income and that the explanation furnished in support thereof was not acceptable. The ld. DR submitted that the Assessing Officer thereafter levied penalty after recording satisfaction that the assessee had furnished inaccurate particulars of income. The ld. DR further held that the ld. CIT(A), however, deleted the penalty by holding that the issue related to interpretation of the Double Taxation Avoidance Agreement was debatable and relied upon orders passed by the Tribunal in assessee’s own case. The ld. DR submitted that the ld. CIT(A) has failed to appreciate that the Assessing Officer had recorded detailed findings after examining the claim and the material available on record. Merely because the assessee raised an alternative interpretation of the treaty provisions cannot by itself justify deletion of penalty where the claim has been found to be unacceptable during assessment proceedings. The ld. DR accordingly submitted that the order of the ld. CIT(A) deserves to be reversed.
36. In his submissions, the ld. AR relied on the order and the findings of the ld. CIT(A). It was submitted that while passing the penalty order, no specific finding has been recorded in terms of whether the penalty is levied for concealment of particulars of income or furnishing in accurate particulars of income. Further, reliance was placed on the decision of the Coordinate Bench in assessee’s own case for A.Y. 2008-09, wherein, the penalty levied on account of non-offering of profits of Sri-Lanka branch was adjudicated by the Coordinate Bench and it was held that where claim made by the assessee under a bonafide belief is not accepted, the same cannot be basis for levy of penalty and reliance was again placed on the decision of the Hon’ble Supreme Court in case of Reliance Petroproducts Ltd. (supra). It was accordingly submitted that the matter is squarely covered by the decision of the Coordinate Bench in assessee’s own case and which has rightly been followed by the ld. CIT(A) while deleting the penalty.
37. We have heard the rival contentions and perused the material available on record. The issue under consideration relates to levy of penalty under section 271(1)(c) in respect of addition of profits attributable to Sri Lanka branch of the assessee. At the outset, from the perusal of the penalty order, we find that the Assessing Officer has referred to the findings of the ld. CIT(A) in the quantum proceedings and has held that since the ld. CIT(A) has upheld the disallowance, and in view of the same, the amount of Rs. 6,73,60,613/-is evaded by the assessee and penalty under section 271(1)(c) is attracted.
38. As we have noted earlier, it is a settled legal proposition that the penalty provisions have to be strictly construed and unless the case of the assessee strictly falls within the meaning of either concealment of particulars of income or furnishing of inaccurate particulars of income, no penalty can be levied on the assessee, and each of these two charges carry their respective significance and have to be understood in the context of the specific facts of each case. Further, it is also a settled legal proposition that merely the fact that the additions have been confirmed in the quantum proceedings cannot be a basis for levy of penalty under section 271(1)(c) in absence of satisfaction of the requisite condition so laid down which needs to be strictly construed.
39. In the instant case, we find that there is no specific finding recorded by the Assessing Officer as to whether it is a case of concealment of particulars of income or furnishing of inaccurate particulars of income, and going merely by the fact that in the quantum proceedings, the additions have been upheld by the ld. CIT(A), he has gone ahead and levied the penalty. On this ground itself, the penalty so levied deserves to be set aside.
40. Further, we refer to the order of the Coordinate Bench in assessee’s own case for A.Y. 2008-09 wherein the relevant findings read as under:
“12. We have heard the submissions made by rival sides and have perused the orders of authorities below. The only issue in appeal by the assessee is whether addition on account of profits of Sri Lanka branch is consequent to furnishing inaccurate particulars of income and hence, triggers penal provisions under section 271(1)(c) of the Act. A perusal of computation of income for the assessment year 2008-09 at page-1 of Paper Book reveal that the assessee has disclosed total profits before tax as per profits and loss accounts for the year ended 31/03/2008. This profit includes profit from Sri Lanka branch as well. Thereafter, the assessee has reduced the profits & losses of the overseas branch at Sri Lanka and Bangladesh, respectively. The contention of the assessee is that the assessee was under bona-fide belief that the profits of the overseas branches are taxable in the host country as the assessee is having permanent establishment in the said country. This belief of the assessee is further substantiated by the fact that the assessee has offered income from said overseas branch to tax in the host country. The DRP has given benefit of the tax credit to the assessee for the taxes paid overseas.
13. The second contention of the assessee is that the issue whether the profits of foreign branch are liable to be taxed in India, is debatable. We find that in the case of DCIT v. Essar Oil Ltd. (supra), the Tribunal has held that income from overseas branch is taxable in the country where branch is established. In the immediately succeeding assessment year, the Co-ordinate Bench of Tribunal in the case of very same assessee i.e. Essar Oil Ltd. v. Addl. CIT (supra) has held that the profits of overseas branch are taxable in India. These two divergent views by two different benches of the Tribunal has made the issue debatable. The matter has travelled to the Hon’ble Bombay High Court in Income Tax Appeal No.227 of 2014(supra). The Hon’ble Bombay High Court has admitted substantial question of law on the issue of place of taxability of profits earned by the overseas. It is a trait law that where the issue is debatable no penalty under section 271(1)(c) of the Act is leviable. We further observe that the assessee in computation of income has already disclosed profits of Sri Lanka branch though, the same were subsequently reduced from the total taxable income by the assessee. Merely for the reason that the claim made by the assessee under bona-fide belief is not accepted by the Department penalty under section 271(1)(c) of the Act cannot be levied. Our view is fortified by the decision rendered in the case of CIT v. Reliance Petroproducts Ltd. (supra).
14. Thus, for the reasons given above, we find merit in the contentions raised by assessee. In our considered view it is not a fit case for levy of penalty under section 271(1)(c) of the Act. Consequently, the penalty levied in respect of non-disclosure of profits of Sri Lanka branch is deleted and the appeal of the assessee is allowed.”
41. We therefore find that the issue as to whether income arising from overseas branch is taxable in India or in the country where the branch is established, the matter is currently pending adjudication before the Hon’ble Bombay High Court in case of Essar Oil Limited (supra) and following the same, the Coordinate Bench has held that since the issue is debatable, no penalty under section 271(1)(c) is leviable. The facts of the said case therefore squarely apply in the instant case.
42. Further, we find that from the computation of income and the disclosure made therein, the Assessing Officer had observed that the profits of Sri Lanka branch has not been offered by the assessee. We therefore find that all necessary disclosure has been made by the assessee and basis such disclosure only, the Assessing Officer has come to a conclusion that the profits so arising in relation to Sri Lanka branch are taxable in India and has allowed credit for taxes paid in Sri Lanka. However, the contention of the assessee that such profits were taxable only in Sri Lanka in terms of Article 5 and 7 of the India-Sri Lanka Double Taxation Avoidance Agreement has not been specifically dealt with by the Assessing Officer while negating the same, and the same has also been highlighted by the ld. CIT(A) holding that this shows a difference of opinion on the interpretation and applicability of the tax treaty provisions in terms of taxability and treaty relief and following the decision of Coordinate Bench in assessee’s own case for A.Y. 2008-09, the ld. CIT(A) has deleted the levy of penalty. In light of the same, we affirm the order and findings of the ld CIT(A) and the ground of appeal so taken by the Revenue is dismissed.
43. In its cross-objections No. 178/Mum/2026, except for ground no. 2, the assessee has basically supported the order and findings of the ld CIT(A) which we have already dealt with and upheld the findings of the ld CIT(A) and therefore doesn’t require any separate adjudication. Ground no. 2 challenging the validity of notice u/s 274 r/w 271 was not pressed during the course of hearing, hence, the same is dismissed as not pressed.
44. Now, coming to appeal in ITA No. 2489/Mum/2026 filed by the Revenue for A.Y. 2005-06, wherein the Revenue has taken the following grounds of appeal:
“1. Whether on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) erred in deleting the penalty levied by AO under section 271(1)(c) of the Act on account of transfer pricing adjustment amounting to Rs.1.29 crore.
2. “Whether on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) erred in deleting the penalty levied by AO under section 271(1)(c) of the Act on account of addition of Modvat Excise duty credit attributable to closing stock of raw material and packing material amounting to Rs.4,36,30,284/-.
3. Whether on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) erred in deleting the penalty levied by AO under section 271(1)(c) of the Act on account of disallowance of provision for Executive Retirement Scheme amounting to Rs.1,01,53,000.
4. Whether on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) erred in deleting the penalty levied by AO under section 271(1)(c) of the Act on account of disallowance of Reserve for Cash Discount amounting to Rs. 28,71,359/-.
5. Whether on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) erred in deleting the penalty levied by AO under section 271(1)(c) of ” the Act on account of disallowance of provision for bonus amounting to Rs.20,83,202/-.
6. Whether on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) erred in deleting the penalty levied by AO under section 271(1)(c) of the Act on account of addition of profits attributable to Sri-Lanka branch of the Appellant amounting to Rs.5,49,40,405/-.
7. Whether on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) erred in deleting the penalty levied by AO under section 271(1)(c) of the Act on account of addition of profits attributable to Bangladesh branch of the Appellant amounting to Rs.2,40,50,136/-.”
45. Firstly, as far as the grounds of appeal nos. 3, 4, 5, 6, and 7 are concerned, both the parties fairly submitted that the facts and circumstances of the case are identical as in ITA No. 2443/Mum/2026 for A.Y. 2004-05 except for the change in figures and the fact that besides, Sri Lanka Branch, there is another branch in Bangladesh in respect of which the penalty has been similarly levied and it was submitted that similar contentions as taken aforesaid be considered. Therefore, following our findings in ITA No. 2443/Mum/2026 for A.Y. 2004-05, we confirm the findings of the ld. CIT(A) and the grounds of appeal so taken by the Revenue are dismissed.
46. Now, coming to ground no. 1 of the Revenue’s appeal, wherein the Revenue has challenged the action of the ld. CIT(A) in deleting the penalty levied by the Assessing Officer in relation to transfer pricing adjustment of Rs. 1.29 crores.
47. In this regard, the ld. DR submitted that the ld. CIT(A) erred in deleting the penalty levied under section 271(1)(c) by holding that the transfer pricing adjustment did not survive on account of the subsequent appellate order. It was submitted that the Assessing Officer had independently examined the transfer pricing adjustment during the penalty proceedings and recorded a categorical finding that the assessee had furnished inaccurate particulars of income in relation to the international transactions. It was further submitted that after considering the assessee’s explanation, the Assessing Officer held that the explanation was not substantiated and that the adjustment made in the assessment proceedings warranted levy of penalty under section 271(1)(c). The penalty was thus levied after recording due satisfaction and after considering all relevant facts and submissions made by the assessee. The ld. CIT(A), while deleting the penalty, merely proceeded on the basis that the quantum addition did not ultimately survive in appellate proceedings, without independently examining the detailed findings recorded by the Assessing Officer in the penalty order. It was submitted that the ld. CIT(A) failed to appreciate that the Assessing Officer had passed a reasoned penalty order after evaluating the facts and the assessee’s explanation, and that the findings recorded therein have not been specifically rebutted. Accordingly, the order of the ld. CIT(A) deleting the penalty is unsustainable and deserves to be set aside.
48. Per contra, the ld. AR relied on the findings of the ld. CIT(A), wherein the ld. CIT(A) has stated that the original transfer pricing adjustment underwent multiple rectifications under Section 154 read with 92CA(5), finally resulting in an adjustment of Rs. 36.56 crore and the ld. CIT(A) thereafter granted relief to the assessee on the transfer pricing adjustment on merits, and the same stood affirmed by the Coordinate Bench vide order dated 26.12.2018 and the entire transfer pricing adjustment ceased to survive. It was further held by the ld. CIT(A) that the penalty has been levied only due to certain arithmetical and consequential errors committed by the Assessing Officer while giving effect to the ld. CIT(A) order, wherein the relief was incorrectly restricted to Rs. 33.98 crores instead of full adjustment. It was held by the ld. CIT(A) that the confirmed amount of Rs. 1.29 crore is therefore not based on any independent finding of concealment or furnishing of inaccurate particulars of income, but purely based on an inadvertent computational mistake. It was accordingly held that when the quantum addition itself has been deleted on merits and the same has attained finality, no penalty can survive. Penalty proceedings being consequential in nature cannot stand in the absence of a sustainable addition. Accordingly, the penalty so levied by the Assessing Officer on Rs. 1.29 crore was rightly deleted by the ld CIT(A). It was accordingly submitted that the ground of appeal so taken by the Revenue be dismissed, since the entire transfer pricing addition stood deleted by the ld. CIT(A), which has been affirmed by the Coordinate Bench.
49. We have heard the rival contentions and perused the material available on record. We find that in the quantum proceedings, necessary relief has been granted by the ld. CIT(A). However, while giving appeal effect to the order so passed by him, there are certain arithmetical mistakes/errors which have crept in, which has resulted in levy of penalty by the Assessing Officer. There is no independent finding recorded by the Assessing Officer as to how the case of the assessee falls under either concealment of income or furnishing of inaccurate particulars of income. Therefore, we do not see any infirmity in the order of ld. CIT(A) wherein, he has rightly held that where the quantum addition has been deleted on merits and the same has attained finality, no penalty can be survived being consequential in nature and which cannot stand in the absence of substantial addition in the hands of the assessee. In light of the same, the ground of appeal so taken by the Revenue is dismissed.
50. Now, coming to Ground no. 2 of the Revenue’s appeal, wherein the Revenue has challenged the action of the ld. CIT(A) in deleting the penalty levied by the AO on account of addition of MODVAT Excise duty credit attributable to closing stock of raw material and packing material amounting to Rs. 4.36 crore.
51. Briefly, the facts of the case are that during the course of assessment proceedings, the Assessing Officer observed that the assessee has not increased the valuation of closing stock by amount of MODVAT credit available at close of the accounting year relevant to impugned assessment year and the assessee was asked to explain as to why the same should not be added to the closing stock. In response, the assessee submitted that the valuation of closing stock adopted by the company is in accordance with the accounting standards as prescribed by the ICAI and the company is consistently being followed the same since the introduction of MODVAT credit available on purchase of material. It was further submitted that in view of the double entry system of accounting, the value of closing stock cannot be enhanced unilaterally without allowing a corresponding debit for the cost of purchases of raw materials. Therefore, where the value of closing stock is increased, then the cost of raw material debited should also be increased by the corresponding excise duty otherwise, one-sided increase in the value of closing stock on account of MODVAT credit will result in double taxation. It was further submitted that the closing balance as on 31.03.2005 in MODVAT credit account is only a sum of Rs. 1,82,85,823/- and where the MODVAT credit is added to the closing stock, the value of opening stock needs to be increased on a similar basis. The submissions so filed by the assessee were considered. The Assessing Officer referred to the assessment order passed for A.Y. 2001-02, wherein the MODVAT credit was added to the closing stock, and on appeal, the said addition was confirmed by the ld. CIT(A) holding that the statute has undergone a change with effect from 01.04.2000. Further, the Assessing Officer referred to the provisions of Section 145A, as per which the closing inventory shall be valued after adjusting the amount of any tax, duty, cess or fee, (by whatever name called), actually paid or incurred to bring the goods to the place of its location and condition as on the date of valuation. Accordingly, an amount of Rs. 5,79,32,818/- was added to the assessee’s income, representing the value of MODVAT credit available at the close of the accounting year.
52. The assessee thereafter carried the matter in appeal before the ld. CIT(A) and drawing reference to the provisions of Section 145A, the memorandum explaining the provisions of Section 145A, it was submitted that, from the perusal of the provisions of Section 145A of the Act and the object behind insertion of the section, the valuation of purchase, sale and inventory should be adjusted to include the amount of any tax, duty, cess or fee actually paid or incurred to bring the goods to the place of its location and condition as on the date of valuation. It was submitted that where taxes are added to the value of closing stock, then all components of the profit & loss account, i.e., opening stock, sales, purchases and the closing stock including excise duty, otherwise it would result in distorting the double entry system of accounting that is neither the inclusive method or the exclusive method. Further, drawing reference to the guidance note issued by the Institute of Chartered Accountants of India in the context of Section 145A, it was submitted that, as stated in paragraph 23.15 of the guidance note, there will be no impact of the adjustment on the profit & loss account of the assessee company. Further, referring to the method of accounting followed by the assessee, it was submitted that the assessee followed exclusive method of valuation of closing stock in accordance with the accounting standards and it was submitted that regardless of whether the inclusive or exclusive method of accounting is followed, it will not have any impact on the P&L account. Further, reliance was placed on the decision of Hon’ble Bombay High Court in case of , CIT v. Indo Nippon Chemical Co. Ltd.  245 ITR 384 (Bombay), wherein the Hon’ble Bombay High Court has discussed both inclusive and exclusive method of accounting, and held that no adjustment was required to be made even though exclusive method of accounting was followed, which was subsequently affirmed by the Hon’ble Supreme Court, as reported in CIT v. Indo Nippon Chemicals Co. Ltd. 261 ITR 275 (SC). It was accordingly submitted that the addition so made by the Assessing Officer be directed to be deleted. Further, without prejudice, it was submitted that in case taxes are to be added to the value of closing stock, the opening stock also would have to be grossed up with excise duty and in support, reliance was placed on the decision of Hon’ble Bombay High Court in case of CIT v. Mahalaxmi Glass Works (P.) Ltd. [2009] 318 ITR 116 (Bombay), wherein the Hon’ble High Court has held that while giving effect to the provisions of Section 145A, where there is a change in closing stock at the end of the year, there must necessarily be a corresponding adjustment in the opening stock of that year. Reliance was also placed on subsequent decision in case of CIT v. Kolsite Maschine Fabrik Limited. The submissions so filed by the assessee were considered by the ld CIT(A). The ld CIT(A) took note of the primary submissions of the assessee and decisions of the Hon’ble Bombay High Court in case of Indo-Nippon as affirmed by the Hon’ble Supreme Court and at the same time, accepted the alternative submissions of the assessee and allowed partial relief to the assessee amounting to Rs. 1,43,02,534/- in respect of MODVAT credit relating to opening stock, and upheld the addition made to the closing stock amounting to Rs. 4,36,30,284/-, following the decision of Hon’ble Bombay High Court in case of Mahalaxmi Glass Works Ltd. (supra). The Revenue thereafter carried the matter in appeal against the relief granted by the Ld CIT(A) which was dismissed by the Coordinate Bench and the findings of the ld CIT(A) were confirmed.
53. Thereafter, during the course of penalty proceedings, the AO referred to the findings in the quantum proceedings, and stated that since the ld. CIT(A) has allowed partial relief of Rs. 1,43,02,534/- and the fact that addition of Rs. 4,36,30,284/- is confirmed by the ld. CIT(A) and in view of the same, an amount of Rs. 1,29,00,000/- (wrongly stated instead of figure of Rs 4,36,30,284/-) is evaded by the assessee and thus penalty under section 271(1)(c) is attracted on this issue.
54. Aggrieved with the action of the AO in levying penalty, the assessee preferred an appeal before the ld. CIT(A). Taking into consideration the findings of the Assessing Officer and the submissions of the assessee, the ld. CIT(A) has deleted the penalty holding that the assessee has neither concealed particulars of income nor furnished inaccurate particulars of income and therefore, the penalty levied under section 271(1)(c) on account of MODVAT adjustment to closing stock was deleted. Against the said order and the findings of the ld. CIT(A), the Revenue is in appeal before us.
55. During the course of hearing, the ld. DR submitted that the ld. CIT(A) erred in deleting the penalty levied under section 271(1)(c) in respect of the MODVAT adjustment by treating the issue as revenue neutral and debatable. The Assessing Officer, after examining the method of accounting adopted by the assessee and the computation of taxable income, recorded a categorical finding that the assessee had made an incorrect claim while computing its total income, resulting in furnishing of inaccurate particulars of income. It was submitted that the Assessing Officer specifically held that the claim was not in accordance with the provisions of the Income-tax Act and, therefore, attracted penalty under section 271(1)(c). The Assessing Officer further recorded that the assessee’s explanation failed to satisfactorily justify the incorrect claim and, accordingly, levied penalty after recording due satisfaction. However, while deleting the penalty, the ld. CIT (A) merely treated the issue as revenue neutral and debatable without specifically rebutting the factual findings and reasoning recorded by the Assessing Officer. The impugned order does not adequately deal with the Assessing Officer’s findings or demonstrate how the conclusion regarding furnishing of inaccurate particulars was erroneous. Accordingly, the order of the ld. CIT(A) on this issue deserves to be set-aside.
56. Per contra, the ld. AR submitted that the assessee follows consistent method of accounting for opening stock, purchases and closing stock as exclusive of excise duty which has not been disputed by the Assessing officer and an adjustment has been done on account of MODAVT credit attributable to closing stock. It was submitted that the ld. CIT(A) granted partial relief to the assessee of Rs. 1.43 crore in respect of MODVAT credit relating to opening stock, and upheld the addition relating to the closing stock of Rs. 4.36 crore and reference was drawn to the written submissions filed before the ld CIT(A). It was submitted that the adjustment on account of MODVAT credit is essentially a timing difference, wherein adjustment to closing stock in year one would have a parallel adjustment in the opening stock in year two. It was submitted while passing the penalty order, no specific finding has been recorded by the AO in terms of whether the penalty is levied for concealment of particulars of income or furnishing in accurate particulars of income. It was further submitted that the ld. CIT(A) deleted the penalty on the ground that no penalty can be levied where addition is solely based on a decision of the Hon’ble High Court, where the issue involved is debatable, and where the addition merely results in a timing difference and our reference was drawn to the findings of the ld CIT(A). Further, reliance was placed on the Coordinate Mumbai Benches decision in the case of Steelfab Building Systems v. ACIT [IT Appeal No. 6509 (Mum.) of 2018, dated 4-3-2020], wherein it was held that no penalty is leviable where the addition doesn’t result in real income or tax evasion. It was submitted that even the auditors in the tax audit report have reported that there is no impact on profits before taxation on account of deviation from the method of accounting prescribed u/s 145A of the Act and thus, the assessee based on the auditor report has not done any specific adjustment while filing the return of income. It was further submitted that for A.Y 2004-05, wherein similar addition has been done by the AO, no penalty has been levied by the AO and on that account as well, the penalty so levied has rightly been deleted. It was accordingly submitted that the grounds so taken by the Revenue be dismissed as no penalty can be levied merely on the ground that the claim of the assessee is incorrect, as well as the fact that the addition does not result in real income or tax evasion by the assessee.
57. We have heard the rival contentions and perused the material available on record. The issue under consideration relates to levy of penalty under section 271(1)(c) in respect of addition on account of MODAVT credit attributable to closing stock. At the outset, from the perusal of the penalty order, we find that the Assessing Officer has referred to the findings of the ld. CIT(A) in the quantum proceedings and has held that since the ld. CIT(A) has upheld the disallowance, in view of the same, the amount of Rs. 1,29,00,000/- (wrongly stated by AO instead of figure of Rs 4,36,30,284/-) is evaded by the assessee and penalty under section 271(1)(c) is attracted.
58. As we have discussed earlier, it is a settled legal proposition that the penalty provisions have to be strictly construed and unless the case of the assessee strictly falls within the meaning of either concealment of particulars of income or furnishing of inaccurate particulars of income, no penalty can be levied on the assessee, and each of these two charges carry their respective significance and have to be understood in the context of the specific facts of each case. Further, it is also a settled legal proposition that merely the fact that the additions have been confirmed in the quantum proceedings cannot be a basis for levy of penalty under section 271(1)(c) in absence of satisfaction of the requisite conditions so laid down which needs to be strictly construed.
59. In the instant case, we find that there is no specific finding recorded by the Assessing Officer while levying the penalty in terms of specific charge against the assessee as to whether it is a case of concealment of particulars of income or furnishing of inaccurate particulars of income, and going merely by the fact that in the quantum proceedings, the additions have been upheld by the ld. CIT(A), he has gone ahead and levied the penalty. On this ground itself, the penalty so levied deserves to be set aside.
60. Further, we find that the ld. CIT(A) has recorded a finding that the assessee has consistently followed an exclusive method of accounting whereby opening stock, purchases and closing stock are valued exclusive of excise duty, while sales are recorded inclusive of excise duty. The adjustment made by the AO by adding MODVAT credit to the closing stock arises solely due to the application of Section 145A and does not stem from any concealment of income or furnishing of inaccurate particulars of income. It has been held that any increase in the value of closing stock in one year necessarily results in a corresponding increase in the opening stock of the subsequent year as evident from the quantum proceedings, wherein the CIT(A) granted relief in respect of MODVAT pertaining to opening stock, thereby acknowledging the revenue-neutral nature of the adjustment. It has been held that the issue involves interpretation of statutory provisions and valuation methodology, supported by consistent accounting practice and disclosures made by the Appellant and merely because a part of the addition was sustained on the basis of a jurisdictional High Court ruling, the same cannot automatically give rise to penalty proceedings and that too, resulting in timing differences. Further, we find that the assessee has a reasonable basis for not making any adjustment basis reliance on the tax audit report where the tax auditors have reported that there is no impact on profits before taxation on account of deviation from the method of accounting prescribed u/s 145A of the Act. We do not find any infirmity in the said findings of the ld CIT(A) and the same is hereby confirmed and the ground of appeal so taken by the Revenue is dismissed.
61. In its cross-objections No.174/Mum/2026, except for ground no. 2, the assessee has basically supported the order and findings of the ld CIT(A) which we have already dealt with and upheld the findings of the ld CIT(A) and therefore doesn’t require any separate adjudication. Ground no. 2 challenging the validity of notice u/s 274 r/w 271 was not pressed during the course of hearing, hence, the same is dismissed as not pressed.
62. In the result, the appeals filed by the Revenue are dismissed and the cross-objections filed by the assessee are partly allowed.