(2010) 322 ITR 158 (SC)
Penalty for under-reporting and misreporting; penalty for concealment and other failures
No. A claim that is not sustainable in law does not amount to furnishing inaccurate particulars. Penalty requires the particulars supplied to be inaccurate — a wrong claim, fully disclosed, is not the same thing.
Does the disallowance of a claim, made openly in the return and supported by full disclosure, by itself attract penalty for furnishing inaccurate particulars of income?
The assessee had borrowed funds and used them to acquire shares in another company by way of investment. It claimed a deduction for the interest on that borrowing. All the relevant facts were set out in the return and the accompanying accounts, and nothing was concealed or misstated. The Assessing Officer disallowed the interest on the footing that the borrowing had been applied to acquire an investment yielding exempt dividend, and proceeded to levy penalty for furnishing inaccurate particulars of income.
The Commissioner (Appeals), the Tribunal and the High Court all deleted the penalty. The Revenue appealed to the Supreme Court, which affirmed and took the opportunity to state the principle generally.
For the assessee
Every particular furnished in the return was accurate. The dispute concerned the legal characterisation of the interest, on which the assessee took a view that the Assessing Officer did not accept. A difference of legal opinion, on facts fully disclosed, cannot amount to furnishing inaccurate particulars.
For the Revenue
The claim was not sustainable, and a return carrying an unsustainable claim contains particulars that are inaccurate. Otherwise a taxpayer could advance any claim without risk, leaving the Revenue to detect and disallow it with no consequence.
The Court approached the question through the language of the provision, which requires either concealment of particulars of income or the furnishing of inaccurate particulars of income. It held that 'inaccurate particulars' means details supplied in the return that are not accurate, not exact or correct, or that are erroneous or false. Where every detail is truthfully stated and the only issue is whether a claim founded on those details is sustainable in law, the particulars are not inaccurate. The Court held that merely because a claim is not accepted, or is not accepted in law, penalty does not follow — otherwise every disallowance would automatically attract a penalty, which is plainly not the scheme. It emphasised that a penalty provision must be construed strictly and cannot be extended by implication, and that the assessee must not be visited with a penalty merely for taking a legal position that fails. The Court did note that the position would differ if the claim rested on facts that were themselves false or concealed.
The penalty regime has been restructured — Section 439 of the IT Act 2025 deals with under-reporting and misreporting, with Section 440 covering concealment and other failures — and the new framework turns on defined categories rather than the older concealment language. The underlying principle, that a bona fide claim on disclosed facts is not penal, carries forward through the exclusions for bona fide explanations, and this remains the most cited authority against penalty founded on a mere disallowance.