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A reputed firm of Chartered Accountants making a silly mistake need not be penalized for concealment holds SC!

Can a taxpayer be penalized for a bonafide or inadvertent error in declaring his income? Would it make any difference if such default was committed by a leading firm of Chartered Accountants?

Dealing with this interesting issue, the Supreme Court has, in its very recent pronouncement in the case of ‘Price Waterhouse Coopers vs. Commissioner of Income-tax (25 400)’ held that, “the caliber and expertise of the taxpayer has little or nothing to do with the inadvertent error. That the taxpayer should have been careful cannot be doubted, but the absence of due care, in a case such as the present, does not mean that the taxpayer is guilty of either furnishing inaccurate particulars or attempting to conceal its income.”

In this case, the taxpayer, a firm of Chartered Accountants had filed its return of income together with the tax audit report in which it was disclosed that an amount of Rs. 23 lakhs towards provision for gratuity was not allowable u/s 40A(7) of the Income-tax Act. However, in the computation of income, the said amount was not disallowed. The Assessing Officer (AO) also overlooked the item and omitted to make the disallowance. Subsequently, he reopened the assessment u/s 147, disallowed the expenditure and levied penalty u/s 271(1)(c). The taxpayer explained that the omission to make the disallowance had occurred because it had a separate accounts department and there was some confusion and that the return was prepared by a non-CA and was signed a director who proceeded on the basis that the return was correctly drawn up. However, the AO levied a penalty of Rs. 27,37,689 at 300% of the tax sought to be evaded by the taxpayer for furnishing of inaccurate particulars in its return of income.

Aggrieved by the order of the AO, the taxpayer preferred an appeal, but the Commissioner of Income-tax (Appeals) upheld the penalty imposed. On further appeal to the Income Tax Appellate Tribunal, it also confirmed the imposition of the penalty, but reduced it to 100% as against the 300% levied by the AO. Significantly, the Tribunal observed that the taxpayer had made a mistake, which could be described as a silly mistake, but since the taxpayer was a high-caliber and competent organisation, it was not expected to make such a mistake.

On appeal to the High Court, it also affirmed the levy of penalty on the ground that since the taxpayer was a well known and reputed Chartered Accountant firm and a tax consultant, it was not expected to make such a mistake and that there had been a failure to discharge the strict liability to furnish true and correct particulars of income.

The taxpayer finally came in appeal to the Supreme Court, who, reversing the orders of all the lower authorities, held that, “the fact that the tax audit report was filed along with the return and that it unequivocally stated that the provision for payment was not allowable u/s 40A(7) indicates that the taxpayer made a computation error in its return of income.” The apex court also noted that apart from the taxpayer, even the AO who framed the original assessment order had made a mistake in overlooking the contents of the tax audit report. The contents of the tax audit report suggested that there was no question of the taxpayer concealing its income or furnishing any inaccurate particulars of income.

In a judgement that will come to be long remembered as a landmark in the realm of penalties, the Supreme Court, quashing down the penalty levied on the taxpayer, concluded with the remarks that, “notwithstanding the fact that the taxpayer is undoubtedly a reputed firm and has great expertise available with it, it is possible that even such a taxpayer could make a ‘silly mistake.’ All that happened in the present case is that through a bona fide and inadvertent error, the taxpayer had failed to add the provision for gratuity to its total income. This can only be described as a human error which we are all prone to make. Consequently, given the peculiar facts of this case, the imposition of penalty on the taxpayer is not justified.”


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