[Opinion] Penalty Not Applicable When Multiple Views Exist

Kushal Soni – [2025] 179 taxmann.com 52 (Article)

1. Introduction

The scheme of penalty provisions under the Income-tax Act, 1961 (“the Act”) has always been a matter of extensive judicial interpretation. The most commonly invoked provisions—section 271(1)(c) (for assessment years prior to AY 2017-18) and section 270A (from AY 2017-18 onwards)—aim to curb practices of concealment of income, furnishing inaccurate particulars, under-reporting or mis-reporting of income.

However, it is a settled proposition of law that penalty is not automatic. The levy of penalty presupposes either concealment of income, furnishing of inaccurate particulars, or in the context of section 270A, an act of “misreporting of income.” Where an assessee has disclosed all primary facts and the addition arises purely on account of a difference of interpretation of law or where two views are possible, penalty is not warranted. Courts have repeatedly held that the element of mens rea—deliberate concealment or misrepresentation—is absent in such cases.

This article analyses judicial precedents on the issue, highlights the rationale adopted by the judiciary, and explains why penalty provisions must not be invoked in matters involving multiple views, debatable or arguable claims.

2. Statutory Framework

2.1 Section 271(1)(c) – Prior Regime

Under the erstwhile section 271(1)(c), penalty could be levied if the Assessing Officer (AO) was satisfied that an assessee had either:

1. Concealed the particulars of income; or
2. Furnished inaccurate particulars of income.

The words “concealment” and “inaccurate particulars” implied an element of wrongdoing. Courts consistently interpreted this provision to mean that a mere rejection of a claim did not, by itself, amount to concealment. Penalty 100% to 300% on the amount of tax sought to be evaded.

2.2 Section 270A – Present Regime

With effect from AY 2017-18, section 270A was introduced. The section distinguishes between:

• Under-reporting of income (penalty @ 50% of tax payable on under-reported income), and
• Misreporting of income (penalty @ 200% of tax payable on mis-reported income).

Misreporting attracts on:

(a) misrepresentation or suppression of facts;
(b) failure to record investments in the books of account;
(c) claim of expenditure not substantiated by any evidence;
(d) recording of any false entry in the books of account;
(e) failure to record any receipt in books of account having a bearing on total income; and
(f) failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply.

3. Judicial Precedents

3.1 CIT v. Reliance Petroproducts Pvt. Ltd. [2010] 189 Taxmann 322/322 ITR 158 (SC)

The Hon’ble Supreme Court delivered a landmark ruling that still guides the application of penalty provisions. The assessee had claimed deduction of interest expenditure, which was disallowed by the AO. The Revenue imposed penalty on the ground of “furnishing inaccurate particulars.”

The Hon’ble Supreme Court, however, categorically held that:

“Merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the Revenue, that by itself would not attract penalty. If we accept the contention of the Revenue, then in case of every return where the claim made is not accepted by the AO, the assessee will invite penalty under section 271(1)(c). That is clearly not the intendment of the legislature.”

This decision clearly draws a line between an unsustainable claim and a false claim, with only the latter attracting penalty.

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