Taxpayer voluntarily clarifies discrepancy in Lease Equalization Disallowance without Malicious Intent: ITAT deletes Penalty u/s 271(1)(c) of Income Tax Act [Read Order]

The Mumbai bench of the Income Tax Appellate Tribunal ( ITAT ) deleted the penalty under Section 271(1)(c) of the Income Tax Act, 1961 as the taxpayer voluntarily clarified the discrepancy in lease equalization disallowance without any malicious intent.

An assessment was conducted on a company operating in the call center industry, which had reported a total loss of Rs. 21, 07,072/- in its income tax return filed on 29.09.2015. The scrutiny, initiated under the Computer Assisted Scrutiny Selection ( CASS ), aimed to investigate various discrepancies including high refund-to-TDS ratio, certificates under section 197 indicating ‘nil’ or lower TDS deductions, claims of depreciation at inflated rates, low income reported by significant contractors, inconsistencies in sales turnover between audit reports and income tax returns, and discrepancies in payments to related parties under Section 40A(2)(b) of the Income Tax Act.

The assessing officer ( AO ) determined the total loss to be Rs. (-)10,07,990/- in an order dated 06.12.2017, after disallowing an amount for lease equalization due to the assessee’s accounting error in rent calculation. The A.O. noted that the assessee incorrectly applied the straight-line method for rent accounting, instead of adjusting for yearly rent increases as specified in the rent agreements.

Consequently, a disallowance of Rs. 2,97,436/- was made by the assessee, contrary to the correct amount of Rs. 13,96,517/-. Additionally, the A.O. initiated penalty proceedings against the company for providing inaccurate income particulars. Hence penalty was imposed under Section 271(1)(c) of the Income Tax Act.

The counsel for the assessee Mr. Vijaykumar S. Biyani argued that the discrepancy in rent accounting arose inadvertently due to the method used by the assessee for premises leased long-term, which included a clause for periodic rent increases. The rent was accounted for using the straight-line method, whereas the rent agreements stipulated yearly increments. He asserted that the difference in lease equalization, amounting to Rs.2,97,436/- instead of Rs.13,96,517/-, was not a deliberate act but an oversight.

Mr. P. D. Choughule representing the revenue presented a contrasting view, disputing the facts put forward. In addition argued that the assessee deliberately concealed the actual disallowance and only disclosed the discrepancy during the assessment proceedings. Referring to legal precedent, the counsel cited the decision of the Kerala High Court in CIT vs. Sreenivasa Pai, which held that any amount added or disallowed in computing total income is considered income and could constitute concealment.

The bench noted that the assessee inadvertently disallowed a lesser amount of Rs.2,97,436/- instead of Rs.13,96,517/-, representing the difference in lease equalization. The assessee maintains that this discrepancy arose due to mistakenly accounting for rent using the straight-line method, whereas the rent agreements stipulated yearly rent increases. The assessee asserts that this was an inadvertent and bona fide error, with no intention to conceal

The two member bench of the tribunal comprising S.Rifafur Rahman (Accountant member) and Kavitha Rajagopal (Judicial member) observed that taxpayer voluntarily clarified discrepancy in lease equalization disallowance without malicious intent. Therefore, the bench further deemed it fit to direct the AO to delete the impugned penalty levied. Hence, the grounds raised by the assessee are allowed.

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