In a recent and noteworthy decision, the Income-Tax Appellate Tribunal (ITAT) Mumbai bench has delivered a ruling that provides significant relief to taxpayers. According to the ITAT, penalties for income concealment cannot be imposed if a taxpayer rectifies errors in a revised tax return. This judgment offers hope to many taxpayers who may unintentionally omit or misreport income, as the current penalty provisions are stringent and often lead to substantial financial consequences.
Case Background: The Incident
The ruling was issued in the case of R. Chatterji, a Singapore resident who was classified as a ‘resident and ordinarily resident’ of India during the financial year 2014-15. This classification required Chatterji to declare and pay tax on his global income, including foreign earnings, in India. Initially, Chatterji reported a total income of approximately ₹12 lakh, which included 50% of the rental income from a Singapore property that he co-owned with his wife. The Income Tax Department selected his return for scrutiny, leading to the uncovering of discrepancies.
Scrutiny and Rectifications: The Process
During scrutiny, the tax authorities discovered that Chatterji had mistakenly reported 100% of the rental income from the Singapore property in the previous financial year (2013-14). This error raised concerns about the reduced rental income in the current return and the omission of interest income. To resolve the issue and avoid further disputes, Chatterji submitted a revised return that included the omitted interest income and the additional rental income.
While the revised return was accepted for tax assessment, the tax authorities initiated penalty proceedings under section 271(1)(c) for allegedly furnishing inaccurate income details. As a result, Chatterji faced a penalty of approximately ₹9 lakh, equivalent to 100% of the tax on the omitted income.
ITAT’s Ruling: A Closer Look
The two-member ITAT bench, comprising judicial member Rahul Chaudhary and accountant member Padmavathy S, meticulously examined the case details. They observed that Chatterji had originally reported 100% of the rental income, despite holding only a 50% share in the property. They also noted that Singapore follows a calendar-year financial system, which may have contributed to the initial reporting errors.
The tribunal concluded that there was no intentional effort by Chatterji to conceal income, and that all discrepancies were voluntarily corrected in the revised return. They emphasized that “penalty is not to be imposed if there is no conscious breach of law,” and thus, they ordered the removal of the penalty.
Implications of the Ruling: What It Means for Taxpayers
During the financial year covered by this ITAT ruling, penalties under section 271(1)(c) ranged from 100% to 300% of the tax involved. However, this provision was replaced in 2016 by section 270A, which imposes a penalty of 50% for under-reporting and 200% for misreporting.
The ITAT’s ruling highlights the importance of honest and accurate tax reporting while acknowledging that errors can happen. It reinforces the idea that taxpayers should be allowed to correct mistakes without the looming threat of severe penalties. This ruling is expected to bring clarity and relief to taxpayers who find themselves in similar situations, ensuring that penalties are reserved only for cases of deliberate income concealment.