The Income Tax Appellate Tribunal, Mumbai, has clarified that penalty under Section 271(1)(c) cannot be imposed when the underlying tax issue has been admitted as a substantial question of law by the jurisdictional High Court, affirming that bona fide legal disputes do not equate to furnishing inaccurate particulars.
Background & Facts
The Dispute
The appellant, Small Industries Development Bank of India (SIDBI), a principal financial institution for MSME promotion and financing, faced penalty proceedings under Section 271(1)(c) of the Income Tax Act, 1961, for assessment years 2014-15 and 2015-16. The penalty arose from the disallowance of a claim for proportionate amortization of lease premium paid to the Mumbai Metropolitan Regional Development Authority (MMRDA) for leasehold land. The Assessing Officer treated this expenditure as capital in nature, thereby denying the deduction and initiating penalty proceedings.
Key Facts
- SIDBI filed its return for AY 2014-15 on 29.11.2014, declaring total income of INR 1,769,73,82,910 under normal provisions and book profit of INR 2,147,27,32,852 under Section 115-JB.
- The return was selected for scrutiny under Section 143(3), and the AO disallowed the amortization claim of INR 60,79,783 on the ground that lease premium was capital expenditure.
- The Commissioner of Income Tax (Appeals) confirmed the disallowance and upheld the penalty of INR 20,56,516 for AY 2014-15.
- For AY 2015-16, the same issue was raised, and a similar penalty of INR 20,66,516 was levied.
- The issue had previously been admitted as a substantial question of law by the Bombay High Court in SIDBI’s own case (ITA No. 792 of 2012) for AY 2004-05, with the question framed: "Whether the amount paid as lease premium constituted revenue expenditure and entitled the assessee to a proportionate deduction."
- SIDBI had made representations and filed appeals before the Tribunal in quantum proceedings, which led to the Tribunal directing the AO to apply the High Court’s admitted position.
Procedural History
- 29.11.2014: SIDBI filed return for AY 2014-15.
- 30.12.2016: AO passed scrutiny order under Section 143(3), disallowing lease premium amortization.
- 18.03.2013: Bombay High Court admitted substantial question of law in ITA No. 792/2012 (AY 2004-05).
- 30.09.2024: AO passed penalty order under Section 271(1)(c) for AY 2014-15, levying INR 20,56,516.
- 28.11.2025: CIT(A) confirmed penalty for both AY 2014-15 and 2015-16.
- 09.04.2026: Hearing before ITAT Mumbai.
- 15.04.2026: ITAT passed order allowing appeals.
The Parties' Positions
For the Appellant (SIDBI)
- Argued that the issue of lease premium amortization was a bona fide legal dispute, already admitted as a substantial question of law by the Bombay High Court.
- Relied on judicial precedents from Delhi High Court and Supreme Court to assert that penalty cannot be imposed where the claim is debatable.
- Emphasized that no evidence of concealment or intentional inaccuracy existed.
For the Respondent (Revenue)
- Contended that the disallowance of the claim justified penalty under Section 271(1)(c), irrespective of the High Court’s admission.
- Argued that the assessee’s claim was legally unsustainable and therefore constituted furnishing inaccurate particulars.
Relief Sought
SIDBI sought quashing of the penalty orders dated 30.09.2024 and 28.11.2025 for both assessment years, and deletion of the penalty amounts of INR 20,56,516 and INR 20,66,516 respectively.
The Legal Issue
Can a penalty under Section 271(1)(c) be levied when the disputed tax claim has been admitted as a substantial question of law by the jurisdictional High Court, indicating the issue is genuinely debatable?
Arguments Presented
For the Appellant
SIDBI relied on CIT v. Harsh International (P.) Ltd. [2021] 128 taxmann.com 88 (Delhi), where the Delhi High Court held that penalty cannot be sustained if the quantum issue has been admitted as a substantial question of law, as it demonstrates the claim is not frivolous or dishonest. It also cited CIT v. Liquid Investment Ltd. and CIT v. Thomson Press India Ltd., where penalties were deleted on identical grounds. Further, it invoked the Supreme Court’s ruling in CIT v. Reliance Petroproducts (P) Ltd. [2010] 322 ITR 158 (SC), which clarified that a mere claim not sustainable in law does not amount to furnishing inaccurate particulars unless the particulars themselves are false or erroneous.
For the Respondent
The Revenue contended that the disallowance of the deduction by the AO and CIT(A) established that the claim was incorrect, thereby triggering penalty under Section 271(1)(c). It argued that admission of a question of law by the High Court does not validate the claim’s correctness, only its arguability, and that the assessee’s position remained legally untenable.
The Court's Analysis
The Tribunal emphasized that the core of Section 271(1)(c) is not mere disagreement over tax treatment, but the furnishing of inaccurate particulars with intent or negligence. The Tribunal noted that the Bombay High Court had explicitly admitted the question of whether lease premium constitutes revenue expenditure - a question central to the penalty imposition.
"It is a trite law that no penalty is leviable on an issue on which the appeal in the quantum proceedings has been admitted by the Hon'ble High Court."
The Tribunal further relied on the Delhi High Court’s reasoning in Harsh International, which held that admission of a substantial question of law demonstrates the issue is debatable, and therefore, the assessee’s claim cannot be deemed inaccurate or dishonest. The Tribunal observed that the Revenue’s argument conflated legal disagreement with concealment, which is impermissible.
The Tribunal also cited Reliance Petroproducts, where the Supreme Court held that "a mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars." The Court clarified that "inaccurate particulars" require factual misstatement or falsification, not merely an unsuccessful legal interpretation.
The Tribunal rejected the Revenue’s contention that the AO’s disallowance alone justified penalty, noting that the very existence of a pending, admitted appeal before the High Court negates any inference of concealment or lack of bona fides.
The Verdict
The appeals were allowed. The penalty orders under Section 271(1)(c) for assessment years 2014-15 and 2015-16 were quashed. The penalty amounts of INR 20,56,516 and INR 20,66,516 were deleted. The impugned orders of the CIT(A) dated 28.11.2025 were set aside. The Tribunal held that the levy of penalty was not justifiable in light of the admitted substantial question of law and the absence of any finding of inaccurate particulars.
What This Means For Similar Cases
Bona Fide Legal Disputes Shield Against Penalty
- Practitioners must argue that penalty under Section 271(1)(c) is inapplicable where the issue has been admitted as a substantial question of law by a High Court, regardless of the AO’s or CIT(A)’s view.
- The mere fact that a claim is disallowed does not trigger penalty; the focus must be on whether the taxpayer’s position was reasonably arguable.
Admission of Question of Law = No Concealment
- If an appeal is admitted on a substantial question of law, the taxpayer’s position is deemed bona fide, and penalty proceedings must be dropped.
- Revenue authorities cannot rely on disallowance alone to justify penalty - they must prove actual inaccuracy or concealment.
Precedent Binding Across Assessment Years
- A High Court’s admission of a question of law in one assessment year binds the treatment of identical issues in subsequent years, even if the quantum appeal is pending.
- Taxpayers should proactively cite such admissions in penalty appeals to pre-empt arbitrary enforcement.
Documentary Evidence Prevails Over Disallowance
- The Tribunal’s reliance on judicial admission over administrative disallowance reinforces that legal precedent trumps lower authority’s interpretation.
- Practitioners should always file and cite High Court admissions in penalty appeals, even if the quantum appeal is still pending.
The Burden Shifts to the Revenue
- Once a substantial question of law is admitted, the burden shifts to the Revenue to prove dishonest intent or factual inaccuracy - not merely legal unsustainability.
- This judgment reinforces that tax law must distinguish between aggressive interpretation and deliberate concealment.
