NEW DELHI, SEPT 27, 2012: THE issues before the Bench are - Whether when it comes to filing of tax return, a high-calibre accounting firm is not expected to commit a silly mistake; Whether high-calibre and expertise provide any immunity to the assessee from making human error and Whether when a high-calibre accounting firm makes an inadvertent error in claiming deduction, which was also overlooked by the AO at the first instance, it warrants imposition of concealment penalty. And, NO is the answer of the Bench.

Facts of the case

Assessee provides multi-disciplinary management consultancy services and has a worldwide reputation. It filed its return of income on 30.11.2000 u/s 139(6) read with Section 139(6A). As statutorily required by Section 139(6A), the assessee also filed its tax audit report u/s 44AB. The Statement of Particulars filed by the assessee was in Form 3CD as required by Rule 6G(2) of the Income Tax Rules, 1962 and is, in a sense, an integral part of the return. Even though the Statement indicated that the provision towards payment of gratuity was not allowable, the assessee claimed a deduction thereon in its return of income. On the basis of the return and the Statement, an assessment order was passed u/s 143(3) on 26.03.2003 and the claim for deduction was overlooked by the AO. Much later, the AO issued a notice to the assessee u/s 148 on 22.01.2004 for reopening the assessment. The notice did not indicate any reason why it was issued except to state that income for the AY 2000-2001 had escaped assessment. In response to the notice, the assessee filed its return under protest on 16.02.2004 and also requested for the grounds for reopening the assessment. In response, the assessee was furnished with the reasons that provision for gratuity was not allowable u/s 40A(7) and was required to be added back. Since, the same was not added by the assessee this had to lead to underassessment of income. The assessee realized its mistake and the AO was immediately informed that there was no willful suppression of facts by the assessee but that a genuine mistake or omission had been committed which also appears to have been overlooked by the AO before whom the Tax Audit Report was placed. However, the AO initiated penalty u/s 271(1)(c) and imposed a penalty of 300% on the assessee.

On appeal, the CIT(A) upheld the penalty imposed. Aggrieved, the assessee filed an appeal before the Tribunal. The Tribunal though admitted that the mistake could be described as a silly mistake, but since the assessee is a high-calibre and competent organization, it was not expected to make such a mistake. Accordingly, the Tribunal reduced the penalty to 100%. The assessee further appealed before the Calcutta High Court. The Calcutta High Court dismissed the appeal and held that this case would automatically come within the four corners of Section 271(1)(c) and that the appellant have failed to discharge their strict liability to furnish their true and correct particulars of accounts while filing the return.

Still aggrieved, the assessee finally filed an appeal before the Supreme Court.

Having heard the parties, the Supreme Court held that:

+ the assessee has filed an affidavit dated 14th September, 2012 in which it is stated that the assessee is engaged in Multidisciplinary Management Consulting Services and in the relevant year it employed around 1000 employees. It has a separate accounts department, which maintains day to day accounts, pay rolls etc. It is stated in the affidavit that perhaps there was some confusion because the person preparing the return was unaware of the fact that the services of some employees had been taken over upon acquisition of a business, but they were not members of an approved gratuity fund unlike other employees of the assessee. Under these circumstances, the tax return was finalized and filled in by a named person who was not a Chartered Accountant and was a common resource;

+ it is further stated in the affidavit that the return was signed by a director of the assessee who proceeded on the basis that the return was correctly drawn up and so did not notice the discrepancy between the Tax Audit Report and the return of income. Having heard the counsel for the parties, we are of the view that the facts of the case are rather peculiar and somewhat unique. The assessee is undoubtedly a reputed firm and has great expertise available with it. Notwithstanding this, it is possible that even the assessee could make a "silly" mistake and indeed this has been acknowledged both by the Tribunal as well as by the High Court;

+ 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 under Section 40A(7) of the Act indicates that the assessee made a computation error in its return of income. Apart from the fact that the assessee did not notice the error, it was not even noticed even by the Assessing Officer who framed the assessment order. In that sense, even the Assessing Officer seems to have made a mistake in overlooking the contents of the Tax Audit Report;

+ the contents of the Tax Audit Report suggest that there is no question of the assessee concealing its income. There is also no question of the assessee furnishing any inaccurate particulars. It appears to us that all that has happened in the present case is that through a bona fide and inadvertent error, the assessee while submitting its return, 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. The calibre and expertise of the assessee has little or nothing to do with the inadvertent error. That the assessee 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 assessee is guilty of either furnishing inaccurate particulars or attempting to conceal its income;

+ we are of the opinion, given the peculiar facts of this case, that the imposition of penalty on the assessee is not justified. We are satisfied that the assessee had committed an inadvertent and bona fide error and had not intended to or attempted to either conceal its income or furnish inaccurate particulars.

(See 2012-TIOL-84-SC-IT)