PERSONAL TAX: No penalty on change of income head in ITR

A taxpayer, engaged commodities trading, filed his return of income for the year ended March 31, 2014 declaring a total income of Rs 1.61 lakh. In the return, the taxpayer claimed that the transactions relating to mutual funds constituted a part of his business and therefore loss arising out of the transaction in the mutual fund units should be treated as business loss.

During the course of assessment, the tax officer did not agree with the taxpayer’s claim and held that the transaction in the MFs did not constitute the taxpayer’s business transaction. Accordingly, the tax officer treated the loss as short-term capital loss of the taxpayer. Consequently, the assessment order was passed determining the total income of the taxpayer at Rs 3.5 lakh. The taxpayer did not prefer to file an appeal against this assessment order. However, simultaneously the tax officer also initiated penalty proceedings on the ground that the taxpayer had furnished inaccurate particulars of his income. After giving the taxpayer an opportunity of being heard on this matter, the tax officer imposed a penalty of Rs 44,500.

The taxpayer was not happy with the penalty order and filed the first level of appeal with the Commissioner of Appeals. The first level appellate authority, on the basis of representations made, dismissed the taxpayer’s appeal and agreed with the levy of penalty.

Before the second-level appellate authority, the taxpayer argued that the claim for treating the loss from mutual fund units as a business loss was a bona fide claim and the same was presented with documentary evidence before the tax officer. The taxpayer contended that there was no malafide intention on his part while raising this claim in the return of income.

On the basis of the facts of the case, the Honourable Mumbai Tribunal observed that the taxpayer had duly disclosed the loss in his return of income. The tribunal relied upon a Supreme Court decision wherein it was held that any disallowance made by the tax officer in the assessment order, only on account of a different view taken on the same set of facts, could be at the most termed as a difference of opinion and would not amount to furnishing of inaccurate particulars of such income by the taxpayer. Hence, no penalty is leviable.

The tribunal also placed reliance upon a Bombay High Court decision wherein it was held that if a taxpayer makes a purported wrong claim in the return of income, but as the same is disclosed in the return of income, penalty is not leviable.

While deciding this case, the tribunal was of the opinion that a mere change of head of income by the tax officer during the course of assessment should not result in an automatic levy of penalty. In the present case, details about the ‘business loss’ or ‘short-term capital loss’ were available on record. Therefore, it cannot be said that the taxpayer has filed inaccurate particulars of income. A difference of opinion between the tax officer and the taxpayer about the head of income under which particular income has to be assessed may remain as a point of disagreement between the two parties, but such differences should not result in invoking penalty provisions under the Income Tax Act.

The Mumbai Tribunal accordingly ordered for deletion of the penalty in this case and thus ruled in favour of the taxpayer.