Rejection Of Tax Claim Alone Cannot Mean Concealment: ITAT Mumbai Deletes ₹1.23 Crore Penalty

The Income Tax Appellate Tribunal (ITAT), Mumbai, has held that merely because a taxpayer's claim is rejected, it does not mean the taxpayer concealed facts or gave a false explanation.

The tribunal made the observation while deleting a ₹1.23 crore penalty imposed on Cyqurex Systems Pvt. Ltd. under Section 270A of the Income Tax Act. The penalty arose from the company's claim of ₹7.41 crore as revenue expenditure on software development.

A bench comprising Judicial Member Challa Nagendra Prasad and Accountant Member G. M. Doss observed:

“The fact that the claim of the assessee was not accepted in the assessment proceedings does not, by itself, establish that the assessee had furnished any false particulars or that the explanation offered by it was not bona fide.”

The bench said the question of whether software development expenditure should be treated as capital or revenue expenditure requires examination of the facts and applicable legal principles.

Cyqurex Systems, which develops cyber-security and software solutions, had claimed ₹7.41 crore as revenue expenditure for the 2023-24 assessment year. The assessing officer rejected the claim and treated the amount as a capital loss.

The expenditure included ₹5.88 crore towards impairment of the internally developed Saife IP asset and ₹1.52 crore towards development of the Blackbox and Command Control Operating Platform. The latter continued to be shown as capital work-in-progress.

The company had disclosed the expenditure and its accounting treatment in Notes 42 and 43 of its audited financial statements.

The assessing officer subsequently imposed a ₹1.23 crore penalty for under-reporting of income. The Commissioner of Income Tax (Appeals) upheld the penalty.

Before the tribunal, the company argued that it had made the claim bona fide and had disclosed all material facts. Its position was that the dispute was about the legal treatment of the expenditure, not about whether the underlying facts had been disclosed.

Section 270A provides for a penalty where income is under-reported. But Section 270A(6)(a) excludes an amount from under-reported income where the taxpayer gives a bona fide explanation and has disclosed all material facts needed to support it.

The tribunal found no indication that the expenditure was fictitious or inflated. Nor was there any finding that the company had concealed a receipt or asset or furnished false primary facts.

The bench noted that the expenditure and its accounting treatment were disclosed in the financial statements. The assessing officer had simply taken a different legal view and treated the expenditure as capital instead of revenue.

The tribunal relied on the Bombay High Court's ruling in G.M. Modular (P.) Ltd. It held that where the facts are disclosed and the claim is made bona fide on a debatable issue, the protection under Section 270A(6)(a) applies.

The tribunal accordingly deleted the ₹1,23,71,443 penalty imposed on Cyqurex Systems

For Assessee: Ruturaj H. Gurjar, Advocate

For Revenue: Pankaj Deshmukh, Sr. AR