Penalty – Where two legal views are not plausible, assessee cannot contend it to be a bonafide belief – Delhi HC

CIT v Fortis Financial Services Ltd [ITA Nos.243/2011 & 244/2011] (Delhi HC)


The assessee was engaged in business of providing financial services. During the assessment proceedings, the AO observed that an amount of interest of Rs 46,63,619/- was not included in the return. Similarly, Rs.4,13,82,323/- and Rs.5,28,16,681/- towards ‘bill discounting charges’, in respect of assessment years 1996-97 and 1997-98 were not included and therefore, added these amounts in his assessment order.

Simultaneously, penalty proceedings were initiated for concealment and/or furnishing of inaccurate particulars. AO levied penalty, in respect of two assessment years and after considering the reply, passed two orders under Section 13 of the Act imposing the penalty for concealment or furnishing accurate particulars of chargeable interest. The CIT (A), deleted the said penalty on the ground that the issue/question raised related to honest and bona fide difference of legal opinion on whether bill “discounting charges” should be treated as interest or not for the purpose of the said Act. The tribunal upheld the said decision.


  • The purport and purpose behind Explanation to Section 271(1)(c) as explained in several decisions, is to shift the onus and impose an obligation on the assessee to prove and establish the reason/cause, and in case of failure to bonafidely elucidate and satisfy their conduct, penalty can be imposed under Section 271(1)(c) of the Income Tax Act. 
  • It is settled that when two legal interpretations were plausible and there was honest and bona fide difference of opinion, penalty for concealment/furnishing of inaccurate particulars, should not and cannot be imposed. The tax statutes are complex and there can be a bona fide difference of opinion on legal interpretation and understanding of a provision. In such cases, even when the interpretation placed by the Revenue is accepted, penalty should not be imposed if the contention of the assessee was plausible and bona fide.
  • It is, equally well settled that establishment of mens rea is not the requirement or a condition precedent to impose penalty. The earlier view that penalty proceedings require establishment and proof of mens rea, has been disapproved in the judgment of the Supreme Court in Dharmendra Textile Processor’s case.
  • The Tribunal has overlooked and not considered the amendment made to Section 2(7) of the Act w.e.f. 1st October, 1991, which makes it clear that for the purpose of the Act, bill discounting charges have to be treated and regarded as ‘interest’. There cannot be any doubt or ambiguity that ‘bill discounting charges’ have to be computed and included in interest for the purpose of tax payable under the Act. This is not the case of a bonafide, honest or even plausible different interpretation. Two divergent views on interpretation of Section 2(7) of the Act are not possible. There is no ambiguity or doubt in the said words. 
  • Reliance placed by the assessee on Circular No. 647 dated 22nd March, 1993 is entirely misconceived. It is not possible to accept the contention of the respondent assessee that there was a genuine difference of opinion on the question; “whether or not bill discounting charges could be treated as interest or not?” Mere statement of the assessee that their contention was plausible and question/issue was debatable, is not sufficient to quash the penalty. The contention has to be examined holistically and objectively keeping in the provision, interpretation put forward and decision, if any, of appellate forum/courts. 

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