2011 (1) TMI 1440 - AT - Income Tax

ITAT Delhi Rules in Favor of Assessee, Sets Aside Penalty Orders

The ITAT Delhi set aside the penalty orders, ruling in favor of the Assessee. The Tribunal found no concealment in delayed payments towards PF and ESI ... - ISSUES PRESENTED AND CONSIDERED 1. Whether claiming payment of ROC fee for increase of authorised capital as preliminary expenditure amortisable under section 35D (deferred revenue expenditure) constitutes concealment or furnishing of inaccurate particulars attracting penalty under section 271(1)(c). 2. Whether delayed payment of employees' contribution to Provident Fund (PF) and Employees' State Insurance (ESI), though reflected in profit & loss account, amounts to concealment or furnishing of inaccurate particulars for purposes of section 271(1)(c), and whether such delayed employee contributions stand on the same footing as employer contributions for tax treatment. 3. Whether disallowance under section 14A by applying Rule 8D (resulting in an adjustment where exempt dividend income was claimed) renders the assessee liable to penalty under section 271(1)(c), particularly where Rule 8D was notified effective from a later assessment year. 4. Whether the cumulative conduct in relation to the above adjustments constitutes contumacious, dishonest or deliberate defiance of law sufficient to warrant imposition of penalty under section 271(1)(c), having regard to higher court pronouncements on the meaning of 'concealment' and 'inaccurate particulars' and the requirement of culpable conduct. ISSUE-WISE DETAILED ANALYSIS Issue 1 - ROC fee claimed as amortisable preliminary expenditure under section 35D Legal framework: Section 35D (as invoked by the assessee) deals with amortisation of preliminary expenses; taxability and allowability of such expenditure depend on statutory scope and whether the company qualifies as a new undertaking. Precedent treatment: The Tribunal treated the matter as one of differing opinion on tax law; reliance placed on principles that mere disagreement on allowability does not amount to concealment (following higher court decisions referenced in the judgment). Interpretation and reasoning: The Tribunal noted the ROC fee was disclosed in the profit & loss account and the claim was made bona fide under a belief in its allowability under section 35D. The authorities rejected the claim on the ground that section 35D does not apply to an existing company (no concept of deferred revenue expenditure in the Act). The Tribunal concluded the dispute was a question of law and not deliberate concealment or inaccuracy in particulars. Ratio vs. Obiter: Ratio - a bona fide claim based on an arguable interpretation of section 35D, reflected in accounts, does not constitute concealment or furnishing inaccurate particulars attracting penalty under section 271(1)(c). Obiter - observations on the non-existence of deferred revenue expenditure in tax law provide context but are not foundational to the penalty conclusion. Conclusion: Penalty under section 271(1)(c) could not be sustained in respect of the ROC fee disallowance; deletion of penalty warranted. Issue 2 - Delayed payment of employees' PF and ESI contributions Legal framework: Section 43B deals with deduction contingent on cash payment for certain items; statutory and regulatory rules determine timing of PF/ESI deposits. Section 271(1)(c) applies where there is concealment or inaccurate particulars. Precedent treatment: The Tribunal relied on a recent decision (as noted in the record) treating employee contributions to PF/ESI, even if delayed, on the same footing as employer contributions for tax purposes, and on higher court authority limiting the reach of penalty provisions where disputes are bona fide. Interpretation and reasoning: The Tribunal observed that payments/delays were disclosed in the profit & loss account and explanations (including statutory/grace period arguments for EPF) were provided. There was no evidence of concealment or dishonest conduct; the issue was factual and legal (timing), not a contumacious evasion. Ratio vs. Obiter: Ratio - delayed deposit of employee contributions, disclosed in accounts and subject to bona fide legal/factual dispute about due dates and treatment, does not amount to concealment or furnishing inaccurate particulars attracting penalty under section 271(1)(c). Obiter - the detailed analysis of circulars and grace periods supports the factual conclusion but is ancillary to the legal holding on penalty. Conclusion: Penalty under section 271(1)(c) could not be sustained for delayed PF/ESI payments; levy deleted. Issue 3 - Disallowance under section 14A by applying Rule 8D in respect of exempt dividend income Legal framework: Section 14A permits disallowance of expenditure incurred to earn exempt income; Rule 8D prescribes a formula for computing such disallowance but was notified with prospective applicability from a specified date. Precedent treatment: The Tribunal followed a High Court decision holding that Rule 8D, having been notified on a given date, is applicable only prospectively from the stated assessment year (post-notification), and thus not applicable to the assessment year under consideration. Interpretation and reasoning: The Tribunal accepted that the Assessing Officer applied Rule 8D to compute disallowance for a year prior to Rule 8D's prospective applicability. Given that Rule 8D was not operative for the assessment year, the Tribunal concluded the assessee could not be said to have acted contumaciously or dishonestly in claiming exemption; the disallowance by AO therefore did not justify penalty for concealment or inaccurate particulars. Ratio vs. Obiter: Ratio - application of a later-notified Rule 8D to prior assessment year does not render an assessee's conduct contumacious so as to attract penalty under section 271(1)(c). Obiter - discussion of the mechanics of Rule 8D and timing is explanatory. Conclusion: Penalty under section 271(1)(c) could not be sustained in respect of the section 14A/Rule 8D disallowance; levy deleted. Issue 4 - Application of section 271(1)(c) and standards for imposing penalty (contumacious/dishonest conduct) Legal framework: Section 271(1)(c) penalises concealment of income or furnishing of inaccurate particulars; judicial authorities require culpable conduct (deliberate, dishonest, contumacious or conscious disregard) for imposition of penalty; mere failure of claim does not automatically attract penalty. Precedent treatment: The Tribunal relied on higher court rulings clarifying that mens rea is not strictly required but that penalty should not be imposed where the assessee advances an arguable claim in good faith; where part of earlier reasoning in a precedent was overruled, the continuing law still protects bona fide disputes from automatic penal consequences. Interpretation and reasoning: Applying these principles, the Tribunal examined the three disallowances and found uniform features: all claims/transactions were disclosed in accounts; explanations were advanced in appeal; disputes were matters of law or fact not indicating deliberate concealment or dishonest intent. The Tribunal emphasised discretion must be exercised judicially and that penalties are not ordinarily imposed for technical or venial breaches or bona fide beliefs about liability. Ratio vs. Obiter: Ratio - imposition of penalty under section 271(1)(c) requires more than a mere non-acceptance of claim by the assessing authority; there must be contumacious, dishonest or deliberate defiance of law. Obiter - references to specific precedents illustrate but do not expand statutory scope beyond the stated standard. Conclusion: Taking into account the nature of the disputes, disclosures made, and applicable judicial standards, the Tribunal set aside and deleted the penalty under section 271(1)(c) in respect of all contested additions.