2014 (6) TMI 181 - AT - Income Tax

Appeal partially allowed on tax penalties, remitted for reconsideration. Decision issued 19/5/2014.

The tribunal partly allowed the appeal, upholding penalties on interest earned, income-tax paid, and interest on late deposit of wealth-tax. The matter ... Deletion of penalty u/s 271(1)(c) of the Act - Addition of excess expenses – Disallowance u/s 43B of the Act – Held that:- CIT(A) has mentioned that similar addition was made for the immediately succeeding AY 1999-2000 on which penalty imposed by the AO came to be finally deleted by the tribunal - revenue could not controvert the factual position stated in the order - the tribunal has ordered for the deletion of penalty on identical facts, the order of the CIT(A) in deleting penalty is upheld. Disallowance of Production bonus – Held that:- The assessee did not accept the addition made by the AO but challenged the same, which was knocked down in the first appeal in the quantum proceedings – revenue has failed to refute the finding in the order that the Revenue did not carry this issue before the tribunal in quantum proceedings - the bedrock for the penalty on the issue, being the addition does not exist, there can be no question of imposing or confirming any penalty on the amount. Interest income earned but not offered for taxation – Held that:- The assessee earned such interest income but instead of showing it as income directly took it to reserve account - When a particular item of income earned by the assessee is routed to balance sheet without passing through the Profit and loss account, the natural interference which is to be drawn is that the assessee did not intend to offer such amount to tax - No explanation has been advanced on behalf of the assessee as to under which circumstances the amount was not offered for taxation but straightway taken to the reserve account in balance sheet- It is a clear cut case of concealment of income warranting the imposition of penalty - By overturning the order, the penalty was rightly imposed by the AO on the amount – the order of the CIT(A) is set aside. Abandonment reserve – Assessee’s 25% share in expenses from PSC for the exploration of crude oil – Held that:- The amount of abandonment cost fell on the assessee at the end of each year though it was to be discharged at the end of the stipulated period - Under the mercantile system of accounting, an expense is allowed as deduction on incurring the liability irrespective of the actual discharge - it cannot be ruled out that the assessee took a possible view in claiming deduction for the amount - where two possible views exist and the assessee has taken one of them, then the penalty is not leviable, if the possible view canvassed by the assessee is not accepted - the assessee has prima facie demonstrated that the deduction claimed by it for such Abandonment cost is a possible view despite the same having not been challenged in the quantum proceedings. Disallowance of Interest expenses – Held that:- Payment of income-tax is not an item of expenditure - The amount of income-tax is an item of appropriation of income and not a charge against the income - the amount of income-tax can be ascertained only after the amount of profit is first determined - What to talk of claiming deduction for payment of income-tax, even the interest paid for payment of income-tax is not an allowable deduction – Relying upon Bharat Commerce and Industries Ltd. Vs CIT [1998 (3) TMI 2 - SUPREME Court] - The liability in the case of payment of income-tax and interest for delayed payment of income-tax or advance tax arises on the computation of the profits and gains of business - If income-tax itself is not a permissible deduction u/s 37, any interest payable for default committed by the assessee in discharging his statutory obligation under the Act, which is calculated with reference to the tax on income cannot be allowed as a deduction - the assessee claimed deduction for payment of income-tax by clubbing it with `Interest expenditure’, which amount is clearly not allowable, the provisions of sec. 271(1)(c) of the Act were rightly magnetized – Decided partly in favour of Revenue. Issues Involved:1. Excess Expenses2. Production Bonus3. Disallowance under Section 43B4. Interest Earned5. Abandonment Reserve6. Interest Expenses7. Reduction in Exemption under Section 10A8. Application under Rule 27 of the ITAT Rules, 1963Detailed Analysis:1. Excess Expenses:The Assessing Officer (AO) had disallowed Rs. 8,59,553/- as excess expenses. The CIT(A) deleted the penalty on this disallowance, referencing a similar case in the subsequent assessment year where the tribunal had deleted the penalty. The tribunal upheld the CIT(A)'s decision, as the Departmental Representative could not refute the factual position.2. Production Bonus:The AO imposed a penalty on the disallowance of Rs. 47,50,000/- for production bonus. The CIT(A) deleted the penalty, noting that the assessee had contested the addition, which was overturned in the first appeal. The tribunal upheld the CIT(A)'s decision since the Revenue did not pursue the matter further in quantum proceedings.3. Disallowance under Section 43B:A penalty was imposed on the disallowance of Rs. 35,183/- under Section 43B. The CIT(A) deleted the penalty, citing a similar case in the subsequent assessment year where the tribunal had canceled the penalty. The tribunal upheld the CIT(A)'s decision due to the lack of distinguishing features between the two years.4. Interest Earned:The AO imposed a penalty on the interest income of Rs. 2,996/- that was not offered for taxation but directly credited to the reserve account. The CIT(A) deleted the penalty. However, the tribunal reversed this decision, holding that the penalty was rightly imposed as the assessee failed to offer a valid explanation for not declaring the income.5. Abandonment Reserve:The AO imposed a penalty on the addition of Rs. 5,30,875/- for the abandonment reserve, treating it as a contingent liability. The CIT(A) deleted the penalty. The tribunal upheld the CIT(A)'s decision, recognizing that the liability was a possible view under the Production Sharing Contract (PSC) and that the issue was debatable.6. Interest Expenses:The AO imposed a penalty on the disallowance of Rs. 98,391/- for interest expenses, which included income-tax and wealth-tax payments. The CIT(A) deleted the penalty. The tribunal upheld the penalty for the income-tax and wealth-tax components but deleted the penalty for sales-tax and interest on late deposit of sales-tax, following the precedent set in the subsequent assessment year.7. Reduction in Exemption under Section 10A:The AO imposed a penalty on the reduction of exemption under Section 10A amounting to Rs. 2,23,148/-. The CIT(A) deleted the penalty, noting that the tribunal had allowed the deduction in quantum proceedings. The tribunal upheld the CIT(A)'s decision as the addition was finally deleted.8. Application under Rule 27 of the ITAT Rules, 1963:The assessee filed an application under Rule 27, arguing for the deletion of the entire penalty based on the final determination of income under Section 115JA. The tribunal admitted the application, noting that the assessee could support the order on grounds decided against him. The tribunal referenced the jurisdictional High Court's judgment in CIT Vs Nalwa Sons Investment Ltd., which held that no penalty could be imposed if the income was computed under Section 115JA/115JB and the concealment did not affect this computation. However, since the income under Section 115JA increased due to certain additions, the tribunal remitted the matter to the AO to reconsider the imposition of penalty in light of the discussion.Conclusion:The tribunal partly allowed the appeal for statistical purposes, upholding the penalty on three items (interest earned, income-tax paid, and interest on late deposit of wealth-tax) and remitting the matter to the AO for reconsideration. The decision was pronounced in the open Court on 19/5/2014.