2014 (7) TMI 712 - AT - Income Tax

Tribunal partially allows appeal, upholds penalty for disallowance, rejects Section 80-IB(8A) deduction claim.

The Tribunal partially allowed the appeal, deleting the penalty imposed on Rs. 16,19,062 for the taxation of trial run receipts, as the assessee's ... Penalty u/s 271(1)(c) – Taxation of trial run receipts – Held that:- There is no concealment of the particulars of the income inasmuch as the assessee made complete disclosure - it cannot be a case of furnishing inaccurate particulars of income because the assessee entertained a bona fide view that the amount of trial run receipts is not chargeable to tax in the year of receipt on the strength of similar practice followed and not disturbed in the past - The sheer fact that in the final assessment, such bona fide view taken by the assessee was jettisoned by the Revenue cannot mean that the assessee either concealed the particulars of his income or furnished inaccurate particulars of such income – Relying upon CIT Vs Reliance Petro Products Pvt. Ltd. [2010 (3) TMI 80 - SUPREME COURT]- mere making of a claim which is not sustainable in law by itself will not attract penalty under the section when the assessee furnishes all the necessary particulars in his return of income – thus, no penalty is sustainable – Decided in favour of Assessee. Levy of penalty for wrong claim of deduction u/s 80IB - Write off of debit balance – additions were made since the advance given to a person which had no relation with sales - claim of deduction u/s 80IB out of such addition - Held that:- Once the amount of deduction u/s 80IB is deemed to have been already granted in computing the 'total income' for the purposes of Expl. 4(a), being the amount of addition representing concealment or furnishing of inaccurate particulars of income, then there can be no scope for inferring that the total income representing the amount of addition would be again eligible for deduction u/s 80-IB(8A), thereby reducing the total income to Nil - the amount of income representing such addition/disallowance would have assumed the character of 'gross total income' eligible for deductions under Chapter VI-A including sec. 80-IB(8A) of the Act - the legislature has chosen to treat the amount of such addition/disallowance as 'total income' in itself, there can be no logic in subjecting such income to further deductions under Chapter VI-A of the Act for computing the amount of tax sought to be evaded – thus, the contention is rejected and the penalty is upheld – Decided against Assessee. Issues Involved:1. Confirmation of penalty on Rs. 16,19,062/- due to taxation of trial run receipts.2. Confirmation of penalty on Rs. 55,693/- due to disallowance of write-off of debit balance.3. Legal argument regarding Explanation 4(a) to Section 271(1) of the Income-tax Act, 1961.Detailed Analysis:1. Confirmation of penalty on Rs. 16,19,062/- due to taxation of trial run receipts:The assessee, a company engaged in scientific research and informatics services, filed a return declaring a loss of Rs. 4.47 crore. During the assessment, the Assessing Officer (AO) observed that the assessee accounted for Rs. 2.83 crore as income from research and development activities against actual receipts of Rs. 2.99 crore from the sale of services. The remaining Rs. 16,19,062/- was reduced from total sales and credited to work-in-progress capitalized in the balance sheet. The AO included this amount in total sales, treating it as a regular activity. This action was upheld by the Tribunal, which also accepted the assessee's alternative contention to enhance the closing balance of work-in-progress. Subsequently, the AO imposed a penalty on this income, which was confirmed in the first appeal.Upon review, it was noted that the assessee consistently followed the method of reducing trial run receipts from work-in-progress, a practice accepted by the Revenue in the preceding year. The Tribunal upheld the inclusion of trial run receipts in total income but clarified that penalty proceedings are distinct from assessment proceedings. The Act does not make penalty automatic upon making an addition. Explanation 1 to Section 271(1) was considered, indicating that penalty applies if the assessee fails to offer a bona fide explanation or if the explanation is found to be false. In this case, the assessee's explanation was consistent with past practices and was not found to be false. The Tribunal concluded that the assessee did not conceal income or furnish inaccurate particulars, and thus, no penalty was sustainable for the addition of Rs. 16,19,062/-.2. Confirmation of penalty on Rs. 55,693/- due to disallowance of write-off of debit balance:The assessee claimed a deduction of Rs. 55,693/- by writing off a debit balance, which was an advance given to an individual unrelated to sales. The AO disallowed this deduction due to lack of justification, and this decision was upheld in the first appeal. The assessee did not contest this issue before the Tribunal. The Tribunal found that the assessee failed to substantiate the explanation and did not prove the bona fide nature of the advance, which was unrelated to business operations. The assessee's explanation was not supported by evidence, and no material indicated that the amount became irrecoverable. Consequently, the Tribunal upheld the penalty on this disallowed amount, as it fell within the mischief of Section 271(1)(c) of the Act.3. Legal argument regarding Explanation 4(a) to Section 271(1) of the Income-tax Act, 1961:The assessee argued that as a company approved under Section 80-IB(8A), its entire income was deductible, and thus, no penalty should apply. Explanation 4(a) to Section 271(1)(c) was cited, which pertains to the amount of tax sought to be evaded. The Tribunal rejected this argument, noting that the addition resulting from concealment or furnishing inaccurate particulars should be treated as total income. The definition of 'total income' under Section 2(45) and 'gross total income' under Section 80B(5) was considered. The Tribunal clarified that the amount of addition/disallowance should be treated as total income, not eligible for further deductions under Chapter VI-A, including Section 80-IB(8A). Thus, the penalty on the addition of Rs. 55,693/- was upheld.Conclusion:The appeal was partly allowed, with the penalty on Rs. 16,19,062/- being deleted, while the penalty on Rs. 55,693/- was sustained. The Tribunal pronounced the order in the open court on 19.5.2014.