2014 (7) TMI 1055 - AT - Income Tax

Tribunal upholds penalties on disallowances, sets aside interest-free loans penalty, and rejects rent paid penalty.

The tribunal upheld the penalty on disallowances under section 14A and provision for doubtful debts due to lack of adequate explanation by the assessee. ... Penalty u/s 271(1)(c) - Disallowance u/s14A - Investment in shares – Held that:- The entire assets of the assessee-company stand financed by borrowed capital, on which interest stands paid - The reserve and surplus is only by way of revaluation reserve created during the year, i.e., on revaluing the (fixed) assets and not in the nature of free reserves - even including the same does not increase the ‘capital’ to exceed the accumulated losses - no explanation in fact have been rendered by the assessee toward the disallowance which emanates from the facts on record, the levy of penalty on the disallowance. Provision for doubtful debts u/s 36(1)(vii) r.w Explanation – Held that:- There could be a case where the provision amount which stands reduced from the amount of ‘sundry debtors’ in the balance-sheet as at the year-end, is not so for presentation purposes only, and in fact not carried forward to the following year in the accounts, and the debtors carried forward at the reduced, net amount so that the it is in effect and substance only a write off as decided in Vijaya Bank vs. CIT [2010 (4) TMI 46 - SUPREME COURT] - No explanation toward claim of a provision having been rendered by the assessee at any stage, thus, the penalty is confirmed – Decided against Assessee. Disallowance for rent paid – Held that:- The Revenue’s case in the penalty proceedings as not tenable - This is as a disallowance u/s. 40A(2)(a) could only be of an expenditure that is otherwise allowable, so that there could be no doubt with regard to the assessee having rented a house property, and for which rent stands paid at ₹ 10,000/- per month, having in fact also made an interest-free deposit of ₹ 100 lacs toward the same - There is no whisper in any order in the quantum proceedings, or even in the penalty proceedings, to show that the rent is excessive having regard to the annual value or the rent that the property may fetch from year to year – Thus, no case for levy of penalty is made out – Decided in favour of assessee. Issues:Challenge to confirmation of penalty u/s. 271(1)(c) for A.Y. 2005-06 on disallowances u/s. 14A, provision for doubtful debts, interest on interest-free loans, and rent paid.Analysis:Disallowance u/s. 14A - The assessee's investment in shares was financed by borrowed capital, resulting in the disallowance of interest on a proportionate basis. The tribunal found that the entire investment was financed by borrowed capital, not proportionately as assumed by the Revenue. As the assessee failed to provide any explanation for the disallowance, the penalty was confirmed.Provision for Doubtful Debts - The provision against bad debts was disallowed as it was not merely a write-off but a carried forward provision. The tribunal directed the AO to verify if the provision was carried forward in accounts, and penalty was confirmed subject to verification.Interest on Interest-Free Loans - The tribunal set aside the penalty on interest paid on loans advanced to directors as the matter was restored back to the AO. The Revenue could levy penalty in the set-aside proceedings if deemed fit.Rent Paid - The disallowance for rent paid to a director was found unjustified as the Revenue's case was not tenable. The disallowance under section 40A(2)(a) could only be of an allowable expenditure, and no excessive rent was proven. Therefore, the tribunal held that no case for penalty was made out, and the appeal was partly allowed.In conclusion, the tribunal upheld the penalty on the disallowances u/s. 14A and provision for doubtful debts, set aside the penalty on interest-free loans, and rejected the penalty on rent paid. The judgment was pronounced on June 30, 2014.