2016 (4) TMI 338 - AT - Income Tax

Tribunal overturns penalty citing legal interpretation differences, supports Assessee's good faith

M/s Ami Builders Pvt. Ltd. Versus ACIT, 5 (1), Mumbai

The Tribunal allowed the appeal, determining that the penalty imposed by the AO was unwarranted. It was found that the disallowances were due to legal ... Penalty U/s. 271(1)(c) - Disallowance of Business Expenses u/s 37(1) - Held that:- These expenses were of routine nature e.g. Director's Salary, Bank Charges, Filing Fee, Audit Fee etc. Undoubtedly, these expenses were of statutory nature and were necessary for maintaining the existence of the company and thus these can be said to be incurred for the purpose of business of the assessee, and therefore these expenses were claimed under the head 'Business'. The claim of the assessee was very much plausible not only on facts but it is also supported on the basis of various judgments in favour of the assessee. CIT vs. Ganga Properties Ltd. [1989 (5) TMI 10 - CALCUTTA High Court] so long as a company is in operation, it has to maintain its status as a company and it has to discharge certain legal obligations and, for that purpose, it is necessary to appoint clerical staff and secretary or accountant and incur incidental expenses. In this background, the conclusion of the Tribunal that the expenses incurred were wholly and exclusively for the activities to earn income is preeminently a reasonable conclusion.- Decided in favour of assessee Disallowance out of interest on loan u/s 24(b) as well as u/s 36(1)(iii) - Held that:- The claim of the assessee was that funds were borrowed for the purpose of business on which interest was paid. The income from House Property although was part of business of the assessee but due to specific provisions, the same was assessed under the head 'Income from House Property'. But, the intrinsic nature of the income remains as income from business, even if it was assessed under a different head. Under these circumstances, the belief of the assessee that any expense incurred during the course of its business (including interest paid on funds borrowed) should be allowable against the income earned during the course of business, cannot be said to be wholly unfounded and without any basis. The claim of the assessee was rejected due to application of particular provisions of law by the AO. It is further noted by us that the AO has himself allowed part of the total claim of interest. The assessee had claimed a sum of ₹ 1,72,79,082/-. Out of the said claim, only a sum of ₹ 55,97,027/- has been disallowed by the AO u/s 24(b) of the Act. Thus, even as per the AO, the claim of the assessee was not wholly disallowable. Rather, substantial amount was allowed by the AO, and disallowance of part of the total claim was made by the AO on the basis of some calculations done by him by alleging that whole of the funds were not utilized for acquiring the property. Thus, an element of guess work was involved while computing and quantifying the amount of disallowance. Further, it is brought to our notice that similar claim has been accepted by the AO in the subsequent year i.e. AY 2010-11, wherein no disallowance has been made by the AO. Under these circumstances, it cannot be said, on 'certain' and 'unambiguous' basis that the claim of the assessee in this year was patently erroneous. Under these circumstances, the AO was not able to make out a case for concealment of income or furnishing of inaccurate particulars of income while initiating the penalty in the assessment order or while levying the penalty in the penalty order. It is noted that penalty has been levied in the manner as if once disallowance has been made, then levy of penalty would be automatic, disregarding the well-settled position of law that penalty proceedings are independent of the assessment proceedings. - Decided in favour of assessee Issues Involved:1. Imposition of penalty under Section 271(1)(c) of the Income Tax Act.2. Disallowance of business expenses under Section 37(1).3. Disallowance of interest on loans under Section 24(b) and Section 36(1)(iii).4. Determination of whether the claim was made in good faith or with the intent to conceal income.5. Justification for levying a maximum penalty of 300%.Detailed Analysis:1. Imposition of Penalty under Section 271(1)(c) of the Income Tax Act:The primary issue revolves around the imposition of a penalty under Section 271(1)(c) for alleged concealment of income or furnishing inaccurate particulars. The Assessee argued that no satisfaction was recorded by the AO regarding concealment of income or furnishing inaccurate particulars. It was contended that all information was provided accurately, and the disallowance was merely due to a different legal interpretation by the AO. The Tribunal noted that the AO did not specify whether the case involved concealment of income or furnishing inaccurate particulars, thus failing to establish a basis for the penalty.2. Disallowance of Business Expenses under Section 37(1):The AO disallowed Rs. 3,51,783/- claimed as business expenses, arguing that since the income was taxable under 'house property,' business expenses were not permissible. The Assessee contended that these were routine expenses necessary for maintaining the company's existence. The Tribunal found that these expenses, such as Director's Salary, Bank Charges, Filing Fee, and Audit Fee, were statutory and necessary for the company's existence, thus plausible under the head 'Business.' The Tribunal cited the judgment of CIT vs. Ganga Properties Ltd., 199 ITR 94 (Cal.), supporting the Assessee's claim.3. Disallowance of Interest on Loans under Section 24(b) and Section 36(1)(iii):The AO disallowed Rs. 55,97,027/- of the interest claimed under Section 24(b), arguing that part of the borrowed funds was not used for acquiring house property. The Assessee claimed that the funds were borrowed for business purposes, and the interest was a legitimate business expense. The Tribunal noted that the AO allowed part of the interest claim, indicating that the claim was not wholly disallowable. The Tribunal also observed that a similar claim was accepted in the subsequent year (AY 2010-11), reinforcing the Assessee's position.4. Determination of Whether the Claim was Made in Good Faith or with the Intent to Conceal Income:The Tribunal emphasized that penalty proceedings are independent of assessment proceedings and that merely making a claim, which is not sustainable in law, does not amount to furnishing inaccurate particulars. The Tribunal referenced the Supreme Court's judgment in CIT vs. Reliance Petroproducts Pvt. Ltd., 322 ITR 158, which held that making an incorrect claim does not automatically attract a penalty unless the claim is found to be not bonafide. The Tribunal found that the Assessee's claim was made in good faith and was not patently erroneous.5. Justification for Levying a Maximum Penalty of 300%:The AO levied a penalty at the maximum rate of 300%, citing the Assessee's deliberate and conscious furnishing of inaccurate particulars. The Assessee argued that the penalty was levied mechanically without considering the quantum of revenue loss. The Tribunal noted that the AO did not provide specific reasons for the maximum penalty rate and that the penalty should not be automatic upon disallowance. The Tribunal found that the penalty was beyond jurisdiction and contrary to law and facts, thus directing its deletion.Conclusion:The Tribunal allowed the appeal filed by the Assessee, concluding that the penalty levied by the AO was not justified. The Tribunal emphasized that the disallowance of expenses and interest was due to a different legal interpretation and not due to concealment or furnishing inaccurate particulars. The Tribunal directed the deletion of the penalty, supporting the Assessee's position with various judicial precedents.