2018 (2) TMI 963 - AT - Income Tax

Tribunal invalidates penalty under Income Tax Act citing incorrect return, lack of specificity in charges

ITO-13 (2) (3), Mumbai Versus M/s Shangrila Sales Pvt. Ltd.

The Tribunal upheld the CIT(A)'s decision to delete the penalty imposed under Section 271(1)(c) of the Income Tax Act, 1961. The penalty was found to be ... Penalty u/s 271(1)(c) - expenses incurred on Linkside building claimed as capital expenditure or revenue expenditure - defective notice - non specify the limb of Sec. 271(1)(c) for which the penalty proceedings had been initiated - Held that:- We find that the issue involved in the present case is squarely covered by the case of Meherjee Cassinath Holdings Vs. ACIT, Circle-4(2), Mumbai (2017 (5) TMI 904 - ITAT MUMBAI) wherein concluded that as the non striking off the irrelevant charge in the notice clearly reflects the non application of mind by the A.O, therefore, the order passed under Sec. 271(1)(c) in the backdrop of the said jurisdictional defect would be rendered as invalid and void ab initio. We find ourselves to be in agreement with the view taken by the CIT(A) that now when the only valid return of income was filed by the assessee as on 31.03.2011, therefore, the A.O could have imposed penalty only by pitting the income assessed vide order dated 19.03.2015, as in comparison to the income returned by the assessee in its return of income filed on 31.03.2011 - assessee had claimed the expenditure incurred on Linkside building as a capital expenditure in its original return of income, therefore, there was no basis for characterising the same as the concealed income of the assessee - as the assessee had duly disclosed the expenditure incurred on Linkside building in its return of income, therefore, merely for the reason that the said expenditure was claimed as a revenue expenditure would not justify imposition of penalty under Sec. 271(1)(c), for the reason that the same was held by the A.O to be in the nature as that of a capital expenditure. - Decided in favour of assessee Issues Involved:1. Deletion of penalty levied under Section 271(1)(c) of the Income Tax Act, 1961.2. Validity of penalty proceedings under Section 271(1)(c) due to non-striking off of irrelevant default in the show cause notice.3. Characterization of expenditure incurred on Linkside building as capital or revenue expenditure.4. Validity of penalty on the grounds of concealment of income or furnishing inaccurate particulars of income.Issue-wise Analysis:1. Deletion of Penalty Levied Under Section 271(1)(c):The revenue challenged the CIT(A)'s decision to delete the penalty levied under Section 271(1)(c) on the grounds that the assessee did not inform the A.O. about the original and revised returns filed on 31.03.2011. The CIT(A) found that the penalty was imposed based on an invalid return filed on 15.11.2013, which had no legal standing. The CIT(A) concluded that the penalty could only be imposed by comparing the income assessed with the income declared in the valid return filed on 31.03.2011. Since the assessee had claimed the Linkside building expenditure as capital expenditure in the original return, there was no basis for characterizing it as concealed income.2. Validity of Penalty Proceedings Due to Non-Striking Off of Irrelevant Default:The A.O. issued a show cause notice under Section 274 r.w.s 271(1)(c) without striking off the irrelevant default, which led to ambiguity about whether the penalty was for 'concealment of income' or 'furnishing inaccurate particulars of income.' The Tribunal noted that both defaults operate in exclusive fields and are not interchangeable. The non-striking off of the irrelevant charge indicated non-application of mind by the A.O., thus invalidating the penalty proceedings. This view was supported by the Hon'ble Supreme Court in the case of CIT Vs. SSA’s Emerald Meadows and other judicial pronouncements.3. Characterization of Expenditure Incurred on Linkside Building:The CIT(A) and the Tribunal agreed that the characterization of the expenditure on Linkside building as capital or revenue was a debatable issue. The mere rejection of the assessee's claim of the expenditure as revenue did not justify the imposition of penalty under Section 271(1)(c). The Tribunal upheld the CIT(A)'s view that the assessee had disclosed all details of the expenditure and that the issue was not one of concealment but of the nature of the expenditure.4. Validity of Penalty on Grounds of Concealment or Furnishing Inaccurate Particulars:The Tribunal observed that the penalty notice did not specify the exact charge, thereby violating the principles of natural justice. The penalty proceedings were initiated for furnishing inaccurate particulars but imposed for concealment of income. The Tribunal emphasized that the assessee must be aware of the exact charge to defend itself adequately. The Tribunal cited the Hon'ble Supreme Court's judgment in Reliance Petro Products to support that merely claiming an expenditure, which was not accepted by the A.O., does not attract penalty under Section 271(1)(c).Conclusion:The Tribunal upheld the CIT(A)'s order, quashing the penalty imposed by the A.O. under Section 271(1)(c). The appeal filed by the revenue was dismissed, and the decision emphasized the importance of clear and specific charges in penalty proceedings and the debatable nature of the expenditure characterization.