2020 (8) TMI 199 - AT - Income Tax

Penalty under Income Tax Act quashed as assessee assessed under different section

The Tribunal quashed the penalty imposed under Section 271(1)(c) of the Income Tax Act, 1961, holding that since the assessee was assessed under Section ... Penalty under section 271(1)(c) - book profit under section 115JB - Explanation 4 to section 271(1)(c) - pre-amendment interpretation - amendment to Explanation 4 by Finance Act, 2015 w.e.f. 01-04-2016 - prospective application of statutory amendment - Nalwa Sons Investments Ltd. (Delhi High Court) on penalty where assessment is under section 115JBPenalty under section 271(1)(c) - book profit under section 115JB - Explanation 4 to section 271(1)(c) - pre-amendment interpretation - amendment to Explanation 4 by Finance Act, 2015 w.e.f. 01-04-2016 - Whether penalty under section 271(1)(c) could be imposed for additions/disallowances made under the general provisions where the assessee was assessed and paid tax on book profits under section 115JB for A.Y. 2014-15 (pre-amendment Explanation 4). - HELD THAT: - The Tribunal examined the pre-amended wording of Explanation 4 to section 271(1)(c) and the Delhi High Court's decision in CIT v. Nalwa Sons Investments Ltd., which held that where assessment is finally made on deemed 'book profit' under section 115JB (being higher than the result under normal provisions), additions/disallowances under the normal provisions have no bearing on tax evasion for the year because tax is determined on the deemed income and the concealment does not lead to actual tax evasion in that assessment. The Tribunal noted that Parliament thereafter amended Explanation 4 by the Finance Act, 2015 (effective 01-04-2016) to provide a formula making penalty quantifiable even where both general provisions and section 115JB apply; the amendment was explicitly prospective and applies from A.Y. 2016-17. Since the year before the Tribunal is A.Y. 2014-15, the post-amendment provision does not apply. Following the High Court precedent and the prospective scope of the legislative amendment, the Tribunal concluded that penalty under section 271(1)(c) could not be sustained for the additions/disallowances made under the normal provisions for A.Y. 2014-15 where the assessee was assessed under section 115JB. [Paras 10, 11]Penalty under section 271(1)(c) quashed insofar as it relates to additions/disallowances made under the normal provisions for A.Y. 2014-15, because the pre-amended Explanation 4 does not permit imposition of such penalty where assessment is on book profits under section 115JB.Final Conclusion: The appeal is allowed: the penalty under section 271(1)(c) imposed for A.Y. 2014-15 is quashed on the ground that the pre-amendment Explanation 4 did not permit quantification of penalty in respect of additions made under the normal provisions where tax was determined under section 115JB; the legislative amendment of 2015 is prospective from A.Y. 2016-17 and not applicable to the year in issue. Issues Involved:1. Levy of penalty under Section 271(1)(c) of the Income Tax Act, 1961.2. Applicability of penalty under Section 271(1)(c) when tax is paid under MAT as per Section 115JB.3. Validity of penalty order due to non-specification of the limb for initiation of penalty under Section 271(1)(c).4. Furnishing inaccurate particulars of income related to interest on compulsory convertible debentures and bid development costs.5. Disputable nature of expenses as capital or revenue.6. Acceptance of alternate plea to capitalize interest cost and grant of depreciation.7. Penalty on provision for income tax claimed as deduction due to clerical error.8. Incorrect reliance on findings regarding capitalization of interest cost.9. Overall validity of penalty imposed under Section 271(1)(c).Detailed Analysis:1. Levy of Penalty under Section 271(1)(c):The appeal concerns the confirmation of a penalty of Rs. 3,26,69,600/- levied by the Assessing Officer (AO) under Section 271(1)(c) of the Income Tax Act, 1961. The penalty was imposed for alleged concealment of income or furnishing inaccurate particulars of income.2. Applicability of Penalty under Section 271(1)(c) when Tax is Paid under MAT:The assessee argued that since it was assessed and paid tax under Minimum Alternate Tax (MAT) as per Section 115JB, no penalty under Section 271(1)(c) should be imposed for additions made under normal provisions. The amendment to Explanation 4 of Section 271, applicable from 01-04-2016, was argued to be prospective and not applicable to the assessment year 2014-15. The Tribunal agreed, citing the Delhi High Court judgment in CIT Vs. Nalwa Sons Investments Ltd., which held that penalty under Section 271(1)(c) could not be imposed when the income was assessed under Section 115JB.3. Validity of Penalty Order Due to Non-Specification of Limb:The assessee contended that the penalty order was null and void as the notice under Section 274 read with Section 271(1)(c) was issued mechanically without specifying whether the penalty was for concealment of income or for furnishing inaccurate particulars of income. This procedural lapse was argued to invalidate the penalty proceedings.4. Furnishing Inaccurate Particulars of Income:The AO disallowed the assessee's claim for revenue expenses on account of interest paid on compulsory convertible debentures and bid development costs, recharacterizing them as capital expenditures. The CIT(A) upheld the AO's finding that the assessee had furnished inaccurate particulars of income, justifying the penalty under Section 271(1)(c).5. Disputable Nature of Expenses:The assessee argued that the nature of expenses (capital or revenue) was disputable and based on a difference of opinion on a legal claim. The Tribunal noted that a mere making of a claim which is not sustainable in law does not amount to furnishing inaccurate particulars of income, referencing the Supreme Court judgment in CIT Vs. Reliance Petroproducts (P) Ltd.6. Acceptance of Alternate Plea:The AO accepted the alternate plea of the assessee to capitalize the interest cost and granted depreciation thereon. This acceptance was argued to indicate the bona fide nature of the assessee's claim, which should not attract penalty.7. Penalty on Provision for Income Tax:The AO imposed a penalty on the provision for income tax of Rs. 3,12,82,993/- claimed as a deduction due to a clerical error. The assessee argued that this was a bona fide mistake and did not result in any revenue loss as the tax was paid under MAT. The Tribunal found merit in this argument, referencing the Supreme Court judgment in Price Waterhouse Coopers (P) Ltd. Vs. CIT.8. Incorrect Reliance on Findings:The CIT(A) wrongly held that the assessee had agreed during assessment proceedings to the mistake of not capitalizing the interest cost to work in progress of assets. The Tribunal found this to be a misinterpretation of the facts.9. Overall Validity of Penalty:The Tribunal concluded that the penalty under Section 271(1)(c) could not be imposed as the assessee was assessed under Section 115JB and the additions/disallowances were made under normal provisions. The penalty order was quashed, and the appeal was allowed.Conclusion:The Tribunal quashed the penalty imposed under Section 271(1)(c) of the Income Tax Act, 1961, on the grounds that the assessee was assessed under the deeming provisions of Section 115JB, and the additions/disallowances were made under normal provisions. The appeal was allowed, and the penalty order was set aside.