2024 (12) TMI 371 - AT - Income Tax

Penalty under section 271(1)(c) deleted for reclassification of compensation from capital receipt to business income

ITAT Mumbai held that penalty u/s 271(1)(c) cannot be imposed merely for change of head of income from capital receipt to business income regarding ... Penalty u/s 271(1)(c) - determination of correct head of income - Compensation received on termination of agency rights by treating it as business income - HELD THAT:- Hon’ble jurisdictional High Court in the case of Bennett Coleman & Co ltd in [2013 (3) TMI 373 - BOMBAY HIGH COURT] have deleted the penalty on account of change of head of income by the assessing officer particularly when he could not establish concealment of income or furnishing of inaccurate particulars of income by stating incorrect facts by the assessee. Hon’ble Bombay High Court in the case of CIT Vs Procter & Gamble Hygiene and Healthcare Ltd [2013 (3) TMI 883 - BOMBAY HIGH COURT] deleted the penalty for change of head of income from “ Income from House property” to “Business income”. Therefore, respectfully relying on the decisions referred above, in our opinion no penalty could be sustained in respect of addition of compensation received on termination of the agreement. Thus, the penalty in respect of this issue is hereby deleted. Penalty in respect of three additions i.e. Addition on account of Insurance claim received during the year, Disallowance of deduction u/s 35(2AB) and u/s 35(1)(iv) in respect of Chennai unit and Disallowance of depreciation on capital expenses of R&D unit is hereby deleted as above three issues, have already been restored back to the file of the Assessing Officer. Issues Involved:1. Legitimacy of penalty under Section 271(1)(c) of the Income-tax Act, 1961 for furnishing inaccurate particulars or concealing particulars of income.2. Classification of compensation received on termination of agency rights as business income or capital gains.3. Treatment of insurance claim received during the year.4. Disallowance of research and development expenditure under Sections 35(2AB) and 35(1)(iv).5. Disallowance of depreciation on capital expenses of the R&D unit.Detailed Analysis:1. Legitimacy of Penalty under Section 271(1)(c):The central issue was whether the penalty under Section 271(1)(c) for furnishing inaccurate particulars or concealing income was justified. The Revenue argued that the penalty was warranted due to inaccurate particulars and concealment. However, the Tribunal noted that the notice issued under Section 274 r.w.s. 271(1)(c) was defective as it did not specify the exact limb of the penalty, relying on the precedent set by the Bombay High Court in Mohd. Farhan Shaikh v. DCIT. The Tribunal concluded that the penalty could not be sustained as the basis for the penalty had been restored to the Assessing Officer for further examination.2. Classification of Compensation Received on Termination of Agency Rights:The ITAT upheld the classification of compensation amounting to Rs. 92,76,62,688/- received on termination of agency rights as business income, not capital gains. The Tribunal referenced Supreme Court judgments, emphasizing that compensation for termination of an agency, which does not impair the profit-making structure, is a revenue receipt. The Tribunal rejected the assessee's claim that the compensation was a capital gain, affirming the addition as business income under Sections 28(ii)(c) and 28(va)(a).3. Treatment of Insurance Claim:The insurance claim of Rs. 2,75,00,000/- was remitted back to the Assessing Officer for verification of the actual loss incurred due to accidental fire. The Tribunal noted that the amount was initially treated as business income by the AO but required further verification. The Tribunal directed the AO to reassess the claim after verifying the loss, thus rendering the penalty on this issue unsustainable at this stage.4. Disallowance of R&D Expenditure:The disallowance of R&D expenditure under Sections 35(2AB) and 35(1)(iv) was also remitted back to the AO. The Tribunal observed that the assessee failed to provide the necessary approval in Form 3CM, which is mandatory for claiming the deduction. The Tribunal restored the issue for the AO to decide after giving the assessee an opportunity to furnish the required approval, thereby nullifying the penalty on this disallowance.5. Disallowance of Depreciation on Capital Expenses of R&D Unit:The issue of disallowance of depreciation on capital expenses was interconnected with the R&D expenditure disallowance and was similarly remitted back to the AO. The Tribunal held that since the underlying issue was restored, the penalty could not survive.Conclusion:The Tribunal deleted the penalty imposed on the assessee, emphasizing that mere disallowance of a claim does not automatically attract penalty under Section 271(1)(c). The Tribunal relied on the Supreme Court's decision in CIT v. Reliance Petroproducts Pvt. Ltd., which held that an incorrect claim in law does not constitute furnishing inaccurate particulars. The Tribunal also referenced jurisdictional High Court decisions that supported the deletion of penalties where there was a change in the head of income without concealment or furnishing of inaccurate particulars. Consequently, the cross-objection of the assessee was allowed, and the Revenue's appeal was dismissed as infructuous.