Penalty under s.271(1)(c) not sustained for denied s.32(1)(iia) depreciation; penalty sustained for disallowed s.40(a)(ii) deduction

ITAT (Indore-AT) held that penalty under s.271(1)(c) could not be sustained for denial of an additional depreciation claim under s.32(1)(iia) where an identical claim was allowed in the preceding AY, finding no furnishing of inaccurate particulars. However, penalty was sustained for disallowance of a tax deduction under s.40(a)(ii), since the deduction was clearly disallowable as submitted in the return and inadvertence did not excuse it. Appeal partly allowed.

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ISSUES PRESENTED AND CONSIDERED

1. Whether penalty under section 271(1)(c) is sustainable for the disallowance of additional depreciation claimed under section 32(1)(iia) for the assessment year in question where an identical claim was allowed by the assessing authority in the preceding assessment year.

2. Whether penalty under section 271(1)(c) is sustainable for the disallowance of deduction of income-tax expenditure (debited in profit & loss account) which is disallowed as not allowable under section 40(a)(ii), when the assessee contends the entry was inadvertent and without intention to furnish inaccurate particulars.

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Penalty for disallowance of additional depreciation under section 32(1)(iia)

Legal framework: Penalty under section 271(1)(c) is leviable where the assessee is found to have furnished inaccurate particulars of income. Claims for additional depreciation fall to be examined on statutory entitlement under section 32(1)(iia) and facts supporting the claim.

Precedent treatment: No specific precedent was relied upon by the parties to negate/affirm penalty in the precise fact pattern of a claim allowed in the immediately preceding year but disallowed in the year under assessment; therefore the Tribunal treated prior allowance as relevant factual matrix.

Interpretation and reasoning: The Court reasoned that where an assessing authority in the immediately preceding year had accepted an identical claim of additional depreciation after scrutiny, a failure to allow the identical claim in the subsequent year does not of itself demonstrate furnishing of inaccurate particulars by the assessee for the subsequent year. The Tribunal emphasised that the issue before the AO related to non-acceptance of the claim by a faceless AO in the later year and that the prior-year allowance undermines a finding of intentional or deliberate misstatement for the year under appeal.

Ratio vs. Obiter: Ratio - where identical claim of statutory deduction (additional depreciation) was allowed in the immediately preceding assessment year by the assessing authority, a subsequent non-allowance in the next year does not constitute furnishing of inaccurate particulars attracting section 271(1)(c), absent other evidence of deliberate misstatement. Obiter - implications for differing factual matrices (e.g., materially different underlying facts or fresh information in the later year) were not decided.

Conclusion: Penalty under section 271(1)(c) is not sustainable in respect of the disallowance of additional depreciation claimed under section 32(1)(iia) for the year under appeal given the identical claim was accepted in the immediately preceding year; the AO was not justified in imposing penalty on this item.

Issue 2: Penalty for disallowance of income-tax deduction debited to P&L under section 40(a)(ii)

Legal framework: Amounts not allowable under the Act (including payments/expenses disallowable under section 40(a)(ii)) cannot be claimed as deductions; section 271(1)(c) may be invoked where claims amount to furnishing inaccurate particulars or are contrary to law/accounting principles indicating deliberate deviation.

Precedent treatment: The Tribunal relied upon Supreme Court decisions referenced by the Revenue: N.G. Technologies v. CIT (2016) - claim contrary to basic accountancy principles leading to penalty where revised return was filed only after AO confronted assessee; and Hamirpur District Cooperative Bank Ltd. v. CIT (2020) - wrongly debited amount in P&L held to be appropriation of profit and penalty sustained. These cases support imposition of penalty where the claim is legally untenable and amounts to taking benefit contrary to law.

Interpretation and reasoning: The Tribunal accepted the Revenue's submission that the assessee claimed a deduction which was statutorily not allowable under section 40(a)(ii). The assessee's assertion of inadvertence and absence of intent to misstate particulars was considered but found insufficient to negate the existence of inaccurate particulars: an objectively untenable claim for deduction, if allowed, would improperly benefit the assessee. Reliance on the cited precedents supported the view that inadvertence does not automatically preclude penalty where the claim is contrary to law/accountancy principles and would improperly reduce taxable income.

Ratio vs. Obiter: Ratio - where a claim for deduction is statutorily not allowable (e.g., falls within section 40(a)(ii)) and is reflected as an expense in the P&L, imposition of penalty under section 271(1)(c) is sustainable even if the assessee pleads inadvertence, absent convincing evidence negating inaccuracy or absence of culpability. Obiter - the degree and nature of evidence required to rebut inference of inaccuracy (e.g., bona fide mistake supported by contemporaneous records or immediate voluntary correction) was not exhaustively explored.

Conclusion: Penalty under section 271(1)(c) is sustainable in respect of the disallowance of the income-tax expenditure of Rs. 6,00,000 claimed as a P&L debit and disallowed under section 40(a)(ii), notwithstanding the assessee's plea of inadvertence.

Cross-reference and Overall Conclusion

Both issues were decided under the same statutory head-imposition of penalty under section 271(1)(c)-but on distinct legal and factual bases: (i) prior-year acceptance of an identical statutory deduction negates the conclusion of furnishing inaccurate particulars for that item (penalty not sustainable); (ii) a claim contrary to statutory disallowance and basic accountancy principles that, if allowed, would give an improper tax benefit, sustains penalty despite assertions of inadvertence (penalty sustainable).

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