TaxTMI 
TaxTMI 
TaxTMI 
2015 (12) TMI 299
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....0.09.2011. The facts and circumstances which led to the penalty is as follows :- (i) The Assessee, which is a Company, operates in the business of shares and securities. (ii) The Assessee filed its return of income on 29.10.2001 declaring income of Rs. 3,84,75,860/- for the year under consideration i.e. 2001-02 and the same was assessed under section 143 (3) of the Act. (iii) During the relevant assessment year, the Assessee had received dividend income of Rs. 3,11,85,522/- from various other companies. (iv) While dealing with the tax assessment of the Assessee, the Assessing Officer noticed that the Assessee had claimed exemption of an expenditure of Rs. 4,15,86,591/- being interest on loans raised for acquiring shares of various companies. (v) The Assessing Officer vide assessment order dated 28.02.2003 came to the conclusion that as per Section 14A and Section 115-O(5), no deduction was allowable with respect to the expenditure incurred in relation to dividend income which was exempted from tax. (vi) On the basis of the relevant calculations, the Assessing Officer made a disallowance of Rs. 3,07,77,285/- and as a consequence, penalty proceedings were initiated a....
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....not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income. The ld. AR brought to our attention the "Explanation I. - Where in respect of any facts material to the computation of the total income of any person under this Act - such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the Commissioner to be false, or such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this subsection, be deemed to represent the income in respect of which particulars have been concealed." The ld. AR further contended that on perusal of the aforesaid, section 271 (1) of the Act provides that the assessing officer may, in the course of a....
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.... was a legal and bona fide claim backed by adequate/ necessary disclosure in the return of income/ accompanying documents. The ld. AR submitted a written synopsis, relevant submissions of which are as follows :- * On perusal of Explanation I to section 271(1)(c) of the Act it will be kindly noticed that the said Explanation has two limbs (A) and (B) as under: (A) fails to offer any explanation or offers an explanation which is found by the assessing officer to be false; or (B) offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to computation of his total income have been disclosed. Clause (A) cannot be applied in the present case since the appellant has offered explanation and the same cannot be regarded as false. Further, on dissecting the provisions of clause (8), it will be kindly noted that the following three conditions must cumulatively exist in order to levy penalty under that clause: * Appellant offers an explanation which he is not able to substantiate; and * Appellant fails to prove that such explanation is bona fide; and * All the ....
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....ct were initiated. The Court noticed in the aforesaid case that the appellant had made the claim after pursuing the expert legal advice and the same was clearly based on cogent, legal ground and there was no authoritative judicial pronouncement covering the said question raised by the appellant. It was observed by the Court that the claim of the appellant for necessary deduction based on legal contentions put forward by it could never amount to concealment of any income of the company and it could never be said that the appellant had furnished inaccurate particulars of its income by seeking to raise the legal pleas. It was held in the above case that the contention raised by the appellant did not in any way indicate that there had been any concealment of particulars of income or filing of inaccurate particulars of income by the appellant and that whether the said contentions are ultimately upheld or turned down, it could not be said that they were frivolous, dishonest or malafide. The rejection of the contention raised by the appellant, the court held could not lead to the conclusion that there had been any concealment of the particulars of income or filing of any inaccurate par....
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....on or offers an explanation which is found to be incorrect by the tax authorities which is not the case in the matter under consideration. We would also like to draw your kind attention to the decision of the Madhya Pradesh High Court in the case of CIT vs S.T.I. Biplus Tubing (India) Ltd. (247 ITR 426) wherein the Hon'ble Court affirmed the Tribunal's view that: Quote .... simply because a claim not tenable in law has been made, one cannot be permitted to jump to the positive conclusion that all was deliberate. Accordingly, it held that where there is no positive evidence of wilful concealment, no penalty can be levied. Unquote In Delhi Cloth and General Mills Company Limited vs. CIT (157 [TR 822), the Delhi High Court held as under: Quote .... the mere fact that a claim for expenditure stands disallowed does not by itself lead to the inference that the assessee had furnished inaccurate particulars to that item. The fact that the plea of the assessee that the expenditure in question was of revenue nature was not accepted, by itself did not mean that the assessee had furnished inaccurate particulars of its income by not adding that back to its total inc....
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.... the assessee was not bona fide. Unquote In this context, the assessee would also like to draw your attention to the decision of the Hon'ble Guwahati High Court in CIT vs Gurudayalram Mukhlal (190 ITR 39) wherein the Hon'ble High Court has observed as under (emphasis supplied): Quote Even in case of stipulated difference between the assessed income and the returned income, the penalty under section 271 (I) (c) is not automatic .... The fact that certain income has been assessed by the Income-tax Officer in the assessment order by itself is not conclusive evidence that the amount assessed was the income of the assessee. In fact, in very many cases, the Assessing Officer can include certain amounts in the income of the assessee if the explanation given by the assessee in regard to the source thereof is not found to be satisfactory. That may be all right so far as the assessment is concerned but when the question of penalty comes, different considerations will apply and the Income-tax Officer will be required to put on record some further material other than the rejection of the explanation of the assessee in regard to its source to hold that the amount in quest....
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....n by the Assessing Officer. The assessee has a right to make any claim which may or may not be allowed. Mere disallowance of a claim cannot by itself form the basis for initiating penalty proceedings in the absence of any material to show that the claim was made mala fide or deliberately under false premises with the ulterior intent to evade fiscal liability. The assessing officer in the course of assessment has not recorded any satisfaction regarding concealment or furnishing of inaccurate particulars of income by the appellant in respect of the additions/ disallowances made by the assessing officer. A mere mention at the end of the assessment order as a matter of routine that penalty proceedings have been initiated separately for filing inaccurate particulars of income cannot, it is respectfully submitted, tantamount to recording of satisfaction regarding concealment of income/submitting of inaccurate particulars of income or indicating that the assessing officer has applied his mind and formed an opinion in respect thereof, prior to initiating penalty proceedings. The assessing officer has to be categorical and should be apparent on a bare reading of the assessment o....
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....ubmits that the mere disallowance of a claim of expenditure during the assessment proceedings based on difference of opinion does not tantamount to concealment of income to justify levy of penalty under section 271(1)(c) of the Act. Accordingly, no penalty should be levied on the assessee in the present case. CONCLUSION It is most humbly submitted that the assessee was under the bona fide belief that the revenue expenditure on interest being in the nature of normal business expenditure, was deductible under the provisions of law for determining the total taxable income of the assessee. Notwithstanding the fact that the quantum appeal filed in your office has been decided against the Appellant and which is pending before Hon'ble ITA T, for penalty purposes your Honour would be entitled to consider the matter afresh and decide if penalty ought to have been levied. In the light of the aforesaid submissions, it is respectfully submitted that on the facts and circumstances of the case and in law no penalty under section 271(1)(c) of the Act was leviable. The penalty levied, therefore, calls for being deleted in its entirety." 5. Ld. DR relied on the orders of the authorit....
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....tion 143(3), wherein the aforesaid undisputed facts were noted in the following words: "The assessee has shown shares in the above-mentioned 15 companies from where dividend was received as 'trading asset'..... Therefore, the portion of interest paid relating to 15 companies (from where dividends have been received) is disallowed) is disallowed." 10. We take note that the AO taking to consideration the fact that the appellant had received dividend only from shares held as trading assets, in the assessment order passed under section 143(3) of the Act the assessing officer invoked provisions of section 14A and disallowed interest expenditure incurred on borrowed funds utilized for acquiring such shares under that section. 11. Thereafter we find that the aforesaid disallowance was sustained in the quantum appeals. The assessing officer imposed penalty under section 271(1) (c) alleging furnishing of inaccurate particulars of income with respect to the claim of interest expenditure, which has been challenged in the present appeal before the Hon'ble Tribunal. 12. The Ld. AR Gauraw Jain submitted that it is well settled that penalty cannot be imposed on debatable issues and relied o....
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....ng control over the group companies, the disallowance under section 14A can be made irrespective of the fact that dividend earnings were only incidental in nature. On the other hand, the assessee had relied on the decision of Delhi Bench of the Tribunal in the case of vidyut Investments v. Ito [2006] 10 SOT 284 wherein it was held that when shares are held as stock-in-trade with the object of trading in shares, and dividend income earning was only incidental in nature no part of the expenses could be disallowed under section 14A of the Act. In view of such difference of opinion, the Bench recommended the constitution of a Special Bench to decide the question mentioned in para I above. It is in the above circumstances that Hon'ble President has constituted the Special Bench to decide the said question as well as to dispose of the appeal."(emphasis supplied) In view of the above, according to the Ld. AR, the issue of application of section 14A was unclear, especially at the time of filing the return of income for the relevant assessment year, being the first year of application of the said section after insertion thereof in the statute. 15. The Ld, AR pointed out that the Spec....
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....ally in the case of dealer in shares would not be sufficient for invoking the provisions of section 14 A of the Act. We take note that the Majority decision expressed in Paras 23.8 and 23.9 of Special Bench order decided the aforesaid issue against the assessee. The relevant portion of the aforesaid order is reproduced hereunder for ready reference :- " .... A great deal of emphasis has been laid on the establishing of dominant and immediate connection between the expenditure incurred and the exempt income. According to the ld. AR the expenditure of interest on investment in shares has direct and proximate link with the profit or loss from trading of shares and indirect link with the dividend income which was earned incidentally and hence no disallowance is warranted. In our opinion there is a basis fallacy in this argument. Dominant and immediate connection refers to first degree of relation between the two things. However, it would cease to be dominant if the degree of relationship slips from first to second. It is noticed that there is a dominant and immediate connection between the expenditure incurred by the assessee in the shape of interest on borrowings for purchase of s....
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.... Court reported at 347 ITR 272 though against the assessee. Further we find that the SLP filed against the aforesaid decision of the Delhi High Court in the appellant's own case for the assessment year 2002-03 has also been admitted by the Hon'ble Supreme Court in CC No. 17279/2012. The Hon'ble Jurisdiction High Court has held that when an issue is admitted by the High Court on the ground that the same involves substantial question of law, the same cannot be visited with penalty under section 271(1)(c) of the Act. The Hon'ble jurisdictional Delhi High Court in the case of Basti Sugar v. CIT rendered in ITA 232/2005, observed as under: "The following questions were framed on 18th October, 2005: '(a) Whether the 1TAT was correct in law 'in holding that the issue regarding allowability of interest payable on late deposit of provident fund was a debatable issue and, therefore, could not be disallowed in the intimation issued order Section 143(1)(a) of the Income Tax Act? (b) Whether the ITAT was correct in law in holding that deleting the addition made by the Assessing Officer of an amount of Rs. 18,02,0261- being interest payable on late deposit of providen....
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....ssing officer on the ground that quantum appeal was admitted by the High Court on the ground of involving question of law, was affirmed by the Apex Court. And we take note that various other Hon'ble High Courts and Tribunals have decided the aforesaid issue in favor of the assessee. We take note of the fact that other High Courts and various benches of Tribunal in the following cases have decided the aforesaid issue in favour of the assessee and held that section 14A cannot be invoked where shares are held as stock-in-trade: * CCI Ltd. v. JCIT: 250 CTR (Kar.) [Refer pg. 90 to 92 of Case Laws PBl * CIT vs. Smt. Leena Ramachandran: 339 ITR 296 (Ker.) [Refer pg 94-96 of Case Laws PBl * DCIT v. M/s. India Advantage: ITA No. 6711lMuml 2011 (Mum. Trib.)- * Subsequently affirmed by the Bombay High Court in ITA No. 1131 of2013 [Copy of the decisions attached herewith) * Prescient Securities Pvt. Ltd. vs. ACIT: ITA No. 8361/Mum/2011 (Mum Trib.) [Refer Page 97-lOl of Case Laws PBl * Yatish Trading v. ACIT: 129 lID 237 (Mum. Trib.) * DCIT vs. Gulshan Investment Co Ltd.: ITA No. 666/Ko1l2012 (Kol.) [Refer Pgs 102- 108 of Case Laws PBl * Apoorva Patni v. ACIT: 54 SOT 9 (P....