TaxTMI 
TaxTMI 
2019 (7) TMI 1264
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....s correct in deleting the penalty imposed by the AO u/s 271(1)(c) of the I.T. Act by holding that disallowance u/s 14A of the I.T. Act was a debatable matter disregarding that the assessee had incorrectly computed the disallowance in contravention of Rule 8D of the I.T. Rules. 3. The appellant craves to be allowed to add any fresh ground(s) of appeal and / or Deleted or amend any of the ground(s) of appeal." 2. Assessment order dated 06.12.2010 was passed u/s 143(3) of the Income tax Act, 1961 (in short "the Act") determining the total income on Rs. 94,52,99,610/- wherein separate additions amounting to Rs. 1,69,57,108/- (on account of valuation of stock) and Rs. 71,223/- (on account of disallowance u/s 14A of the Act r.w. Rule 8D of Income tax Rules) were made. The AO also passed penalty order dated 30.03.2014 u/s 271(1)(c) of the Act levying penalty amounting Rs. 57,87,930/- in respect of the aforesaid two additions. The aforesaid additions were confirmed by CIT(A) vide here order dated 23.07.2011. The assessee filed appeal in ITAT against the aforesaid order dated 27.03.2012 vide ITA No.6600/Del/2014. The assessee's appeal in aforesaid appeal was disposed of vide ord....
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....n of stock. In addition to this the AO has also made a additional disallowance of Rs. 71233/- under section 14A against the suo moto disallowance by the assessee of Rs. 29120/-. The assessee then filed an appeal before the CIT(A) wherein the Ld. CIT(A) in his order dated 23.07.2013 upheld the additions made by the AO. However, the assessee being not satisfied with the decision of the CIT(A) has moved before the ITAT and has filed an appeal before the same which is still pending. Now the Id. AO levied the penalty under section 271(1)(c) on both the additions. On going through the penalty order your honour will notice that the Id. AO has no where mentioned what made him believe that the assessee has done any concealment or furnished any inaccurate particular in the return of income. He has simply quoted the text of the addition made by him in the assessment order and quoted the judgment of Delhi High Court in the case of Zoom Communication Pvt. Ltd. (2010) 327 ITR 510. Your honour the said judgment of Delhi High Court has nothing to do with the case of the assessee as the facts of the said case are different from that of the assessee company. In th....
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.... that the income so calculated is correct and the method used for calculating the value of stock is valid and accordingly the same was offered for taxation. Thus there can be no allegation that the assessee has concealed the particulars of its income. There is no instance in the order passed by the Ld. AO wherein the Id. AO has mentioned any activity of the appellant which could conclude that there was some concealment of any facts. Also your honor the assessee has not furnished any inaccurate particulars. Thus the initiation of penalty proceedings is bad in law and against the facts of the case. Your honour it is not a case here where the assessee has adopted an unlawful method to value its inventory. The weighted average method is a recognised method of valuation and therefore the same cannot be regarded as baseless. Accordingly, the penalty cannot be levied for the difference on account of new method adopted by the AO. Your honor further reliance is placed on following case laws where it is held that no penalty can be imposed on disallowance on account of valuation of stock: In the case of CIT vs. J.H. PARABIA (TRANSPORT) (P) LTD. HIGH COURT OF GUJARAT....
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.... a recognized method and it cannot be branded as something abnormal or baseless. It is a case where assessee has been following a consistent method of valuation of closing stock for the last 16 years. Reliance on the principle of cost or market price whichever is less, for determining the closing stock as per cost, the assessee has been employing the weighted average cost method. The approved AS-2 for valuation of inventories also make it clear that 'the cost of inventories is to be determined by following the FIFO method or the weighted average cost method. Undisputedly, it is not a case of change of method of valuation in the case of assessee but the method of valuation which has consistently been followed for the last so many years. Under these circumstances, we fully concur with the finding of the learned CIT(A) that the method of valuation of stock followed by the assessee was an accepted method in consonance with the law as well as Accounting Standard and therefore, there is no reason to discard the same. We thus do not find reason to interfere with the first appellate order on the issue which is a speaking order supported with the decisions relied upon by him. The same i....
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....ng sufficient to discharge the burden that is cast on the department by section 271 (l)(c). The matter is concluded by the decision of the Supreme Court in Commissioner of Income-tax v. Anwar Ali. That too was a case where the assessee's explanation regarding the sum of Rs. 87,000 which he had admittedly deposited in a bank was rejected, and the amount added as his income in the assessment proceedings. When action for imposition of penalty was taken under section 271(1)(c) it was contended that the ingredients that should be satisfied for the application of the section had not been made out. This contention was accepted by the Supreme Court and their Lordships came to two conclusions : the first of the conclusions is : "The section is penal in the sense that its consequences are intended to be an effective deterrent which will put a stop to practices which the legislature considers to be against the public interest. " Having said so, they proceeded to deal with the next question and we shall extract the paragraph dealing with this question: 'The next question is that when proceedings under section 28 are penal in character what would be the nature....
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.... explanation of the assessee as false, there was any material before the authorities justifying the conclusion that the value of 471 bags of raw nuts pledged with the bank represented the income of the assessee or that the amount representing the difference in the value of the closing stock by the adoption of a higher valuation of the closing stock by the assessing authorities represented the assessee's income. We therefore think that the matter must be governed by the decision of the Supreme Court in Commissioner of Income-tax v. Anwar Ali. This decision has been again referred to with approval by the Supreme Court in a recent pronouncement in Commissioner of Income-tax v. Khoday Eswarsa and Sons. We therefore answer the question in the negative, that is, in favour of the assessee and against the department. We make no order as to costs. " Penalty on disallowance under section 14A Your honour the Id. AD has made additional disallowance under 14A rejecting the calculation done by the assessee without giving any basis of the same. It is to be noted that every addition/disallowance must not give rise to imposition of penalty. If that be so penalty would....
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....the case of Espire Infolabs Private Limited vs. ITO ITA No. 4190- 4191/Del/2013, the Honorable ITAT (Delhi) held as under: In our opinion, merely because certain disallowance is made under Section 14A rejecting the assessee's contention that no disallowance is called for would not be sufficient to levy the penalty under Section 271 (1)(c). There is no allegation of the Revenue that the assessee furnished any details which are found to be false or inaccurate. Merely because some disallowance is computed as per the formula prescribed under Rule SO, it cannot be presumed that the assessee has concealed the income or furnished inaccurate particulars of income. While taking this view, we derive support from the decision of Hon'ble Apex Court in the case of CIT Vs. Reliance Petroproducts Pvt.Ltd. - 322 ITR 158. In the case of Nalwa Investment Limited I. T.A. No.380S/0/2010 for assessment year 2005-06, dated 29.10.2010 the Honorable ITAT(Delhi Bench) held as under: "No computation of disallowance was made u/s 14A as no disallowance was made in the return of income. However, the accounts have been audited and the return was accompanied by the tax audit re....
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....alia mentioned that allocation of expenses is beset with a lot of problems and the issue was laid to rest by introduction of Rule 80, in the year 2008. Therefore, even in absence of any attempt on the part of the assessee to segregate the expenditure, it can be said that the questions of disallowance and its quantification are contentious, which leads to the inference that the difference of opinion between the assessee and the authorities is bonafide. Respectfully following this decision, it is held that the learned CIT (A) was right in deleting the penalty. Your honor the issue in the case of the assessee of disallowance of claim under section 14A is highly debatable one. The issue being debatable no penalty can be levied as such. In this regard reliance has been placed on the following judgments: In the case of CIT vs. Jindal Equipment Leasing and Consultancy Services Ltd. ITA no. 68/2012, the Honorable High Court of Delhi in its order dated 03/02/2012 held as under: "6. The CIT (Appeals) and the tribunal have considered the aforesaid explanation given by the assessee to justify their claim why no disallowance was mandated under Section 14A in the prese....
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....not be said that the assessee either concealed the income or furnished inaccurate particulars of income. Therefore, by keeping in view the ratio laid down by the Hon'ble Apex Court in the case of CIT Vs Reliance Petro Products Pvt. Ltd. (supra), we are of the view that the Ld. CIT(A) was fully justified in deleting the penalty levied by the A.O u/s 271(1)(c) of the Act: We do not see any infirmity in the impugned order of the Id. CIT(A) and accordingly do not see any merit in this aspect of the department. In the' case of Trans Asia Consultant Pvt. Ltd. vs. ACIT ITA No. 141/Del/2013, the Honorable ITAT Delhi Bench held as under: 14. The ITAT Delhi 'F' Bench in the case of DCIT vs Nalwa Investments Ltd. (supra) cancelled the penalty imposed on the assessee pertaining to the disallowance u/s 14A of the Act. The relevant observations and findings are as under:- 15. In view of above, we observe that the authorities below have not recorded any finding that the explanation offered by the assessee before the Assessing Officer was found to be false and in this situation, the decision of Hon'ble Supreme Court in the case of Reliance Pe....
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.....K Jajoo vs. CIT (1990) 181 ITR 410, 412(MP) [mere rejection of claim for expenses would not mean that there was concealment of income] ii) CIT vs. University Printers, (1991) 188 ITR 206(AII) [mere rejection of the explanation of the assessee would not mean that there was concealment of income] iii) CIT vs. Nepani Biri Co. Trust, (1991) 190 ITR 402, 403(AII) [where the difference between the income returned and the income assessed was due to 'disallowance of expenditure claimed by the assessee] iv) CIT vs. Dhamchand 1. Shah,(1993) 204 ITR 462, 468-69(Bombay) [penalty cannot be sustained merely on the grounds that certain additions were made and the same were accepted by the assessee without invoking the Explanation to Section Uls 271 (1)(c)]. v) CIT vs. Inden Bislers (1999) 240 ITR 943, 946, 947 (Madras)[tribunal was held - justified in canceling the penalty where it has recorded a finding that the additions . have' been made because a particular expenditure was not justifiable from a commercial point of view and that there was no evidence of concealment of income). Thus the action of the assessing officer in levying the penalty is bad i....
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....14A and levied penalty u/s 271 (1) (c) on the ground that the claim was unsustainable. The penalty was deleted by the appellate authorities. On appeal by the department to the Supreme Court, HELD dismissing the appeal: "(i) S. 271 (1) (c) applies where the assessee "has concealed the particulars of his income or furnished inaccurate particulars of such income". The present was not a case of concealment of the income. As regards the furnishing of inaccurate particulars, no information given in the Return was found to be incorrect or inaccurate. The words "inaccurate particulars" mean that the detail$ supplied in the Return are not accurate, not exact or correct, not according to truth or erroneous. In the absence of a finding by the AO that any details supplied by the assessee in its Return were found to be incorrect or erroneous or false, there would be no question of inviting penalty u/s 271 (1)(c). (ii) The argument of theO revenue that "submitting an incorrect claim for expenditure would amount to giving inaccurate particulars of such income" is not correct. By no stretch of imagination can the making of an incorrect claim in law tantamount to furnishing inaccu....
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.... honour to kindly delete the penalty levied by the Id. AO as neither the appellant has furnished inaccurate particulars nor it has concealed its income. Even otherwise the addition made bv the AQ is not sustainable in law Your honour the Id. AO has made two disallowances vide his order dated 06/12/2010 i.e. 1. Valuation of stock on FIFO basis rejecting the weighted average followed by the assessee thereby making addition of Rs. 16957108/- 2. Disallowance under section 14A of Rs. 71223/-. The above additions made by the Id. AO are not tenable in law and on the facts of the case. Valuation of stock; Your honour the assessee is into the business of extraction, processing and sale of Iron ore. The main product of the assessee company is Calibrated Lump Ore(CLO). The other products are lump ore and size ore. The CLO is processed out of the Run of Mine(ROM) which extracted out of the big rock using the explosives. The said Run of Mine is passed through series of crushers and processed until the particles are smaller than 19mm. The said particles of 19mm are termed as CLO which is the ultimate product of the assessee company. ....
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....ermore the weighted average method of valuation is also recognised method of valuation. The Accounting Standard- 2 of ICAl on Valuation of Inventory suggests both weighted average and FIFO method as' fair/good method of valuation. Moreover, various judicial forums have acknowledged the use of weighted average method of accounting and criticized the adoption of other method by the AO at particular time and working the difference accordingly. Accordingly, we pray before your honour that the addition of under valuation of stock worked out by the AO is itself not tenable in law and accordingly the same cannot in any away form basis for levying the penalty for concealment or furnishing of inaccurate particulars. Disallowance under section 14A: Your honour the Id. AO has computed a disallowance of Rs. 1,00,343/- under 14A as against the suo moto disallowance of Rs. 29,120/- done by the assessee itself. The Id. AO has rejected the disallowance done by the assessee without giving any reason for the same. Your honor as per the provisions of section 14A r.w.r. 8D of the I. T.Rules, that the having regard to the books of accounts maintained by the asses....
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....essary that an assessee must voluntarily compute disallowance as per Rule BD of the Rules. Where the disallowance or _nil' disallowance made by the assessee is found to be unsatisfactory on examination of accounts, the assessing officer is entitled and authorised to compute the deduction under Rule 80 of the Rules. This pre-condition and stipulation as noticed below is also mandated in sub Rule (1) to Rule 80 of the Rules. The above judgment of Delhi High Court clearly interprets the provisions of law given in section 14A(2) and Rule 80(1), as to mandatory recording of satisfaction by the assessing officer before exercising/adopting the methodology given in sub rule (2) of the Rule 80. Your honour in the present case of the assessee the Id. AO in his assessment order has no where discussed as to why the claim of the assessee of suo moto disallowance of Rs. 29,120/- is not satisfactory having regard to its books of accounts. Moreover, while calculating the value of investment in the working as per Rule 80(2) he has wrongly taken the value of investments in subsidiary companies of Rs. 1904.5 lacs. Your honor, it must be noted here that the amou....
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....g inaccurate particulars and thereby concealing its income of Rs. 1,70,28,321/- and levied a penalty of Rs. 57,87,930/-. 4.3. It is evident that penalty is levied on addition resulting out of rejection of method of valuation of closing stock. The appellant had been consistently following weighted average method for valuation of stock. The AO however, substituted the FIFO method of valuation in place of the weighted average method and rejected the books of accounts of the appellant to this extent Consequential addition due to the substitution of the valuation method resulted in the impugned addition of Rs. 1,69,57,108/-. The impugned addition arose only because the AO was of the opinion that the valuation method adopted by the appellant was not acceptable. All the facts were available in the return of income and in the submissions filed before the AO. Weighted average method is also an accepted method of valuation of stock and the appellant had been following the same consistently over the years. It is not the case of the AO that there is any suppression of information or furnishing of inaccurate particulars with the intent to conceal income. These are critical prerequisite....
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....e meaning of the word ''particulars'' used in section 271(I)(c) would embrace the details of the claim made. Where no information given in the return is found to be incorrect or inaccurate, the assessee cannot be held guilty of furnishing inaccurate particulars. In order to expose the assessee to penalty, unless the case is strictly covered by the provision, the penalty provision cannot be invoked By no stretch of imagination can making an incorrect claim tantamount to furnishing inaccurate particulars. There can be no dispute that everything depend upon the return filed by the assessee, because that is the only document where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. To attract penalty, the details supplied in the return must not be accurate, not exact or correct, not according to the truth or erroneous. Where there is no finding that any details supplied by the assessee in its return are found to be incorrect or erroneous or false there is no question of inviting the penalty under section 271(1)(c). A mere making of a claim, which is not sustainable in law, by itsel....
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....e the assessee's conduct cannot be said to be contumacious so as to warrant levy of penalty. Hence, we hold that there is no infirmity in the order of the Ld. Commissioner of Income Tax (A) and the same deserves to be upheld. 10. While coming to the aforesaid conclusion, we place reliance from the Apex Court decision rendered by a larger Bench comprising of three of their Lordships in the case of Hindustan Steel vs. State of Orissa in 83 ITR 26 wherein it was held that "An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceedings, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be j....
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.... of Rs. 57,88,000/- was levied. First addition was made on account of valuation of stock amounting to Rs. 1,69,57,108/- and second addition is of Rs. 71,223/- u/s 14A read with rule 80 of IT rules. 3. The addition of Rs. 1,69,57,108/- made by the AO on account of valuation of stock is deleted by Hon'ble ITAT in the order passed dt. 22.12.2017 bearing ITA No. 6600/De1l2014. Relevant finding of Hon'ble tribunal is at Page No.6 Para 6 of the ITAT Order. 4. The addition of Rs. 71,223/- on account of section 14A was not dealt in the order due to smallness of the amount (Page No. 4 Para 3 of IT AT Order). However assessee had a good case on merits and the addition made by the AO is untenable in law. 5. In the present case, assessee had made suo-motto disallowance of Rs. 29,120/- under section 14A of the Income Tax Act whereas AO computed the total disallowance of Rs. 1,00,343/- (Rule 80(iii) of Rs. 22,798/- and Rule 80(ii) of Rs. 77,545/-) and thus difference of Rs. 71,223/- was added in the hands of the assessee. 6. The AO, while ignoring the computation of the assessee, has not given any proper reasoning and has merely rejected the same Secti....
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....does not follow that the funds borrowed on interest were utilized for the purpose of investing in assets yielding exempt income. If even after the decrease the assessee has interest free funds sufficient to make the investment in assets yielding the exempt income, the presumption that it was such funds that were utilized for the said investment remains. There is no reason for it not to. The basis of the presumption as we will elaborate later is that an assessee would invest its funds to its advantage. It gains nothing by investing interest free funds towards other assets merely on account of the interest free funds having decreased. In that event so long as even after the decrease thereof there are sufficient interest free funds the presumption that they would be first used to invest in assets yielding exempt income applies with equal force." Reliance in this regard is placed on the following catena of judgements: i. CIT versus HDFC Bank Ltd in ITA No. 330 of 2012 dated 23 July 2014 (Bombay High Court) 1[2014] 366 ITR 505 (Bombay) ii. Gujarat High Court in the case of CIT v. Suzlon Energy Ltd. (2013) 354 ITR 630 iii. H.T. Media Ltd. vs Principal ....
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....d." 4. At the time of hearing before us, Ld. Counsel for the assessee reiterated the submissions made in the aforesaid synopsis. The Ld. Departmental Representative (in short "DR") did not dispute the facts, submissions and contentions contained in this synopsis. However, Ld. DR contended that the penalty levied in respect of aforesaid addition amounting to Rs. 71,223/- towards disallowance u/s 14A r.w. Rule 8D should be confirmed. For this purpose, he submitted that any addition made in the assessment order should invariably lead to imposition of penalty u/s 271(1)(c) of the Act. Regarding penalty levied in respect of the aforesaid addition of Rs. 1,69,57,108/-, Ld.DR relied on the order of the AO. 5. We have heard both sides. We have considered materials on record carefully. As far as the penalty levied in respect of aforesaid addition of Rs. 1,69,57,108/- is concerned, we note that this addition has already been deleted by order of Co-ordinate Bench of ITAT in aforesaid ITA No.6600/Del/2014. Since the quantum addition already stands deleted, the penalty levied u/s 271(1)(c) of the Act has no legs to stand. When the quantum addition stands deleted, the corresponding penalty....