TaxTMI 
TaxTMI 
2019 (7) TMI 1264
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..../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 order dated 22.12.2017 wherein the aforesaid addition of Rs. 1,....
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....1233/- 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 the said it was established that deduction claimed by the assessee in the profit and loss account are not in complia....
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.... 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 (2006) 284 ITR 0361 it was held as under: 7. As can be seen from the question raised and referred, the entire submission of Revenue and the basis of levy of penalty gets ....
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.... 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 is upheld. Ground No. 2 is accordingly rejected. In the case of Lakshmi Jewellery vs CIT, 1988 (2) TMI59 - Hon'ble ANDHRA PRADESH High Court held as under There is force in the submission of Mr. Satyanarayana that while valui....
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....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 of the burden upon the department for establishing that the assessee is liable to payment of penalty. As has been rightly observed by Chagla C. J. in Commissioner of Income-tax v. Gokuldas Harivallabhdas, the gist of the offence under section 28(1)(c) is that the assessee has conc....
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....n 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 have been made compulsory on all additions/ disallowances made in the assessment proceedings without looking into the facts of the case. But this is not the case. Penalty proceedings are separate from assessment proceedings and are quasi criminal. Penalty cannot be blindly imposed. Assessing officer has to prove the malic....
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....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 report. The latter did not suggest any disallowance u/s 14A. Therefore, it can be inferred that all expenses were claimed in full as the auditors did not suggest disallowance of any part of the expenditure relating it to the dividend income. Thus, it can be concluded that the claim was made on the basis of tax audit report. There is no allegation by the AO tha....
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....hat 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 present case. They have accepted that the explanation given by the assessee was genuine and bona fide. The contention of the respondent assessee may have been rejected in the quantum proceedings but when deciding whether or not penalty for concealment should be imposed, the justification and explanation why the assessee had made the claim, is to be examined. Disallowance under the said sectio....
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.... 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 Petroproducts Pvt. Ltd. (surpa) comes into play to rescue the assessee from penalty. Respectfully following the above decision, we hold that if the contention of the revenue is accepted, then in the case of Shri Manish Jain where the claim is not accepted by the Assessing Officer for any reason, the assessee will invite the penalty u/s 271 (l)(c) of the Act which is not the intention of the legislature. Accordingly, sole ground of th....
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....iture 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 in law and the penalty is liable to be deleted otherwise same will create undue hardship on the assessee. Penalty and assessment proceedings are two different things The power to impose penalty cannot be exercised if the AO is not satisfied about the existence of conditions specified in clause (a), (b), (c) of Section 271(1), before the proceedings are concluded. In the assessee's case, the penalty proceedings have been sustained not on the basis of any defects in the books of accounts but for....
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....hat 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 inaccurate particulars. A mere making ot the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. If the contention of the Revenue is accepted then in case of every Return where the claim made is not accepted by the AO for any reason, the assessee will invite penalty u/s 271(1)(c). That is clearly not the intendment of the Legislature. (iii) The law laid down in Dilip Shroff 291 ITR 519 (SC) as to the meanings of the words "conceal" and "inaccurate" continues to be good law because what was overruled in Dharmendra ....
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....nour 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. The ROM, Calibrated Lump Ore(CLO) and other products is measured in tons/ metric tons. Accordingly, the assessee adopted weighted average method for valuation of the same. The Id. Ao during the course of assessment proceedings doubted the methodology adopted by the assessee and proposed to value the ROM using FIFO method of valuation. Accordingly, he worked out the value of stock on the basis of FIFO method and added differential amount of Rs. 1,69,57,108/- in the hands of assessee and treated the same as undervaluation of stock. Your honour the Id. AO simply rejected the method of valuation adopted by the assessee without giving any reason as to why the same i....
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....ishing 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 assessee if the assessing officer is not satisfied with the any of the following claims of the assessee: a) Expenses incurred in relation to income which does not form part of the total income or, b) No expenses incurred in relation to income which does not form par to the total income. Then the assessing officer being not satisfied with the claim of the assessee shall determine such expenses with help of the methods prescribed under the act i.e. Rule 8D of the I T Rules. Meaning thereby, the assessing officer cannot adopt the methodology given in Rule 80(2) unless satisfaction as to the claim of the assessee is recorded. The satisfaction is not simply stating that the claims of the assessee are not a....
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....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 amount of investment made by the appellant company in its subsidiary was not made for the purpose of earning exempt income but to exercise control and ownership over it. The said investment has been duly disclosed in the audited balance sheet of the appellant company for the year under consideration. In this regard reliance is being placed on the following: 1. G.E. Capital Services India And Others Versus Addl. CIT, Rage 12, New Delhi And Others I. T.A. No. 2897/0el/2007, I. T.A. No. 2807/0el/2007 Dated - 10 June 2015 ITAT Delhi 2. Garware Wall Ropes Limited vs, Addl.CIT ITA No. 5408/Mum/2012 judgment dated 15/01/2014 3. EIH Associated Hotels Limited Vs. DCIT , Company Circle 11(1), ITA No. 1503/MDS/2012 4. M/s.J M Financial Limited vs. Additional....
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....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 prerequisites for invocation of penal proceedings within the meaning of section 271 (1 )(c) of the Act. 4.4. Further, it is for consideration whether penalty for concealment must be imposed as the quantum is decided against the appellant It is a settled legal position that penalty proceedings and quantum proceedings are separate and distinct. It is equally a settled legal position that the explanation offered in the penalty proceedings has to be considered separately and independently in the matrix of requirements of the penal provisions. As per opinion expressed by the Hon'ble Supreme Court in CIT vs. Anwar Ali, 76 ITR 696 findings in assessment order may constitute good evidence but it does not follow that penalty for concealment u/s 271 (1 )(c) is mandatory whenever an addition or disallowance is made. The appellant ha....
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.... 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 itself, will not amount to furnishing of inaccurate particulars regarding the income of the assessee. Such a claim made in the return cannot amount to furnishing inaccurate particulars. 4.7. In view of the facts of the case and the rulings referred above, penalty u/s 271 (1 )(c) with reference to the addition of Rs. 1,69,57, 108/- on account of valuation of stock is clearly not leviable as the appellant had disclosed all material facts and charge of furnishing of inaccurate particulars and concealment of income do not survive. Levy of penalty with reference to the impugned amount is not warranted. 4.8. The other item in respect of which penalty is levied is additional disallowance of Rs. 71,223/- u/s 14A read with Rule 80. Disallowance u/s 14A has been a debatable and a contentious issue and there are numerous rulings by the Hon'ble Courts and Tribunals....
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....nalty 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 justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act, or where the breach flows from a bonafide belief that the offender is not liable to act in the manner prescribed by the statute. " 11. We further place reliance upon the Hon'ble Apex Court decision in the case of CIT vs. Reliance Petro Products Ltd. in Civil Appeal No. 2463 of 2010. In this case vide order dated 17.3.2010 it has been held that the law laid down in the Dilip Sheroff case 291 ITR 519 (SC) as to the meaning of word 'concealment' and 'inaccurate' continues to be a good law because what was overruled in the Dharmender Textile case was only that part in Dilip Sheroff case where it was held that mensrea was a essential requirement of penalty u/s 271(l)(c). The Hon'ble Apex Court also observed that if the contention of the revenue is accepted then....
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....ule 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 Section 14A(2) of the Act requires the AO to first examine the accounts of the assessee and then record his satisfaction in this regard, which has not at all been done by the AO in the present case. 7. It is a settled law that the AO has to first examine the records of the assessee, and only after arriving at the dissatisfaction as to the correctness of the claim of assessee in respect of expenditure incurred in relation to exempt income, that he can resort to the provisions of section 14A read with Rule 80. Reliance in this regard is placed on the following judgements: i. Maxopp Investment Ltd. Versus Commissioner of Income Tax, New Delhi 2018 (3) TMI 805 - SUPREME COURT OF INDIA ii. Godrej & Boyce Manufacturing Company Ltd. v. DCIT [2017] 394 ITR 449- Supreme Court 8. Secondly, own funds being more than the investment made by the assessee no disallowance under section 14A is called for. In the present case, own funds are of Rs. 22,591 Lac....
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.... (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 Commissioner of Income Tax-IV, New Delhi- [2017] 399 ITR 576 (Delhi) iv. ITAT Delhi in the case of NATH BROS. EXIM INTERNATIONAL LTD. VERSUS THE ACIT, ITA No. 5547/De1/2012, C.O.No.95/DeI/2013 And ITA.No.6030/Del/2015 v. ITAT Delhi in the case of CHINA TRUST COMMERCIAL BANK VERSUS ADIT, INTERNATIONAL TAXATION, ITA No. 1257/Del/2011 order dated 26.12.2017 10. In addition to the above, disallowance under section 14A being a debatable issue, penalty under section 271(1)(c) is not leviable. Reliance in this regard is placed on the following judgements. i. CIT v. Jindal Equipment Leasing and Consultancy Services Ltd. ITA NO. 68/2012 (Del) (HC) Relevant finding is 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 present case. They have accepted that the explanation given by the assessee was genuine and bona fide. The contention of the respondent assessee may ha....
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....ed u/s 271(1)(c) of the Act has no legs to stand. When the quantum addition stands deleted, the corresponding penalty levied u/s 271(1)(c) of the Act is unsustainable. In coming to this conclusion, we are guided by the decision of Hon'ble Supreme Court in the case of K.C.Builders vs ACIT [2004] 135 taxmann 461 (SC) in which the Hon'ble Supreme Court held that "where the additions made in the assessment order, on the basis of which penalty for concealment was levied, are deleted there remains no basis at all for levying the penalty for concealment, and therefore, in such a case no such penalty can survive and the same is liable to be cancelled." Therefore, the penalty levied u/s 271(1)(c) of the Act in respect of the aforesaid addition of Rs. 1,69,57,108/- is held to be untenable and the order of the CIT(A) on this issue is upheld. 5.1. As far as the penalty levied in respect of the aforesaid addition of Rs. 71,223/- u/s 14A r.w. Rule 8D is concerned, we find that the Ld.DR has not disputed the facts, submissions and contentions contained in the aforesaid synopsis filed from the assessee's side during the appellate proceedings in ITAT. In the facts and circumstances of this case, ....