2019 (10) TMI 251 - AT - Income Tax

Penalty u/s 271(1)(c) - disallowance of expenditure claimed as revenue expenditure which was held to be capital expenditure by the AO - debatable issue - HELD THAT - The genuineness of expenses incurred has not been doubted per se. What is the subject matter of controversy is the nature of expenditure that is whether the expenditure incurred would acquire the character of capital expenditure or a revenue expenditure. CIT(A) has demonstrated in its order that the issue is sufficiently debatable and there is sufficient room for entertaining a different view. Conclusion drawn in the quantum proceedings would not automatically apply to the penalty proceedings which are distinct in character. The assessee is entitled to demonstrate its bonafide towards claim of expenditure in penalty proceedings. It is trite that every disallowance of claim cannot lead to as an automatic consequence in the form of penalty. The confirmation of addition/disallowance in quantum proceedings is not conclusive on standalone basis. In the absence of any malafide in the action of the assessee, we see no reason to interfere with the order of the CIT(A). In the instant case, in our view, the CIT(A) has correctly applied law and deleted the penalty. We totally concur with the view expressed by the CIT(A). The Revenue could not demonstrate the lack of bonafide in the action of the assessee. The assessee with reference to several judicial precedents has demonstrated before us that the issue as to whether expenditure in question is capital or revenue is highly debatable.- Decided against revenue

Summary

Issues involved:
Challenge to reversal of penalty imposed by Assessing Officer under section 271(1)(c) of the Income Tax Act, 1961 concerning Assessment Year 2007-08.

Detailed Analysis:

Issue 1: Challenge to reversal of penalty by CIT(A)

The Revenue challenged the action of the CIT(A) in reversing the penalty imposed by the Assessing Officer. The Revenue contended that the expenditure claimed by the assessee as revenue expenditure was disallowed in quantum proceedings and held to be capital expenditure. The Revenue argued that this action lacked bonafide and fell under Explanation 1 to Section 271(1)(c) of the Act.

Analysis: The CIT(A) examined the issue and held it to be highly debatable and not free from doubt. The CIT(A) considered that the expenditure incurred by the assessee had a direct nexus with the existing business operations and that the genuineness of the expenses was not in question. The CIT(A) concluded that the nature of the expenditure was debatable, and the assessee had demonstrated bonafide in claiming it as revenue expenditure. The CIT(A) found no lack of bonafide on the part of the assessee and deleted the penalty.

Issue 2: Nature of Expenditure - Capital or Revenue

The core controversy revolved around whether the expenditure claimed by the assessee should be categorized as capital or revenue expenditure. The Revenue argued that the expenditure, disallowed in quantum proceedings, should be treated as capital expenditure, justifying the penalty under Section 271(1)(c) of the Act.

Analysis: The CIT(A) observed that the issue of whether the expenditure was capital or revenue in nature was sufficiently debatable. The CIT(A) emphasized that every disallowance of a claim does not automatically lead to a penalty. The CIT(A) highlighted that the confirmation of addition/disallowance in quantum proceedings does not conclusively determine the penalty outcome. The CIT(A) found that the assessee had demonstrated bonafide in claiming the expenditure as revenue, citing various judicial precedents. The CIT(A) concluded that the issue was contentious and debatable, leading to the deletion of the penalty.

Conclusion:

The Appellate Tribunal upheld the decision of the CIT(A) to delete the penalty imposed by the Assessing Officer. The Tribunal concurred with the CIT(A) that the issue of the nature of expenditure was debatable and the assessee had shown bonafide in its claim. The Tribunal found no error in the CIT(A)'s order and dismissed the appeal filed by the Revenue.

This detailed analysis showcases the thorough consideration given to the legal aspects of the case, emphasizing the debatable nature of the expenditure classification and the importance of bonafide in penalty proceedings under the Income Tax Act, 1961.