2022 (8) TMI 1585 - AT - Income Tax

Penalty u/s 271(1)(c) - addition of income/ disallowance of expense/ exemption/ deduction and TP adjustment with respect to which the particulars of income were concealed or inaccurate particular of income were furnished - HELD THAT - Additions on the basis of which the penalty was levied upon the assessee by the AO has ceased to exist. In other words the quantum additions made by the AO and confirmed by the learned CIT (A) were deleted by the ITAT with respect to the items as detailed above. Thus the question of concealment of income or furnishing inaccurate particular of income does not arise and therefore the penalty cannot be sustained. Under the provisions of section 271(1)(c) amount of penalty has been specified which shall not be less than hundred percent of the amount of tax sought to be evaded subject to the maximum limit of 300% of such amount. Under explanation 4 to section 271(1)(c) of the Act the manner for quantifying the amount of tax sought to be evaded has been specified which has direct nexus with the additions/ disallowances made during the quantum proceedings. Therefore where the quantum additions/ disallowances have been deleted then the manner of quantifying the amount of penalty under explanation 4 to section 271(1)(c) of the Act as discussed above fails. Accordingly there cannot be any penalty with respect to the quantum additions which have been deleted by the authorities whether on merit or on technical grounds. Thus the ground of the assessee s appeal is hereby allowed. Penalty levied on account of addition made in book profit u/s 115JB representing the remuneration received from the partnership firms - The first situation under explanation 1 to section 271(1)(c) does not survive. It is also an undisputed fact that the assessee offered an explanation and submitted that the amount of remuneration received was based on percentage of profit earned by the firm hence same is appropriation of profit and equivalent to share of profit from firm. Thus treating the same as exempted income under section 10 of the Act it reduced the remuneration receipt from book profit under the provision of subsection 2 of section 115JB of the Act. We note that there was no finding of the authorities below qua the fact that the assessee fails to substantiate the explanation offered by him and fails to prove that such explanation is bona fides with respect to material facts relating to the computation of total income. Going further we find that the claim of the assessee was not allowed by the ITAT in the own case of the assessee with respect to the deduction claimed by it for the remuneration received from the partnership firm while calculating the profit under the provisions of section 115JB of the Act in the earlier years including in the year under consideration and in subsequent year. However we note that recently in the case of PCIT vs. M/s Ankit Metal Power Ltd. 2019 (7) TMI 878 - CALCUTTA HIGH COURT held that items of receipt which are not income under the provision of section 2(24) of the Act cannot be made subject to tax under the provisions of MAT while calculating the profit under section 115 JB of the Act. Provisions of explanation 1 to section 271(1)(c) of the Act cannot be attracted in the given facts and circumstances. Penalty levied on disallowances of repair expenses - Coming to case on hand there was no iota of evidence suggesting that the assessee failed to offer explanation or explanation offered by the assessee was false. Thus the first situation under explanation 1 to section 271(1)(c) does not survive. It is undisputed that the assessee offered explanation and submitted that the amount was incurred for replacement of worn out item and treated the same as revenue expenses but the revenue authority treated the same as capital expenditure. Thus the same is debatable issue and bona-fide difference of opinion with respect to necessary materials available on record. We note that there was no finding of the authorities below qua the fact that the assessee fails to substantiate the explanation offered by him and fails to prove that such explanation is bona fides with respect to material facts relating to the computation of total income. Going further we also note in case of Reliance Petroproducts Pvt Ltd. 2010 (3) TMI 80 - SUPREME COURT where the Hon ble court observed that mere claim of the assessee which is not sustainable does not tantamount to concealment of income or filing inaccurate particulars of income. Provisions of explanation 1 to section 271(1)(c) of the Act cannot be attracted in the given facts and circumstances. Assessee appeal allowed.

Summary

ISSUES:

• Whether penalty under section 271(1)(c) of the Income-tax Act can be sustained where quantum additions/disallowances have been deleted by appellate authorities.
• Whether penalty under section 271(1)(c) is leviable for additions made on transfer pricing adjustments and related issues where the assessee has made full disclosure and bona fide explanations.
• Whether penalty under section 271(1)(c) is justified on addition made to book profits under section 115JB for reduction of remuneration received from partnership firms.
• Whether penalty under section 271(1)(c) is leviable on disallowance of repair and maintenance expenses treated as capital expenditure by the Assessing Officer.
• Whether the requirements of recording satisfaction and issuance of a valid penalty show cause notice specifying grounds (concealment or furnishing inaccurate particulars) are mandatory for initiation of penalty under section 271(1)(c).
• Whether difference of opinion on legal and debatable issues amounts to furnishing inaccurate particulars of income attracting penalty under section 271(1)(c).
• Whether penalty proceedings can be adjudicated independently when quantum additions are pending or set aside for fresh adjudication.

RULINGS / HOLDINGS:

• Penalty under section 271(1)(c) cannot be sustained where the quantum additions/disallowances have been deleted by the appellate authorities, as "the question of concealment of income or furnishing inaccurate particular of income does not arise" and the "manner of quantifying the amount of penalty under explanation 4 to section 271(1)(c) fails."
• Penalty levied on transfer pricing additions confirmed by CIT(A) but subsequently deleted by ITAT is not sustainable; mere addition to taxable income does not automatically lead to penalty without establishing deliberate furnishing of inaccurate particulars, especially where full disclosure and bona fide explanations were made.
• Penalty under section 271(1)(c) on addition to book profits under section 115JB for reduction of remuneration received from partnership firms is not justified where the assessee disclosed full particulars and offered bona fide explanation; explanation 1 to section 271(1)(c) does not apply absent failure to offer explanation or false explanation.
• Penalty on disallowance of repair expenses treated as capital expenditure is not sustainable as the issue is a bona fide difference of opinion, and "mere claim of the assessee which is not sustainable does not tantamount to concealment of income or filing inaccurate particulars of income."
• Requirement of recording satisfaction for initiation of penalty under section 271(1)(c) remains mandatory even after insertion of section 271(1B); penalty show cause notice must specify the specific ground for levy (concealment or furnishing inaccurate particulars) and cannot be issued in a stereotyped manner.
• Legal and debatable issues, including difference of opinion on transfer pricing methods or characterisation of receipts, do not attract penalty under section 271(1)(c) where full disclosure is made and bona fide explanations are offered.
• Where quantum additions are pending adjudication or set aside for fresh consideration, penalty proceedings must be restored to the Assessing Officer for fresh adjudication after outcome of quantum additions; penalty cannot be determined independently in such cases.

RATIONALE:

• The Court applied provisions of section 271(1)(c) of the Income-tax Act, including Explanation 1 and Explanation 4 thereto, governing penalty for concealment of income or furnishing inaccurate particulars, and section 115JB relating to Minimum Alternate Tax on book profits.
• The Court relied on the principle that penalty under section 271(1)(c) requires "deliberate furnishing of inaccurate particulars" or concealment, and mere disallowance or addition without such intent does not attract penalty.
• The Court emphasized that full disclosure in the return, tax audit report, transfer pricing documentation, and bona fide explanations negate the presumption of concealment or furnishing inaccurate particulars.
• The Court referred to judicial precedent, including the Hon'ble Supreme Court's ruling in Reliance Petroproducts Pvt Ltd., which held that non-acceptance of a claim by revenue does not ipso facto amount to concealment or furnishing inaccurate particulars.
• The Court noted the necessity of proper recording of satisfaction by the Assessing Officer before initiating penalty proceedings, as mandated by statutory provisions and judicial pronouncements.
• The Court recognized that where quantum additions are deleted or pending, penalty quantification under Explanation 4 to section 271(1)(c) cannot be sustained, and penalty proceedings must follow the outcome of quantum adjudication.
• The Court acknowledged a doctrinal application that bona fide difference of opinion on legal or factual issues, including transfer pricing methods or classification of receipts/expenditure, does not constitute concealment or inaccurate particulars for penalty purposes.