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2025 (5) TMI 1183 - HC - Income TaxPenalty u/s 271 (1) (c) - disallowance of revenue expenditure - AO allowed twenty-five percent of the said expenditure as depreciation allowance and made an addition of the balance seventy-five percent of the said amount - Respondent/Assessee had wilfully attempted to reduce his income and therefore it was a fit case for imposition of penalty - HELD THAT - We find no infirmity with the decision of the CIT(A) holding that the question involved was a debatable one and therefore a penalty u/s 271 (1) (c) could not be imposed. ITAT did not express any opinion as to the CIT(A) s view; it rejected the Revenue s appeal solely on the ground that the notice issued by the AO under Section 274 of the Act read with Section 271 of the Act did not specifically state as to under which limb of Section 271 (1) (c) of the Act penalty proceedings were intended to be proceeded. Section 271 (1) (c) of the Act has two limbs the first is where the allegation is that the assessee has concealed income; and the second is that the assessee has furnished incorrect particulars of income. This court has in a number of decisions held that the notice which does not specifically indicate the particular limb of Section 271 (1) (c) that is sought to be invoked would be invalid as being vague.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Court are:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Imposition of penalty under Section 271(1)(c) for classification of expenditure as revenue or capital Relevant legal framework and precedents: Section 271(1)(c) imposes penalty for concealment of particulars of income or furnishing inaccurate particulars. The Supreme Court's decision in Empire Jute Co Ltd vs. CIT (1980) 124 ITR 1 was extensively relied upon. In Empire Jute, the Court held that expenditure which facilitates trading operations or enables business management more efficiently, even if it results in enduring benefits, may still be revenue expenditure. The Court also referred to the principle that mere rejection of a claim by the Assessing Officer does not warrant penalty unless concealment or furnishing inaccurate particulars is established, as reiterated in Reliance Petro products and MAK Data cases. Court's interpretation and reasoning: The CIT(A) found the issue of whether the expenditure on acquisition of customer contracts and assembled workforce was capital or revenue expenditure to be debatable. The expenditure was towards intangible assets which have enduring value, but the Assessee claimed it as revenue expenditure on the basis that it facilitated expansion of business and was related to profit-earning operations. The CIT(A) emphasized that the test of enduring benefit is not conclusive and must be applied with regard to facts and circumstances. Since two views were possible and the Assessee had disclosed its position clearly in the Tax Audit Report, the CIT(A) held that penalty under Section 271(1)(c) could not be imposed. Key evidence and findings: The Assessee's revised return declaring loss, the assessment order disallowing part of the expenditure as capital, and the Assessee's explanation that the expenditure related to intangible assets without enduring value were central facts. The CIT(A) relied on judicial precedents and the Assessee's bona fide explanation to conclude absence of concealment or furnishing inaccurate particulars. Application of law to facts: The Court agreed with the CIT(A) that the issue was debatable and the Assessee's claim was not shown to be false or made with intent to conceal income. Hence, penalty was not justified. Treatment of competing arguments: The Revenue argued for penalty imposition based on AO's view of capital expenditure. The Court rejected this, holding that mere rejection of a claim is insufficient for penalty if the claim is debatable and bona fide. Conclusion: Penalty under Section 271(1)(c) was rightly not imposed as the issue was debatable and no concealment or furnishing inaccurate particulars was established. Issue 2: Validity of penalty notice under Section 274 read with Section 271(1)(c) without specifying particular limb invoked Relevant legal framework and precedents: Section 271(1)(c) has two limbs: concealment of income and furnishing inaccurate particulars. The Court noted its prior decisions holding that a penalty notice must specify which limb is invoked, failing which it is invalid as vague. Court's interpretation and reasoning: The ITAT rejected the Revenue's appeal solely on the ground that the notice did not specify the limb of Section 271(1)(c) under which penalty proceedings were initiated. The High Court concurred with this approach, noting that the learned counsel for the Revenue did not dispute the applicability of this principle. Key evidence and findings: The notice under Section 274 did not specify whether penalty was sought for concealment or furnishing inaccurate particulars. Application of law to facts: Since the notice was vague, it was invalid, and penalty proceedings could not be sustained on this ground alone. Treatment of competing arguments: The Revenue did not contest the principle that notice must specify the limb invoked. Conclusion: The penalty notice was invalid for failure to specify the limb of Section 271(1)(c), leading to dismissal of the appeal. Issue 3: Whether the appeal raises any substantial question of law The Court held that since the CIT(A) decision was supported by judicial precedents and the penalty notice was invalid, no substantial question of law arose for consideration. The appeal was dismissed accordingly. 3. SIGNIFICANT HOLDINGS "From the various judicial precedents, it is seen that the facts and circumstances in each case has to be seen in the context and then penalty provision should be applied to see whether there was the concealment of particulars of income or the appellant has furnished inaccurate particulars so as to call for the penal action under Section 271 (1) (c)." "The test of enduring benefit is therefore not certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case." "If two views are possible on a particular matter and if an assessee has adopted a view most favorable to it, penalty proceedings are not warranted as held by Courts from time to time." "The legislature does not intend to impose penalty on every assessee whose claim is rejected by the assessing officer. What is sought to be covered under Section 271 (1) (c) is concealment of 'particulars of income' or furnishing of 'inaccurate particulars of income' and not making of an untenable claim." "The notice, which does not specifically indicate the particular limb of Section 271 (1) (c) that is sought to be invoked, would be invalid as being vague." Core principles established include:
Final determinations:
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