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2025 (5) TMI 358 - AT - Income TaxPenalty u/s 270A - under-reporting of income attributable to additions u/s 14A r.w. Rule 8D - HELD THAT - Revenue in the instant case has computed an estimated disallowance under Section 14A solely due to existence of exempt income. It is not the case of the Revenue Authorities that assessee has in fact incurred any expenses to earn the exempt income and suppressed the facts thereon beyond any doubt. Revenue Authorities have determined the disallowances on the basis of deeming provisions of computation of disallowances provided under Rule 8D of the Income Tax Rules. A conspectus of Section 270A of the Act makes it clear that the statute visualizes the assessment proceedings and penalty proceedings to be wholly distinct and independent of each other. While the Assessing Officer may be justified in making estimated disallowance in quantum proceedings such disallowance of expenses and that too on estimated basis could not automatically fall within the mischief of Section 270A of the Act on the grounds of under-reporting. While the claim towards expenditure may not be found acceptable in quantum proceedings such disallowance per se cannot invite rigors of penalty. Where all material facts relevant to the issue were placed on record mitigating circumstances to disprove any culpability of any sort against the assessee is established by implication. In CIT vs. Liquid Investment Trading Co. 2010 (10) TMI 1021 - DELHI HIGH COURT observed that issue of disallowance u/s 14A is a debatable issue. Appeal of the assessee is allowed.
1. ISSUES PRESENTED and CONSIDERED
The core legal questions considered by the Appellate Tribunal (AT) in this appeal are:
2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Justification for penalty under Section 270A on account of disallowance under Section 14A Relevant legal framework and precedents: Section 270A of the Act deals with penalty for under-reporting and mis-reporting of income. The section mandates that penalty can be levied only if there is under-reporting or mis-reporting of income. Section 14A and Rule 8D provide for disallowance of expenditure incurred in relation to exempt income, often estimated on a deemed basis. Court's interpretation and reasoning: The Tribunal emphasized that the penalty under Section 270A is contingent upon the existence of under-reporting of income. The mere disallowance of expenditure on an estimated basis under Section 14A cannot be equated with under-reporting or mis-reporting of income. The Tribunal observed that the AO's action of invoking penalty provisions as an automatic consequence of disallowance was not justified. Key evidence and findings: The AO disallowed INR 7,99,580/- under Section 14A against total expenditure of INR 8,97,477/-. The assessee contended that the expenditure related to ordinary business expenses like bank charges, printing, and stationery, necessary for the survival of the business and not connected to exempt income. The AO did not identify any specific expenditure actually incurred in relation to exempt income nor did he demonstrate any suppression of facts by the assessee. Application of law to facts: The Tribunal held that disallowance on estimated basis under Section 14A does not ipso facto amount to under-reporting of income. Since the AO failed to establish that the assessee had incurred expenses specifically related to exempt income or had suppressed facts, the penalty under Section 270A could not be sustained. Treatment of competing arguments: The Revenue's argument rested on the deemed disallowance under Rule 8D and the existence of exempt income. The assessee's counter was that the expenses disallowed were unrelated to exempt income and were genuine business expenses. The Tribunal favored the assessee's explanation, noting the absence of any concrete evidence from the Revenue to prove under-reporting or mis-reporting. Conclusions: The Tribunal concluded that the penalty under Section 270A was not justified merely on the basis of disallowance of expenditure under Section 14A on an estimated basis. Issue 2: Distinction between assessment proceedings and penalty proceedings under Section 270A Relevant legal framework and precedents: Section 270A contemplates that assessment and penalty proceedings are distinct and independent. The assessment proceedings determine the quantum of income, while penalty proceedings require proof of culpability such as concealment or mis-reporting. Court's interpretation and reasoning: The Tribunal underscored that while the AO may be justified in making estimated disallowances during assessment proceedings, such disallowances cannot automatically trigger penalty proceedings. The Tribunal emphasized that penalty can be imposed only if the facts and circumstances indicate that the assessee has under-reported income or mis-reported facts deliberately. Key evidence and findings: The Tribunal noted that all material facts were placed on record by the assessee, and no evidence of deliberate concealment or suppression was found. The AO's action was based on a mechanical application of Section 14A disallowance without further inquiry or proof of wrongdoing. Application of law to facts: The Tribunal applied the principle that penalty is not to be imposed as a matter of course but only when there is culpability. The absence of any such culpability or suppression negated the applicability of penalty. Treatment of competing arguments: The Revenue's reliance on the deemed disallowance provisions was rejected as insufficient to attract penalty. The Tribunal held that the Revenue must prove under-reporting beyond mere disallowance in assessment. Conclusions: The Tribunal ruled that the penalty under Section 270A could not be sustained as the disallowance of expenses on estimated basis in assessment proceedings does not ipso facto amount to under-reporting for penalty purposes. Issue 3: Plausibility of assessee's explanation regarding non-application of Section 14A Relevant legal framework and precedents: The assessee's explanation that expenses were unrelated to exempt income and necessary for business survival is a relevant factor in assessing whether penalty is warranted. Court's interpretation and reasoning: The Tribunal found the assessee's explanation plausible and reasonable. It noted that the Revenue did not dispute the nature of expenses or demonstrate that the assessee suppressed any facts. Key evidence and findings: The expenses disallowed included bank charges, printing, and stationery, which are ordinary business expenses. The Tribunal found no evidence that these were incurred to earn exempt income. Application of law to facts: The Tribunal applied the principle that penalty cannot be imposed where the assessee has placed all relevant facts on record and offered a reasonable explanation. Treatment of competing arguments: The Revenue's contention that disallowance was justified on the basis of Rule 8D was rejected in light of the assessee's plausible explanation and lack of evidence of concealment. Conclusions: The Tribunal accepted the assessee's explanation and held that penalty under Section 270A was not warranted. 3. SIGNIFICANT HOLDINGS The Tribunal held:
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