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2016 (4) TMI 338 - ITAT MUMBAI

2016 (4) TMI 338 - ITAT MUMBAI - TMI - Penalty U/s. 271(1)(c) - Disallowance of Business Expenses u/s 37(1) - Held that:- These expenses were of routine nature e.g. Director's Salary, Bank Charges, Filing Fee, Audit Fee etc. Undoubtedly, these expenses were of statutory nature and were necessary for maintaining the existence of the company and thus these can be said to be incurred for the purpose of business of the assessee, and therefore these expenses were claimed under the head "Business". Th .....

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conclusion of the Tribunal that the expenses incurred were wholly and exclusively for the activities to earn income is preeminently a reasonable conclusion.- Decided in favour of assessee

Disallowance out of interest on loan u/s 24(b) as well as u/s 36(1)(iii) - Held that:- The claim of the assessee was that funds were borrowed for the purpose of business on which interest was paid. The income from House Property although was part of business of the assessee but due to specific provi .....

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of the assessee was rejected due to application of particular provisions of law by the AO. It is further noted by us that the AO has himself allowed part of the total claim of interest. The assessee had claimed a sum of ₹ 1,72,79,082/-. Out of the said claim, only a sum of ₹ 55,97,027/- has been disallowed by the AO u/s 24(b) of the Act. Thus, even as per the AO, the claim of the assessee was not wholly disallowable. Rather, substantial amount was allowed by the AO, and disallowance .....

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'certain' and 'unambiguous' basis that the claim of the assessee in this year was patently erroneous. Under these circumstances, the AO was not able to make out a case for concealment of income or furnishing of inaccurate particulars of income while initiating the penalty in the assessment order or while levying the penalty in the penalty order. It is noted that penalty has been levied in the manner as if once disallowance has been made, then levy of penalty would be automatic, disregarding the .....

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2 for AY-2009-10 on the following grounds: 01. The order imposing penalty U/s. 271(1)(c) of the Act is contrary to the facts of the case and prejudicial to the Law. 02. On appreciation of the facts and circumstances of the case, the Learned Commissioner of Income Tax (Appeals) ought not to have confirmed the action of the Learned Assessing Officer imposing the penalty of ₹ 55,14,546/-. The appellant has neither concealed her income nor submitted any inaccurate particulars of income. The ac .....

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ntrary to the facts of the case and deserves to be deleted. 2. During the course of hearing, arguments were made by Shri R.S.Singhvi, Advocate on behalf of the assessee-company and Dr. Pramod Nikalje, CIT(DR) on behalf of the Revenue. 3. The brief facts of the case are that the assessee-company was engaged in the business of renting of commercial properties. The assessee furnished its return of income for the AY 2009-10 on 07/12/2011 declaring total loss at ₹ 58,36,019/-. The AO completed .....

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4 (b) read with u/s 36(1)(iii) of the Act on the ground that a part of borrowed fund was not used in acquiring house property, so corresponding interest was not deductible. Penalty proceedings u/s 271(1)(c) of the Act were also initiated at the time of assessment. During the penalty proceedings, it was contended by the assessee that penalty u/s 271(1)(c) was not leviable on the disallowance made by the A.O since the assessee had not furnished any inaccurate particulars of income. The contention .....

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,235/- out of ₹ 14,81,93,217/- in the property. Therefore, against income from House Property, the assessee could have claimed interest u/s 24(b) only to the extent of capital invested/ used for such property. Thus, AO did not agree with the contentions of the assessee and held that the assessee had furnished inaccurate particulars of income in respect of both the above referred additions. Accordingly, penalty was levied by the AO at the rate of 300% of the tax sought to be evaded being th .....

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58,36,019/- The assessment was completed on the basis of the following additions a) Disallowance of Business Expenses - ₹ 3,51,783/- u/s 371(1) of the Income Tax Act. b) Disallowance out of interest on loan for Rs, 55,97,027/- u/s 24(b) as well as u/s 36(1)(iii) of the Income Tax Act. 2. The appellant has disclosed income under the head "income from business" but the Learned Assessing Officer has computed the same under the head "income from house property". 3. The appe .....

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3/- U/S 371(1) of the Income Tax Act. b) Disallowance out of interest on loan for ₹ 55,97,027/- U/S 24(b) as well as u/s 36(1)(iii) of the Income Tax Act. 6. Regarding the disallowance of business expenses amounting to ₹ 3,51,783/-,it is submitted that these expenses were the normal business expenses to maintain the basic existence of the assessee company and were of routine nature. However, the Learned Assessing Officer has disallowed the same on the ground of absence of business ac .....

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ult in reduction of tax. 7. Regarding interest paid on loans from M/s Dewan Housing Finance Corp, it is submitted that the part of loan was utilized for acquisition of the property which was let out to M/s Hewlett Packard India Sales (P) Ltd. and part of these borrowed funds were used for making advances to various parties for acquisition of facilities on joint venture basis. However, the Learned Assessing Officer completed the assessment by making disallowance out of interest paid on borrowed f .....

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ncome from house property" the interest was re-calculated and disallowed as per the view of the Learned Assessing Officer. Since the property let out was a commercial building to a, company in Bangalore the appellant was having a bonafide belief that the activity of letting out the property to a company carrying its commercial activity from that place amounts to income' from business. Accordingly as per the provision of 28 to 44 the company had claimed various expenses including interes .....

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ourt in the case of Dharmendra textile processors 306 ITR 277 and observed as under: "The Apex Court held that object behind enactment of section 271(1)(c), read with the Explanation thereto, indicates that the said section has been enacted to provide for a remedy for loss for "loss of revenue. The penalty under that provision is a civil liability." (extract from the order levying penalty emphasis supplied) 9.1.1 In this regard we would like to humbly bring forth before your honor .....

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It has been held that mens rea is an essential condition for levy of penalty. In para 20 in the decision of the Rajasthan Spinning and Weaving Mills the honorable Apex court has clearly laid down the correct law in regard to imposition of penalty. 9.1.2 In this regard it is humbly submitted that the Learned Assessing Officer While admitting that penalty U/s. 271(1)(c) has been enacted to provide for a remedy for loss of revenue has merely stated that this case law is in favor of the department. .....

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n Spinning and Weaving Mills while holding that the decision Dharmendra textile processors is in favor of the department. 9.2 The Learned Assessing Officer has also distinguished the decision of Honorable Apex Court in the case of Reliance Petroproducts 189 Taxman 322. The Learned Assessing Officer has mentioned extract from the above decision which is reproduced hereunder.- "A mere making of the claim, which "is hot sustainable in law by itself, will not amount to furnishing of inaccu .....

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he appellant has will fully concealed/furnished inaccurate particulars of income. Observation of the Learned Assessing Officer Our view on the facts The assessee had consciously and knowingly claimed various as business expenses against income from house property which was not permissible by the Act Further the assessee claimed interest expenses U/S 24(b) knowing fully well that the principal amount had not been utilized for the repair, purchase or construction of the house property from which t .....

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of intentional diversion of funds with a view to reducing tax payment. Even during the course of the assessment proceedings when the issue was brought before the assessee, it did not voluntarily offer the said amount to tax. The appellant while appearing before the Learned Assessing Officer has merely submitted the accounts and the facts as known to company and interpreted the tax laws as per his knowledge. That is the reason why the appellant company had not voluntarily offered the said amount .....

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conformity with the provisions of the IT Act 1961. Important to note here is the fact that over the last couple of years the assessee has been claiming similar deduction with the sole intent of concealing its taxable income. This conclusion of the Learned Assessing Officer in our humble opinion is not correct. The appellant did not prefer an appeal to co-operate with the department only after he came to know the view points of the department through the assessment order. It cannot be presumed th .....

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ee, but it cannot be disputed that the claim made by the assessee needs to be bona fide. If the claim beside being incorrect, in law, is mala fide the Explanation 1 to section 271(1) would come into play and work to the disadvantage of the assessee. (extract from the decision CIT V/s. Zoom Communications Pvt. Ltd) In the extant case it has already been established the claim made by the assessee is malafide. Had it not been so the assessee would have preferred appeal against the order of the AO. .....

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s of the appellant at the time of filing the return. This is not humanly possible since the view point of the department has been made through the assessment order only and not known to the appellant at the time of filing the return of income. At that point of time the appellant was under a bona-fide belief that interest paid on moneys borrowed for acquiring the property is deductible u/s. 24(b) 9.4. The Learned Assessing Officer has concluded in the last paragraph of the order as under.- " .....

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our honor that the appellant has correctly submitted an particulars of income viz. the nature, source and quantum, which has not been disputed by the Learned Assessing Officer. The addition to the total income is by way of disallowance of a claim Vis. 24(b) of the Act. This claim has been disallowed on the basis of a different method of calculation under a different head of income adopted by the Learned Assessing Officer. This amounts to a different interpretation of law leading to a different m .....

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r honor to delete the penalty imposed by the Learned Assessing Officer and allow our appeal in toto. 11. Alternate prayer 11.1 In the event your honor do not consider our submission and prayer as above in the preceding paragraphs, we would like to put forth before your honor the facts of the case in brief and our alternate prayer in regard to the quantum of the penalty 11.2 Kindly refer to the observation of the Learned Assessing Officer as given in paragraph 9.1 supra reproducing the observatio .....

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is humbly requested to adopt a liberal approach and drop the penal action for which the appellant company shall ever remain grateful and oblige." 5. But Ld. CIT(A) did not accept the submissions of the assessee, and he confirmed the action of the AO in levying the penalty @ 300%. It was held by him that the assessee had made a wrong claim and it was not a debatable issue where two opinions were possible and that it was a case of old assessee who was expected to know basic aspect of deducti .....

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this case no satisfaction has been recorded as per law by the AO in the assessment order while initiating the penalty proceedings, nothing has been mentioned whether there was concealment of income or furnishing of inaccurate of particulars of income. It was further argued that satisfaction is not discernible even from the perusal of the assessment order, and that complete information was provided in the return filed and in the assessment proceedings with regard to claim of expenses and interes .....

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nuine. The claim of the expenses has not been found to be bogus by the AO. The disallowance has been made only because of change of head of assessment of income and different legal interpretation adopted by the AO. None of the information/details filed by the assessee was found to be incorrect by the AO. It was thus, submitted that it was neither a case of concealment nor furnishing of inaccurate particulars of income. In support of his arguments, ld. counsel relied upon the following judgments: .....

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im has been allowed to the assessee in the subsequent years. Our attention was drawn upon the copy of return filed for AY 2010-11 to show that similar claim was made on account of interest amounting to ₹ 14780632/-, which has been accepted and no disallowance has been made by the AO in AY 2010-11. Thus, merely because, the claim has been disallowed in this year, it does not call for levy of penalty. 7. On the other hand, Ld. DR supported the orders of lower authorities and argued that impu .....

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n. At the outset, it is noted by us that in the penalty order and the assessment order, the AO has not made out a case that whether it was a case of concealment of income or furnishing of inaccurate particulars of income. 9. It is further noted by us that, admittedly, claim of expenses and interest has not been found to be bogus. It has also been accepted by the lower authorities that these expenses were incurred by the assessee in the normal course of his business. The only allegation of the AO .....

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es, Filing Fee, Audit Fee etc. Undoubtedly, these expenses were of statutory nature and were necessary for maintaining the existence of the company and thus these can be said to be incurred for the purpose of business of the assessee, and therefore these expenses were claimed under the head "Business". The claim of the assessee was very much plausible not only on facts but it is also supported on the basis of various judgments in favour of the assessee. Similar claim was held to be all .....

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rporate activities of the company for all practical purposes. So long as it is in operation, it has to maintain its status as a company and it has to discharge certain legal obligations and, for that purpose, it is necessary to appoint clerical staff and secretary or accountant and incur incidental expenses. In this background, the conclusion of the Tribunal that the expenses incurred were wholly and exclusively for the activities to earn income is preeminently a reasonable conclusion. We have c .....

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assessee but due to specific provisions, the same was assessed under the head "Income from House Property". But, the intrinsic nature of the income remains as income from business, even if it was assessed under a different head. Under these circumstances, the belief of the assessee that any expense incurred during the course of its business (including interest paid on funds borrowed) should be allowable against the income earned during the course of business, cannot be said to be wholl .....

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ount was allowed by the AO, and disallowance of part of the total claim was made by the AO on the basis of some calculations done by him by alleging that whole of the funds were not utilized for acquiring the property. Thus, an element of guess work was involved while computing and quantifying the amount of disallowance. Further, it is brought to our notice that similar claim has been accepted by the AO in the subsequent year i.e. AY 2010-11, wherein no disallowance has been made by the AO. Unde .....

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e, then levy of penalty would be automatic, disregarding the well-settled position of law that penalty proceedings are independent of the assessment proceedings. 12. Our view is supported by many judgments, some of which have been relied upon by the ld. counsel before us. We begin with the judgment of Hon'ble Supreme Court in the case of CIT vs. Reliance Petroproducts India (P) Ltd. 322 ITR 158 wherein it was held that if there is no finding that any details supplied by the assessee in its r .....

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as under: "There has been a complete disclosure of all facts by the assessee. Besides the claim made by the assessee of not being taxable was not found to be not bonafide. As held by the Supreme Court in Reliance Petroproducts Pvt. Ltd 322 ITR 158 making of an incorrect claim would not tantamount to furnishing inaccurate particulars of income. In this case, the assessee bonafide believed that the difference of ₹ 1.65 Crores and ₹ 55 Lakhs is not chargeable to tax and had so stat .....

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t the case of revenue that the claim made by the assessee was not on the basis of bona fide view." 14. Similarly in another judgment, Hon'ble Bombay High Court in the case of CIT vs. Nalin P. Shah (HUF) vide its order dated 04.03.2012 in ITA No.49/2013 held as under: "Though the income from the transfer of units of a mutual fund is exempt u/s 10(33), the assessee claimed a deduction for the loss of ₹ 3.08 crores suffered by him on transfer of US 64 units. The AO disallowed th .....

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eal: As the assessee had disclosed all details in the return of income, at the highest it can be said that the claim of the assessee was not sustainable in law. But as there was no furnishing of inaccurate particulars or concealment of income on the part of the assessee, penalty u/s 271 (1)(c) could not be levied." 15. It is further noted by us that similar issue has been decided by Hon'ble Delhi Bench of ITAT in the case of Naresh Kumar Vs. ACIT (ITA No. 6000/Del/2010) order dated 27.0 .....

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ive portion of same is reproduced hereunder for the sake of ready reference: "11. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is noticed that the assessee claimed interest amounting to ₹ 79,16,523/- as deductible u/s 24 of the Act. The assessee also claimed interest of ₹ 70,22,831/- on the loans from certain companies which were utilized for purchase of property, investment in com .....

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against the interest claimed at ₹ 70,22,831/-. In the present case, the assessee furnished all the particulars relating to the interest earned and paid but the claim of the assessee was not accepted in toto. Now question arises as to whether penalty u/s 271(1)(c) of the Act is leviable when the claim of the assessee is partly allowed. In this regard the Hon'ble Supreme Court in the case of CIT Vs Reliance Petro Products Pvt. Ltd. (2010) 322 ITR 158 (supra) held as under: "A glance .....

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guilty of furnishing inaccurate particulars. In order to expose the assessee to penalty, unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By no stretch of imagination can making an incorrect claim tantamount to furnishing inaccurate particulars. There can be no dispute that everything would depend upon the return filed by the assessee, because that is the only document where the assessee can furnish the particulars of his income. When such particula .....

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naccurate particulars regarding the income of the assessee. Such a claim made in the return cannot amount to furnishing inaccurate particulars." 13. From the ratio laid down by the Hon'ble Supreme Court in the aforesaid referred to case it can be held that the penalty u/s 271(1)(c) of the Act was not leviable to the facts of the present case because the AO disallowed the claim of the assessee, in part. In other words the AO estimated the interest payable on the loans @ 9% i.e. ₹ 3 .....

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r: "Penalty u/s 271(1)(c) of the Act for filing inaccurate particulars of income is being initiated separately. " 14. From the above observation, it cannot be said that the AO was satisfied that the assessee concealed the income. On a similar issue the Hon'ble Jurisdictional High Court in the case of Ms. Madhushree Gupta Vs Union of India and Another (2009) 317 ITR 107 held as under: "The legal position that power to impose penalty under section 271 of the Act depends upon the .....

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are initiated, if otherwise it is discernible from the record, that the Assessing Officer has arrived at prima facie satisfaction for initiation of penalty proceedings. The issue is of discernibility of the "satisfaction" arrived at by the Assessing Officer during the course of proceeding before him. Section 271(1)(c) has to be read in consonance with section 271 (1B). The presence of prima facie satisfaction for initiation of penalty proceedings was and remains a jurisdictional fact. .....

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of the Act." 15. Similarly the Hon'ble Gujarat High Court in the case of CIT Vs Lakhdhir Lalji (1972) 85 ITR 77 held as under: "That the penalty proceedings had been commenced against the assessee on a particular footing, viz., concealment of particulars of income, but the final conclusion for levying the penalty was based on a different footing altogether, viz., on the footing of furnishing inaccurate particulars of income. Under the circumstances, it could not be said that the a .....

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as correct." 16. In the present case also the AO in the course of assessment proceedings had not recorded any satisfaction while initiating the penalty proceedings, therefore, the penalty u/s 271(1)(c) of the Act was not leviable. In the present case, this contention of the Id. Counsel for the assessee that in the subsequent year similar claim was although disallowed but penalty proceedings were dropped was not rebutted. Therefore, on the identical facts in the year under consideration vis- .....

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