Penalty not leviable as disallowance u/s 14A made on estimate basis

DCIT Vs ICICI Bank Ltd (ITAT Mumbai)

ITAT Mumbai held that no penalty leviable on account of disallowance u/s 14A of the Act when disallowance has been made on estimate basis and return of income was filed prior to insertion of section 14A of the Act.

Facts- AO in his penalty order observed that assessee has filed its return of income of ₹.85,44,80,740/- on 30.12.1999 and assessment was completed on the income of ₹.1,55,24,14,834/ after making various additions. He also observed that assessee claimed tax free interest income of ₹.23,29,28,249/-. The above said amount consists of ₹.15,67,83,562/- exempt u/s 10(15)(v)(ii) being interest on tax free income and ₹.7,61,54,687/- being dividend income exempt u/s 10(33) of the Act. Accordingly, assessing officer disallowed interest expenditure attributable to earning exempt income amounting to ₹.21,29,58,900/-. Since assessee has claimed exempt interest income and dividend income on gross basis, accordingly, he disallowed the total interest attributable to earning of exempt income u/s. 14A of the Act.

AO held that the assessee has deliberately evaded payment of taxes. Accordingly, he levied penalty of ₹.1,55,25,615/- i.e., 100% of the tax sought to be evaded.

Conclusion- We observe that the Assessing Officer has levied the penalty on disallowance of interest expenditure u/s. 14A of the Act on estimate basis. It is fact on record that the Assessing Officer has disallowed the interest expenditure and 14A disallowance on estimated basis even though assessee has filed the return of income prior to insertion of section 14A of the Act. Therefore, the findings of the Ld.CIT(A) is found to be in order. Accordingly, the grounds raised by the revenue are dismissed.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

1. These appeals are filed by the revenue against separate orders of the Learned Commissioner of Income Tax (Appeals) – XXVII, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 18.03.2008, 31.12.2007 and 31.12.2007 for the A.Ys.1996-97, 1999-2000 and 2000-2001 respectively.

2. Since the issues raised in all these appeals are identical, therefore, for the sake of convenience, these appeals are clubbed, heard and disposed off by this consolidated order.

3. At the time of hearing, it is brought to our notice facts relating to A.Y. 1999-2000, that Assessing Officer in his penalty order observed that assessee has filed its return of income of ₹.85,44,80,740/- on 30.12.1999 and assessment was completed on the income of ₹.1,55,24,14,834/ after making various additions. He also observed that assessee claimed tax free interest income of ₹.23,29,28,249/-. The above said amount consists of ₹.15,67,83,562/- exempt u/s 10(15)(v)(ii) being interest on tax free income and ₹.7,61,54,687/- being dividend income exempt u/s 10(33) of the Act. Accordingly, assessing officer disallowed interest expenditure attributable to earning exempt income amounting to ₹.21,29,58,900/-. Since assessee has claimed exempt interest income and dividend income on gross basis, accordingly, he disallowed the total interest attributable to earning of exempt income u/s. 14A of the Act.

4. In response, assessee submitted that after combined reading of section 10(33) of the Act and section 115-O of the Act, the exemption is available on gross dividend and not on net income. The investment in the tax free bonds and shares have been made out of net worth of Bank and not from borrowed capital therefore no part of interest is allocable to exempt income. Further, it was submitted that there is no formula u/s.14A for allocation of interest towards exempt income.

5. The above submissions of the assessee was not accepted by the Assessing Officer, accordingly, he disallowed the same. Since the above said exemption claimed by the assessee is rejected by the Ld.CIT(A), Assessing Officer held that the assessee has deliberately evaded payment of taxes. Accordingly, he levied penalty of ₹.1,55,25,615/- i.e., 100% of the tax sought to be evaded.

6. Aggrieved assessee preferred an appeal before the Learned Commissioner of Income Tax (Appeals)-XXVIII, Mumbai. After considering the detailed submissions of the assessee, Ld.CIT(A) by relying on the decision of ICICI Bank Limited for the A.Y. 2000-2001, deleted the penalty with the observation that no penalty leviable on account of disallowance u/s. 14A of the Act when the disallowance has been made on estimate basis and return of income was filed prior to insertion of section 14A of the Act.

7. Aggrieved revenue is in appeal before us raising following grounds in its appeal: –

ITA.No. 1733/Mum/2008 (A.Y. 1999-2000)

“1. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the penalty levied u/s. 271(1)(c) amount to ₹.1,55,25,615/-/- due to wrong claim of interest expenditure by assessee on account of income claimed as exempt from tax and so held by the CIT(A).

2. The appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored.

3. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”

ITA.No. 1745/Mum/20008 (A.Y. 2000-2001)

1. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the penalty levied of Rs.18,90,59,097/- u/s.271(1)(c) of the I.T. Act without appreciating the fact that the assessee had concealed the particulars of its income and had also furnished inaccurate particulars of such income.”

2. “The appellant prays that the order of CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored.”

3. “The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”

ITA.No. 4223/Mum/2008 (A.Y. 1996-97)

1. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the penalty levied of Rs.18,90,59,097/- u/s.271(1)(c) of the I.T. Act without appreciating the fact that the assessee had concealed the particulars of its income and had also furnished inaccurate particulars of such income.”

2. “The appellant prays that the order of CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored.”

3. “The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”

8. At the time of hearing, both the counsels have brought to our notice the issue involved in these appeals i.e., ITA.No. 1745/MUM/2008, and ITA.No. 1733/Mum/2008 involving similar issue of disallowance u/s. 14A of the Act on estimated basis and also the return of income was filed prior to insertion of section 14A of the Act. It is also brought to our notice that ITAT has deleted the quantum addition made by the Assessing Officer in assessee’s appeal and it was submitted that the issue involved in the two appeals are similar.

9. Considered the rival submissions and material placed on record, we observe that the Assessing Officer has levied the penalty on disallowance of interest expenditure u/s. 14A of the Act on estimate basis. It is fact on record that the Assessing Officer has disallowed the interest expenditure and 14A disallowance on estimated basis even though assessee has filed the return of income prior to insertion of section 14A of the Act. Therefore, the findings of the Ld.CIT(A) is found to be in order. Accordingly, the grounds raised by the revenue are dismissed.

10. Apart from the above ground relating to 14A disallowance, revenue in ITA.No. 4223/Mum/2008 for the A.Y. 1996-97 has raised other issues relating to entertainment expenses u/s. 37(3), expenditure on articles intended for presentation under Rule 6B and Cash payments u/s. 40A(3) of the Act.

11. At the time of hearing, Ld. AR of the assessee brought to our notice relevant facts on record. Ld. AR of the assessee filed a chart and argued referring to the chart. Copy of the chart is placed on record. The relevant columns of the chart are reproduced below: –

12. On the other hand, Ld. DR relied on the findings of the Assessing Officer.

13. Considered the rival submissions and material placed on record, we observe from the facts brought on record that majority of the expenses disallowed in regular assessment were deleted by ITAT / Ld.CIT(A) in the subsequent appellate proceedings. The entertainment expenses also, the penalty was levied without considering the relief granted by Ld.CIT(A). Therefore, all the issues were decided by the appellate authorities in favour of the assessee. Therefore, the penalty levied on the same amount is not maintainable. Accordingly, the grounds raised by the revenue are dismissed.

14. In the result, appeals filed by the revenue are dismissed.

Order pronounced in the open court on 29^th May, 2023