Merely non-allowability of claim by Revenue authorities is not a valid ground for imposition of penalty U/s. 271(1)(c)
Penalty under section 271(1)(c) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) has remained a controversial issue.
In an appeal before Ahmedabad ITAT, DCIT vs. Parinay Organizers Pvt. Ltd.[ ITA No. 3040/Ahd/2013,04.01.2017], for the AY 2007-08, one of the grounds raised was that whether on the facts of the circumstances of the case, the CIT(A) was justified in deleting the penalty levied by the AO on account of dis allowances of interest expenses of Rs. 44,19,194/- without considering the merits of the case.
Briefly stated facts in the case were that assessee was a private limited company engaged in construction work. Return of income for AY 2007-08 showing nil income was filed on 19.10.2007. The case was selected for scrutiny assessment and assessment order under section 143(3) of the Act was framed on 15.12.2009 after disallowing interest expenses of Rs. 44,19,194/- and income assessed at Rs. nil after setting off of brought forward losses. In the quantum appeal assessee could not succeed before CIT(A) and the Tribunal. Penalty proceedings under section 271(1)(c) of the Act were initiated on the dis allowance of interest and levied penalty of Rs. 13,25,759 vide order dated 13.03.2012 which was deleted by CIT(A) vide his appellate order dated 24.10.2013.
Thereupon, Revenue filed appeal before ITAT.
The learned Members of the ITAT heard the rival contentions and perused the material placed on record. Sole grievance of the Revenue in this appeal was against the order of CIT(A) deleting the penalty under section 271(1)(c) of the Act levied by the AO on account of dis allowance of interest expenses of Rs. 44.19,194/- without considering the merits of the case. The learned Members observed that assessee was engaged in the construction business and has booked the expenses on a pro rata basis as per the completion of construction and the area sold during the year. As submitted by AR total area of construction was 11,219 sq.ft. out of which during the AY 2007-08 assessee has sold 2192 sq.ft. During assessment proceedings AO observed that a sum of Rs. 44,19,194/- incurred towards interest expenditure was added to the construction account. This amount of Rs. 44,19,194/- included interest paid to a Co-op. Bank at Rs. 21,10,019/- in AY 2004-05 and Rs. 23,01,175/- in AY 2005-06. In response to the query raised by AO it was specifically replied by the assessee that the total amount of Rs. 44,19,194/- has been transferred to construction account and the amount standing in the construction account has been apportioned on the basis of square feet areas sold. In the year under appeal assessee sold 2191 sq.ft. out of 11,219 sq.ft and proportionate amount of Rs. 2,49,81,176/- being the total construction amount was accordingly apportioned by applying 2192 sq.ft. /11,219 sq.ft., which gave a figure of Rs. 48, 80,893/- and the same was transferred to profit and loss account. Assessee had also submitted before AO that Rs.48,80,893/- includes the interest amount of Rs. 8,63,435/- only and not Rs. 44,19,194/- and the expenditure claimed was normal business expenditure on mercantile basis. However, AO brought in provisions of section 43B of the Act in the picture and observed that as per the provisions of section 43B(e) of the Act deduction can be claimed for the interest paid to a scheduled bank which in the instant case pertains to a Co-op. Bank. AO also ignored the fact that proportionate interest amount was only Rs. 8,63,435/- and not Rs. 44,19,194/-. He disallowed the total interest expenditure of Rs. 44,19,194/- as not eligible for deduction under section 43B(e) of the Act.
The learned Members of the ITAT observed that in this appeal we have to limit our focus only to the grievance of Revenue that whether CIT(A) was correct in deleting the penalty imposed under section 271(1)(c) of the Act on the alleged addition of Rs. 44,19,194/-.
Respectfully following the judgments of Hon’ble Supreme Court in the case of CIT vs. Reliance Petro Products Pvt. Ltd.[(2010) 322 ITR 158 (SC)] and in the case of Price Waterhouse Coopers (P) Ltd. vs. CIT [(2012) 25 taxmann.com 400 (SC)], the learned Members of the ITAT held that, we are of the confirm the view that in the given case assessee had made claim of expenditure on pro rata basis by way of filing particulars which were not found to be inaccurate at any stage nor there has been any concealment of income but it was merely non-allow ability of claim by the Revenue authorities by applying the provisions of section 43B(e) of the Act but certainly such circumstances do not call for visiting assessee with penalty under section 271(1)(c) of the Act, we, therefore, find no reason to interfere with the order of CIT(A) deleting the penalty under section 271(1)(c) of the Act on dis allowance of Rs. 44,19,194/- and accordingly uphold the same and dismiss this ground of Revenue.