Case Law Details
Brief of the case
1. In the case of Asst Commissioner of Income Tax vs. Dhariwal Industries Ltd, Hon’ble ITAT has held that once issue on which penalty u/s 271 (1)(C)levied involves substantial question of law, then, no penalty is leviable. And no penalty can be levied in succeeding assessment year, if in proceeding assessment year AO has not levied penalty on similar/ identical disallowance.
Facts of the case
1. The assessee is engaged in the business of manufacturing and sale of Pan Masala and Gutka. The assessee had claimed deduction u/s. 80I of the Act in respect of profits derived from its undertakings at Godnadi and Pune and u/s. 80IA of the Act in respect of profits derived from its undertakings at Baroda and Hyderabad. The Revenue allowed deduction to the assessee in respect of profits derived from manufacturing and sale Pan Masala. However, the claim of deduction in respect of profits derived from manufacturing and sale of Gutka was denied to the assessee.
2. In the first appeal, the Commissioner of Income Tax (Appeals) for the assessment years 1994-95, 1995-96, 1997-98 to 2000-01 the Commissioner of Income Tax (Appeals) allowed the claim of the assessee. The assessee was held to be eligible for deduction u/s. 80I and 80IA on manufacturing and sale of Gutka. The Revenue filed appeal before the Tribunal. The Tribunal set aside the order of Commissioner of Income Tax (Appeals) in the assessment years 1994-95, 1995-96, 1997-98 to 2000-01.
3. In the assessment year 2003-04 the Commissioner of Income Tax (Appeals) dismissed the quantum appeal of the assessee by placing reliance on the order of Tribunal in assessee’s own case for earlier assessment years. The assessee took the matter to the Hon’ble High Court which is pending for final adjudication.
4. Issues involve in the instant appeals are, whether penalty be levied on following disallowance (a) Disallowance of claimed made u/s 80I and 80IA on profit derived from manufacturing of Gutka. (b) on treatment of sales tax incentive on generation of power by windmills as capital receipt instead of revenue receipt by assessee. (c) on claiming higher rate of depreciation on items ancillary to the running of windmills, 100% rate of depreciation instead of 80%.
5. On all the above three counts, the Assessing Officer levied penalty. Aggrieved by the penalty orders u/s. 271(1)(c) for the assessment year 2003-04, the assessee preferred appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) vide order dated 20-02-2009 deleted penalty with respect to deduction claimed by the assessee u/s. 80I and 80IA and receipts by way of sales tax incentive. However, the Commissioner of Income Tax (Appeals) upheld the penalty with respect to assessee’s claim of depreciation on windmills
In the assessment years 2004-05 and 2005-06 the penalty was levied only on account of assessee’s claim of deduction u/s. 80I and 80IA of the Act and receipt of sales tax incentive. The Commissioner of Income Tax (Appeals) vide order dated 01-06-2010 deleted the penalty on both the counts.
Issue under Consideration
Can Penalty u/s 271 (1)(c) be levied if quantum appeal involve substantial question of law and High court admit the quantum appeal. And whether penalty can be levied, when AO himself has not levied penalty in preceding assessment year on same and identical issue of disallowance?
Assessee’s Contention
1. That the Commissioner of Income Tax (Appeals) has rightly deleted the penalty as the additions/disallowance which are subject matter of penalty involved substantial question of law. The assessee has filed appeal before the Hon’ble Bombay High Court challenging the order of Tribunal. The Hon’ble High Court has admitted the appeals of the assessee and its group companies on the same issue. And that substantial question of law is involved in quantum appeals therefore penalty is not leviable. Reliance on the decision of Hon’ble Bombay High Court in the case of CIT Vs. M/s. Nayan Builders and Developers in ITA No. 415 of 2012 decided on 08-07-2014 and the decision of Pune Bench of the Tribunal in ITA Nos. 580 & 581/PN/2009 in assessee’s own case for assessment years 1999-2000 & 2000-01 decided on 30-08-2011.
2. That the assessee had claimed depreciation on structures incidental or ancillary structure to the windmill in the assessment year 2002-03. While framing assessment for assessment year 2002-03, the Assessing Officer did not initiate any concealment penalty. The assessment order for assessment year 2003-04 is a carryover of the decision in assessment year 2002-03. If no penalty proceedings are initiated in assessment year 2002-03 there cannot be levy of penalty in subsequent assessment year for same cause. The ld. AR further submitted that the assessee had inadvertently claimed depreciation @ 100% instead of 80% on windmills.
3. That the assessee had claimed higher rate of depreciation in the assessment year 2002-03 which was disallowed. The Revenue had not imposed any penalty on the said disallowance. In the assessment order for assessment year 2003-04 identical reasons have been given for disallowing the higher rate of depreciation. Therefore, penalty cannot be levied on same set of facts in the immediately succeeding assessment year. The claim of higher rate of depreciation is bonafide mistake.
4. The rate of depreciation was reduced from 100% to 80% in assessment year 2003-04. It was mere calculation error. The mistake is bonafide. In support of his submissions the ld. AR placed reliance on the decision of Hon’ble Supreme Court of India in the case of Price Waterhouse Coopers (P.) Ltd. Vs. CIT reported as 348 ITR 306 (SC).
Revenue’s Contention
1. Department Representative supported order of AO in levying penalty u/s 271 (1) (c) of the Act.
ITAT decision / observations
1. We are of the considered view that since the first two issues on which the penalty has been levied u/s. 271(1)(c) involves substantial question of law, therefore, no penalty is leviable thereon. The Hon’ble jurisdictional High Court in the case of CIT Vs. M/s. Nayan Builders and Developers (supra) has held that where the debatable and arguable issues are involved and substantial question of law is framed in quantum proceedings, no case for levy of penalty is made out. The Co-ordinate Bench in ITA Nos. 580 & 581/PN/2009 in assessee’s own case for assessment year 1999-2000 and 2000-01 decided on 30-08-2011 upheld the order of Commissioner of Income Tax (Appeals) in deleting penalty by placing reliance on the decision of Hon’ble jurisdictional High Court in the case of CIT Vs. M/s. Nayan Builders and Developers (supra).
2. The relevant extract of the order of the Tribunal deleting penalty reads as under:
We find that in the case of Nayan Builders (supra) wherein an admission of substantial question of law in quantum proceedings by the jurisdictional High Court lends credence to the bona fides of the assessee in claiming deduction. Once it turns out that claim of the assessee could have been considered for deduction as per a person properly instructed in law and is not completely debarred at all, the mere fact of confirmation of disallowance would not per se lead to imposition of penalty. Since the disallowance in quantum have been held by the jurisdictional High Court to be involving a substantial question of law, the penalty is not exigible under the provisions of section 271(1)(c) of the Act.
3. In view of the facts of the case and the decision of the Hon’ble Bombay High Court rendered in the case of CIT Vs. M/s. Nayan Builders and Developers (supra), we do not find any reason to interfere with the order of the Commissioner of Income Tax (Appeals) in deleting penalty. Accordingly, all the three appeals of the Revenue are dismissed.
4. We find force in the submissions of the ld. AR. No penalty was levied by the Assessing Officer on similar disallowance in the preceding assessment year, therefore, the penalty cannot be levied in succeeding assessment year for the same disallowance. The Co-ordinate Bench of the Tribunal in ITA No. 957/PN/2011 in the case of Shri C.P. Mohandas Vs. DCIT decided on 29-05-2015 has deleted the penalty on similar grounds.
5. As far as rate of depreciation is concerned, the assessee has admitted that the mistake in adopting rate at 100% was bonafide. We accept the explanation furnished by the assessee in erroneously applying higher rate of depreciation. It was in the impugned assessment year that rate of depreciation was reduced from 100% to 80%. The assessee applied 100% rate of depreciation instead of 80%. The mistake can be said to be a silly mistake caused by callousness. The assessee should have been more careful in applying the rate of depreciation. In view of the facts of the case, we are of the view that levy of penalty is not justified.
