Case Law Details
Advocate Akhilesh Kumar Sah
Merely the claim of deduction did not find favour of the AO would not justify imposition of penalty under section 271(1)(c): Aristo Pharma case
Recently, in Aristo Pharmaceuticals Pvt. Ltd. vs. ACIT [ITA No.6680/Mum/2012 with ITA No.5553/Mum/2014 and ITA No.5479/Mum/2015, A.Y.: 2009-10, 2011-12 & 2012-13, decided on 26.07.2018], briefly stated, the assessee-company was engaged in the business of manufacturing and sale of pharmaceuticals products filed its return of income for A.Y. 2005-06 on 31.10.2005, declaring income at Rs. 81,16,05,080/-. The case of the assessee was thereafter taken up for scrutiny assessment under Sec. 143(2) of the Income Tax Act, 1961 (for short ‘the Act’).
The assessee in its return of income had claimed deduction under Sec. 80IB of Rs. 16,18,40,947/- on account of a new industrial undertaking located at Daman. The deduction claimed by the assessee was to the extent of 30% of the profits of the said unit. The AO while framing the assessment, being of the considered view that the deduction under Sec. 80IB was to be worked out on the basis of the profit and gains “derived from” an eligible industrial undertaking, thus declined to allow the said deduction in respect of certain other incomes aggregating to Rs. 5,87,993/- viz.
(i) interest on MSEB : Rs. 622/-;
(ii) interest on security deposit for tender : Rs. 13,615/-;
(iii) interest on electricity deposits : Rs. 828/-;
(iv) insurance claim : 4,33,788/-; and
(v) miscellaneous income : Rs. 1,39,140/-.
The AO characterizing the expenditure of Rs. 3,58,454/- incurred by the assessee on computer software as a capital expenditure, therein dislodged the claim of the same as a revenue expenditure by the assessee. Further, the AO carried a lump sum disallowance of 25% of the expenses on gift articles as claimed by the assessee and made a disallowance of Rs. 1,22,06,085/- on the said count in the hands of the assessee. However, the disallowance in respect of expenses incurred by the assessee on gift articles was on appeal scaled down by the CIT(A) to 15% of the aggregate of such expenses, as a result whereof the disallowance stood restricted to an amount of Rs. 73,23,651/-
Subsequent to the receipt of the CIT(A) order a “Show cause‟ Notice (for short “SCN‟) under section 274 r.w.s. 271(1)(c), dated 28.09.2010 was issued by the AO. The AO not finding favour with the explanation of the assessee as regards the issues involved viz.
(i) raising of a wrong claim of deduction under Sec. 80IB which had resulted in under assessment of its income;
(ii) wrong claim of computer software expenses which though was in the nature of capital expenditure, but was claimed as a revenue expenditure by the assessee; and
(iii) wrong claim of expenditure on account of gift articles which were incurred for non-business purposes, thus imposed a penalty of Rs. 1,07,50,531/- under Sec. 271(1)(c) of the Act.
Pursuant to an application filed by the assessee under Sec. 154 of the Act, the quantum of penalty imposed by the AO was reduced to an amount of Rs. 30 lacs, vide a rectification order dated 06.01.2014 passed by the AO under Sec. 154 of the Act.
Against above, the assessee carried the rectified order of penalty, dated 06.01.2014 in appeal before the CIT(A) The CIT(A) after deliberating on the contentions advanced by the assessee in support of its claim that no penalty under Sec. 271(1)(c) was liable to be imposed in respect of the additions/disallowances sustained in its hands viz.
(i) disallowance of part of the claim of deduction under Sec. 80IB;
(ii) re-characterization by the AO of the computer software expenses as capital expenditure; and
(iii) disallowance of 15% of gift article expenses, being persuaded to subscribe to the said claim of the assessee, deleted the penalty of Rs. 30 lacs imposed by the AO.
The Revenue against the order of the CIT(A) carried the matter to ITAT.
The learned Members of the ITAT, Mumbai heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record and found that the AO had declined the claim of deduction of the assessee under Sec. 80IB in respect of certain other incomes aggregating to Rs. 5,87,993/- viz.
(i) interest on MSEB : Rs. 622/-;
(ii) interest on security deposit for tender : Rs. 13,615/-;
(iii) interest on electricity deposits : Rs. 828/-;
(iv) insurance claim : 4,33,788/-; and
(v) miscellaneous income : Rs. 1,39,140/-.
On perusal of the order of the CIT(A) that the entitlement of the assessee for claim of deduction under Sec. 80IB in respect of the aforesaid other incomes had always been the subject matter of debate between the assessee and the department since A.Y. 1995-96 onwards, and the same had always been decided in favour of the assessee. The Tribunal, vide its order dated 30.09.2005 for A.Ys. 1995-96 to 2001-02 had decided the said issue in the favour of the assessee. The Revenue had accepted the said order of the Tribunal and had not carried the same in further appeal before the High Court. Still further, the Tribunal following its earlier order had again vide its order dated 30.05.2008 for A.Ys 2002-03 to 2004-05 had decided the said issue in favour of the assessee. In the backdrop of the aforesaid factual position and the fact that the assessee had furnished complete details as regards its claim of deduction under Sec. 80IB(4) of the Act. The learned Members were of the considered view merely for the reason that the said claim of deduction did not find favour with the AO would not justify imposition of penalty under Sec. 271(1)(c) in the hands of the assessee. The re-characterization of the computer software expenditure as a capital expenditure by the AO, as against the claim of the same as a revenue expenditure by the assessee, though would justify the disallowance of the said expenditure, but keeping in view the fact that the assessee had made a complete disclosure of the details of the said expenditure and claim of the same as a revenue expenditure in its return of income, thus no penalty under Sec. 271(1)(c) could have been imposed in the hands of the assessee. Though an unproved claim of expenditure would justify an addition/disallowance, however nothing short of a disproved claim would justify imposition of penalty under Sec 271(1)(c) of the Act. No penalty under Sec. 271(1)(c) on either of the aforesaid counts could have validly been imposed in the hands of the assessee which was fortified by the judgment of the Hon’ble Supreme Court in the case of CIT vs. Reliance Petroproducts Pvt. Ltd. (2010) 322 ITR 158 (SC). The learned Members of the ITAT, Mumbai found no infirmity in the order of the CIT(A) and upheld the deletion of the penalty of Rs. 30 lacs imposed by the A.O under Sec. 271(1)(c) as per his rectified penalty order, dated 06.01.2014.
