Brief- Merely because the assessee had claimed the expenditure, where claim was not accepted or was not acceptable to the revenue, that by itself would not, attract the penalty under Section 271(1)(c).
Brief Facts of the Assessee:
The Assessee has claimed the exemption under section 10A of the Act Income Tax Act, 1961 (“The Act”). During assessment, the Assessing officer had excluded the income on account of foreign exchange fluctuation for computing eligible income for deduction u/s.10A.
The Assessee had claimed the expenditure of one unit against another unit which was not eligible for deduction u/s 10A of the Act amounting to Rs. 50 Lakhs. The total turnover of the assessee included STPI link charges received amounting to Rs. 8,03,258/-.
The Assessing officer however levied penalty u/s. 271(1)(c) of the Act and the same was confirmed by the CIT(A) on the plea that assessee has wrongly claimed expenditure of eligible unit against other unit.
Held by CIT (A):
The CIT (A) held that the income on account of foreign exchange fluctuation is eligible income for deduction u/s 10A and reversed the order of assessing officer.
The CIT (A) however enhanced the income by Rs. 50 Lakhs by upholding the view that the said deduction was not eligible for deduction u/s 10A. The charges received towards STPI link charges were also reduced from export turnover treating the same as telecommunication charges as per explanation 2(iv) to section 10A of the Act.
Question of Law:
Whether penalty under section 271(1)(c) of the Income Tax Act, 1961 (“Act”) is attracted if the claim made by Assessee is not accepted by Revenue.
Contention of the Revenue:
The Revenue was of the view that that assessee has wrongly claimed expenditure of eligible unit against non-eligible unit so as to claim higher deduction u/s. 10A, accordingly the Assessing officer was justified in levying penalty for such a wrongful claim.
Contention of the Assessee:
The Assessee contended that mainly penalty is imposed with reference to income of Rs.50 lakhs enhanced by the AO by revising the claim of deduction u/s.10A. He contended that since the enhancement was done by CIT(A), therefore, he should initiate the penalty and record his satisfaction for the same, however, the CIT(A) has not initiated penalty in his order, therefore, penalty imposed by the AO with reference to the enhancement made by the CIT(A) was not justified.
The Assessee also relied on the decision of the Hon’ble Supreme Court in the case of Reliance Petroproducts ltd.322 ITR 158, in which it was held that decline of claim of deduction will not be sufficient to levy of penalty u/s. 271(1)(c) of the Act.
Held by the Income Tax Appellate Tribunal (“ITAT”):
The ITAT held that the enhancement of Rs.50 Lakhs was made by CIT(A). Therefore the penalty proceedings should be commenced in the course of, and before the completion of the proceedings in which the income tax authority is satisfied about the default which attracts the penalty. Here in this case the CIT(A) was satisfied and completed the proceedings by making enhancement. However, he did not initiate any penalty proceeding.
The ITAT also relied upon the decision of the Hon’ble Supreme Court in the case of Reliance Petroproducts Ltd. (supra) held that merely because the assessee had claimed the expenditure, which was not accepted or was not acceptable to the revenue, that by itself would not, attract the penalty under Section 271(1)(c). If the view of Revenue is accepted then in case of every return where the claim made is not accepted by Assessing officer for any reason, the assessee would invite penalty under Section 271(1)(c), which is not the intendment of the Legislature.
Hence the appeal of Assessee was allowed.
For Ready Reference of our readers:
Explanation 2(iv) to Section 10A:
Explanation 2.—For the purposes of this section,—
(iv) “export turnover” means the consideration in respect of export by the undertaking of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India;
Section 271(1)(c) –
271 (1) If the Assessing Officer or the Commissioner (Appeals) or the 83[Principal Commissioner or] Commissioner in the course of any proceedings under this Act, is satisfied that any person—
(b) has failed to comply with a notice under sub-section (2) of section 115WD or under sub-section (2) of section 115WE or under sub-section (1) of section 142 or sub-section (2) of section 143 or fails to comply with a direction issued under sub-section (2A) of section 142, or
(c) has concealed the particulars of his income or furnished inaccurate particulars of such income, or
(d) has concealed the particulars of the fringe benefits or furnished inaccurate particulars of such fringe benefits,
he may direct that such person shall pay by way of penalty, …….