1. The assessee is an individual, who filed his income tax return for the assessment year under consideration on March 31st, 2010. The assessee worked as an Exhibitor and Infrastructure Provider during the year under consideration. Subsequently, the case was selected for scrutiny under CASS on the basis of AIR information.
2. The A.O., during the course of proceedings, noticed building material and processing charges claimed as expense in the profit and loss account. It was contended that the same were of capital nature and hence, added to assessee’s income. The Tribunal, in its order, has mentioned the following facts:
a) The A.O. has disallowed these expenses merely stating that, these expenses were of capital nature and has not given any detailed finding on the issue.
b) No independent reasons were given by the A.O. for imposing penalty. Reliance was placed upon the fact that in the quantum proceedings, the expenses claimed by the assessee were held to be of capital nature.
c) There is no discussion in the assessment order on this issue except one line is written which reads: “These expenses are of capital nature should have been capitalized”. No reasons have been assigned for consideration of expenditure as of capital nature.
3. Assessee had also booked interest on Overdraft as an expense through P&L account. A.O. added the same to the total income stating that the same was not an allowable expense. This was based on the A.O.’s finding that the assessee has withdrawn Rs. 9 lakhs from business as imprest. Furthermore, the following are the facts that have been provided by the Tribunal in the its order:
a) On perusal of the Assessment order, it becomes quite clear that the A.O. has made disallowance of interest on overdraft without assigning any reason.
b) No reasons have been provided for in the penalty order as well and reliance has been placed upon the assessment order.
4. A.O. also added back the credit card expenses claimed as deduction in the Profit and Loss Account, stating that the same was not in relation to the business. As per Tribunal’s order, the penalty was levied by A.O. stating that the aforementioned addition was made by his predecessor as the same was not in relation to the business.
5. Penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961 were also initiated in case of all the additions made to the total income, as stated in points 2 to 4 above. The CIT(A) confirmed the aforementioned penalty.
Levy of penalty under section 271(1)(c) of the Income Tax Act, 1961 is justified in assessee’s case as the assessee has failed to disclose fully and truly the particulars of his total income.
The assessee contended that the impugned additions were made on estimate basis and he has not submitted any inaccurate particulars and concealed any facts and all the particulars of income and expenses are shown in the profit and loss account and the balance sheet of the assessee. Thus the bonafide of the assessee cannot be doubted. It was submitted that the amounts were routed through books of accounts.
1. It was contended that the expenditure incurred on building material as well as processing charges was revenue in nature and the same was allowable as deduction. Thus, the question of penalty does not arise at all.
2. On levy of penalty upon the addition of interest on overdraft, the assessee contended that the amount has been routed through the books of accounts. The issue is debatable in the sense that whether the amount of interest claimed is allowable or not, it is not free from controversy and, hence, there is no concealment of income or filing of any inaccurate particulars of income.
3. The following was the assessee’s contention upon levy of penalty on additions made to the income by disallowing credit card expenses:
There is no question of concealment of income or filing of inaccurate particulars of income because amount has been routed through the books of accounts. There is no discussion in the assessment order and also in the penalty order as to how these expenses are not related to business.
Held by ITAT
1. On the issue of levy of penalty u/s 271(1)(c) of the Income Tax Act, 1961 on the expenditure incurred on building material and processing charges, the Tribunal held as under:
a) It is true that in the course of penalty proceedings, findings recorded in quantum proceeding can be referred to and relied upon, but confirmation of the quantum addition by itself cannot be reason enough for imposing penalty u/s 271(1) (c) of the Act .
b) It is true that penalty proceedings and the quantum proceedings are different and independent proceedings. As per law, the Assessing Officer was obliged to give independent reasons for imposing penalty u/s 271(1) (c).
c) The assessee claimed these expenses as Revenue expenses in the profit and loss account. However, the Assessing Officer treated these expenses of capital nature. Thus, there was difference of opinion between the Assessing Officer and the assessee.
d) Even otherwise also this issue is debatable in the sense that in the given facts and circumstances of the case whether these expenses can be treated as Revenue expenses or capital expenses which can be established by a long drawn process of reasoning on points on which there may be conceivably two opinions.
e) Such issues are never free from controversy and, therefore, no penalty u/s 271(1) (c) of the Act can be levied on the above amount.
2. The interest on overdraft was disallowed and added back to the assessee’s income along with levy of penalty u/s 271(1) (c) of the Act, upon which the Tribunal’s decision was as under:-
a) The issue is debatable in the sense that the amount of interest claimed on overdraft is allowable or not, is not free from controversy.
b) Secondly, the A.O. has not given any independent reason while imposing penalty u/s 271(1)(c) of the Act . On both counts, penalty u/s 271(1)(c) is not leviable on the amount of disallowance of interest on overdraft.
c) Accordingly, the impugned penalty is cancelled.
3. The credit card expenses had been disallowed by the A.O. and the following observations relating to the same were made in the Assessment Order:
“The assessee has debited an amount of Rs. 34,663/- under the head credit card payments. The same are disallowed being not related to business.”
The findings of the Tribunal are as under:
a) The Assessing Officer has not pointed out any single item of expenses which was not related to business.
b) There are no such findings that these expenses are non-genuine or bogus or was claimed to reduce the tax liability.
c) In the absence of such findings, the levy of penalty is cancelled.
d) In the case of DCIT v Abhishek Exports (2014) 148 ITD 20 (Ahd. ), the Tribunal held that merely because such an expenses claimed by the assessee have incurred in cash but not supported by documentary evidence to the satisfaction of Revenue authorities, it could not be said that Revenue has proved that expenses claimed were not genuine.
In the case of DCIT Vs. Abhishek Exports (2014) 148 ITD 20 (Ahd.), the Ahmedabad Tribunal has made the following observations:-
1. In the absence of complete and convincing corroborative evidence, the revenue may justifiably disallow certain part of the expenses claimed by the assessee, but in the matter of penalty proceedings, the onus lies heavily on the revenue to prove that the assessee had concealed its income or has filed inaccurate particulars of its income. Merely because certain expenses have been claimed by the assessee to have incurred in cash and were not supported by documentary evidence to the satisfaction of the revenue authorities, it could not be said that the revenue has proved that the expenses claimed were inflated or non-genuine.
2. It is well settled that the parameters of judging the justification for addition made in the assessment case of the assessee is different from the penalty imposed on account of concealment of income or filing of inaccurate particulars of income and that certain disallowance/addition could legally be made in the assessment proceeding on the preponderance of probabilities, but no penalty could be imposed under section 271(1)(c) on the preponderance of probabilities and revenue has to prove that the claim of the expenses by the assessee was not genuine or was inflated to reduce its tax liability. Thus, it is not a fit case to levy penalty under section 271(1)(c), which was rightly cancelled by the Commissioner (Appeals) and the grounds of the appeal of the revenue being without any merit are dismissed.[Para 5] [RELEVANT EXTRACT]
Thus, the principles that have been settled in the aforementioned case are justified and the rules laid out therein provide an appropriate direction towards the circumstances under which penalty under section 271(1)(c) can be levied.