Penalty not leviable for mere disallowance of claim made by Assessee

This appeal by assessee has been directed against the order of the Ld. CIT(A), Muzaffarnagar, dated 11th September, 2014 for the A.Y. 2006-2007, challenging the levy of penalty under section 271(1)(c) of the I.T. Act, 1961.

2. Briefly, the facts of the case are that assessee is a Cooperative Society and claimed exemption of Rs. 1.45 crores under section 80P of the I.T. Act, 1961. During the assessment proceedings, it was noticed that assessee had received interest of Rs. 17,67,059 which Is also claimed exempt. It was claimed by the assessee that interest of Rs. 11,92,784 was paid and therefore, net interest was only at Rs. 5,74,275. Finally, after discussion, assessment was completed at net taxable income of Rs. 5,74,275. However, the proceedings under section 263 were initiated and it was noticed that interest of Rs. 11,92,784 could not have been deducted out of the interest recovered in terms of Section 14A of the I.T. Act. The Ld. CIT set aside the order of the A.O. to that extent and directed the A.O. to make fresh assessment. The A.O. directed the assessee to explain why the interest allowed may not be added to the income of assessee as the same is interest on loan to earn exempt income under section 80P (2) of the I.T. Act in terms of Section 14A. The assessee agreed for the addition. The A.O. accordingly made addition of Rs. 11,92,784 as the same was not allowable in terms of Section 14A of the I.T. Act. The A.O. vide separate order levied penalty under section 271(1)(c) of the I.T. Act. The assessee explained before Ld. CIT(A) that it is an estimated addition and assessee has not concealed the particulars of income. It was also submitted that in similar circumstances, ITAT, Delhi Bench has allowed the appeal in the case of assessee in the
A.Y. 2007-08 in ITA.No. 5480/Del./2011 vide order dated 13th September, 2013. It was therefore, submitted that the issue is covered in favour of the assessee. The Ld. CIT(A), however, dismissed the appeal of assessee.

3. After considering the rival contentions, we are of the view that penalty is not leviable in the matter. The A.O. specifically noted the facts of the case when assessee made the claim at the original assessment stage. The assessee declared the interest received which was claimed exempt as well as explained the interest paid. Therefore, income of the assessee was found taxable of the difference in interest amount of Rs. 5,74,275. The Ld. CIT however, did not accept the contention of assessee in proceedings under section 263 of the I.T. Act and directed the A.O. that no deduction for expenditure incurred in respect of exempt income against taxable income is allowable under section 14A of the I.T. Act. The assessee agreed for addition before A.O. In such facts and circumstances, it is clear that assessee declared complete facts before A.O. that initially the A.O. accepted the explanation of assessee by allowing deduction of the interest paid against the interest earned which was claimed as exempt. Therefore, it is not the case of concealment of particulars of income. Ultimately, it is a case where expenses have not been allowed. Therefore, mere making a claim which is not sustainable in Law, by itself would not amount to furnishing inaccurate particulars of income or to conceal the particulars of income. We rely upon the decision of the Hon’ble Supreme Court in the case of CIT vs. Reliance Petro Products P. Ltd., 322 ITR 158. It may also be noted here that assessee specifically submitted before the Ld. CIT(A) that issue is covered by order of ITAT, Delhi Bench in the case of assessee for subsequent A.Y. 2007-08 dated 13th September, 2013 (supra), in which on identical facts penalty was cancelled by the Ld. CIT(A) and Departmental appeal have been dismissed. The findings of the Tribunal in paras 10 and 11 are reproduced as under :

“10. In the present case, there is no doubt that assessee had disclosed bank interest in its P&L Account as a separate item and had enclosed the said P&L Account with the return of income. The Assessing Officer on the basis of this P&L Account came to know that the total income included bank interest amounting to Rs. 15,88,141/-. The assessee had claimed the bank interest income as exempt u/s 80P of the Act on a bona fide belief that total income of society was exempt u/s 80-P and full particulars thereof were submitted to the Assessing! Officer. The Assessing Officer made the dis allowance as in his opinion! this amount could not form part of exempt income u/s. 80P of the Act. The bona fide error or bonafide claim constitutes valid defence against the charge of concealment of particulars of income or furnishing of inaccurate particulars of income. The mere making of a claim which is not sustainable in law cannot amount to furnishing of inaccurate particulars regarding income of assessee. The Ld CIT(A) after relying upon a number of judicial pronouncements has rightly deleted the penalty. Therefore, we do not see any infirmity in the order of Ld. CIT(A).

11. In view of the above, the appeal filed by the revenue is dismissed.”

4. The Ld. CIT(A) did not adversely commented upon this submission of the assessee. Since on identical facts the Ld. CIT(A) has cancelled the penalty which is confirmed by the Tribunal, therefore, penalty need not to be levied in assessment year under appeal as well. In view of the above discussion, we are of the view that penalty need not be imposed in the facts and circumstances of the case. We, accordingly, set aside the orders of the authorities below and cancel the penalty.

5. In the result, appeal of the assessee is allowed.

Order pronounced in the open Court.