Brief of the Case
ITAT Delhi held In the case of M/s. Mohair Investment and Trading Company (P) Ltd. vs. DCIT that it is clear that the present issue, related to application of section 14A, especially in relation to shares held as trading assets, was clearly debatable and so it cannot be visited with penalty under section 271(1)(c). Further we find that the assessee has furnished all the details relating to the earning of dividend income. So it cannot be said that the assessee had concealed income or furnished inaccurate particulars of income. Hence penalty u/s 271 (1) (C) is not sustainable.
Facts of the Case
The Assessee is a private limited company, operates in the business of shares and securities and giving loans. The Assessee filed its return of income on 29.10.2001 declaring income of Rs.3,84,75,860/- for the year 2001-02 and the same was assessed under section 143 (3). During the relevant assessment year, the Assessee had received dividend income of Rs.3,11,85,522/- from various other companies. While dealing with the tax assessment of the Assessee, the Assessing Officer noticed that the Assessee had claimed exemption of an expenditure of Rs.4,15,86,591/- being interest on loans raised for acquiring shares of various companies. The Assessing Officer vide assessment order dated 28.02.2003 came to the conclusion that as per Section 14A and Section 115-O(5), no deduction was allowable with respect to the expenditure incurred in relation to dividend income which was exempted from tax. On the basis of the relevant calculations, the Assessing Officer made a disallowance of Rs.3,07,77,285/- and as a consequence, penalty proceedings were initiated under Section 271(1)(c).
The Assessing Officer levied penalty of Rs.1,49,38,148/- under Section 271(1)(c) on the ground that the Assessee had furnished incorrect particulars of his income. The penalty order was confirmed by the CIT (A). Consequently, the Assessee approached the Tribunal and argued that the said issue being a debatable issue, hence penalty is not maintainable. The Tribunal allowed the Appeal of the Assessee. The Tribunal quashed the penalty order on the ground that it was imposed beyond the period of limitation as prescribed under Section 275(1)(a). Against this order, the Revenue went in appeal before the Hon’ble jurisdictional High Court and the High Court allowed the appeal of the Revenue and directed the Tribunal to decide the appeal on merits.
Contention of the Assessee
The ld. counsel for the assessee submitted that the assessing officer levied penalty under section 271(1)(c) in respect of the aforesaid addition without judicially appreciating the facts of the case and the position of law and contented that if the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act is satisfied that any person, has concealed the particulars of his income or furnished inaccurate particulars of such income, then only AO may direct that such person shall pay by way of penalty.
He further submitted that the lawmakers have deliberately used the word “may” in section 271 (I), which shows that discretion in this regard has been conferred on the assessing officer. Merely because certain additions are made in the assessment, it does not necessarily follow that penalty is to be levied. The ld. AR contended that while deciding the penalty proceedings, the AO has to decide whether the appellant had, on the facts of the case and in view of the position in law, by making a claim or not disclosing an amount, sought to conceal/file inaccurate particulars of income.
He further submitted that the assessee has not concealed any particulars of its income nor furnished any inaccurate particulars of its income which may be subjected to penalty u/s 271(1)(c). A perusal of the return of income and the documents filed by the Appellant Company and the order passed u/s. 143(3) reveal that the above disallowances are in the nature of difference of opinion as to the taxability of income / allow ability of expenditure and no facts were concealed. The additions of Rs.3,77,70,285 are on account of debatable claims. These disallowances, it is submitted, should not lead to the conclusion that the assessee has, in any way, concealed the particulars of its income or furnished inaccurate particulars of such income.
Finally he submitted that there was no warrant to levy / impose penalty under section 271(1)(c) primarily on the ground that the claim of the appellant was a legal and bona fide claim backed by adequate/ necessary disclosure in the return of income/ accompanying documents.
Contention of the Revenue
The ld counsel of the revenue relied on the order of AO & CIT (A).
Held by ITAT
It is clear that during the relevant assessment year, the appellant did not sell any shares held as capital assets and, therefore, no income was disclosed under the head ‘capital gains’. However, certain shares held as trading assets were sold during the year and income/profit arising there from was offered to tax as business income. So according to the assessee, dividend income earned from such shares, if any, was incidental and did not constitute the dominant motive of the appellant when it filed the return of income and participated in the assessment proceedings before to AO and other authorities. We find that during the relevant assessment year, the appellant received dividend income of Rs. 3,11,25,522/- from the shares of 15 companies which were held as ‘trading assets’. In other words, the appellant did not receive any dividend from shares held as capital asset and received dividend only from share held as trading assets.
The ld counsel of the revenue submitted that it is well settled that penalty cannot be imposed on debatable issues and relied on the decision of the Hon’ble High Court of Delhi in CIT vs. Electrolux Kelvenatro Ltd. 357 ITR 665 (Del) and CIT vs. Jaswinder Singh Ahuja 351ITR262(Del.) According to him, the issue whether the provisions of section 14A are applicable in a case where shares are held as trading assets is clearly a debatable issue. According to Ld. AR, since it was the first year, it would be appreciated that the issue regarding applicability of section 14A in various situations like shares held for controlling interest, shares held as trading assets, etc. and the method of computation of disallowance, etc. lacked clarity and so the action of the assessee was a bonafide action which cannot invite penalty.
He pointed out that due to the aforesaid uncertain position of law there were substantial litigation on the aforesaid issue of application of section 14A and several conflicting decisions were even rendered by the various benches of Tribunal. And in order to reconcile conflicting decisions from various benches of the Tribunal, a Special Bench was also constituted in the case of IRO s. Daga Capital Management Pvt. Ltd.: 117 ITAT169 (SB).
In the aforesaid facts and question of law framed by the Special Bench as pointed out by the ld. AR, we find force in the contention that the issue whether the provisions of section 14A are applicable where shares were held as stock-in-trade was clearly a debatable issue. A useful reference may be made to the decision of Apex Court in the case of CIT v. Reliance Petro products Private Limited: 322 ITR 158, where the decision of Bombay High Court deleting the penalty imposed by the assessing officer on the ground that quantum appeal was admitted by the High Court on the ground of involving question of law, was affirmed by the Apex Court. And we take note that various other Hon’ble High Courts and Tribunals have decided the aforesaid issue in favor of the assessee. We take note of the fact that other High Courts and various benches of Tribunal in the following cases have decided the aforesaid issue in favour of the assessee and held that section 14A cannot be invoked where shares are held as stock-in-trade: CCI Ltd. v. JCIT: 250 CTR (Kar.), CIT vs. Smt. Leena Ramachandran: 339 ITR 296, DCIT v. M/s. India Advantage: ITA No. 6711lMuml 2011 (Mum. Trib.) From the aforesaid decisions cited, it is clear that the present issue, viz., application of section 14A, especially in relation to shares held as trading assets, was clearly debatable and so it cannot be visited with penalty under section 271(1)(c).
Further, we rely on the following decisions where penalty under section 271(1)(c) has been deleted on the issue of disallowance u/s 14A on the ground that the said issue is clearly debatable, which cannot be visited with penalty under the former section :- CIT v. Jindal Equipment Leasing and Consultancy Services Ltd. ITA NO. 68/2012 (Del) (HC, CIT v. Liquid Investments Ltd. ITA No. 2401/2009 (Del) (HC), DCIT v. Nalwa Investment Ltd. ITA No. 3805/2010(Del) (ITAT) , ACIT v. A.T. Invofin India (P) Ltd. ITA No. 4479/2013.
Further we find that the assessee has furnished all the details relating to the earning of dividend income. So it cannot be said that the assessee had concealed income or furnished inaccurate particulars of income. The only basis of levying the penalty u/s 271(1) (c) was that the claim of the assessee for the disallowance u/s 14A was not accepted by the AO, so it can at the most be a ground for making the addition but was not sufficient to levy the penalty u/s 271(1)(c). So we find merit in the appeal of the assessee and direct deletion of penalty levied against the assessee.
Accordingly appeal of the assessee allowed.