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2009 (3) TMI 635 - AT - Income TaxDeletion of penalty u/s 271(1)(c) - wrong claim for deduction u/s 80-IA - claimed deduction u/s 35 for scientific research expenses at hundred per cent inter alia towards the cost of motor car purchased - concealment of income - AO added back amount and allowed depreciation at 20 per cent by treating it as car used for ordinary business purposes not connected with the scientific research and development activity - addition was confirmed up to the Tribunal level - penalty imposed by AO on this count has been overturned by CIT(A), against which the revenue is aggrieved - HELD THAT - In our considered opinion the mere fact of confirmation of addition cannot per se lead to the confirmation of the penalty. It is obvious that both the quantum and the penalty proceedings are independent of each other. In the penalty proceedings the assessee is given chance to show that why the penalty be not imposed with reference to the addition made or confirmed in the quantum proceedings. If the assessee succeeds in explaining his case then no penalty can follow and vice versa . It is, therefore, amply clear that the confirmation of the addition by the Tribunal in quantum proceedings cannot mean that the penalty be automatically confirmed. If the contention of the ld. DR is taken to the logical conclusion then the penalty proceedings would require obliteration from the statute and the very act of making addition in quantum should entitle AO to impose penalty simultaneously. Section 271(1)( c ) provides that if AO or CIT (A) or the Commissioner, in the course of the proceedings in this Act, is satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty a sum which shall not be less than but which shall not exceed three times the amount of tax sought to be evaded by reason of the concealment of particulars of his income. Seven Explanations are there to section 271(1). The necessary elements for attracting this Explanation are three-fold. ( a )the person fails to offer the explanation, or ( b )he offers the explanation which is found by the authorities to be false, or ( c )the person offers explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same have been disclosed by him. If the case falls in any of these three ingredients, then the deeming provision comes into play and the amount added or disallowed in computing the total income is considered as the income in respect of which particulars have been concealed for the purposes of clause ( c ) of section 271(1) and the penalty follows. If the assessee successfully comes out of the above three constituents then he cannot be deemed to have concealed the particulars of his income with reference to the amount added or disallowed in computation of total income. That the penalty proceedings are distinct from the assessment proceedings and hence it becomes amply clear that any addition made does not automatically lead to the imposition of penalty u/s 271(1)( c ). In the penalty proceedings the assessee is given a chance to explain his case. If he successfully explains his position and is not trapped within the parameters of clause ( c ) of section 271(1) along with the Explanations deeming the concealment of income, the penalty cannot be imposed. Adverting to the facts of the instant case we find that the assessee had bona fidely made a claim for deduction u/s 35 in respect of cost of car purchased for the purpose of R D activity by disclosing all the necessary particulars in the audit report. The facts that the car was purchased by the assessee and also used for the purpose of the business have not been controverted by AO. Further the granting of depreciation at 20 per cent instead of hundred per cent deduction claimed by the assessee shows that there was a genuine difference of opinion between the assessee and AO on this aspect of the matter. It cannot be said that the assessee, under such circumstances, has concealed his income and is caught within the four corners of section 271(1)( c ). We, therefore, hold that the learned CIT(A) has rightly not imposed penalty on this addition. Deletion of penalty on interest accrued but not disclosed by the assessee - addition u/s 41(1) on cessation of liability - AO made addition and levied the penalty, which came to be deleted in the first appeal - There may be several situations when the money is not claimed or paid by one party to another within three years and thereafter the claim is made and honored by the other. So simply because a particular amount is outstanding for a period of more than three years, that does not constitute income u/s 41(1). The act of the assessee in agreeing for the inclusion of such amount in the total income during the course of assessment, subject to the condition that the deduction will be claimed as and when the amount is paid to the third parties, manifests that the assessee had not concealed its income or furnished inaccurate particulars of its income for which he could be visited with the penalty. The discussion made supra qua the confirmation of deletion of penalty on deduction claimed by the assessee u/s 35 holds good here also. Thus we approve the view taken by CIT(A). Penalty u/s 271(1)( c ) - reduction in deduction u/s 80HHC - AO found that the assessee had claimed higher deduction u/s 80HHC in respect of AY's 1997-98 and 1998-99 for Rs. 79,331 in total, because of the bad debts claimed as deduction in this year as relating to those years. HELD THAT - AO proceeded to reduce the claim of deduction in this year instead of the right course available to him for rectifying orders for the earlier two assessment years in which deduction u/s 80HHC was found to have been over claimed. Be that as it may there is no dispute that the amount of bad debts was deductible in entirety as having been written off in the books of account for this year itself. How Penalty u/s 271(1)( c ) can be imposed in this year qua the reduction of claim for deduction u/s 80HHC in respect of earlier assessment years is beyond our comprehension. CIT(A) too mechanically upheld the penalty on this aspect without applying his mind to the real controversy. If the claim for deduction in an earlier years is found to be untenable, the proper course available to AO is to make rectification of such earlier years orders and consider the imposition or otherwise of the penalty in those years. AO committed primary mistake by reducing the claim of bad debts in this year and then again the mistake was repeated by imposing penalty u/s 271(1)( c ) on this amount. Therefore, CIT(A) erred in upholding the imposition of penalty. We, therefore, order for the deletion of penalty to this extent. In the result, the appeal by the assessee is allowed and that of the revenue is dismissed.
Issues Involved:
1. Deletion of penalty on expenses allocated for earning tax-free dividend income and wrong claim under section 80HHC in respect of interest income. 2. Deletion of penalty on wrong claim for deduction under section 80-IA. 3. Deletion of penalty in respect of deduction claimed under section 35 for a motor car not related to R&D activity. 4. Deletion of penalty on interest accrued but not disclosed. 5. Deletion of penalty on addition under section 41(1) on cessation of liability. 6. Confirmation of penalty under section 271(1)(c) on the reduction in deduction under section 80HHC. Issue-wise Detailed Analysis: 1. Deletion of Penalty on Expenses Allocated for Earning Tax-Free Dividend Income and Wrong Claim under Section 80HHC: The Tribunal upheld the deletion of the penalty imposed by the Assessing Officer (AO) under section 271(1)(c) for expenses allocated for earning tax-free dividend income. The AO had added Rs. 2,43,948 based on an estimation of expenses, but this addition was deleted by the Tribunal in quantum proceedings. Since the foundation for the penalty ceased to exist, the Tribunal upheld the CIT(A)'s order on this issue. Similarly, the penalty related to the claim under section 80HHC for interest income was deleted, following the precedent set in the assessment year 1999-2000. 2. Deletion of Penalty on Wrong Claim for Deduction under Section 80-IA: The Tribunal found that the penalty imposed under similar circumstances in the assessment year 1999-2000 was deleted by the Tribunal. In the absence of any distinguishing feature, the Tribunal upheld the CIT(A)'s order deleting the penalty. 3. Deletion of Penalty in Respect of Deduction Claimed under Section 35 for a Motor Car Not Related to R&D Activity: The Tribunal emphasized that the confirmation of an addition does not automatically lead to the imposition of a penalty. The Tribunal noted that the penalty proceedings are independent, and the assessee's explanation must be considered. The Tribunal found that the assessee had offered a bona fide explanation and disclosed all relevant facts in the tax audit report. The Tribunal held that the necessary conditions for invoking Explanation 1 to section 271(1)(c) were not met, and thus, the CIT(A) rightly deleted the penalty. 4. Deletion of Penalty on Interest Accrued but Not Disclosed: The Tribunal noted that the addition on account of notional interest was deleted in quantum proceedings. Since the very addition for which the penalty was imposed was deleted, no penalty could be imposed. 5. Deletion of Penalty on Addition under Section 41(1) on Cessation of Liability: The Tribunal found no concealment of income by the assessee on this issue. The Tribunal held that merely because a liability is outstanding for more than three years does not constitute income under section 41(1). The Tribunal observed that the assessee agreed to include the amount in the total income during assessment, subject to the condition of claiming deduction when paid. The Tribunal upheld the CIT(A)'s view that there was no concealment or furnishing of inaccurate particulars. 6. Confirmation of Penalty under Section 271(1)(c) on the Reduction in Deduction under Section 80HHC: The Tribunal noted that the AO reduced the claim of bad debts in the assessment year by Rs. 79,331, which was related to earlier years. The Tribunal held that the proper course was to rectify the earlier years' orders. The Tribunal found that the CIT(A) mechanically upheld the penalty without considering the real controversy. The Tribunal ordered the deletion of the penalty to this extent. Conclusion: The Tribunal dismissed the revenue's appeal and allowed the assessee's appeal, confirming the deletion of penalties on various grounds while ordering the deletion of the penalty related to the reduction in deduction under section 80HHC.
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