2013 (3) TMI 651 - AT - Income Tax

Summary

Issues Involved:
1. Levy of penalty u/s 271(1)(c) for disallowance of legal expenses.
2. Applicability of section 14A.
3. Whether the claim of legal expenses as business expenditure was bona fide.
4. Whether penalty can be imposed in a case of loss return.

Summary:

1. Levy of penalty u/s 271(1)(c) for disallowance of legal expenses:
The assessee, engaged in investment and trading in shares, declared a loss of Rs. 17,48,146 for AY 2000-01. The AO disallowed legal expenses of Rs. 17,44,896, invoking section 14A and section 57, and levied a penalty of Rs. 6,71,785 u/s 271(1)(c). The CIT (A) initially deleted the penalty, stating that the assessee had disclosed all details and the claim was bona fide. However, the High Court remanded the matter for fresh consideration, leading to the re-imposition of the penalty by the AO, which was confirmed by the CIT (A).

2. Applicability of section 14A:
The AO invoked section 14A, introduced in FY 2000-01, to disallow the legal expenses, arguing that the expenditure was not allowable as the assessee's main income was dividend income, and there was no trading of shares. The ITAT noted that the AO's disallowance was based on the application of section 14A and section 57.

3. Whether the claim of legal expenses as business expenditure was bona fide:
The CIT (A) in the first round of appeal found the assessee's claim to be bona fide, which was not contested by the Revenue. The ITAT emphasized that the claim of legal expenses was made in good faith to protect the assessee's investment in shares. The ITAT referred to the Supreme Court's judgment in CIT vs. Reliance Petroproducts Ltd, stating that mere disallowance of a claim does not amount to furnishing inaccurate particulars of income.

4. Whether penalty can be imposed in a case of loss return:
The ITAT initially affirmed the CIT (A)'s order deleting the penalty, following the Supreme Court's judgment in Virtual Soft Systems Ltd vs. CIT. However, the High Court remanded the matter after the Supreme Court's decision in Gold Coin Health Food Products Ltd, which held that penalty u/s 271(1)(c) can be levied even in cases of loss. Despite this, the ITAT concluded that the penalty was not warranted as the assessee's claim was bona fide and there was no concealment or furnishing of inaccurate particulars.

Conclusion:
The ITAT cancelled the penalty, holding that the mere disallowance of legal expenses, which were claimed in good faith, does not attract penalty u/s 271(1)(c). The decision was supported by the Supreme Court's principles in Reliance Petroproducts Ltd and the consistent treatment of similar cases within the group. The appeal filed by the assessee was allowed.