2015 (3) TMI 1131 - AT - Income Tax

Disallowance u/s 14A - penalty u/s Sec 271(1)(c ) - Held that - For levy of penalty the AO must show that there was furnishing of inaccurate particulars of income or that the explanation furnished by the assessee was not bonafide one. The findings given in the assessment proceedings cannot operate as resjudicata, because the considerations that arise in the penalty proceedings are different from those in the assessment proceedings. The AO has brought nothing on record to suggest that the explanation of the assessee was false or devoid of bonafide. As per Explanation 1 to Sec 271(1)(c ), if the AO finds that the explanation offered by the assesse is false, then the penalty can be levied on the amount which is found to be concealed. Therefore, the whole idea behind Explanation 1 is that the AO has to first record reasons for arriving at a conclusion that there is concealment on the part of the assessee. After seeking an explanation if the authority comes to a conclusion that it is false, then the AO can proceed to levy the penalty. The findings given in the assessment proceedings cannot operate as res-judicata, because the considerations that arise in the penalty proceedings are different from those in the assessment proceeding. In case of Reliance Petroproducts (2010 (3) TMI 80 - SUPREME COURT ), Hon ble Supreme Court has deleted the penalty, which was imposed on account of disallowance of interest paid on loans taken for purchase of shares. Accordingly, we do not find any infirmity in the order of CIT(A) for deleting penalty levied with reference to disallowance of expenses u/s.14A of the IT Act. - Decided in favour of assessee.

Summary

Issues:
- Imposition of penalty u/s.271(1)(c) of the Act for disallowance u/s.14A r.w.Rule 8D
- Justification for deletion of penalty by CIT(A) based on judicial pronouncements
- Consideration of specific expenditure in earning exempt income for penalty imposition
- Application of Hon'ble Supreme Court's decision in Reliance Petroproducts case for penalty deletion

Analysis:
1. The appeal was filed by the Revenue against the CIT(A)'s order imposing a penalty u/s.271(1)(c) of the Act for disallowance u/s.14A r.w.Rule 8D. The AO made an addition under section 14A, and penalty proceedings were initiated. The assessee argued that penalty was not justified as the addition was due to a difference in opinion on a disputable issue. However, the AO disagreed and levied a 100% penalty, stating inaccurate particulars of income were furnished.

2. The CIT(A) deleted the penalty after considering various judicial pronouncements. The CIT(A) noted that no specific expenditure directly linked with earning exempt income was mentioned in the assessment or penalty order. Therefore, it was concluded that the assessee did not furnish inaccurate particulars of income/expenditure or conceal income. The disallowance was made under Section 14A, and the penalty was deleted based on the decision in Reliance Petroproducts case by the Hon'ble Supreme Court.

3. The contention of the assessee was that no specific expenditure was incurred in earning dividend income received from investments made out of surplus funds. Despite this, the AO computed the disallowance as per rule 8D. The CIT(A) emphasized that for penalty imposition, a direct nexus between expenditure and exempt income must be established, which was lacking in this case.

4. The AO's failure to establish a direct link between expenditure and exempt income led to the deletion of the penalty. The CIT(A) highlighted that the AO's findings in the assessment proceedings cannot be used as res judicata for penalty proceedings. The AO did not show that the explanation provided by the assessee was false or lacked bona fide intent, a prerequisite for penalty imposition.

5. Referring to the Reliance Petroproducts case, the Hon'ble Supreme Court's decision was applied to delete the penalty imposed for disallowance of expenses u/s.14A. The appellate tribunal found no infirmity in the CIT(A)'s decision to delete the penalty, ultimately dismissing the appeal of the Revenue.

This detailed analysis highlights the key arguments, judicial considerations, and the rationale behind the decision to delete the penalty in this case.