2010 (10) TMI 1072 - AT - Income Tax

Disallowance u/s 014A - interest expenditure - Penalty proceedings - the revenue is in appeal before us. the sum and substance of which is that the ld. CIT(A) erred in deleting the penalty of ₹ 39,27,965/- by holding that the matter is debatable and it involves difference in opinion. HELD THAT - The facts of the case are that the assessee claimed payment of bank interest and charges. Certain other expenses were also claimed. Besides interest income, the assessee earned dividend income on investment in shares. The dividend income was not liable to be taxed in view of the provisions contained in section 10(34) of the Act. The AO was of the view that the net interest of ₹ 95,63,346/-, demat charges of ₹ 60/- and proportionate expenses amounting to ₹ 11,70941/- were not deductible in computing the total income by dint of the provision contained in section 14A, as such expenses related to earning of tax-free income. .On careful consideration of various cases relied upon by the assessee, it is found that three major propositions arise therefrom (a) penalty proceedings are quasi-criminal in nature and, therefore, it is for the revenue to establish contumacious conduct on the part of the assessee; (b) if all facts in respect of a claim have been furnished fully and correctly and no falsity is found therein, then, the claim made on the basis of such facts does not lead to inference of concealment of income and (c) the penalty is not leviable when there is honest difference of opinion between the assessee and the authorities in respect of admissibility of a claim. Thus, it can be concluded that the claim was made on the basis of tax audit report. There is no allegation by the AO that there was any collusion between the auditor and the assessee to enhance the loss in the return of income by ignoring the provision contained in section 14A. Therefore, it can be said that the assessee has furnished an explanation which is bona fide. However, it is also a fact that such segregation is beset with lot of problems as the issue has finally been laid to rest by introduction of Rule 8D in the Income-tax Rules in the year 2008. The assessee did not have benefit of this rule when it filed the return of income. Therefore, even in absence of any attempt on the part of the assessee, it can be said that questions of disallowance and its quantification are quite disputable and can lead to bona fide difference in opinion between the assessee and the authorities. In such a situation, the levy of penalty will not be justified. In the result, the appeal is dismissed.

Summary

Issues:
Penalty under section 271(1)(c) for failure to attribute expenses to tax-free income.

Analysis:
The appeal arose from the order of Commissioner of Income-tax (Appeals) and corresponding penalty order under section 271(1)(c) of the Income-tax Act, 1961. The Assessing Officer (AO) disallowed interest expenditure and other expenses related to earning dividend income under section 14A. Penalty proceedings were initiated and a penalty was levied, which was later deleted by the CIT(Appeals) on the grounds that the disallowance made by the AO was contentious. The revenue appealed against this deletion of penalty. The main contention was that the matter was debatable and involved a difference in opinion.

The Revenue argued that the assessee failed to attribute expenses to tax-free income, constituting inaccurate particulars of income. The assessee, on the other hand, contended that it had provided all necessary details regarding the admissibility of expenses, and any disallowance under section 14A should not lead to a penalty for concealment of income. The assessee highlighted the retrospective insertion of section 14A in the Act and the absence of a prescribed rule for disallowance until the introduction of Rule 8D in 2008.

The Tribunal considered the facts and submissions. It noted that the assessee claimed various expenses, including interest and charges, against dividend income that was not taxable under section 10(34). The AO disallowed certain expenses under section 14A, but the return, audited accounts, and tax audit report did not suggest any disallowance. The Tribunal emphasized that penalty proceedings are civil in nature, and the revenue must establish contumacious conduct. It found that the assessee's explanation was bona fide, as all expenses were claimed in full based on the tax audit report. The Tribunal also highlighted the disputable nature of the disallowance under section 14A before the introduction of Rule 8D, leading to a genuine difference of opinion between the assessee and the authorities.

Ultimately, the Tribunal dismissed the appeal, concluding that the levy of penalty was not justified in the circumstances. The decision was based on the absence of collusion between the auditor and the assessee, the bona fide nature of the explanation provided, and the disputable nature of the disallowance under section 14A before the introduction of Rule 8D.

The appeal was thus dismissed, upholding the deletion of the penalty by the CIT(Appeals).