2015 (5) TMI 1147 - AT - Income Tax

Penalty u/s 271(1)(c) - disallowance of interest u/s 36(1)(iii) - Held that - The assessee has debited interest to the Profit & Loss Account of Dera Bassi Unit whereas the funds in respect of which the interest was claimed were used by Baddi manufacturing unit. AO estimated the interest on debit balances and noticed that the estimated interest was working out to more than interest in Dera Bassi unit and so he disallowed the interest claimed ip-so-facto resulted into retention of deduction under section 80IC. Therefore an issue of proportionate disallowance of interest u/s 36(1)(iii). Since all the particulars of claim of interest were disclosed to the revenue and only proportionate interest have been disallowed therefore on mere disallowance of interest on estimate basis ld. CIT(Appeals) was justified in canceling the penalty. Penalty on addition made on account of Web Software Development Expenses - AO treated the expenditure to be capital in nature and allowed heavy depreciation which resulted into part addition. The assessee claimed the expenditure to be revenue in nature however Assessing Officer took it to be capital in nature. Therefore it was mere case of change of opinion and as such would not warrant levy of penalty. The ld. CIT(Appeals) therefore correctly deleted the penalty on that addition. Disallowance of expenses on account of re-allocation of expenses - assessee made allocation of expenses on actual basis whereas in the opinion of the Assessing Officer it was done only to reduce taxable profit. With regard to the re-allocation of expenses of various units there may be a difference of opinion as the Assessing Officer did not accept opinion of the assessee with regard to one unit but certainly it would not give rise for levy of the penalty against the assessee. The ld. CIT(Appeals) by following the decision in the case of Raj Overseas (2010 (7) TMI 553 - PUNJAB AND HARYANA HIGH COURT) and order of ITAT Chandigarh Bench in the case of Perfect Forgings (2011 (6) TMI 451 - ITAT CHANDIGARH) cancelled the penalty on this issue. Levy of penalty on reduction of deduction u/s 80IC - gross tax payable on MAT i.e. 115JB income is higher therefore even after making some additions there is no tax effect against the assessee for levy of the penalty - Held that - Referring to the calculation sheet filed by the assessee which is not in dispute we find that issue is squarely covered in favour of the assessee by judgement of Hon ble Delhi High Court in the case of Nalwa Sons Investment Ltd. (2010 (8) TMI 40 - DELHI HIGH COURT). Therefore penalty cannot be levied against the assessee on all the additions maintained even after giving appeal effect of the order of ld. CIT(Appeals) and the Tribunal. We accordingly set aside the order of ld. CIT(Appeals) and delete penalty even on the addition maintained in a sum of Rs. 62, 44, 417/. Penalty on disallowance of carry forward of depreciation - Held that - CIT(Appeals) considered this issue in detail and noted that the assessee had increased the claim of depreciation due to various disallowances because of which entire current year s depreciation was absorbed in the current year itself. Therefore it may be a mistake committed by assessee in computing the income. Therefore penalty was correctly cancelled in the matter on claim of depreciation. Even otherwise on the basis of computation of income as per MAT provisions no penalty would be levied against the assessee. Therefore this ground of appeal of departmental appeal is also dismissed.

Summary

Issues Involved:
1. Deletion of penalty on disallowance of interest under Section 36(1)(iii) of the Income Tax Act.
2. Deletion of penalty on capitalization of Web & Software Development expenses.
3. Deletion of penalty on reallocation of expenses.
4. Deletion of penalty on reduction of deduction under Section 80IC.
5. Deletion of penalty on disallowance of carry forward of depreciation loss.
6. Confirmation of penalty on excess deduction claimed under Section 80IC.

Detailed Analysis:

1. Deletion of Penalty on Disallowance of Interest under Section 36(1)(iii):
The assessee had debited interest to the profit and loss account of the Dera Bassi unit, whereas the funds were used by the Baddi manufacturing unit. The Assessing Officer estimated the interest on debit balances and disallowed the entire interest claimed, resulting in a reduction of deduction under Section 80IC. The CIT(A) found that the disallowance was based on an estimate and notional, and thus did not warrant a penalty under Section 271(1)(c). The tribunal agreed, noting that all particulars of the interest claim were disclosed, and the disallowance was merely a proportionate disallowance based on an estimate.

2. Deletion of Penalty on Capitalization of Web & Software Development Expenses:
The assessee claimed an amount on account of web and software development expenses as revenue expenditure. The Assessing Officer treated this expenditure as capital and allowed depreciation, resulting in a disallowance. The CIT(A) found that the issue was a difference of opinion on the nature of the expenditure and did not warrant a penalty for concealment. The tribunal upheld this view, noting that the claim was based on the assessee's opinion and did not constitute concealment.

3. Deletion of Penalty on Reallocation of Expenses:
The assessee had three units and claimed deduction under Section 80IC on the profits of the Baddi manufacturing unit. The Assessing Officer reallocated expenses among the units on a turnover basis, reducing the deduction under Section 80IC. The CIT(A) found that the reallocation was a matter of opinion and did not constitute concealment of income. The tribunal agreed, citing precedents where penalties were canceled under similar circumstances, as the assessee had not concealed any particulars of its income.

4. Deletion of Penalty on Reduction of Deduction under Section 80IC:
The Assessing Officer reduced the deduction under Section 80IC by reallocating interest and common expenses, and by noting a discrepancy between the claimed deduction and the amount certified by the auditor. The CIT(A) canceled the penalty for reallocation of expenses but confirmed it for the excess claim due to the discrepancy. The tribunal found that the penalty could not be imposed for the reallocation of expenses as it would result in double addition. However, it upheld the penalty for the excess claim, noting that it was not a bona fide mistake.

5. Deletion of Penalty on Disallowance of Carry Forward of Depreciation Loss:
The Assessing Officer disallowed the carry forward of current year's depreciation loss due to various additions, which absorbed the entire depreciation. The CIT(A) found that the mistake in the computation of income was wiped out by the additions and that the penalty for concealment was not warranted. The tribunal agreed, noting that the penalty was already levied on various additions, and the mistake in claiming depreciation was not intentional.

6. Confirmation of Penalty on Excess Deduction Claimed under Section 80IC:
The CIT(A) confirmed the penalty for the excess deduction claimed under Section 80IC, noting that the discrepancy between the claimed amount and the amount certified by the auditor was not a bona fide mistake. The tribunal upheld this view, citing the Delhi High Court's decision in the case of Zoom Communication Pvt. Ltd., which held that making a wholly untenable claim without any basis could attract a penalty under Section 271(1)(c).

Conclusion:
The tribunal dismissed the departmental appeal and allowed the assessee's cross-objection, setting aside the part of the CIT(A)'s order that sustained the penalty. The tribunal found that penalties for disallowance of interest, web/software development expenses, reallocation of expenses, and carry forward of depreciation loss were not warranted. However, it upheld the penalty for the excess deduction claimed under Section 80IC due to the discrepancy with the auditor's certification.