2014 (9) TMI 1143 - AT - Income Tax

Penalty u/s. 271(1)(c) - claim of bad debts under section 36(1)(vii) r.w.s.36(2) rejected - Held that - When the issue is debatable and substantial question of law has been accepted by the Hon ble High Court, no penalty is leviable. This issue is squarely covered by the decision of Hon ble jurisdictional High Court in the case of M/s Nayan Builders & Developers Pvt. Ltd. (2014 (7) TMI 1150 - BOMBAY HIGH COURT) wherein it was categorically held that mere admission of appeal by the High Court is sufficient to debar the penalty levied u/s.271(1)(c) of the Act.

Summary

Issues:
Imposition of penalty u/s.271(1)(c) of the Act for assessment year 2005-06 based on addition of bad debts amounting to Rs. 74,54,700/-.

Analysis:

Issue 1: Imposition of Penalty u/s.271(1)(c) of the Act

The appeal was filed against the order of CIT(A) for the imposition of a penalty under section 271(1)(c) of the Act. The Hon'ble Bombay High Court accepted a substantial question of law related to the addition of bad debts amounting to Rs. 74,54,700/-, which was confirmed by the Tribunal. The decision in the case of M/s Nayan Builders & Developers Pvt. Ltd. held that when a substantial question of law is accepted by the High Court regarding an addition, no penalty should be imposed under section 271(1)(c) of the Act. The Tribunal, following this decision, directed the deletion of the penalty imposed in this case.

Issue 2: Tribunal's Decision and Legal Precedents

The Mumbai Bench of the Tribunal referred to the case of M/s Nayan Builders & Developers Pvt Ltd. where it was held that when a substantial question of law is admitted by the High Court regarding an addition, it indicates that the addition is debatable. In such circumstances, the penalty under section 271(1)(c) cannot be levied. The Tribunal emphasized that the admission of a substantial question of law by the High Court supports the bona fides of the assessee's claim for deduction. Therefore, in cases where additions are considered debatable and involve substantial questions of law, the penalty should not be imposed. The Tribunal ordered the deletion of the penalty based on these legal principles.

Issue 3: Clarification on Penalty Contest and Conclusion

The learned AR clarified that the appeal was specifically against the penalty imposed concerning the addition of bad debts of Rs. 74,54,700/-. The Tribunal's decision on the penalty being not leviable under section 271(1)(c) of the Act was limited to this specific addition based on the substantial question of law admitted by the High Court. The penalty attributable to bad debts was deleted in line with the decision of the Hon'ble jurisdictional High Court in the case of M/s Nayan Builders & Developers Pvt. Ltd. The Tribunal allowed the appeal of the assessee based on these findings.

In conclusion, the Tribunal ruled in favor of the assessee, directing the deletion of the penalty imposed under section 271(1)(c) of the Act specifically related to the addition of bad debts, as the substantial question of law was accepted by the High Court, making the addition debatable and exempt from penalty.