2011 (3) TMI 46 - AT - Income Tax

Penalty u/s.271(1)(c)- Whether the deposit of Rs.1,04,76,050/- received from Spectrum is exigible to tax - Disallowance of brokerage Rs.10,79,221/- and legal fees Rs.2,00,000/- High Court admits substantial question of law on an addition, it becomes apparent that the addition is certainly debatable - In such circumstances penalty cannot be levied u/s 271(1) as has been held in several cases - The admission of substantial question of law by the Hon ble High Court lends credence to the bona fides of the assessee in claiming deduction - Decided in favour of assessee

Summary

Issues:
Penalty imposition under section 271(1)(c) of the Act based on upheld additions of income from Spectrum Corporate Services Ltd., disallowance of brokerage, and legal fees for assessment year 1997-98.

Analysis:

Issue 1: Penalty Imposition
The appeal concerns the penalty imposed by the CIT(A) amounting to Rs.37,32,777 under section 271(1)(c) of the Act for the assessment year 1997-98. The Tribunal confirmed the penalty related to additions of Rs.1,04,76,050 from income of Spectrum Corporate Services Ltd., disallowance of brokerage of Rs.10,79,221, and disallowance of legal fees of Rs.2,00,000. Notably, the Hon'ble jurisdictional High Court admitted substantial questions of law regarding these additions, indicating their debatable nature. The Tribunal cited precedents where penalty cannot be levied when substantial questions of law are admitted, as it suggests the claim could have been considered for deduction by a legally knowledgeable person. Consequently, the Tribunal ordered the deletion of the penalty due to the substantial questions of law admitted by the High Court, indicating that the penalty was not exigible under section 271(1)(c).

Issue 2: Legal Validity of Additions
The judgment highlighted that the additions for which the penalty was confirmed had been accepted by the Hon'ble Bombay High Court as involving substantial questions of law. This acceptance by the High Court indicated that the additions were debatable and not outrightly impermissible. The Tribunal emphasized that the confirmation of disallowances alone does not warrant penalty imposition, especially when substantial questions of law are involved. The Tribunal's decision to delete the penalty was based on the premise that the additions, which were upheld in the present proceedings, had been recognized by the High Court as contentious and subject to legal interpretation, thereby negating the immediate imposition of penalty under section 271(1)(c).

Conclusion
The Tribunal allowed the appeal, ordering the deletion of the penalty imposed by the CIT(A) based on the upheld additions for the assessment year 1997-98. The decision was grounded in the acknowledgment of substantial questions of law by the Hon'ble High Court, indicating the debatable nature of the additions and the lack of clear disallowance grounds. The judgment emphasized the importance of legal interpretation and the absence of absolute disallowance for penalty imposition under section 271(1)(c), ultimately leading to the favorable outcome for the appellant.