2010 (12) TMI 242 - AT - Income Tax

Penalty u/s 271(1)(c) - Concealment of income - Disallowance of bad debt written off, depreciation, capital gain on slump sale of unit - Supreme Court in the case of CIT v. Reliance Petroproducts Ltd. (2010 (3) TMI 80 - SUPREME COURT) , merely because the assessee has made a legal claim, even if inadmissible, the assessee cannot be imposed penalty under section 271(l)(c) of the Act - Assessee does not provide any inaccurate claim in his return - The assessee gets the relief accordingly Appeal is allowed

Issues Involved:
1. Penalty under Section 271(1)(c) of the Income Tax Act, 1961 for furnishing inaccurate particulars of income.
2. Disallowance of bad debts.
3. Allowance of depreciation.
4. Calculation of capital gains on slump sale of unit.

Detailed Analysis:

1. Penalty under Section 271(1)(c):
The primary issue is the correctness of the penalty amounting to Rs. 10,34,56,092 imposed under Section 271(1)(c) for the assessment year 2003-04. The penalty was based on the grounds that the assessee furnished inaccurate particulars of income to evade tax liability. The CIT(A) upheld the penalty, stating that the assessee's actions fell within the purview of Explanation 1(A) and 1(B) to Section 271(1)(c).

2. Disallowance of Bad Debts:
The penalty related to the disallowance of Rs. 23,45,000 on account of bad debts was deleted by a co-ordinate bench order dated 3rd December 2010. Since the related quantum disallowance itself was deleted, the penalty did not survive for this disallowance.

3. Allowance of Depreciation:
The assessee claimed depreciation of Rs. 2,10,671, while the Assessing Officer (AO) allowed Rs. 8,61,26,465. The AO's stance was that depreciation must be allowed as the assets were used for a substantial period during the year. The AO observed that the non-claim of depreciation was a strategy to reduce current year losses and benefit from a higher set-off upon the company's subsequent merger with Pfizer Limited. The CIT(A) upheld the AO's decision, relying on judicial precedents that depreciation is a statutory allowance and cannot be claimed at the assessee's discretion.

4. Calculation of Capital Gains on Slump Sale:
The assessee reported a long-term capital loss of Rs. 6,53,72,000 on the slump sale of a unit to Cadbury India Limited. The AO recalculated this, resulting in a capital gain of Rs. 12,78,80,383 by considering the allowable depreciation, which the assessee had not claimed. The CIT(A) upheld this recalculation, stating that the depreciation must be considered in computing the written down value of assets sold.

Tribunal's Findings:

On Depreciation:
The Tribunal noted that the assessee's claim was based on a reasonable interpretation of Section 43(6)(c), which requires adjustments for assets sold during the year. The Tribunal acknowledged that the assessee's interpretation, although rejected by a co-ordinate bench, was not devoid of a reasonable basis and was made transparently without concealing any material facts. The Tribunal emphasized that merely because a legal claim is rejected does not mean it is made with inaccurate particulars. The Tribunal also noted that the claim was made in a fair and transparent manner, with all necessary disclosures.

On Capital Gains:
The Tribunal found that the assessee's claim regarding capital gains was also a legal claim made transparently. The Tribunal observed that the issue of whether depreciation is mandatory has been subject to differing judicial opinions, including the need for a Special Bench to resolve the controversy. The Tribunal concluded that the assessee's stand was not unreasonable or lacking bona fides.

Conclusion:
The Tribunal held that the penalty under Section 271(1)(c) was not justified as the claims made by the assessee were based on reasonable interpretations of the law and were made transparently. The Tribunal directed the AO to delete the penalty of Rs. 10,34,56,092.

Result:
The appeal was allowed, and the penalty was deleted.

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