2010 (2) TMI 644 - AT - Income Tax

Penalty Claiming expenditure without showing income corresponding to such expenditure - Management Service Fee - the fact that the disallowance made in the assessment on account of its claim for managerial fees was accepted by the assessee has also been taken against the assessee by the authorities below in the matter of imposition of penalty u/s. 271(l)(c). - However, while disallowing the deduction claimed by the assessee on this issue in the year under consideration, the following observation was made by the A.O. in his assessment order, the assessee may claim this expenditure in the year in which the corresponding income is received with this view the assessee s . - Held that - the claim of the assessee company for deduction on account of managerial fees was a bona fide claim made by it in the year under consideration and the assessee having been able to support and substantiate the same by showing the legitimate basis on which it was claimed, it was not a fit case for imposition of penalty u/s 271(l)(c) in respect of the addition made on account of disallowance of the said claim. - Penalty cancelled - Decided in favor of assessee.

Issues Involved:
1. Disallowance of Management Service Fees
2. Addition on Account of Interest Income
3. Imposition of Penalty under Section 271(1)(c)

Detailed Analysis:

1. Disallowance of Management Service Fees
The assessee, a company, claimed a deduction of Rs. 18,08,35,000/- on account of management service fees in its return of income. The Assessing Officer (A.O.) disallowed this claim, citing that the Memorandum of Understanding (MOU) between the assessee and Paradeep Phosphates Ltd. (PPL) was entered into only after the end of the relevant previous year and had not been approved by PPL's Board of Directors. The A.O. viewed the MOU as an afterthought to claim the expenditure against the interest income earned on bank deposits. The CIT(A) sustained the penalty imposed by the A.O. under Section 271(1)(c) for furnishing inaccurate particulars of income, highlighting that the MOU was not effective and the expenditure could not be said to be for the purpose of business. The Tribunal, however, found that the assessee's claim was bona fide, supported by substantial evidence, and the expenditure was incurred for the revival of PPL. The Tribunal noted that the service agreements with Zuari Industries Ltd. (ZIL) and Maroc Phosphates SA (MPSA) were operational and enforceable, and the managerial fees were paid after deducting tax at source. The Tribunal concluded that the penalty under Section 271(1)(c) was not justified as the claim was bona fide and supported by legitimate basis.

2. Addition on Account of Interest Income
The assessee had declared interest income of Rs. 3,64,70,951/- but the total interest received during the year was Rs. 4,72,85,607/-. The difference arose due to a unilateral reduction in the interest rate on inter-corporate deposits (ICDs) given to PPL. The A.O. added the difference amount of Rs. 1,08,11,228/- to the total income, considering the reduction in interest rate as an afterthought to avoid tax. The CIT(A) confirmed the addition but canceled the penalty under Section 271(1)(c), noting that the reduction in interest rate was a mutual agreement between the assessee and PPL, and the excess interest was refunded before the end of the year. The Tribunal remanded the matter to the CIT(A) for fresh adjudication, aligning with the quantum proceedings.

3. Imposition of Penalty under Section 271(1)(c)
The A.O. imposed a penalty under Section 271(1)(c) for furnishing inaccurate particulars of income concerning the disallowance of management service fees and the addition on account of interest income. The CIT(A) sustained the penalty for the disallowance of management service fees but canceled it for the addition on account of interest income. The Tribunal canceled the penalty for the disallowance of management service fees, finding the claim bona fide and supported by substantial evidence. For the addition on account of interest income, the Tribunal remanded the matter to the CIT(A) for fresh adjudication in line with the quantum proceedings.

Conclusion:
The Tribunal allowed the assessee's appeal, canceling the penalty imposed for the disallowance of management service fees, and remanded the Revenue's appeal concerning the addition on account of interest income to the CIT(A) for fresh adjudication. The Tribunal emphasized the importance of bona fide claims and substantial evidence in penalty proceedings under Section 271(1)(c).

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