2011 (4) TMI 130 - AT - Income Tax

Assessee in default - Penalty - Allowance - The assessee is engaged in the business of dealing in shares and securities, investment therein and advancing loans - The assessee claimed payment of bank interest and charges and certain other expenses also - Besides interest income, the assessee earned dividend income on investment in shares - The Assessing Officer was of the view that the net interest of Rs. 95,63,346, demat charges of Rs. 60 and proportionate expenses amounting to Rs. 11,70,941 were not deductible in computing the total income by dint of the provision contained in section 14A, as such expenses related to earning of tax-free income. Regarding penalty - However, the accounts have been audited and the return was accompanied by the tax audit report - There is no allegation by the Assessing Officer that there was any collusion between the auditor and the assessee to enhance the loss in the return of income by ignoring the provision contained in section 14A - Therefore, it can be said that the assessee has furnished an explanation which is bona fide - It was inter alia mentioned that allocation of expenses is beset with a lot of problems and the issue was laid to rest by introduction of Rule 8D - Therefore, even in absence of any attempt on the part of the assessee to segregate the expenditure, it can be said that the questions of disallowance and its quantification are contentious, which leads to the inference that the difference of opinion between the assessee and the authorities is bona fide - It is held that the learned CIT(A) was right in deleting the penalty.

Issues Involved:
1. Deletion of penalties levied under section 271(1)(c) of the Income-tax Act, 1961.
2. Furnishing inaccurate particulars of income and concealing taxable income.
3. Application and interpretation of section 14A of the Income-tax Act, 1961.
4. Bona fide explanation and substantiation of the assessee's claims.

Issue-wise Detailed Analysis:

1. Deletion of Penalties Levied Under Section 271(1)(c) of the Income-tax Act, 1961:
The revenue appealed against the consolidated order passed by the CIT(A)-VII, New Delhi, which deleted penalties levied by the Assessing Officer under section 271(1)(c) of the Income-tax Act, 1961. The penalties amounted to Rs. 1,01,14,199 for the assessment year 1999-00 and Rs. 45,44,158 for the assessment year 2001-02. The CIT(A) had deleted these penalties, finding that the assessee had disclosed all material facts and that mere disallowance or addition does not justify the levy of penalty.

2. Furnishing Inaccurate Particulars of Income and Concealing Taxable Income:
The Assessing Officer found that the assessee had furnished inaccurate particulars of income and concealed taxable income by claiming non-allowable expenses incurred for earning exempt income under section 10(33) of the Income-tax Act. The assessee had paid interest on borrowed capital employed for investment in shares on which dividend income was received, which was not includible in the total income. The Assessing Officer disallowed a proportionate amount of interest and administrative expenses, leading to the computation of a lower total loss and initiation of penalty proceedings.

3. Application and Interpretation of Section 14A of the Income-tax Act, 1961:
Section 14A was inserted in the Act by the Finance Act, 2001, retrospectively with effect from 1-4-1962. The return for the assessment year 1999-00 was filed before the insertion of this provision, and the revised return was also filed prior to its insertion. The assessee could not have been expected to make any disallowance in terms of the provision at the time of filing the return. The CIT(A) found that the initial burden to rebut the presumption of Explanation 1 to section 271(1)(c) was on the assessee, which could be rebutted by showing bona fides through an explanation. The assessee had disclosed all material facts, and the claim did not amount to furnishing inaccurate particulars of income.

4. Bona Fide Explanation and Substantiation of the Assessee's Claims:
The CIT(A) noted that the assessment and penalty proceedings are different, and the findings in assessment proceedings are not conclusive for the levy of penalty. The assessee had made a claim regarding the deduction of expenses, which was not found to be legally acceptable. However, the claim was made in a bona fide manner, and all material facts were disclosed. The Tribunal found that the levy of penalty by the Assessing Officer was not justified, as the assessee had disclosed all facts and there was no suppression of facts. The Tribunal also considered the case of Nalwa Investments Ltd., where similar penalties were deleted, finding that the disallowance was contentious and involved a bona fide difference of opinion.

Conclusion:
The Tribunal upheld the CIT(A)'s order, deleting the penalties for both assessment years, concluding that the assessee's claims were bona fide, and all material facts were disclosed. The appeals by the revenue were dismissed.

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