2010 (1) TMI 664 - AT - Income Tax

Penalty u/s 271(1)(c) - Capital or revenue expenditure - Assessing Officer was of the view that the assessee concealed income by making wrong claim of deduction for software expenses, and for claiming the deduction of non-business expenditure penalty equivalent to 100 per cent of tax thus sought to be evaded was imposed on the assessee - It could not be, therefore, said that merely because the assessee has made a claim for deduction of expenses on software purchase, and has not challenged in appeal the Assessing Officer s action of denying this deduction, the assessee can be deemed to have concealed his income - The explanation given by the assessee ought to have been accepted on the facts of the present case - Decided in favour of the assessee

Summary

Issues:
Penalty under section 271(1)(c) for deemed concealment of income regarding software expenses and hotel expenses disallowance.

Analysis:
1. The revenue appealed against the Commissioner of Income-tax (Appeals)'s order deleting the penalty levied under section 271(1)(c) for the assessment year 2002-03. The Assessing Officer disallowed deductions claimed by the assessee for software expenses and reimbursement of meal expenses to employees. The disallowances were accepted by the assessee but penalty proceedings were initiated for deemed concealment of income. The Commissioner of Income-tax (Appeals) deleted the penalty based on the assessee's explanations and legal arguments.

2. The Commissioner noted that the treatment of software expenses as capital expenditure instead of revenue expenditure was not litigated by the assessee in quantum proceedings due to the availability of depreciation at 60 percent from the next assessment year, resulting in a virtual write-off in 2-3 years. The Commissioner also considered the legal position supported by judicial pronouncements, such as the Chennai High Court's decision in the case of CIT v. Southern Roadways Ltd., regarding the treatment of software expenses as revenue expenditure. The Commissioner emphasized that where two views are possible, a penalty cannot be imposed on an assessee for adopting one view.

3. Regarding the disallowance of hotel expenses, the Commissioner noted that the assessee being a limited company, no expenditure could be considered personal in nature. The Commissioner highlighted that the assessee's non-litigation of the quantum addition of hotel expenses should not be held against them in penalty proceedings. The Commissioner also considered various decisions of the Supreme Court and High Courts supporting the assessee's position.

4. The Appellate Tribunal, after hearing the rival contentions, upheld the Commissioner's decision to delete the penalty. The Tribunal cited several decisions supporting the eligibility of software expenses as revenue expenditure. It was emphasized that the mere claim for deduction of software expenses does not imply concealment of income. The Tribunal also noted that the nature of disallowance for personal expenses and the assessee's decision not to challenge it in appeal were not sufficient grounds for imposing a penalty under section 271(1)(c).

5. In conclusion, the Tribunal approved the Commissioner's decision and dismissed the appeal. The Tribunal found that it was not a fit case for the imposition of a penalty under section 271(1)(c) based on the explanations and legal arguments presented by the assessee.