2010 (9) TMI 676 - AT - Income Tax

Penalty - Deduction u/s 80HH and 80 I - When a legal claim is made by the assessee, it is obviously open to the Assessing Officer to accept or reject the interpretation canvassed by the assessee, but then it does not follow that when the claim is rejected, it would imply that there has been a concealment of income on the part of the assessee - The deeming fiction under section 271(1)(c) only shifts the onus of proof on the assessee, as this Explanation itself provides that a penalty can only be imposed (a) when there is no explanation by the assessee, (b) when the explanation given by the assessee is found to be false, and (c) when the assessee provides an Explanation which he fails to substantiate and he fails to prove that the explanation was bonafide and that all the facts necessary for the same and material for computation of income have been duly disclosed by the assessee - It is not a frivolous, absurd or patently inadmissible claim that has been made by the assessee - Decided in the favour of the assessee Regarding royalty - No justification has been given, save and except for the stand that the accounts of the assessee were duly audited and the provision can not thus be said to be devoid of any basis, for the claim of deduction - The Assessing Officer will examine this aspect of the matter and quantify the penalty correctly in the light of the amount so worked out - Decided against the assessee

Issues Involved:
1. Penalty under section 271(1)(c) for difference in deductions under sections 80HH and 80I.
2. Penalty under section 271(1)(c) for royalty disallowance.

Issue-wise Detailed Analysis:

1. Penalty under section 271(1)(c) for difference in deductions under sections 80HH and 80I:

The assessee was penalized for a difference of Rs 4,92,144 between the deductions claimed under sections 80HH and 80I and those finally granted during the assessment proceedings. The reduction in the deduction was due to a different legal interpretation than the one adopted by the assessee. The Assessing Officer (AO) held that the assessee furnished inaccurate particulars of income by making this claim. The CIT(A) upheld this penalty, relying on the Supreme Court's judgment in Union of India Vs Dharmendra Textile Processors, which stated that penalty is a civil liability to provide a remedy for loss of revenue.

Upon review, it was noted that the disallowance was based on legal interpretation and that the assessee had made the claim transparently. The Tribunal referenced the case of Kanbay Software Vs DCIT, which clarified that concealment of income implies hiding or covering up income, which was not the case here. The assessee's claim was made in a fair and transparent manner, and the rejection of a legal claim does not equate to furnishing inaccurate particulars of income.

The Tribunal also cited the Supreme Court's judgment in Reliance Petroproducts, which held that making a claim that is not sustainable in law does not amount to furnishing inaccurate particulars of income if the details supplied are not found to be incorrect, erroneous, or false. The Tribunal concluded that a legal claim, whether right or wrong, cannot amount to furnishing inaccurate particulars of income.

The Tribunal further discussed that even if the deeming fiction under Explanation 1 to Section 271(1)(c) is triggered by a wrong legal claim, penalty can only be imposed if there is no explanation by the assessee, the explanation is false, or the explanation is not substantiated. In this case, the assessee provided a reasonable explanation, and the claim was not frivolous or patently inadmissible.

Therefore, the Tribunal directed the AO to delete the impugned penalties related to the difference in deductions under sections 80HH and 80I.

2. Penalty under section 271(1)(c) for royalty disallowance:

The assessee was also penalized for a royalty disallowance of Rs 2,34,866. The disallowance was made on an ad hoc basis, and the assessee did not appeal against this quantum disallowance. The assessee argued that the quantum of income said to be concealed should consider the higher deductions under sections 80HH and 80I that would have been available if the royalty deduction was not claimed, suggesting that the concealed income should be Rs 1,29,176 instead of Rs 2,34,866.

The Tribunal found no reason to interfere with the penalty related to the royalty disallowance due to the lack of justification from the assessee. However, the Tribunal upheld the assessee's alternate contention that the concealed income should consider the higher deductions under sections 80HH and 80I. The AO was directed to re-examine and quantify the penalty accordingly, providing relief to the assessee if any is admissible.

Conclusion:

The appeal was partly allowed. The Tribunal directed the deletion of penalties related to the difference in deductions under sections 80HH and 80I, while upholding the penalty related to royalty disallowance but with instructions to re-quantify the penalty considering the higher deductions. The decision was pronounced in the open court on 30th September 2010.

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