2010 (2) TMI 769 - AT - Income Tax

Penalty u/s 271(1)(c) - Income of the assessee from franchisees and the partnerships would have gone down by 1% of the turnover of the franchisees and the partnership on account of the royalty. Thus the expenditure even as per the A.O. is an allowable expenditure though in the hands of the income generating apparatus being business of the partnership and the franchisee centers. Thus it cannot be said that by paying the royalty from the hands of the assessee is a concealment of income or furnishing inaccurate particulars of income. - the assessee has not furnished inaccurate particulars nor concealed the income for the purpose of levy of penalty u/s 271(1)(c) of the Act. In these circumstances the penalty as levied by the A.O. and as confirmed by the Ld. CIT(A) stands deleted. Period of limitation for levy of penalty u/s 275 - proviso to clause (a) of sub-section (1) of Section 275 - Held that - the outer limit of passing the order will be one year from the end of the financial year in which the order of the learned CIT(A) was received; and in cases where the matter is carried further in appeal to the Tribunal the time limit shall be six months from the end of the month in which the order of the Tribunal is received by the Commissioner. Thus it is held that the order of penalty was passed within the time prescribed by the statute u/s 275(1)(a).

Summary

Issues:
Levy of penalty u/s 271(1)(c) of the Act for disallowance of royalty paid to Mrs. Vandana Luthra in respect of revenue generated under partnership and franchisee agreements. Bar on penalty by limitation under proviso to Clause (a) of Section 275(1).

Analysis:

Issue 1: Levy of Penalty u/s 271(1)(c) for Disallowance of Royalty
The assessee, engaged in healthcare and beauty parlor business, paid royalty to Mrs. Vandana Luthra based on an agreement. The Assessing Officer (A.O.) disallowed the royalty paid in relation to revenue from partnership and franchisee centers under Section 37(1) of the Act. The Tribunal upheld the disallowance, considering Section 14A's applicability, which was introduced in the year under assessment. The A.O. levied penalty u/s 271(1)(c), confirmed by the CIT(A), citing concealment. However, the Tribunal found that the royalty was an allowable expenditure, as the franchisees and partnerships benefited from the brand value, reducing the assessee's income. Consequently, the penalty was deleted, as there was no concealment or inaccurate particulars.

Issue 2: Bar on Penalty by Limitation
The assessee argued that the penalty was time-barred under the proviso to Clause (a) of Section 275(1). Citing a precedent, the Coordinate Bench held that the penalty order was within the prescribed time limit under Section 275(1)(a), rejecting the limitation defense. Thus, the penalty was not barred by limitation, and the appeal was allowed in part.

This detailed analysis of the judgment highlights the key legal issues, arguments presented, and the Tribunal's decision on each issue, providing a comprehensive understanding of the case.