2011 (4) TMI 677 - AT - Income Tax

Whether rejection of the claim of deduction of expenditure on account of non-commencement of business is justified to levy penalty under section 271(1)(c) - Held that - The assessee has surrendered the whole of the amount and abandoned the claim of the carry forward loss and even revised the return for subsequent year. However the issue of allowability was a debatable issue. Mere rejection of the claim of deduction of expenditure on account of non-commencement of business would not be sufficient to satisfy the requirements of levy of penalty under section 271(1)(c).

Summary

Issues Involved:
Sustaining penalty under section 271(1)(c) of IT Act, 1961.

Detailed Analysis:

Issue 1: Sustaining penalty under section 271(1)(c)
The only issue in this appeal was the sustaining of a penalty of Rs. 8,07,284 under section 271(1)(c) of the IT Act, 1961. The assessee, a company incorporated in 2005, had filed its return declaring a loss without conducting any business activities during the year. The company, in its audited accounts, carried forward the loss. However, during assessment proceedings, the company surrendered this claim of loss, attributing it to a clerical mistake made by an in-house person during the first year of filing. The Revenue contended that the surrender only occurred after being pointed out by the Assessing Officer.

Issue 1 Analysis:
The assessee argued that the mistake was inadvertent, rectified promptly, and there was no intention to evade taxes. They cited various case laws to support their claim of inadvertent error due to being the company's first year. The Revenue, however, relied on the lower authorities' orders. The Tribunal found that as it was the company's initial year, with no business commencement, the claim of inadvertent error seemed plausible. The Tribunal noted that the company voluntarily surrendered the amount and revised subsequent returns. It was observed that certain business expenditures are allowable even without active business transactions, as per judicial precedents. The Tribunal concluded that the issue of allowability was debatable, and the mere rejection of the claim wouldn't warrant a penalty under section 271(1)(c). Consequently, the Tribunal set aside the lower authorities' orders and allowed the appeal of the assessee.

Conclusion:
The Tribunal, after considering the arguments and case laws cited, set aside the penalty imposed under section 271(1)(c) on the assessee. The decision was based on the finding that the inadvertent error in claiming expenses in the company's first year, without any active business operations, did not warrant a penalty.