2012 (11) TMI 509 - AT - Income Tax

Penalty u/s 271(1)(c) - revised return admitting nil income claiming set off of losses - Held that - As gain and loss of sale of PSL shares are concerned there are more or less cancel each other. As far as the loss of LNG project is concerned AO himself accepted the claim even though assessee has not originally claimed but offered along with the capital gain on MISEZ shares. Out of two major amounts of disallowance one was expenses of Rs. 30/- lakhs disallowed on adhoc basis. This amount cannot be a basis for levy of penalty as it was adhoc disallowance. The other amount is disallowance under section 14A and the disallowances under section 14A was considered by the Hon ble Supreme Court in the case of CIT v. Reliance Petroproducts (P.) Ltd. 2010 (3) TMI 80 - SUPREME COURT wherein furnishing of inaccurate particulars was examined and cancellation of penalty was upheld. Therefore disallowance under section 14A also does not call for penalty. Capital gain on the sale of MISEZ shares - there is a bonafide belief on the part of assessee that the capital gains arising on sale of MISEZ shares are exempt from taxation as the application under section 10(23G) was pending with CBDT. The argument of the learned DR that the provision itself was withdrawn from 1/4/2007 cannot be accepted as relevant provisions was applicable for the year under consideration and assessee did make an application in time which was pending by the time the return was filed. In fact the application is still pending as no decision has been taken as yet by CBDT. Since the entire amount of capital gain ultimately brought to tax was arising out of sale of shares in MISEZ alone there is a bona fide belief on the part of assessee in not offering capital gains. Therefore section 271(1)(c) cannot be attracted and accordingly allowing the grounds of assessee. The order of AO does not indicate whether this loss was set off in earlier years or still available for set off. There is no mention about the carry forward losses. However after setting off to the capital gain as net computation under the head business was a loss the total income determined at Rs. 4, 43, 14, 513/- was only arising out of the long term capital gain out of which if the amounts of disallowances were excluded the net amount of Rs. 2, 98, 97, 272/- comprises only of long term capital gain - in favour of assessee.

Summary

Issues Involved:
1. Levy of penalty under section 271(1)(c) of the Income Tax Act.
2. Concealment of income and furnishing of inaccurate particulars.
3. Applicability of Explanation 4(a) and 4(c) of section 271(1)(c).
4. Bona fide belief regarding exemption under section 10(23G).
5. Disallowances and their impact on penalty.

Detailed Analysis:

1. Levy of Penalty under Section 271(1)(c):
The primary issue in the cross appeals by the assessee and the Revenue revolves around the levy of penalty under section 271(1)(c) of the Income Tax Act. The penalty was initially levied by the Assessing Officer (AO) for an amount of Rs. 29,23,58,316/- on the grounds of concealed income totaling Rs. 122,97,19,590/-. The CIT(A) later reduced the penalty to the extent of income finally brought to tax at Rs. 4,43,14,513/-.

2. Concealment of Income and Furnishing of Inaccurate Particulars:
The AO initiated penalty proceedings under section 271(1)(c) for the capital gains arising from the sale of MISEZ and PSL shares, which were not offered in the original return of income. The assessee contended that there was neither concealment nor furnishing of inaccurate particulars, arguing that the capital gains were not offered due to a pending application for exemption under section 10(23G) and the offsetting of business losses.

3. Applicability of Explanation 4(a) and 4(c) of Section 271(1)(c):
The CIT(A) and the Tribunal discussed the applicability of Explanation 4(a) and 4(c) of section 271(1)(c). The CIT(A) held that Explanation 4(a) was not applicable as there was no reduction in the loss declared or converting the loss into income. Explanation 4(c) was found to be applicable, which considers the difference between the tax on the total income assessed and the tax that would have been chargeable had the concealed income not been included.

4. Bona Fide Belief Regarding Exemption under Section 10(23G):
The assessee argued that the capital gains from the sale of MISEZ shares were not offered for taxation due to a bona fide belief that the gains were exempt under section 10(23G), pending approval from the CBDT. The Tribunal accepted this argument, noting that the application for exemption was made in time and was still pending. The Tribunal referenced a similar case (Mewar Industries Ltd. v. ITO) where the claim for exemption under section 10(23G) in anticipation of approval did not attract penalty under section 271(1)(c).

5. Disallowances and Their Impact on Penalty:
The Tribunal examined the disallowances made by the AO, including depreciation, expenses, and amounts under section 14A. It was noted that these disallowances were routine and did not constitute concealment of income or furnishing of inaccurate particulars. The Tribunal referenced the Supreme Court case (CIT v. Reliance Petroproducts (P.) Ltd.) to support the view that disallowances under section 14A do not attract penalty under section 271(1)(c).

Conclusion:
The Tribunal upheld the CIT(A)'s decision to reduce the penalty to the extent of the income finally brought to tax at Rs. 4,43,14,513/-. It was concluded that the assessee had a bona fide belief regarding the exemption under section 10(23G), and the disallowances did not warrant a penalty under section 271(1)(c). Consequently, the appeal filed by the assessee was allowed, and the Revenue's appeal was dismissed.