2013 (10) TMI 705 - AT - Income Tax

Penalty u/s 271(1)(c) disallowances, i.e., qua repair and maintenance and depreciation - Held that - The building is in the process of completion, work for which has been contracted and, in any case, was in progress - The construction or the acquisition of an asset cannot be said to be complete prior to it attaining a working condition, which has to be reckoned with reference to its intended user, as for the purpose of guest house - It is not the case, as has been sought to be projected by the assesse, that the Revenue has not accepted its claims in the absence of actual user, even though the building is ready for use, so that it is a case of passive user - Why, the detail of the expenditure itself reveals a good part of the expenditure to be on furniture and which has also been factored into in arriving at our foregoing inferential finding of the building being readied for its intended user, as admitted in the quantum proceedings. It would be fit and proper to remit the matter with respect to the claim qua Bhiwandi property back to the file of the ld. CIT(A), to allow the assessee an opportunity to substantiate its case in respect of cost incurred toward the Greenhouse, if any, included therein, as well as of the same as not representing a capital expenditure - For the balance expenditure qua the Bhiwandi property, we confirm the levy of penalty u/s. 271(1)(c), save qua expenditure for which it has a plausible explanation; the assessee having completely failed to explain the same as representing repair and maintenance of building; rather, its explanation having been found as contrary to facts as well as inconsistent with the material on record - Its claim for depreciation on the Bhiwandi building would also follow suit inasmuch as there has been no explanation, much less its substantiation, as to the user of the Bhiwandi property or even of its being ready for its intended user Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Confirmation of penalty levied under Section 271(1)(c) of the Income Tax Act, 1961.
2. Disallowance of repair and maintenance expenses.
3. Disallowance of depreciation claims.
4. Examination of the nature of expenses incurred for two properties.

Detailed Analysis:

1. Confirmation of Penalty Levied Under Section 271(1)(c):
The primary issue in this appeal is the confirmation of the penalty imposed by the Assessing Officer (A.O.) amounting to Rs. 9,33,422/- under Section 271(1)(c) of the Income Tax Act, 1961, which was upheld by the Commissioner of Income Tax (Appeals)-21, Mumbai (CIT(A)).

2. Disallowance of Repair and Maintenance Expenses:
The penalty pertains to two disallowances claimed by the assessee for repair and maintenance expenses and depreciation for the assessment year 2004-05. The assessee argued that the expenses were incurred to make the buildings at Bhiwandi, Maharashtra, and Kodaikanal, Karnataka, ready for use. The assessee contended that the expenses were written off in accounts as per Accounting Standard AS-10 and that the buildings were intended to be used as guest houses. The Revenue, however, did not accept this explanation, asserting that the buildings were still under construction and not put to use, thus disallowing the repair and maintenance expenses.

3. Disallowance of Depreciation Claims:
The assessee claimed depreciation on the buildings, arguing that even passive user entitles a claim for depreciation. However, the Revenue disallowed this claim on the grounds that the buildings were not complete and not put to use. The assessee did not contest these disallowances beyond the first appellate stage, accepting them. Still, the penalty proceedings require more than just an inability to prove the claim; there must be evidence of concealment or furnishing inaccurate particulars of income.

4. Examination of the Nature of Expenses Incurred for Two Properties:
The judgment emphasizes the need to consider the two properties separately due to differing facts. For the Kodaikanal property, which was capitalized in the financial year 1998-99, the assessee had a plausible explanation for the claimed expenses on repairs and maintenance and depreciation, supported by allowed expenses in previous assessments. However, for the Bhiwandi property, the completion status was contradictory, with the assessee's accounts showing additions during the year, raising doubts about the building's readiness and the nature of the claimed expenses.

The assessee failed to provide satisfactory explanations for the expenses on furniture and other items, leading to the conclusion that the building was still being prepared for use. The Revenue's disallowance was thus upheld, except for plausible expenses related to garden maintenance, electricity, and telephone charges, which were remitted back to the CIT(A) for further examination.

Conclusion:
The Tribunal partly allowed the assessee's appeal, remitting the matter concerning the Bhiwandi property back to the CIT(A) for further examination of specific expenses. The penalty under Section 271(1)(c) was confirmed for the remaining disallowed expenses, as the assessee failed to substantiate the claims adequately. The decision by the apex court in CIT vs. Reliance Petroproducts (P.) Ltd. was deemed inapplicable due to the factual nature of the case. The order was pronounced on October 14, 2013.