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2013 (11) TMI 464 - AT - Income TaxPenalty u/s 271(1)(c) - Disallowance of commission expense u/s 36(1)(ii) of the Income Tax Act - commission paid to its employee directors The said claim of the assessee was disallowed on the ground that since such commission was not paid to the directors in the earlier years and the assessee company had not distributed dividend during the relevant year in spite of there being handsome profits; the payment of commission to directors during the relevant previous year was in order to reduce the taxable profit so as to minimize the tax liability - Held that - Assessee has made true and full disclosure and hence, there is no concealment of income or furnishing of inaccurate particulars - The factum of payment of commission was categorically disclosed in the Audited Financial Accounts as well as in the Tax Audit Report filed alongwith return of income - Issue of allowability of the payment of commission to assessee company to its directors was a debatable matter - The Special Bench was constituted to interpret the provisions of section 36(1)(ii) of the Act. This goes to prove that the issue involved was debatable Further, in the immediately following year, similar payment of commission was allowed. Reliance is placed upon the Apex Court decision rendered by a larger Bench comprising of three of their Lordships in the case of Hindustan Steel vs. State of Orissa in 1969 (8) TMI 31 - SUPREME Court , wherein it was held that An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceedings, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act, or where the breach flows from a bonafide belief that the offender is not liable to act in the manner prescribed by the statute Decided against the Revenue.
Issues Involved:
1. Deletion of penalty under section 271(1)(c) of the Income Tax Act, 1961. Detailed Analysis: 1. Deletion of Penalty under Section 271(1)(c): The core issue in this appeal is whether the penalty imposed under section 271(1)(c) of the Income Tax Act, 1961, amounting to Rs. 1,17,60,000/-, should be deleted. The facts of the case reveal that the assessee, a company engaged in the advertising business, had paid a commission of Rs. 3.20 crores to its employee directors for the assessment year 2003-04. The Assessing Officer (AO) disallowed this deduction on the grounds that it was paid to reduce taxable profits and minimize tax liability. The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who deleted the disallowance, noting that the directors were taxed at the maximum marginal rate and that the commission was paid following a board resolution and legal requirements, including tax deduction at source. The CIT(A) also observed that a similar commission was paid in the subsequent year without disallowance by the Department. Upon further appeal, the ITAT upheld the AO's disallowance, leading to the initiation of penalty proceedings under section 271(1)(c). The assessee contended that there was no concealment of income or furnishing of inaccurate particulars, as all relevant facts were disclosed in the audited financial accounts and tax audit report. The CIT(A) agreed, stating that the disallowance was due to a legal difference of opinion rather than hidden facts or concealed particulars. The CIT(A) relied on the Supreme Court decision in CIT vs. Reliance Petroproducts Private Limited (322 ITR 158) to support the deletion of the penalty. The Revenue's appeal against this deletion was heard by the ITAT, which considered the submissions and precedents. The ITAT found that the assessee had made full and true disclosures, and the issue of the commission's allowability was debatable. The ITAT noted that the High Court had admitted the assessee's appeal under section 260A, indicating the debatable nature of the issue. The ITAT also observed that a Special Bench had been constituted to interpret the relevant provisions of section 36(1)(ii) of the Act, further underscoring the issue's debatability. The ITAT relied on the Supreme Court's decision in CIT vs. Reliance Petro Products Ltd. and the larger Bench decision in Hindustan Steel vs. State of Orissa (83 ITR 26), which held that penalty should not be imposed unless there was deliberate defiance of law or contumacious conduct. Conclusion: In conclusion, the ITAT upheld the CIT(A)'s order deleting the penalty, finding no concealment of income or furnishing of inaccurate particulars by the assessee. The appeal filed by the Revenue was dismissed. The judgment emphasized that penalty under section 271(1)(c) is not warranted in cases where the issue is debatable and the assessee has made full and true disclosures. The ITAT's decision aligns with the principles laid down by the Supreme Court, ensuring that penalties are imposed judiciously and not merely because it is lawful to do so. Order: The appeal filed by the Revenue stands dismissed. Order pronounced in the open court on 12/04/2013.
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