2014 (6) TMI 332 - AT - Income Tax

Confirmation of penalty u/s 271(1)(c) of the Act Adjustment made to returned income - Disallowance of provision on completed/uncompleted contracts Held that - What all the assessee is required to demonstrate, more so in the penalty proceedings, is that the estimates are valid and no more, i.e., are sound, based on cogent material it should be admissible as a cost, on the basis of the percentage of the work completed - the assessee stating to be following the method, as also agree with the matching cost principle Relying upon Bharat Earth Moers vs. CIT 2000 (8) TMI 4 - SUPREME Court - the matter cannot be decided on generalized statements or assumptions, but would need to be factually determined, separately qua each provision, even as was done by the tribunal in the quantum proceedings thus, the matter is required to be CIT(A). Disallowance of software expenses and disallowance of deduction u/s.80-HHB Held that - There is no question of any penalty in view of the order by the tribunal in the quantum proceedings deleting the disallowance -even where challenged by the Revenue, i.e., assuming so, its acceptance by the tribunal - the matter posing mixed question of fact and law, would exclude penalty Decided partly in favour of Revenue.

Summary

Issues involved:
1. Appeal against the levy of penalty u/s. 271(1)(c) of the Income Tax Act, 1961 for the assessment year 2004-05.
2. Disallowance of provision of costs on completed/uncompleted contracts.
3. Disallowance of software expenses.
4. Disallowance of deduction u/s. 80-HHB.

Analysis:

1. Appeal against Penalty:
The appeal challenges the confirmation of the penalty u/s. 271(1)(c) of the Income Tax Act, 1961 by the Commissioner of Income Tax (Appeals) for the assessment year 2004-05. The Tribunal notes a significant difference in the quantum proceedings where the assessee was granted relief regarding certain adjustments. The Tribunal emphasizes the need to differentiate between factual and legal explanations provided by the assessee. If the explanation is factually valid or legally plausible, penalty imposition may not be justified. The Tribunal highlights that the appellate court's jurisdiction is limited to substantial questions of law. The decision on penalty hinges on the substantiation of the explanations provided by the assessee.

2. Disallowance of Provision on Contracts:
The Tribunal delves into the disallowance of provisions on completed/uncompleted contracts, focusing on eleven contracts. While the provision was accepted for six contracts, it was disallowed for the remaining five due to uncertainties and lack of definitiveness. The Tribunal stresses the importance of valid estimates supported by cogent material, in line with accounting standards and legal principles. The matter is deemed primarily factual, requiring a detailed factual determination for each provision. The Tribunal orders a fresh adjudication by the Commissioner of Income Tax (Appeals) for the contracts where disallowance was confirmed, emphasizing the need for specific findings of fact based on evidence.

3. Disallowance of Software Expenses and Deduction u/s. 80-HHB:
The Tribunal addresses the disallowance of software expenses and deduction u/s. 80-HHB, noting that the penalty does not apply due to the Tribunal's decision in the quantum proceedings to delete the disallowances. Even if challenged by the Revenue, the mixed question of fact and law involved would preclude the imposition of a penalty. The Tribunal decides that no penalty is warranted in these instances based on the quantum proceedings' outcomes.

In conclusion, the Tribunal partially allows the assessee's appeal and remands the disallowed provisions on contracts for fresh adjudication. The penalty is automatically vacated concerning the contracts where the disallowance was not appealed by the Revenue. The decisions regarding software expenses and deduction u/s. 80-HHB in the quantum proceedings negate the need for a penalty.