2015 (1) TMI 734 - AT - Income Tax

Penalty levied by the AO u/s 271(1)(c) - disallowance made u/s 94(7) - Held that - In the present case, it is not the case of the revenue that the assessee has failed to furnish all particulars of income. As noticed earlier, the assessee has indicated in its return of income that it was conscious of the provisions of sec. 94(7) of the Act. The assessee had attached a note also in this regard expressing its view about the applicability of the provisions of sec. 94(7) of the Act. In the assessment proceedings, the assessee has contended that the amended provisions should not be applied on the transactions concluded prior to the date of receipt of assent of Hon ble President of India. Thus, in our view, the assessee was under bona fide belief that the amended provisions will not be applicable for the transactions concluded atleast upto the date of receipt of assent of the Hon ble President to Finance (No.2) Bill , 2004. In our view, the said belief cannot be altogether rejected, since the said claim of the assessee is a debatable one. Even otherwise, we are of the view that the decision of Hon ble Supreme Court in the case of Reliance Petro Products (2010 (3) TMI 80 - SUPREME COURT ) supports the case of the assessee, i.e., a claim which is not sustainable in law by itself would not lead to furnishing of inaccurate particulars of income. Thus the penalty levied on the disallowance made u/s 94(7) of the Act is liable to be deleted. - Decided in favour of assessee.

Issues Involved:
1. Penalty under Section 271(1)(c) of the Income Tax Act, 1961.
2. Application of amended provisions of Section 94(7) of the Income Tax Act.
3. Disallowance of expenses incurred in connection with a new project.

Detailed Analysis:

1. Penalty under Section 271(1)(c) of the Income Tax Act, 1961:
The assessee appealed against the penalty of Rs. 36,14,604/- levied by the Assessing Officer (AO) under Section 271(1)(c) of the Income Tax Act, 1961. The penalty was confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)] and related to the assessment year 2005-06. The penalty was imposed due to disallowances made under Section 94(7) and certain expenses claimed by the assessee.

2. Application of Amended Provisions of Section 94(7) of the Income Tax Act:
The AO noticed that the assessee purchased and sold mutual fund units after receiving dividends, leading to losses. The AO applied the amended provisions of Section 94(7) of the Act, which extended the period of holding after the record date from three months to nine months. The assessee contended that the transactions were concluded before the Finance (No.2) Act, 2004 received the President's assent on 10th September 2004, and thus the pre-amended provisions should apply. However, the tax authorities and the Tribunal held that the amended provisions were applicable from the assessment year 2005-06, and disallowed the loss to the extent of Rs. 64,13,137/-. The High Court of Bombay also confirmed this disallowance.

3. Disallowance of Expenses Incurred in Connection with a New Project:
The AO disallowed expenses amounting to Rs. 36,62,414/- claimed by the assessee against income received from rent, profit on sale of investment, and dividend, stating that these expenses were incurred for a new project related to making a special diary on Mahatma Gandhi. The CIT(A) confirmed this disallowance in the quantum appeal proceedings. The Tribunal, however, restored the matter to the AO for re-examination.

Penalty Proceedings:
In the penalty proceedings, the assessee argued that:
- The amendment to Section 94(7) was introduced after the transactions were concluded, and thus the pre-amended provisions should apply.
- The assessee had a bona fide belief that the amended provisions would not affect transactions concluded before the President's assent.
- The assessee did not furnish inaccurate particulars of income as all details were disclosed in the return or during assessment proceedings.
- A claim not sustainable in law does not equate to furnishing inaccurate particulars of income.

The Tribunal noted that the assessee had disclosed all details and appended a note in the return of income regarding the applicability of Section 94(7). The Tribunal found that the assessee's belief that the amended provisions would not apply to transactions concluded before the President's assent was bona fide and debatable. Citing the Supreme Court's decision in CIT Vs. Reliance Petro Products Pvt Ltd, the Tribunal held that making a claim not sustainable in law does not amount to furnishing inaccurate particulars of income.

Conclusion:
The Tribunal concluded that the penalty levied on the disallowance made under Section 94(7) was liable to be deleted and directed the AO to delete the penalty. Regarding the penalty on the disallowance of expenses, since the matter was restored to the AO for re-examination, the penalty on this issue did not survive. The appeal of the assessee was allowed, and the order was pronounced in the open court on 9th January 2015.

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