2015 (3) TMI 567 - AT - Income Tax

Penalty order passed u/s 271(1)(c) - disallowance of ROC fees - Held that - ROC fees is not allowable as expenditure. The position of law in this regard is very clear. Ld. AR also did not make any submission. Thus, it was a clear cut disallowable amount, which has been claimed as revenue expenditure. So the levy of concealment penalty to this extent is confirmed. - Decided against assessee. Trade mark and patent expenses - Held that - On this issue also Ld. AR did not submit any arguments and levy of concealment penalty on this amount is also confirmed. - Decided against assessee. Excess depreciation claimed in the return - Held that - As it can be seen from the observations of the AO, it is case of the assessee right from the beginning that such claim was inadvertently made. The fact regarding the assets were duly disclosed in the return and only rate of depreciation was wrongly claimed. The basis of claim made by the assessee is that it has been described under Companies Act. Keeping in view the smallness of the claim and disclosures of particulars of assets and rate of depreciation and also the returned income of ₹ 8.90 crores, we are of the opinion that this could be an inadvertent mistake for which the assessee should not be held liable for concealment penalty. We, therefore, delete the penalty. - Decided in favour of assessee. Disallowance under section 14A r.w.r. 8D - Held that - In the year under consideration the assessee has made substantial investment and for making such investment decision have to be taken and it cannot be said that assessee did not incurred any expenditure to earn dividend income which is substantial. Therefore, there is no force in the claim of Ld. AR that assessee did not incur expenditure for earning the dividend income. It is a case where expenses incurred by the assessee to earn exempted income are incurred from joint expenditure and for such situation formula has been prescribed in Rule 8D. In the present case, since assessee did not make any disallowance and even could not substantiate its explanation that no expenditure was incurred for earning exempted income, therefore, we don t see any force in the claim of the assessee that disallowance on account of expenditure cannot be made as per Rule 8D. However, so far as it relates to component of interest which is a sum of ₹ 9,403/-, we are of the opinion that same is not sustainable for the reason that assessee s own funds are much more the funds deployed by the assessee in investment out of which the assessee has earned tax free income. Such claim would be supported by the decision of Hon ble Jurisdictional High Court in the case of HDFC Bank (2014 (8) TMI 119 - BOMBAY HIGH COURT), wherein it has been held that in a case where the own funds of the assessee are sufficient to make investment in tax free securities and shares, then the presumption would be that investment made by the assessee in tax free shares and securities would be out of the own funds of the assessee. Therefore, disallowance to the extent of ₹ 9403/- is deleted. disallowance of ₹ 12,70,726/- is upheld. - Decided partly in favour of assessee. Depreciation on goodwill - Held that - Since the issue is covered by the Hon ble Supreme Court in the case of Smifs Securities Ltd. (2012 (8) TMI 713 - SUPREME COURT), as accepted by either parties, the ground is allowed. Hence, the order of the Ld. CIT(A) is set aside on this issue and the AO is directed to allow the claim of depreciation on goodwill. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the penalty order under section 271(1)(c) of the Income Tax Act.
2. Confirmation of penalty by CIT(A) despite no concealment of income or furnishing of inaccurate particulars.
3. Specific penalties related to various disallowances and expenses.
4. Ex-parte order by CIT(A) and its implications.
5. Disallowance under section 14A of the Income Tax Act.
6. Disallowance of depreciation on goodwill.

Issue-wise Detailed Analysis:

1. Validity of the Penalty Order under Section 271(1)(c):
The assessee argued that the penalty order under section 271(1)(c) was invalid and bad in law. The Tribunal examined the penalties related to various disallowances and expenses. For instance, penalties on deferred revenue disallowance, gratuity, and renovation/civil expenses were deleted due to the deletion of these items in quantum proceedings by the Tribunal. Penalties on depreciation on goodwill and franchisee termination expenses were restored to the AO for reconsideration after quantum proceedings.

2. Confirmation of Penalty by CIT(A):
The CIT(A) partly confirmed the penalties, which the assessee contested, arguing there was no concealment of income or furnishing of inaccurate particulars. The Tribunal found that for certain items like ROC fees and trademark & patent expenses, the penalties were confirmed as these were clear cut disallowable amounts. However, for excess depreciation claimed, the Tribunal accepted the assessee's argument of inadvertent mistake and deleted the penalty.

3. Specific Penalties Related to Various Disallowances and Expenses:
- Deferred Revenue Disallowance: Penalty deleted as the addition was deleted in quantum proceedings.
- Depreciation on Goodwill: Matter restored to AO for reconsideration after quantum proceedings.
- Gratuity: Penalty deleted as the addition was deleted in quantum proceedings.
- Renovation/Civil Expenses: Penalty deleted as the addition was deleted in quantum proceedings.
- ROC Fees: Penalty confirmed as it was a clear cut disallowable amount.
- Franchisee Termination Expenses: Matter restored to AO for reconsideration after quantum proceedings.
- Trademark & Patent Expenses: Penalty confirmed as it was a clear cut disallowable amount.
- Excess Depreciation Claimed: Penalty deleted as it was considered an inadvertent mistake.

4. Ex-parte Order by CIT(A) and Its Implications:
For the assessment year 2007-08, the CIT(A) proceeded ex-parte due to non-appearance of the assessee despite adjournments. The Tribunal restored the matter back to the CIT(A) for re-adjudication after giving a reasonable opportunity of hearing to the assessee.

5. Disallowance under Section 14A of the Income Tax Act:
The AO invoked section 14A r.w. Rule 8D and calculated disallowance. The Tribunal upheld the disallowance of Rs. 12,70,726/- but deleted the component of interest amounting to Rs. 9,403/- as the assessee's own funds were sufficient to cover the investments. The Tribunal relied on the decision of the Hon'ble Bombay High Court in the case of HDFC Bank Ltd.

6. Disallowance of Depreciation on Goodwill:
For the assessment year 2009-10, the Tribunal restored the issue of disallowance of depreciation on goodwill to the AO with directions to re-adjudicate the issue as per the decision of the Hon'ble Supreme Court in the case of Smifs Securities Ltd.

Conclusion:
The appeals for assessment years 2006-07 and 2009-10 were partly allowed for statistical purposes, and the appeal for assessment year 2007-08 was allowed for statistical purposes. The Tribunal directed the AO to reconsider certain penalties and disallowances after quantum proceedings and provided specific directions for re-adjudication by the CIT(A) and AO. The order was pronounced in the open court on 02/03/2015.