2015 (6) TMI 351 - AT - Income Tax

Penalty u/s 271(1)(c) - depreciation on the IPRs - Held that - on the date of search, when Mr. Jingnesh Shah director of the assessee company withdrew the claim of depreciation on IPRs, the claim was already allowed by the CIT(A), but was sub judice before the ITAT in regular assessment proceedings.In such a situation, the issue could not have been made the subject matter of assessment under section 153A read with section 143(3), because that provision contemplates, assessment of material found during the course of search along with the original ingredients of the original return. The important qualification is that the material must be incriminating and found during the search, and which may have the character of increasing the income declared in original ROI. In the instant case, it is not the case of department that there was something which was concealed by the assessee, while filing its original return or the return in response to section 153A. In such a case incidence of penalty at all cannot be comprehended. Coming to the correctness of addition, based on statement under section 132(4), we are in agreement with the submissions of the AR, that addition itself cannot be sustained simply on the basis of statement under section 132(4), as held in the case of Raj Pal Bhatia (2009 (11) TMI 531 - DELHI HIGH COURT). Also in the case of SMJ Housing (2013 (7) TMI 660 - MADRAS HIGH COURT) that Explanation 5 cannot be invoked, as no incriminating material is found from the search. All the facts were on record, which has not been disproved by the revenue authorities or otherwise proved to be illegal, even if the claim was non allowable. Non-allowable claim cannot, by itself invite penalty, as held in the case of CIT vs Reliance Petro Products Pvt. Ltd., (2010 (3) TMI 80 - SUPREME COURT) . - Decided in favour of assesse.

Summary

Issues Involved:
1. Sustaining the penalty levied under section 271(1)(c) for assessment years 2002-03, 2004-05, 2005-06, and 2006-07.
2. Disallowance of depreciation on Intellectual Property Rights (IPRs).
3. Applicability of Explanation 5A to section 271(1)(c).
4. Validity of addition based on the statement under section 132(4).
5. Legal claim and change of opinion regarding the depreciation on IPRs.

Detailed Analysis:

1. Sustaining the Penalty Levied Under Section 271(1)(c):
The appeals were filed against the common order of the CIT(A), which sustained the penalty levied by the AO under section 271(1)(c) for the assessment years 2002-03, 2004-05, 2005-06, and 2006-07. The penalties were imposed due to the disallowance of depreciation on IPRs acquired through amalgamation, which the assessee had claimed in its books.

2. Disallowance of Depreciation on Intellectual Property Rights (IPRs):
The IPRs were capitalized by the assessee following the amalgamation approved by the Hon'ble Madras High Court and Hon'ble Bombay High Court. The AO disallowed the claim of depreciation on IPRs during the regular assessment proceedings. The CIT(A) initially allowed the claim, but the issue resurfaced during search and seizure operations, leading to the withdrawal of the depreciation claim by the Managing Director to avoid litigation.

3. Applicability of Explanation 5A to Section 271(1)(c):
The AO invoked Explanation 5A to section 271(1)(c) to levy the penalty. The AR argued that Explanation 5A could not be applied as it pertains to assets found during the search, which was not the case here. The AR cited decisions from the Hon'ble Delhi High Court and Hon'ble Madras High Court, which held that penalties under Explanation 5A could not be imposed without incriminating material found during the search.

4. Validity of Addition Based on the Statement Under Section 132(4):
The AR contended that the addition was a result of the withdrawal of the depreciation claim and could not be sustained solely based on the statement under section 132(4). The ITAT agreed, citing the case of Raj Pal Bhatia, where the Hon'ble Delhi High Court held that statements alone could not be considered as material found during the search for imposing penalties.

5. Legal Claim and Change of Opinion Regarding the Depreciation on IPRs:
The ITAT noted that the depreciation claim on IPRs was a legal charge allowed by the CIT(A) in regular proceedings. The withdrawal of the claim was a strategic decision to avoid litigation, not an admission of concealment or furnishing of inaccurate particulars. The ITAT emphasized that a legal claim and change of opinion could not be construed as concealment or inaccurate particulars, thus not warranting penalties under section 271(1)(c).

Conclusion:
The ITAT concluded that the penalties under section 271(1)(c) were not justified, as the disallowance of depreciation was a result of a legal claim and change of opinion. The penalties for the assessment years 2002-03, 2004-05, 2005-06, and 2006-07 were set aside, and the AO was directed to cancel the penalties. The appeals filed by the assessee were allowed.