2015 (10) TMI 2369 - AT - Income Tax

Penalty levied under section 271(1)(c) - disallowance of Legal Charges, treating the same as disallowance u/s 14A - Held that - We find no merit in the order passed by the Assessing Officer in this regard, where no satisfaction was recorded for initiating the penalty under section 271(1)(c) of the Act in respect of disallowance made under section 14A of the Act, while completing the assessment under section 143(3) of the Act, by the Assessing Officer or while making the enhancement by CIT(A). Though the provisions of section 14A of the Act were brought on statute on an earlier date, however, the provisions of Rule 8D of the Rules were introduced w.e.f. 01.04.2008 only. Before the insertion of Rule 8D of the Rules, no set procedure was laid down under the statute to work out the disallowance under section 14A of the Act. The disallowance made in the hands of the assessee before us is an ad-hoc disallowance, which admittedly has been accepted by the assessee because of no tax effect. But merely because an addition has been made in the hands of the assessee on a debatable issue, it cannot be held that the assessee has furnished inaccurate particulars of income in respect of the said disallowance under section 14A of the Act. Where the question of disallowance and its quantification are contentious, which lead to inference that difference of opinion between the assessee and the authorities were bona-fide and in such circumstances, it cannot not be said that the assessee has furnished inaccurate particulars of income. Such was proposition laid down by the Delhi Bench of the Tribunal in Jindal Equipment Leasing & Consultancy Services Ltd. (2011 (4) TMI 130 - ITAT DELHI). Thus no merit in the levy of penalty under section 271(1)(c) of the Act and we direct the Assessing Officer to delete the same. - Decided in favour of assessee.

Summary

Issues Involved:
1. Penalty for concealment of income under section 271(1)(c) of the Income Tax Act, 1961.
2. Disallowance of legal charges under section 40A(2)(b) and section 14A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Penalty for Concealment of Income under Section 271(1)(c):
The core issue is whether the penalty for concealment of income under section 271(1)(c) is justified. The assessee contended that the penalty was initially imposed for disallowance under section 40A(2)(b) and not for disallowance under section 14A. The CIT(A) had reclassified the disallowance under section 14A, but the Assessing Officer (AO) imposed the penalty based on the original disallowance under section 40A(2)(b). The Tribunal noted that the AO did not initiate penalty proceedings for the disallowance under section 14A during the assessment. Therefore, the penalty for concealment cannot be levied when no satisfaction for such penalty was recorded by the AO for disallowance under section 14A.

2. Disallowance of Legal Charges under Section 40A(2)(b) and Section 14A:
The AO disallowed Rs. 19,70,000 paid as legal fees to Shri S.A. Gundecha, invoking section 40A(2)(b), considering it excessive and unreasonable. However, the CIT(A) found that Shri Gundecha was not a related person under section 40A(2)(b) and that the legal fees were justified. Instead, the CIT(A) disallowed the amount under section 14A, relating it to the earning of exempt dividend income. The Tribunal observed that the provisions of Rule 8D, which provide a methodology for computing disallowance under section 14A, were not applicable for the assessment year 2004-05. The Tribunal concluded that the disallowance under section 14A was debatable and contentious, leading to a bona fide difference of opinion between the assessee and tax authorities. Therefore, it cannot be said that the assessee furnished inaccurate particulars of income.

Conclusion:
The Tribunal held that there was no merit in the levy of penalty under section 271(1)(c) for concealment of income, as the initial penalty proceedings were not for disallowance under section 14A. Furthermore, the issue of disallowance under section 14A was debatable, and the assessee's actions were bona fide. Consequently, the Tribunal directed the AO to delete the penalty of Rs. 7,06,738, allowing the appeal of the assessee.