2015 (12) TMI 299 - AT - Income Tax

Penalty under section 271(1)(c) - Held that - The assessee has furnished all the details relating to the earning of dividend income. So it cannot be said that the assessee had concealed income or furnished inaccurate particulars of income. The only basis of levying the penalty u/s 271(1) (c) of the Act was that the claim of the assessee for the disallowance u/s 14A of the Act was not accepted by the AO, so it can at the most be a ground for making the addition but was not sufficient to levy the penalty u/s 271(1)(c) of the Act. So we find merit in the appeal of the assessee and direct deletion of penalty levied against the assessee - Decided in favour of assessee

Summary

Issues Involved:
1. Confirmation of Penalty under Section 271(1)(c) of the Income-tax Act, 1961.
2. Applicability of Section 14A of the Income-tax Act to shares held as trading assets.
3. Debatable nature of the legal issue and its impact on penalty proceedings.

Issue-wise Detailed Analysis:

1. Confirmation of Penalty under Section 271(1)(c) of the Income-tax Act, 1961:
The appeal was directed against the confirmation of a penalty of Rs. 1,49,38,148/- levied under Section 271(1)(c) of the Income-tax Act, 1961. The penalty was imposed on the grounds that the Assessee had furnished incorrect particulars of income. The Assessee argued that the penalty was levied without judicially appreciating the facts and the position of law. The Assessee contended that the penalty could only be imposed if it was proven that there was a concealment of particulars of income or furnishing of inaccurate particulars of such income. The Assessee highlighted that the penalty provisions under Section 271(1)(c) are discretionary, and merely because certain additions are made in the assessment, it does not necessarily follow that penalty must be levied.

2. Applicability of Section 14A of the Income-tax Act to shares held as trading assets:
The Assessee, engaged in the business of shares and securities, received dividend income from shares held as trading assets. The Assessing Officer disallowed interest expenditure incurred on borrowed funds used to acquire these shares under Section 14A, which was sustained in quantum appeals. The Assessee argued that the issue of whether Section 14A applies to shares held as trading assets was debatable, especially since it was the first year of the section's application. The Assessee pointed out that the Special Bench in the case of Daga Capital Management Pvt. Ltd. had conflicting views on this issue, indicating its debatable nature. The Majority view held that Section 14A applied, while the Minority view did not.

3. Debatable nature of the legal issue and its impact on penalty proceedings:
The Assessee argued that penalty cannot be imposed on debatable issues, citing several judicial precedents. The Assessee referred to the decision of the Delhi High Court in CIT vs. Electrolux Kelvenatro Ltd. and CIT vs. Jaswinder Singh Ahuja, which held that penalty cannot be levied on debatable issues. The Assessee also highlighted that the issue of Section 14A's applicability to shares held as trading assets was admitted by the High Court as involving substantial questions of law, further supporting its debatable nature. The Assessee cited various cases where courts and tribunals held that Section 14A cannot be invoked for shares held as stock-in-trade, reinforcing that the issue was not settled and thus, not a ground for penalty.

Conclusion:
The Tribunal found merit in the Assessee's arguments, noting that the issue of Section 14A's applicability to shares held as trading assets was indeed debatable and that the Assessee had furnished all relevant details. The Tribunal concluded that the mere disallowance of a claim does not automatically lead to the imposition of penalty under Section 271(1)(c). It was held that the Assessee's claim was bona fide and backed by adequate disclosure, and therefore, the penalty levied was directed to be deleted. The appeal of the Assessee was allowed, and the penalty order was quashed.