2018 (6) TMI 1797 - AT - Income Tax

Penalty u/s 271(1)(c) - addition u/s 40(a)(ia) - HELD THAT - Deduction of TDS is a debatable and technical issue; therefore at least penalty cannot be imposed. Admittedly the provision of section 40(a)(ia) is a deeming section which creates legal fiction therefore the disallowance made simply invoking the provision will not attract penalty for concealment or furnishing of inaccurate particulars of income. Hon ble Apex Court in Hindustan Steel Ltd. vs State of Orissa 1969 (8) TMI 31 - SUPREME COURT supports our view wherein it was held that the authority competent to impose the penalty will be justify in refusing the penalty where there is a technical or venial breach of provision or where the breach flows from a bon-fide belief that offender is not liable to act in a manner prescribed by a statute . The case of the assessee further find support from the decision in the case of CIT vs AT T Communications Services Pvt. Ltd. 2012 (2) TMI 8 - DELHI HIGH COURT wherein it was held that invoking the provisions of section 40(a)(ia) for making the disallowance should not be a ground for levy of penalty. Identical ratio was laid down in New Horizon India Pvt. Ltd. vs DCIT 2010 (5) TMI 653 - ITAT DELHI and in Ram Krishna S. Shetty 2014 (1) TMI 1072 - ITAT MUMBAI and the decision from Hon ble Apex Court in the case of Reliance Petro Products 2010 (3) TMI 80 - SUPREME COURT . - Decided against revenue.

Summary

Issues Involved:
1. Deletion of penalty imposed under section 271(1)(c) of the Income Tax Act, 1961.
2. Admissibility of FCCB expenses under section 40(a)(ia) of the Act.
3. Allegations of concealment of income and furnishing of inaccurate particulars of income.

Detailed Analysis:

1. Deletion of Penalty Imposed Under Section 271(1)(c):
The Revenue contested the deletion of a penalty amounting to ?57,99,493/- imposed under section 271(1)(c) of the Income Tax Act, 1961. The penalty was originally imposed for the alleged concealment of income and furnishing inaccurate particulars by the assessee. The First Appellate Authority had deleted this penalty, which the Revenue argued was not justified given that the assessee had claimed inadmissible FCCB expenses.

2. Admissibility of FCCB Expenses Under Section 40(a)(ia):
The Revenue argued that the FCCB expenses totaling ?1,72,29,629/- were inadmissible under section 40(a)(ia) of the Act because the assessee failed to deduct tax at source on payments made to a foreign entity. The Revenue contended that this failure amounted to an attempt to reduce the incidence of taxation by concealing income and furnishing inaccurate particulars.

3. Allegations of Concealment of Income and Furnishing Inaccurate Particulars:
The assessee defended against the allegations by arguing that the issue of deducting TDS on FCCB expenses was highly debatable and that there was no concealment or furnishing of inaccurate particulars of income. The assessee cited various judicial precedents to support their case, including decisions from the Tribunal and High Courts, which have held that mere disallowance under section 40(a)(ia) does not automatically lead to penalty under section 271(1)(c).

Tribunal's Findings:

1. On the Deletion of Penalty:
The Tribunal considered the rival submissions and the material available on record. It noted that the First Appellate Authority had granted part relief and that the Tribunal had affirmed this order. The Tribunal referenced several judicial precedents, including the decision of the Hon'ble Gujarat High Court in the case of Nayan C. Shah (2016) 386 ITR 304 (Guj.), which held that penalty under section 271(1)(c) is not warranted for technical or venial breaches of the law, especially when the issue is debatable.

2. On the Admissibility of FCCB Expenses:
The Tribunal observed that the disallowance under section 40(a)(ia) is a deeming provision that creates a legal fiction. Therefore, disallowance made by invoking this provision does not automatically attract a penalty for concealment or furnishing of inaccurate particulars of income. The Tribunal cited the decision of the Hon'ble Supreme Court in Reliance Petro Products Pvt. Ltd. (2010) 322 ITR 158, which held that making an incorrect claim in law does not tantamount to furnishing inaccurate particulars of income.

3. On Allegations of Concealment and Inaccuracy:
The Tribunal concluded that the assessee had neither concealed income nor furnished inaccurate particulars. It noted that the assessee had disclosed all relevant details and that the disallowance was made on a technical ground of non-deduction of TDS, which does not justify a penalty under section 271(1)(c). The Tribunal also referenced the decision of the Hon'ble Apex Court in Hindustan Steel Ltd. vs State of Orissa 83 ITR 26, which supports the view that penalties should not be imposed for technical or venial breaches.

Conclusion:
The Tribunal affirmed the order of the First Appellate Authority, resulting in the dismissal of the Revenue's appeal. Consequently, the cross-objection raised by the assessee became infructuous and was also dismissed. The Tribunal's order was pronounced in the open court in the presence of representatives from both sides.

Final Order:
The appeal of the Revenue and the cross-objection of the assessee were both dismissed.