2018 (2) TMI 2104 - AT - Income Tax

Levy of penalty u/s 271(1)(c) - disallowance on account of expenses on increase in the authorized share capital - bonafide Belief or deliberate intention - whether the fees paid for increasing the authorized capital, particularly when the same is to meet the working capital requirement is a capital expenditure or not? - HELD THAT - As in the penalty proceedings, assessee has categorically stated that the increase in the authorized share capital was with a view to expand the capital base of the company for availing more credit facility from the bank for its working capital requirement. This is also evidenced by the loan sanction letter issued by the assessee s bank for working capital requirement (due to proposed increase in sales) wherein the assessee was required to increase the share capital from Rs. 9 crores to Rs. 11 crores before release of enhanced limits - Revenue has not controverted the said explanation of the same submitted during the course of penalty proceedings. Bonafide of the said explanation is therefore not under challenge especially in light of the plausible view which can be taken in respect of share issue expenditure which has been claimed as revenue expenditure. Given that all necessary facts are on record regarding claim of the share issue expenditure and the explanation of the assessee has been found to be bonafide, merely because the expenditure so claimed is disallowed and treated as capital expenditure, the same cannot be basis for levy of penalty for furnishing inaccurate particulars of income u/s 271(1)(c) - A similar view has been taken in case of JKP Auto parts 2017 (5) TMI 1617 - ITAT DELHI In the result, the penalty so levied and confirmed by the ld CIT(A) is hereby deleted. Decided in favour of assessee.

Summary

Issues Involved:
1. Levy of penalty under section 271(1)(c) of the IT Act, 1961.
2. Nature of expenses related to increase in authorized share capital.
3. Bona fide belief and furnishing of inaccurate particulars of income.

Detailed Analysis:

1. Levy of Penalty under Section 271(1)(c):
The primary issue in this case was whether the penalty of Rs. 99,653 levied under section 271(1)(c) of the IT Act, 1961, for furnishing inaccurate particulars of income should be upheld. The penalty was related to the disallowance of Rs. 3,00,000 claimed by the assessee as an expense for increasing its authorized share capital.

2. Nature of Expenses Related to Increase in Authorized Share Capital:
The assessee claimed an expense of Rs. 3,00,000 for increasing its authorized share capital, which was disallowed by the Assessing Officer (AO) on the grounds that it was of a capital nature. The AO relied on the Supreme Court decisions in Brooke Bond India Ltd. vs. CIT 225 ITR 798 and Punjab State Industrial Development Corporation vs. CIT 225 ITR 792 (SC). The assessee argued that the expense was incurred to expand the capital base for availing more credit facilities from the bank for its working capital requirement and believed it was allowable under section 37(1) of the Act.

3. Bona Fide Belief and Furnishing of Inaccurate Particulars of Income:
During the penalty proceedings, the assessee contended that the claim was made under a bona fide belief that the expense was allowable. The AO, however, rejected this explanation, stating that the nature of the expense was clearly capital, and thus, the assessee had furnished inaccurate particulars of income. The CIT(A) upheld the AO’s view, stating that the claim was not bona fide given the existing legal position and the assistance of competent professionals.

Tribunal's Observations and Decision:

Cleavage of Opinion:
The Tribunal noted that there was a cleavage of opinion on whether fees paid for increasing authorized capital, particularly for meeting working capital requirements, constituted a capital or revenue expenditure. The Tribunal referred to several decisions, including the Supreme Court's rulings and various High Court judgments, which had differing views on this matter.

Relevant Case Laws:
The Tribunal discussed the Supreme Court’s decisions in Punjab State Industrial Development Corporation vs. CIT and Brooke Bond India Ltd. vs. CIT, which held that expenses related to the increase in share capital were capital in nature. However, it also considered other decisions, such as General Insurance Corporation vs. CIT and Lakshmi Auto Components Ltd. vs. DCIT, which distinguished the nature of expenses based on their purpose, i.e., whether they were incurred for meeting working capital requirements.

Bonafide Claim:
The Tribunal noted that the assessee had a plausible explanation for its claim, supported by evidence such as the loan sanction letter from the bank requiring an increase in share capital for working capital needs. The Tribunal emphasized that the bona fide nature of the claim and the existence of a plausible view on the matter meant that the mere disallowance of the expense did not justify the levy of penalty for furnishing inaccurate particulars of income.

Conclusion:
The Tribunal concluded that the assessee’s explanation was bona fide and supported by a plausible view. Therefore, the penalty under section 271(1)(c) for furnishing inaccurate particulars of income was not warranted. The Tribunal deleted the penalty and allowed the appeal of the assessee.

Order Pronounced:
The appeal of the assessee was allowed, and the order was pronounced in the open Court on 23/02/2018.