2017 (1) TMI 1212 - AT - Income Tax

Levy of penalty u/s 271(1)(c) - payment of compensation to investors - claim of compensation paid by the assessee to the investors as revenue expenses u/s 37(1) not allowed by the AO - Held that - We have observed that the assessee is engaged in the business of Asset Management and Portfolio Management and advisory services . Compensation were paid as per acts of omission by earlier consultant M/s. Karvy Consultants Limited appointed by the Mutual Fund. These payments are settlement of claims as per SEBI regulations. The AO in quantum assessment disallowed these payments made by the assessee to investors which was later confirmed by learned CIT(A), while the tribunal for assessment year 2007-08, allowed the appeal of the assessee and the quantum additions has been deleted by the tribunal. Thus, in our considered view, since the quantum additions itself have been deleted by the tribunal in assessee s own case the penalty levied by the A.O. u/s 271(1)(c) and as sustained by learned CIT(A) cannot now be sustained and hence is hereby ordered to be deleted. - Decided in favour of assessee

Summary

Issues Involved:
1. Levy of penalty under Section 271(1)(c) of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Levy of Penalty under Section 271(1)(c) of the Income-tax Act, 1961

Background:
The appeal by the assessee is directed against the appellate order dated 3rd June 2013 by the Commissioner of Income Tax (Appeals)-16, Mumbai, which upheld the penalty order dated 22nd March 2012 passed by the Assessing Officer (AO) under Section 271(1)(c) of the Income-tax Act, 1961. The penalty was levied on the grounds that the assessee had concealed or furnished inaccurate particulars of its income.

Facts of the Case:
- The assessee, engaged in Asset Management and Portfolio Management and advisory services, paid compensation of ?50,86,434 to investors, which was disallowed by the AO during the assessment proceedings under Section 143(3) read with Section 143(2) of the Act.
- The AO initiated penalty proceedings under Section 271(1)(c) on the grounds that the compensation payments were not the liability of the assessee and were an attempt to reduce its tax liability.
- The CIT(A) confirmed the disallowance and the penalty levied by the AO.

Assessee's Arguments:
- The assessee argued that the payments were made to compensate investors as per SEBI regulations, which held the assessee responsible for acts of commission and omission by its employees and service providers.
- The assessee contended that the payments were made on account of business expediency and were legitimate claims of the investors.
- The assessee cited a previous tribunal order dated 18th May 2016, which deleted the quantum additions made by the AO for the assessment year 2007-08, arguing that the penalty could not be sustained once the quantum additions were deleted.

Revenue's Arguments:
- The Departmental Representative (DR) relied on the order of the CIT(A) but conceded that in light of the tribunal's order deleting the quantum additions, the penalty could not be sustained.

Tribunal's Findings:
- The tribunal noted that the assessee had made compensation payments of ?50,86,434 to various investors due to omissions by the earlier consultant, M/s. Karvy Consultants Limited, as per SEBI regulations.
- The tribunal observed that the compensation payments were incidental to the trade and were made to safeguard the assessee's business interests and comply with SEBI regulations.
- The tribunal referred to its earlier order dated 18th May 2016, which allowed the assessee's appeal against the quantum additions, holding that the expenses were incurred on account of business expediency and were allowable as deductions.
- The tribunal concluded that since the quantum additions had been deleted, the penalty under Section 271(1)(c) could not be sustained.

Conclusion:
The tribunal ordered the deletion of the penalty of ?17,12,092 levied by the AO under Section 271(1)(c) and sustained by the CIT(A), as the quantum additions had been deleted in the assessee's own case by the tribunal's order dated 18th May 2016.

Result:
The appeal of the assessee in ITA No. 5456/Mum/2013 for the assessment year 2007-08 was allowed. The order was pronounced in the open court on 23rd January 2017.