2018 (4) TMI 395 - AT - Income Tax

Penalty levied u/s.271(1)(c) - Disallowance of deduction u/s 80HHC - Disallowance of weighted deduction u/s.35(2AB) - disallowance of prior period expenses - Arms Length Price of International Transaction - Disallowance of claim u/s. 80G - Held that - Supreme Court of India in the matter of CIT vs. Reliance Petroproducts Pvt. Ltd.,(2010 (3) TMI 80 - SUPREME COURT), wherein it has been held that merely because the assessee has claimed the expenditure, which claim was not accepted or was not acceptable to the Revenue, that by itself would not, in our opinion, attract the penalty under section 271(1)(c). If we accept the contention of the Revenue then in case of every return where the claim made is not accepted by Assessing Officer for any reason, the assessee will invite penalty under section 271(1)(c). That is clearly not the intendment of the Legislature. In this matter some of the claim was not accepted by the department and disallowance were made. In our considered opinion, respectfully following the above said judgment penalty cannot be levied in such cases. Therefore, penalty is directed to be deleted.

Summary

Issues Involved:
1. Deletion of penalty levied under Section 271(1)(c) on various additions/disallowances.
2. Confirmation of disallowance of prior period expenses.
3. Disallowance of deduction under Section 80HHC.
4. Disallowance of weighted deduction under Section 35(2AB).
5. Arms Length Price adjustment of international transactions.
6. Disallowance of prior period expenses.
7. Loss due to foreign exchange fluctuation.
8. Disallowance of claim under Section 80G.

Issue-wise Detailed Analysis:

1. Deletion of Penalty Levied under Section 271(1)(c):
The CIT(A) deleted the penalty levied on additions/disallowances of ?4,42,73,956/- except for the penalty on disallowance of prior period expenses of ?10,83,885/-. The revenue argued that the penalty was correctly levied by the AO on the total additions/disallowances. The assessee contended that the penalty proceedings were time-barred and that the disallowances did not warrant a penalty.

2. Confirmation of Disallowance of Prior Period Expenses:
The CIT(A) confirmed the disallowance of prior period expenses of ?10,83,885/-. The assessee argued that these expenses were crystallized in the current year and should be allowed. However, the CIT(A) stated that the assessee could not provide details to justify the crystallization of these expenses during the year.

3. Disallowance of Deduction under Section 80HHC:
The assessee claimed a deduction under Section 80HHC of ?18,85,093/-. Upon review, it was found that the profit of the business was negative, making the assessee ineligible for any deduction under this section. The CIT(A) confirmed the addition, noting the absence of eligible positive profit for the deduction.

4. Disallowance of Weighted Deduction under Section 35(2AB):
The assessee claimed a deduction for Scientific Research expenses. The DSIR approved ?10,38,08,966/- out of the claimed ?10,41,64,966/-. The AO disallowed ?3,56,000/- not approved by DSIR, which was confirmed by the CIT(A). The assessee argued that the DSIR's assessment was arbitrary, but the AO emphasized that DSIR is the apex body for such certifications.

5. Arms Length Price Adjustment of International Transactions:
The Transfer Pricing Officer (TPO) made an upward adjustment of ?38,14,000/- to the assessee's international transactions. The assessee contended that the TPO's method was incorrect and ad-hoc. However, the AO and CIT(A) found the TPO's method to be scientific and logical, confirming the addition.

6. Disallowance of Prior Period Expenses:
The assessee debited several prior period expenses in its P&L Account. The AO disallowed these expenses, stating that under the Mercantile System of Accounting, such expenses from previous years cannot be claimed in the current year. The CIT(A) upheld the disallowance, noting the lack of specific evidence from the assessee.

7. Loss Due to Foreign Exchange Fluctuation:
The AO disallowed the loss of ?56,88,182/- due to foreign exchange fluctuation on term loans, stating it should be capitalized. The CIT(A) confirmed the disallowance but allowed depreciation on the capitalized amount, resulting in a net addition of ?42,66,137/-.

8. Disallowance of Claim under Section 80G:
The assessee claimed a deduction for donations but failed to provide original receipts. The AO disallowed the deduction of ?3,50,000/-, which was upheld by the CIT(A).

Judgment and Conclusion:
The ITAT noted that in quantum proceedings, relief was granted to the assessee by the ITAT in ITA No.1117/Ahd/2012, particularly regarding prior period expenses. The ITAT observed that the assessee's expenses had indeed crystallized in the relevant year, and the genuineness of the expenses was not in doubt. Citing the Supreme Court's judgment in CIT vs. Reliance Petroproducts Pvt. Ltd., the ITAT held that merely disallowing a claim does not attract a penalty under Section 271(1)(c). Consequently, the ITAT deleted the penalty confirmed by the CIT(A) and allowed the assessee's appeal while dismissing the revenue's appeal.