2018 (6) TMI 749 - AT - Income Tax

Levy of penalty u/s 271(1)(c) - additions made by the AO pertaining to patently wrong claims of the assessee relating to encashment of bank guarantee - Held that - Penalty on the bank guarantee encashed and claimed as deduction is already allowed by the coordinate bench, hence, addition itself is deleted - therefore, on this sum penalty u/s 271(1)(c) cannot survive. Penalty levied on account of disallowance of loss on foreign exchange - in which AY such loss is allowable - Held that - Assessee originally claimed such loss in AY 2009-10 and AO allowed it u/s 154 of the Act for AY 2008-09. Therefore, it cannot be said that the assessee was not under the bonafide belief about the allowability of loss in AY 2009-10 - thus we do not find any infirmity in deleting the penalty on disallowance of notional loss of ₹ 18.28 crores. Penalty levied on account of loss of mark of market transaction on foreign exchange hedging contract - Held that - CBDT instruction dated 23.03.2010 was not available to the assessee at the time of filing of the return of income and became available on assessment proceedings - till the time of instruction, there were several cases where it has been allowed as deduction as accrued allowability and not as contingent allowability - thus where there are possible two views possible on an issue, penalty thereon cannot be levied - hence we not find any infirmity in the order of the ld CIT(A) in deleting the penalty u/s 271(1)(c) of the Act - appeal of the revenue is dismissed.

Summary

Issues Involved:
1. Penalty under Section 271(1)(c) of the Income Tax Act, 1961.
2. Disallowance of encashment of bank guarantee.
3. Disallowance of loss on account of Mark to Market transactions.
4. Disallowance of notional loss on foreign exchange.
5. Application of Explanation 1 to Section 271(1)(c).

Detailed Analysis:

1. Penalty under Section 271(1)(c):
The primary issue is whether the penalty under Section 271(1)(c) for concealment of income or furnishing inaccurate particulars of income was justified. The Assessing Officer (AO) imposed a penalty of ?18,59,95,055/- which was later revised from ?1,86,50,956/- through rectification under Section 154. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the penalty, leading to the Revenue's appeal.

2. Disallowance of Encashment of Bank Guarantee:
The assessee claimed a deduction for ?8,52,79,100/- due to the encashment of a bank guarantee by Indian Oil Corporation Ltd. (IOCL). The AO disallowed this claim, treating it as a contingent liability, not an ascertained one. The CIT(A) upheld this disallowance, but the ITAT later deleted the addition, stating that the encashment of the bank guarantee was an allowable expenditure. Consequently, the penalty related to this disallowance could not survive.

3. Disallowance of Loss on Account of Mark to Market Transactions:
The assessee claimed a Mark to Market loss of ?27,90,59,000/- on foreign exchange hedging contracts. The AO disallowed this based on CBDT Instruction No. 03/2010, which was issued after the due date for filing the return. The CIT(A) found that the assessee had a bona fide belief in the allowability of the claim at the time of filing the return. The ITAT noted that the AO allowed this loss in the subsequent assessment year (AY 2010-11), indicating no concealment of income.

4. Disallowance of Notional Loss on Foreign Exchange:
The assessee initially claimed a notional loss of ?18,28,67,127/- for AY 2008-09 but later claimed it in AY 2009-10. The AO disallowed this, stating it pertained to the previous year. The CIT(A) noted that the AO allowed the loss for AY 2008-09 through rectification under Section 154, showing the issue was only about the year of allowability. The ITAT agreed that the assessee was under a bona fide belief regarding the claim's timing, thus no penalty was warranted.

5. Application of Explanation 1 to Section 271(1)(c):
The CIT(A) and ITAT examined whether the assessee's explanations for the claims were bona fide and substantiated. The CIT(A) concluded that the assessee disclosed all necessary facts and the disputes were due to differences in opinion on the timing of the claims. The ITAT upheld this view, referencing several judgments, including the Supreme Court's decision in CIT v. Reliance Petroproducts Pvt. Ltd., which held that a mere disallowance of a claim does not amount to furnishing inaccurate particulars or concealment of income.

Conclusion:
The ITAT upheld the CIT(A)'s decision to delete the penalty under Section 271(1)(c), finding no concealment of income or furnishing of inaccurate particulars. The appeal by the Revenue was dismissed. The order emphasized that differences in opinion on the timing of allowable claims and the subsequent acceptance of these claims in other assessment years indicated the assessee's bona fide belief, negating the basis for penalty imposition.

Order Pronounced:
The appeal of the Revenue was dismissed, and the order was pronounced in the open court on 13/06/2018.