2018 (7) TMI 1684 - AT - Income Tax

Revenue expenditure or not - expenses on NPA s - Held that - Expenses incurred on NPA s and treated as part of asset in the books of account cannot be treated as revenue expenditure in statement of total income as the same is not meeting the matching principles of accountancy. Penalty u/s 271(1)(c) - Held that - We find merit in the arguments of the assessee for the reason that mere disallowance of expenses incurred cannot be considered as furnishing inaccurate particulars of such income, when assessee has furnished complete details of expenses and treatment of such expenses in its books of account, by way of notes to account explaining reasons for differential treatment in the books of account and in return of income for the relevant assessment year. We further observe that it is not a case of the Assessing Officer that assessee neither furnished any details of expenses nor explained reasons for giving differential treatment in books of account and return of income filed for the year. He levied penalty only for the reasons that assessee has given differential treatment of expenses in the books of account and in return of income without pointing out how such treatment given by the assessee towards expenses incurred on NPA is not allowable as revenue expenses, which is evident from the fact that the Assessing Officer has never doubted the genuineness of expenses and also not observed that these expenses are not revenue in nature. Additions made by the AO towards disallowance of expenses incurred on loan assets and treated as part of cost of asset and claimed as revenue in nature in statement of total income was only on account of different views taken on same set of facts and, therefore, they could at the most be termed as difference of opinion but nothing to do with concealment of income or furnishing of inaccurate particulars of income. This legal proposition is supported by the decision of Hon ble Supreme Court in the case of Reliance Petroproducts (2010 (3) TMI 80 - SUPREME COURT), wherein, it was clearly observed that merely because the assessee has claimed the expenditure, which claim was not accepted or not acceptable to the Revenue, that by itself would not attract penalty u/s. 271(1)(c) of the Act

Summary

Issues Involved:
1. Disallowance of revenue expenses incurred towards realization of Non-Performing Assets (NPA).
2. Deletion of penalty levied under Section 271(1)(c) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance of Revenue Expenses Incurred Towards Realization of Non-Performing Assets (NPA):

The assessee, engaged in acquiring and resolving non-performing loans from banks and financial institutions, filed returns for A.Y. 2011-12 and 2012-13, declaring substantial incomes. During scrutiny, the Assessing Officer (AO) noted that the assessee capitalized expenses related to NPAs in the books but claimed them as revenue expenses in the statement of total income. The AO disallowed these expenses, amounting to ?37,22,563, reasoning that they were not routed through the profit and loss account but directly credited to the asset account as work-in-progress. The AO argued that since the asset was not sold or transferred during the year, these expenses could not be deducted while computing income.

The CIT(A) upheld the AO's decision, referencing the ITAT Mumbai Bench's previous ruling in the assessee's own case for A.Y. 2009-10 and 2010-11. The Tribunal had held that expenses incurred on NPAs, treated as part of the asset in the books, should not be allowed as revenue expenditure in the statement of total income due to the matching principle of accountancy. The CIT(A) reiterated that such expenses should be treated as work-in-progress and transferred to the profit and loss account only when the NPA is finally settled.

The ITAT, upon appeal, agreed with the CIT(A) and AO, emphasizing that the expenses related to NPAs did not meet the matching principle of accountancy. The Tribunal dismissed the appeals for A.Y. 2011-12 and 2012-13, maintaining that the CIT(A) was correct in confirming the disallowance of expenses.

2. Deletion of Penalty Levied Under Section 271(1)(c) of the Income Tax Act, 1961:

For A.Y. 2010-11, the AO levied a penalty of ?31,76,752 under Section 271(1)(c) for furnishing inaccurate particulars of income, due to the disallowance of expenses related to loan assets. The assessee argued that the expenses were fully disclosed and the disallowance was merely a difference in opinion on the treatment of expenses, not an attempt to conceal income.

The CIT(A) deleted the penalty, citing the Supreme Court's judgment in Reliance Petro Products, which held that mere disallowance of a claim does not amount to furnishing inaccurate particulars of income. The CIT(A) noted that the assessee had disclosed all details and the claim was based on a bona fide belief, thus not warranting a penalty.

The ITAT upheld the CIT(A)'s decision, agreeing that the disallowance was due to a difference in opinion and not due to any concealment or furnishing of inaccurate particulars. The Tribunal emphasized that the AO had not disputed the genuineness of the expenses or their revenue nature. The appeal by the Revenue was dismissed, and the cross-objections by the assessee were deemed infructuous.

Conclusion:

The ITAT dismissed the appeals by the assessee for A.Y. 2011-12 and 2012-13, upholding the disallowance of expenses related to NPAs. Additionally, the ITAT dismissed the Revenue's appeal against the deletion of penalty for A.Y. 2010-11, affirming that the disallowance of expenses did not constitute furnishing inaccurate particulars of income. The Tribunal's decisions were consistent with the principles laid out in previous judgments and the matching principle of accountancy.