2018 (10) TMI 920 - AT - Income Tax

Penalty u/s.271(1)(c) - disallowance of expenses - assessee claimed the expenses were for business purpose only and not for personal purpose - Held that - Company is engaged in the business of financial services for its clients and during the year under consideration the company was not able to get fruitful results for its clients and hence, no fees were earned by the company during the year under consideration. Since, the expenses are of fixed and administrative nature, they had to be incurred by the company during the year under consideration. Thus, there was no case of concealment of income nor there was any case of furnishing inaccurate particulars since the expenses incurred by the company are pertaining to the company itself and duly reflected in the return of income filed u/s. 139(1) for the year under consideration i.e. A.Y. 2012-13. The allegation of the AO that the expenses incurred are /or personal purpose since there is no income earned during the year under consideration without bringing any corroborative evidence on record is misplaced, accordingly, the penalty levied on this very ground is not sustainable. The CIT(A) has dealt with the issue threadbare and reached to the conclusion that even if the assessee has not carried any business during the previous year relevant to the assessment year, the expenses debited towards depreciation, bad debts, administrative expenses which are statutory in nature are to be incurred for complying with legal and statutory requirements under various laws are allowable deductions. Even if the AO disallowed these expenses during the course of Assessment, penalty is not leviable as the AO has not pointed out the concealment of particulars of income or furnished inaccurate particulars of income by assessee. No penalty is leviable in the instant case. - Decided in favour of assessee.

Summary

Issues Involved:
1. Imposition of penalty under Section 271(1)(c) of the Income Tax Act.
2. Disallowance of expenses due to no business activity.
3. Nature of expenses claimed (whether personal or business-related).

Issue-Wise Detailed Analysis:

1. Imposition of Penalty under Section 271(1)(c) of the Income Tax Act:
The Revenue appealed against the order of CIT(A) which deleted the penalty imposed under Section 271(1)(c) of the IT Act. The Assessing Officer (AO) had levied a penalty of ?27,00,000/- for furnishing inaccurate particulars of income. The CIT(A) observed that the expenses were genuinely incurred for business purposes and were duly reflected in the return of income. The Tribunal upheld the CIT(A)'s decision, stating that the AO failed to demonstrate any concealment of income or furnishing of inaccurate particulars by the assessee.

2. Disallowance of Expenses Due to No Business Activity:
The AO disallowed expenses totaling ?86,65,690/- on the grounds that no business activity was carried out during the year, resulting in a positive income of ?1,26,620/-. The CIT(A) and the Tribunal found that the expenses were of a fixed and administrative nature, necessary for maintaining the company's existence and compliance with statutory obligations. The Tribunal emphasized that it is not necessary for a business to earn income in every financial year to claim such expenses.

3. Nature of Expenses Claimed (Whether Personal or Business-Related):
The AO argued that the expenses were personal in nature. However, the CIT(A) noted that the AO did not provide specific evidence to support this claim. The Tribunal agreed with the CIT(A) that the expenses, including employee benefits, depreciation, and other administrative costs, were essential for the company's operations and were not personal. The Tribunal also referenced various judicial precedents to support the view that maintaining an establishment and incurring fixed expenses are necessary even if no business income is earned in a particular year.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s order that no penalty under Section 271(1)(c) was warranted. The expenses were deemed necessary for the business, and the AO's disallowance and subsequent penalty were found to be unjustified. The Tribunal highlighted the importance of distinguishing between the cessation of business and the mere absence of income in a particular year, supporting the allowance of fixed and administrative expenses even in the absence of business activity.