2019 (10) TMI 193 - AT - Income Tax

Penalty u/s 271 (1) (C) - Addition of expenditure held to be not for the purposes of the business u/s 37 - admission of additional evidence - HELD THAT - Admitting additional ground of assessee with respect to not specifying any of twin charges in notice, penalties were cancelled. Identical additional ground has been raised by assessee for these years. Therefore according to judicial precedent available before us in assessee s own case as well as it is merely a legal issue, which can be raised by assessee at any stage, we must admit additional ground raised by assessee. Further claim of learned departmental representative that fresh facts are required to be investigated is also not acceptable because of reason that penalty notices issued under 274 of income tax act are already available on appeal files. Thus, respectfully following decision of coordinate bench in assessee s own case on same set of facts, we admit additional grounds raised by assessee. Levy of penalty u/s 271 (1) (C) read with section 274 has not mentioned clearly any of twin charges for which penalty is initiated. Though in assessment order penalty has been initiated by assessing officer for furnishing inaccurate particulars of income but in accompanying notice along with assessment order learned assessing officer has not cancelled 1 of twin charges for making charge very specific and clear to assessee. Levy of the penalty on the basis of not striking of any of the twin charges in the notice issued u/s 274 of the income tax act in earlier years cancelling the penalty levied - Decided in favour of assessee

Issues Involved:
1. Legality and validity of the penalty notices issued under section 271(1)(c) read with section 274 of the Income Tax Act.
2. Disallowance of lease rent payments and associated penalties for Assessment Years 2001-02, 2004-05, and 2005-06.
3. Disallowance of personal expenditure and associated penalties for Assessment Years 2001-02 and 2004-05.

Issue-wise Detailed Analysis:

1. Legality and Validity of the Penalty Notices:
The appellant raised an additional ground challenging the legality of the penalty notices issued under section 271(1)(c) read with section 274 of the Income Tax Act, arguing that the notices were issued without specifying any specific charge, making them illegal, bad in law, and without jurisdiction. The Tribunal admitted this additional ground, noting that it goes to the root of the matter and does not require new facts to be investigated. The Tribunal relied on the decision of the Honorable Supreme Court in the case of National Thermal Power Corp 229 ITR 383 (SC), which allows raising such legal issues at any stage of the proceedings.

The Tribunal referred to the decision of the Karnataka High Court in Commissioner of Income-tax v. Manjunatha Cotton & Ginning Factory [2013] 35 taxmann.com 250 (Karnataka), which held that notices under Section 274 should specifically state the grounds for penalty, i.e., whether it is for concealment of income or for furnishing incorrect particulars of income. The Tribunal also cited the decision of the Delhi High Court in the case of Sahara Financial ITA No 475/2019, which followed the Karnataka High Court's decision and held that a notice that does not specify the charge is bad in law. Consequently, the Tribunal found the penalty notices issued to the appellant to be invalid and directed the deletion of the penalties for all three years.

2. Disallowance of Lease Rent Payments and Associated Penalties:
For Assessment Year 2001-02, the appellant made a payment of INR 1,500,000 to Mezbaan Hoteliers Pvt Ltd for obtaining rent-free accommodation for its managing director. The Assessing Officer (AO) disallowed the entire amount of lease rent and made an additional disallowance of INR 600,000 on account of notional interest on the security deposit. The CIT (A) allowed partial relief by allowing INR 240,000 per annum as expenditure and disallowed the excess amount. The Tribunal upheld the CIT (A)'s decision, allowing partial relief to the extent of INR 240,000 per annum.

For Assessment Year 2004-05, the AO disallowed the entire claim of lease rent of INR 2,710,000 paid by the appellant. The CIT (A) allowed a payment of INR 20,000 per month as reasonable rent and disallowed the balance expenditure as excessive under section 40A(2)(b) of the Act. The Tribunal upheld the CIT (A)'s decision.

For Assessment Year 2005-06, the facts were similar, and the Tribunal upheld the disallowance of excessive rent.

The appellant argued that the lease rent was claimed under a bona fide belief and supported by a valuation certificate from an independent registered valuer. The Tribunal noted that the disallowance was based on the excessive nature of the payment to a related party and not on the genuineness of the transaction. The Tribunal found that the appellant had furnished inaccurate particulars of income by claiming excessive rental expenditure and upheld the penalties for these disallowances.

3. Disallowance of Personal Expenditure and Associated Penalties:
For Assessment Year 2001-02, the appellant incurred an expenditure of INR 7,500 on car accessories for employees, which was treated as perquisites in the hands of the employees. The AO disallowed this expenditure. For Assessment Year 2004-05, the appellant incurred expenditure on house maintenance and computer maintenance for employees, which was claimed as revenue expenditure allowable under section 37 of the Income Tax Act. The AO disallowed these expenditures, and the Tribunal confirmed the disallowances.

The appellant argued that these expenditures were genuine business expenses incurred according to company policy and should be allowable under section 37 of the Act. The Tribunal found that the disallowances were made due to the rejection of the appellant's bona fide claim and held that penalties could not be levied for these disallowances.

Conclusion:
The Tribunal allowed the additional ground raised by the appellant, finding the penalty notices to be invalid for not specifying the specific charge. Consequently, the penalties levied under section 271(1)(c) were deleted for all three years. On the merits, the Tribunal upheld the penalties related to the disallowance of excessive lease rent payments but deleted the penalties related to personal expenditure disallowances. Thus, the appeals were partly allowed.

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