2021 (5) TMI 916 - AT - Income Tax

Penalty u/s 271(1)(c) - addition being speculative loss on derivative transactions which according to him cannot be set off against business income and disallowance u/s 14A r.w.r 8D(2)(iii) of the Rules - HELD THAT - The Hon ble Supreme Court in the case of CIT vs Reliance Petro Products Pvt. Ltd. 2010 (3) TMI 80 - SUPREME COURT has held that making of an incorrect claim in law cannot tantamount to furnishing of inaccurate particulars. Merely because the assessee claimed deduction which has not been accepted by the Revenue, the penalty u/s 271(1)(c) is not attracted. If the contention of the Revenue is accepted, the assessee would be liable for penalty u/s 271(1)(c) of the Act in every case where the claim made by the assessee is not accepted by the AO for any reason. That is clearly not the intendment of the legislature. In view of the above discussion, we are of the considered opinion that the learned CIT(A) is fully justified in cancelling the penalty levied by the AO u/s 271(1)(c) . Even otherwise also, a perusal of the notice issued by the Assessing Officer u/s 274 r.w.s 271 of the Act, dated 29.12.2011, a copy of which is placed at page 87 of the paper book shows that it is in only a printed form without striking off the inappropriate words in the said notice. Therefore, it is not understood as to under which limb of the provisions of section 271(1)(c), the Assessing Officer has initiated penalty proceedings i.e. whether for concealment of income or for furnishing of inaccurate particulars of such income. The Hon ble Delhi High Court in the case of PCIT vs Sahara India Life Insurance Company Ltd. 2019 (8) TMI 409 - DELHI HIGH COURT has dismissed the appeal filed by the Revenue on identical circumstances, the relevant observations of which have already been reproduced in the preceding paragraphs while recording the arguments of the learned counsel for the assessee. We, therefore, hold that the notice issued by the Assessing Officer is bad in law since it did not specify under which limb of section 271(1)(c) of the Act, the penalty proceedings have been initiated i.e. whether for concealment of income or for furnishing of inaccurate particular of income. In this view of the matter, we uphold the order of the learned CIT(A) cancelling the penalty levied by the Assessing Officer. The grounds raised by the Revenue are accordingly dismissed.

Summary

Issues Involved:
1. Legitimacy of the penalty levied under Section 271(1)(c) of the Income Tax Act.
2. Interpretation of speculative loss and its setoff against business income.
3. Validity of the penalty notice issued under Section 274 read with Section 271 of the Act.

Detailed Analysis:

1. Legitimacy of the Penalty Levied under Section 271(1)(c):
The core issue revolves around whether the penalty of ?9,39,26,270/- imposed by the Assessing Officer (AO) for furnishing inaccurate particulars of income is justified. The AO had determined that the assessee furnished inaccurate particulars by claiming a speculative loss of ?27,63,35,028/- as a business loss, which was subsequently disallowed. The CIT(A) canceled the penalty, noting that the assessee had disclosed all transactions transparently in its audited financial statements and during assessment proceedings. The Tribunal upheld the CIT(A)'s decision, citing that the assessee's claim was based on a bona fide interpretation of complex legal provisions and not on any misrepresentation or concealment of facts.

2. Interpretation of Speculative Loss and Its Setoff Against Business Income:
The assessee had incurred significant losses from trading in shares and derivatives, which were disclosed in its financial statements. The AO treated these losses as speculative under the explanation to Section 73 of the Act, thus disallowing their setoff against business income. The CIT(A) observed that the assessee had consistently treated derivatives separately from shares, aligning with certain judicial interpretations that supported this view. The Tribunal noted that the matter involved complex legal issues and the assessee's interpretation was plausible. It was emphasized that no penalty could be levied merely for making a claim that was not accepted by the AO, as established in the Supreme Court's decision in CIT vs. Reliance Petro Products Pvt. Ltd. (322 ITR 158).

3. Validity of the Penalty Notice Issued under Section 274 Read with Section 271:
The Tribunal scrutinized the penalty notice issued by the AO and found it to be defective. The notice did not specify whether the penalty proceedings were initiated for concealment of income or for furnishing inaccurate particulars of income, as required by law. This ambiguity rendered the notice invalid. The Tribunal referenced the Delhi High Court's decision in PCIT vs. Sahara India Life Insurance Company Ltd., which held that such a notice is bad in law. Consequently, the Tribunal upheld the CIT(A)'s order canceling the penalty on this ground as well.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to cancel the penalty levied under Section 271(1)(c). The Tribunal concluded that the assessee had made full and transparent disclosures, the legal issues were complex, and the penalty notice was invalid due to its ambiguity. Therefore, the grounds raised by the Revenue were dismissed, and the appeal was not upheld.