2021 (7) TMI 1244 - AT - Income Tax

Levy of penalty u/s 271(1)(c) - assessee s claim of write off of brought forward unabsorbed depreciation was disallowed by the Assessing Officer while computing book profits under section 115JB of the Act on the premise that cumulative balance in the books of assessee for Financial Year 2002-03 show profits and Reserves Surplus - HELD THAT - The assessee made claim on the premise that business loss/unabsorbed depreciation were to be considered on year to year basis. The assessee in support of its computation of claim placed reliance on the decision of Tribunal in the case of Amline Textiles Pvt. Ltd. 2008 (11) TMI 438 - ITAT MUMBAI . As against this, the Assessing Officer rejected the claim of assessee following aggregation approach, as reflected in the Balance Sheet. Per approach of Assessing Officer there would be no unabsorbed depreciation/business losses available for adjustment under section 115JB of the Act. There are two school of thoughts in computing set off of unabsorbed depreciation/business losses i.e. year to year basis vs aggregation. Both views are possible as per the language of Explanation- 1 clause (iii) to section 115JB (1) of the Act. This makes the issue debatable. The method adopted by the assessee at the time of filing return was one of the acceptable view. Ergo, the assessee is able to furnish reasonable explanation in making a claim of unabsorbed depreciation while computing book profits u/s 115JB of the Act. In light of the fact discussed above coupled with the fact that divergent views have been expressed by the Tribunal on the issue of treating unabsorbed depreciation/business loss of preceding assessment years while computing book profits u/s 115JB, makes the issue debatable. Hence, no penalty under section 271(1)(c) of the Act can be levied on such disallowance It is no more res-integra that levy of penalty is not automatic. Even if addition/disallowance made by Assessing Officer is accepted by the assessee and is not contested further, it would not result in levy of penalty. Assessment proceedings and penalty proceedings are separate and distinct. The Assessing Officer has to record satisfaction before initiating penalty proceedings and the penalty proceedings are subject to judicial scrutiny independent of additions/disallowances made under assessment proceedings. Therefore, levy of penalty for the reason that the addition/disallowance has been accepted by the assessee is not sustainable ground - Penalty levied under section 271(1)(c) of the Act is deleted - Decided in favour of assessee.

Summary

Issues:
Levy of penalty under section 271(1)(c) of the Income Tax Act, 1961 for the assessment year 2004-05 based on disallowance of brought forward unabsorbed depreciation while computing book profit under MAT provisions.

Detailed Analysis:

Issue 1: Disallowance of Brought Forward Unabsorbed Depreciation
The Assessing Officer disallowed the assessee's claim of brought forward unabsorbed depreciation while computing book profit under section 115JB of the Act. The assessee claimed set off of unabsorbed depreciation against book profits for the year 2003-04, following a year-on-year approach. However, the Assessing Officer rejected this claim by adopting an aggregation approach, stating that there was no loss in the books of account for the financial year 2002-03. The debate arose on whether unabsorbed depreciation/loss of preceding assessment years should be considered on a year-on-year basis or through cumulative balance in the Profit & Loss account. Various Tribunal decisions were cited, showcasing conflicting views on this matter, making it a contentious issue.

Issue 2: Debatability of the Issue
The authorized representative of the assessee argued that the issue of computation of unabsorbed depreciation/brought forward business loss under section 115JB of the Act is debatable, as evidenced by divergent Tribunal decisions. The Tribunal's stance in previous cases highlighted the debatable nature of the issue, emphasizing the possibility of different interpretations regarding the treatment of unabsorbed depreciation and business losses.

Issue 3: Penalty Imposition under Section 271(1)(c)
The Department defended the penalty imposition, asserting that the assessee wrongly claimed unabsorbed depreciation of the immediately preceding assessment year while computing book profit under section 115JB. The Assessing Officer initiated penalty proceedings under section 271(1)(c) based on this disallowance, which was upheld by the CIT(A). However, the assessee contended that the issue was debatable, and penalty provisions should not apply in this scenario.

Issue 4: Deletion of Penalty
The Tribunal considered the debatable nature of the issue, the assessee's disclosure in the return of income, and the conflicting Tribunal decisions. It emphasized that the levy of penalty is not automatic, even if the addition/disallowance is accepted by the assessee. Citing the decision in CIT vs. Reliance Petroproducts (P) Ltd., the Tribunal concluded that the penalty was not justified in this case. Consequently, the penalty under section 271(1)(c) was deleted, and the appeal by the assessee was allowed.

In conclusion, the Tribunal's judgment focused on the debatable nature of the issue regarding the treatment of unabsorbed depreciation and brought forward business losses under section 115JB of the Income Tax Act. The decision highlighted conflicting views from different Tribunal cases, emphasizing the need for a thorough examination of such matters before imposing penalties under section 271(1)(c).