2022 (10) TMI 754 - AT - Income Tax

Penalty u/s 271(1)(c) - expenditure on account of advertisement and publicity - Debatable issue - AO concluded by holding that part of the expenditure i.e. 60% is disallowed as capital expenditure and 40% is allowed as Revenue expenditure - amount disallowed as capital expenditure was treated as intangible asset and the Assessing Officer allowed depreciation as per provisions of section 32 - HELD THAT - Past history, when considered with assessment of the years under consideration, it can be safely concluded that disallowance made by the Assessing Officer are consistently on estimation without any basis. Since the action of the Assessing Officer was tax neutral to the assessee, no appeal was preferred before the appellate authority. But this does not mean that the assessee has accepted the action of the Assessing Officer. In our considered opinion, whether an expenditure is of capital in nature or Revenue in nature, or whether part of the expenditure is capital and part is Revenue, is a highly debatable issue and, therefore, in our humble opinion, no penalty is leviable u/s 271(1)(c) of the Act on such a debatable issue. At the same time, we cannot ignore the fact that disallowance is on adhoc basis and for that reason also, no penalty is leviable. Considering the facts of the case in totality, we do not find any reason to interfere with the findings of the ld. CIT(A). Appeal of revenue dismissed.

Summary

Issues:
Appeals against deletion of penalty under section 271(1)(c) of the Income Tax Act, 1961 for Assessment Years 2013-14 and 2014-15.

Analysis:
The appeals before the Appellate Tribunal ITAT Delhi involved challenges against the deletion of penalties imposed by the Assessing Officer under section 271(1)(c) of the Income Tax Act, 1961 for two separate Assessment Years. The common grievance in both appeals related to the deletion of penalties, despite differences in the quantum of penalties for each year. The core issue revolved around the claim of expenditure on advertisement and publicity by the assessee, which was subject to scrutiny during assessment proceedings. The Assessing Officer disallowed 60% of the expenditure as capital and allowed 40% as revenue, treating the disallowed portion as an intangible asset and allowing depreciation accordingly.

During penalty proceedings, the Assessing Officer alleged that the assessee furnished inaccurate particulars of income deliberately, relying on previous court decisions. The penalties imposed were substantial amounts for both years. However, the assessee contested the penalties before the CIT(A), arguing that the Assessing Officer's estimation of capital expenditure lacked basis, and the disallowance was purely on estimation grounds. The CIT(A) agreed with the assessee, noting that the classification of expenditure as capital or revenue was a debatable issue, and penalties cannot be levied on such debatable matters.

The Appellate Tribunal, after considering the submissions and past disallowances by the Assessing Officer in earlier years, concurred with the CIT(A)'s decision. The Tribunal emphasized that the disallowances were consistently based on estimation without a proper basis, and the action was tax-neutral to the assessee. Given the debatable nature of the issue and the adhoc basis of the disallowance, the Tribunal upheld the deletion of penalties by the CIT(A) and dismissed the appeals of the Revenue for both Assessment Years.

In conclusion, the Appellate Tribunal upheld the decision to delete the penalties imposed under section 271(1)(c) of the Income Tax Act, emphasizing the lack of basis for the Assessing Officer's estimations and the debatable nature of the expenditure classification. The Tribunal's decision reflected a consistent approach to penalties levied on adhoc grounds without a solid foundation, ultimately ruling in favor of the assessee in both appeals.