2022 (11) TMI 962 - AT - Income Tax

Penalty u/s 271(1)(c) - allowability of club expenses - HELD THAT - In the light of plethora of judicial precedents, the question of allowability of club expenses, in itself, is a debatable issue and varies from case to case. Under the circumstances imposition penalty on such contentious addition/disallowance on account of club expenses is not justified on the touchstone of law interpreted by the Hon ble Supreme Court in Reliance Petro Products Pvt . Ltd, 2010 (3) TMI 80 - SUPREME COURT and other host of judgments. The penalty imposed on club expenses is thus reversed. Penalty on disallowances u/s 14A r.w. Rule 8D - assessee contends that Section 14A has many legal facets and disallowance under Section 14A is a highly debatable issue and considerable varies having regard to the facts of the case - HELD THAT - The action of the AO imposing penalty under Section 271(1)(c) on disallowance made u/s 14A appears to be mechanical exercise and thus stands reversed. Donation claimed u/s 80G - As pointed out on behalf of the assessee, the amount of donation claimed under Section 80G is correct per se but however the quantum of deduction eligible under Section 80G is restricted to 10% of the total income in accordance with law. Thus, no allegation of furnishing of inaccurate particulars of income is justified. Coupled with this, AO has not applied his mind towards basis for imposing penalty on the issue. No satisfaction has been reached to invoke provisions of Section 271(1)(c) of the Act. In totality, we find merit in the plea of the assessee for reversal of penalty on this point. Appeals of the assessee are allowed.

Summary

Issues:
Imposition of penalty under Section 271(1)(c) in relation to various additions made in the quantum assessment under Section 143(3) of the Act.

Analysis:

Issue 1: Disallowance of Interest Amount
The ITAT deleted the quantum addition, rendering the basis for imposing penalty on disallowance of interest obsolete, leading to the deletion of penalties in all assessment years.

Issue 2: Disallowance of Loss under Section 94(7)/94(8)
The ITAT found the failure to apply deeming provisions of Section 94(7)/94(8) as a bona fide error, following a judgment by the Delhi High Court, leading to the deletion of the penalty.

Issue 3: Disallowance of Club Expenses
The ITAT reversed the penalty imposed on club expenses, considering the debatable nature of the issue and relying on legal precedents such as the judgment in Reliance Petro Products Pvt. Ltd.

Issue 4: Disallowances under Section 14A r.w. Rule 8D
The ITAT reversed the penalty on disallowances under Section 14A, citing a Co-ordinate Bench decision and emphasizing that estimated disallowances do not automatically warrant penalties under Section 271(1)(c).

Issue 5: Computational Error
The ITAT reversed the penalty on a computational error of Rs.14,250 due to its smallness and absence of falsity in the explanation.

Issue 6: Penalty Quantification under Section 80G
The ITAT found the penalty quantification on the difference in the claim made under Section 80G unjustified, as the donation claimed was correct, and the restriction to 10% of total income was in accordance with the law, leading to the reversal of the penalty.

In conclusion, all issues raised in the appeals were decided in favor of the assessee, resulting in the allowance of all three appeals.