2024 (5) TMI 1202 - AT - Income Tax

Penalty u/s 271(1)(c) - defective notice issued u/s 274 - concealment of income OR furnishing of inaccurate particulars of income - Disallowance of leasehold improvements and Addition on account of straight lining of rent expenditure. HELD THAT - Whether there was concealment of income or furnishing of inaccurate particulars of income . In the absence of such clear-cut findings, the penalty order is liable to be struck off. We are of the considered view that where there is confusion in recording the satisfaction for initiation of penalty proceedings or levy of penalty on the limb for which no satisfaction was recorded and no penalty proceedings were initiated in the assessment order, then the penalty levied is un-sustainable, hence we answer the issue no. 1 accordingly. Coming to the claim of the Ld. D.R. that the additions made by the AO as affirmed by the Ld. Commissioner and not further appealed by the assessee before higher courts, have attained finality, therefore penalty is liable to be levied. We are not in agreement with such claim of the assessee, as the Hon ble Apex Court in the case of CIT Vs. Reliance Petro Products Pvt. Ltd 2010 (3) TMI 80 - SUPREME COURT has clearly laid down the dictum that merely making an incorrect claim does not tantamount to furnishing of inaccurate particulars . We are also of the considered view that rejection of claim does not ipso facto leads to levy of penalty. Even otherwise in this case the penalty levied failed to pass the legal tests, as determined by the Higher Courts and therefore on the aforesaid analyzations and peculiar facts and circumstances in cumulative effects, the decision of the Ld. Commissioner for deletion of the penalty does not require any interference, as the same is neither perverse nor suffers from any impropriety and/or illegality. Consequently, deletion of penalty is sustained and Revenue s appeal is dismissed.

Issues Involved:
1. Classification of expenditure as capital or revenue.
2. Disallowance of rent expenditure.
3. Initiation and imposition of penalty under section 271(1)(c) for furnishing inaccurate particulars of income.
4. Defective notice under section 274 read with section 271(1)(c).

Issue-wise Detailed Analysis:

1. Classification of Expenditure as Capital or Revenue:
The assessee, engaged in manpower recruitment services, declared a total loss of Rs. 23,79,32,221/- for A.Y. 2012-13. The AO scrutinized the return and noted that the assessee claimed Rs. 2,16,88,667/- as expenditure for leasehold improvements. The AO questioned why this should not be treated as capital expenditure instead of revenue expenditure. The assessee argued that the expenses were for leasehold improvements necessary for business operations and did not result in any capital asset providing enduring benefits. The AO, however, disallowed the claim, treating it as capital expenditure, relying on the judgment in Assam Bengal Cement Co. Ltd. vs. CIT, West Bengal (27 ITR 34).

2. Disallowance of Rent Expenditure:
The AO also disallowed Rs. 18,56,375/- included in rent expenses as an adjustment entry, not actual expenditure, under section 37(1) of the Act. The AO initiated penalty proceedings under section 271(1)(c) for furnishing inaccurate particulars of income regarding both the leasehold improvements and rent adjustment entry.

3. Initiation and Imposition of Penalty under Section 271(1)(c):
The AO issued a penalty notice for furnishing inaccurate particulars of income and concealment of income. The Ld. CIT(A) affirmed the additions but allowed depreciation on leasehold improvements. The AO, unsatisfied with the assessee's explanations, levied a penalty of Rs. 76,39,190/- for concealing/furnishing inaccurate particulars of income. The Ld. Commissioner deleted the penalty, noting that the AO was not clear about the specific limb of the default when imposing the penalty. The assessee relied on several judgments, including CIT vs. Manjunath Cotton & Ginning Factory, CIT vs. Samson Perinchery, and Ashok Pai vs. CIT, to argue that the penalty was improperly imposed.

4. Defective Notice under Section 274 read with Section 271(1)(c):
The Revenue argued that the penalty should be restored as the additions were affirmed by the Ld. Commissioner and not appealed further by the assessee. The Ld. Commissioner, however, observed that the AO did not adhere to the satisfaction recorded for initiating the penalty proceedings while imposing the penalty. The AO initiated penalty proceedings for furnishing inaccurate particulars of income but imposed the penalty for both concealment and furnishing inaccurate particulars, which was incorrect. The Tribunal, referencing various judgments, held that the penalty could not be imposed on a limb for which no satisfaction was recorded or proceedings initiated. The Tribunal dismissed the Revenue's appeal and the assessee's cross objections, affirming the deletion of the penalty.

Conclusion:
The Tribunal concluded that the penalty imposed by the AO was unsustainable due to the confusion in recording satisfaction for initiation and imposition of penalty. The decision of the Ld. Commissioner to delete the penalty was upheld. The Tribunal did not delve into the issue of the defective notice, as the deletion of the penalty was already affirmed. Both the Revenue's appeal and the assessee's cross objections were dismissed.

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