2024 (7) TMI 214 - AT - Income Tax

Penalty u/s 271(1)(c) - deterimnation of correct head of income - AO has treated the income earned by assessee from subject property as income from house property and not as business income and for that reason made the impugned disallowances of deductions - AR submitted that the assessee has disclosed complete and accurate particulars of the claims of depreciation and interest expenses and it is not a case of AO that the assessee has supplied any incorrect or erroneous or false detail in the return or during assessment-proceedings - HELD THAT - AR has claimed that the AO in preceding AY 2015- 16 has accepted the very same activity/income of assessee as Income from business . In current AY 2016-17 only, the AO has treated the same activity/income as Income from House Property in assessment-order and disallowed the deductions of depreciation and interest. But since the assessee has not filed any appeal against assessment-order, we do not have that issue before us and we do not wish to make any further comment on either side. However, we find that the AO has also imposed penalty u/s 271(1)(c) qua the disallowances of depreciation and interest expenses by treating it as a case of furnishing inaccurate particulars . This approach of AO is, in our considered view, not a justified approach according to the settled decisions of various judicial forums as narrated earlier. The Hon ble Supreme Court has categorically held in Reliance Petro Products (P) Ltd. 2010 (3) TMI 80 - SUPREME COURT that unless the assessee has supplied any incorrect or erroneous or false information to department, this would not be a case of inviting the penalty u/s 271(1)(c). It is further held that a mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars. Same view has been taken by ITAT, Indore in Turning Point Estate Pvt. Ltd. 2023 (4) TMI 1339 - ITAT INDORE Similarly, ITAT Indore in Krishi Upaj Mandi Samiti 2009 (11) TMI 1033 - ITAT INDORE and Indersons Leather Pvt. Ltd. 2009 (8) TMI 730 - PUNJAB AND HARYANA HIGH COURT have categorically held that in a case where the assessee declared rental income as business income but the AO assessed as Income from House Property , there is neither concealment of income nor furnishing of inaccurate particulars of income and penalty u/s 271(1)(c) is not attracted. Thus, it is very clear that in the present case of assessee where the AO has merely rejected a claim of deductions of depreciation and interest made by assessee on the premise of change in taxability head but without finding any incorrect or erroneous or false information having been supplied by assessee, no penalty can be imposed. Hence, the present case is not fit for imposition of penalty. Assessee has not received any rent from tenant - As we notice that the assessee has made a recovery of Rs. 1.67 crore during current year from tenant. Although the assessee has not received any money in the nomenclature of rent yet the recovery of Rs. 1.67 crore from tenant is a much higher compensation than the rent of Rs. 1,20,000/- agreed in lease-agreement. Assessee has not filed any appeal to contest the disallowances made in assessment-order and therefore the assessee cannot raise objection against imposition of penalty qua those disallowances. This concern, in our view, is meritless because assessment-proceeding and penalty-proceedings are two distinct and separate proceeding. Any addition/disallowance made in assessment-proceedings and even if not contested by assessee for any reason, does not attract penalty automatically. The assessee is within his right to claim and prove on facts and with the support of decided judicial rulings, that there is no concealment of income or furnishing of inaccurate particulars of income and therefore the penalty u/s 271(1)(c) is not attracted. Decided in favour of assessee.

Summary

Issues Involved:
1. Legitimacy of the penalty order under Section 271(1)(c) of the Income-tax Act, 1961.
2. Justification of the penalty sustained by CIT(A).
3. Disallowance of depreciation under Section 32 of the Income-tax Act, 1961.
4. Disallowance of interest under Section 37 of the Income-tax Act, 1961.
5. Consistency in assessment treatment between AY 2015-16 and AY 2016-17.

Issue-wise Detailed Analysis:

1. Legitimacy of the Penalty Order under Section 271(1)(c):
The assessee challenged the penalty imposed by the Assessing Officer (AO) under Section 271(1)(c) for allegedly furnishing inaccurate particulars of income. The AO disallowed depreciation and interest expenses claimed by the assessee, treating the income from the property as "Income from House Property" instead of "Income from Business." The AO's basis for the penalty was that the assessee did not use the assets for business purposes and did not receive any rental income from the property in question. The Tribunal found that the AO's imposition of penalty was not justified as the assessee had disclosed all relevant particulars and there was no concealment of income or furnishing of inaccurate particulars. The Tribunal relied on the Supreme Court's decision in CIT Vs. Reliance Petro Products (P) Ltd., which held that merely making a claim that is not sustainable in law does not amount to furnishing inaccurate particulars.

2. Justification of the Penalty Sustained by CIT(A):
The CIT(A) upheld the penalty imposed by the AO, but the Tribunal found this to be erroneous. The Tribunal noted that the assessee's case for the preceding assessment year (AY 2015-16) was also subjected to scrutiny, and the income was assessed under the head "Income from Business or Profession," allowing the same deductions for depreciation and interest. The Tribunal emphasized that there was no change in the nature of business or income earned by the assessee between the two assessment years, and the disallowance in AY 2016-17 was merely due to a difference in opinion between the assessee and the revenue authorities.

3. Disallowance of Depreciation under Section 32:
The AO disallowed the depreciation claimed by the assessee on the grounds that the assets were not used for business purposes. The Tribunal found that the assessee had provided a composite structure of building with furniture, fixtures, and electrical installations for running a school, which was part of its business activity of renting properties. The Tribunal noted that the assessee had disclosed all relevant particulars and that the disallowance was a matter of opinion rather than an indication of inaccurate particulars.

4. Disallowance of Interest under Section 37:
The AO disallowed the interest expenses claimed by the assessee, arguing that the borrowed funds were used for constructing and developing school facilities, which were not incidental to the assessee's business. The Tribunal found that the assessee had recovered a significant amount from the tenant as reimbursement of interest expenses, which was more than the agreed rent. The Tribunal concluded that the disallowance was based on a difference in opinion and did not constitute furnishing inaccurate particulars.

5. Consistency in Assessment Treatment between AY 2015-16 and AY 2016-17:
The Tribunal highlighted the inconsistency in the assessment treatment between the two assessment years. In AY 2015-16, the AO had accepted the assessee's income under the head "Income from Business or Profession" and allowed the deductions for depreciation and interest. However, in AY 2016-17, the AO treated the same income as "Income from House Property" and disallowed the deductions. The Tribunal found that there was no change in the nature of the assessee's business or income, and the disallowance in AY 2016-17 was unjustified.

Conclusion:
The Tribunal concluded that the penalty imposed by the AO under Section 271(1)(c) was not sustainable as the assessee had disclosed all relevant particulars and there was no concealment of income or furnishing of inaccurate particulars. The Tribunal allowed the appeal and deleted the penalty. The Tribunal emphasized that differences in opinion between the assessee and the revenue authorities regarding the classification of income do not justify the imposition of penalties.