2009 (8) TMI 677 - HC - Income Tax

Penalty - Concealment of income - The Assessing Officer disallowed the expenses related to the issue of shares u/s 35D of the Act. The Assessing Officer further found that the assessee had claimed 50 percent. of the entertainment expenses on account of the employees participation in the business meeting while entertaining company s guests. In earlier years, the employees participation was estimated only at 25 percent. accordingly he disallowed entertainment expenses. The Assessing officer not treated the loss as long term loss and gain as short term capital gain. Assessing officer also imposed penalty. Commissioner (Appeals) set aside penalty and allowed appeal of assessee, which was upheld by Tribunal. Held that- in case of entertainment expenses, if the Assessing Officer reduced it from 50 percent to 35 percent that could not attract penalty. For the expenses of section 35D matter was remand back. For the capital loss/gain, since a finding of fact regarding inadvertent error was recorded by the two authorities below, and while imposing the penalty the Assessing Officer has nowhere contradicted that the error was not inadvertent, matter need not be interfered.

Issues Involved:
1. Legitimacy of penalty under section 271(1)(c) of the Income-tax Act, 1961.
2. Claim of deduction under section 35D of the Act.
3. Claim of entertainment expenses.
4. Claim of capital loss.

Issue-wise Analysis:

1. Legitimacy of Penalty under Section 271(1)(c) of the Income-tax Act, 1961:
The Tribunal upheld the decision of the Commissioner of Income-tax (Appeals) to delete the penalty imposed by the Assessing Officer. The Commissioner of Income-tax (Appeals) opined that the facts were duly disclosed by the assessee in the return of income, and there was no conscious concealment of income. The Tribunal also noted that the Assessing Officer had not recorded his satisfaction regarding the concealment of income or furnishing inaccurate particulars in the assessment order. However, due to the retrospective amendment to clause (1B) of section 271, this ground was no longer available, and the matter was argued on merits.

2. Claim of Deduction under Section 35D of the Act:
The assessee claimed a deduction of Rs. 21,02,228 under section 35D, which was disallowed by the Assessing Officer, treating the expenditure as capital in nature. The Commissioner of Income-tax (Appeals) and the Tribunal observed that the claim was based on the opinion of the chartered accountants and was mentioned in the prospectus for the public issue of shares. However, the court found that the claim under section 35D was ex facie inadmissible for a finance company, as the section applies to expenses incurred in connection with the expansion of industrial undertakings or setting up new industrial units. The court held that this was not a bona fide error but a false claim, thereby attracting penalty provisions.

3. Claim of Entertainment Expenses:
The assessee claimed 50% of the entertainment expenses as on account of employees' participation, which the Assessing Officer reduced to 35%. The Commissioner of Income-tax (Appeals) and the Tribunal found no concealment of income or furnishing of inaccurate particulars, as the difference was due to varying estimates. The court agreed that this difference in estimation did not attract penalty.

4. Claim of Capital Loss:
The assessee declared a long-term capital loss of Rs. 98,04,485 and a short-term capital gain of Rs. 17,52,855, which the Assessing Officer treated as business loss/business income and speculative loss/profit. The assessee submitted that there was an inadvertent error in computing the loss and gain and filed a revised computation. The Commissioner of Income-tax (Appeals) and the Tribunal accepted this explanation, noting that the error was corrected by the assessee during the assessment proceedings. The court upheld this finding, noting that the Assessing Officer did not contradict the claim of inadvertent error, and thus, this did not attract penalty.

Conclusion:
The appeal was partly allowed. The court remitted the matter back to the Assessing Officer to determine the penalty afresh, specifically for the false claim under section 35D of the Act. The claims related to entertainment expenses and capital loss were not considered as attracting penalty.

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