2012 (11) TMI 171 - AT - Income Tax

Penalty u/s 271(1)(c) of the Income Tax Act - concealment of income Held that - Nothing has been brought on record to show that any expenditure had been incurred either directly or indirectly, for earning the exempted income - no details filed by the assessee have been found to be incorrect or erroneous or false. A mere making of a claim which is not sustainable in law, by itself, would not amount to furnishing inaccurate particulars regarding the income of the assessee and such claim made in the return cannot amount to inaccurate particulars. Therefore, penalty on this aspect was also not leviable - explanation offered by the assessee has not been shown to be not a bona fide explanation. Such explanation, as observed, was neither found to be false nor incorrect nor unreasonable in favor of assessee

Summary

Issues Involved:
1. Additional depreciation disallowed.
2. Disallowance under Section 14A of the Income Tax Act.
3. Disallowance of sales promotion expenses.
4. Imposition of penalty under Section 271(1)(c) of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Additional Depreciation Disallowed:
The assessee claimed additional depreciation of Rs. 2,60,58,579 on the total additions to the block of plant and machinery. The AO disallowed Rs. 12,77,824 of this claim, citing lack of substantiation. During penalty proceedings, the assessee provided a detailed break-up and invoices for the disallowed amount, arguing that these expenses were related to the installation of equipment and thus eligible for additional depreciation. The explanation was found neither false nor incorrect. The AO accepted the additions to the plant and machinery, and no concealment of particulars of income or furnishing of inaccurate particulars was established.

2. Disallowance under Section 14A of the Income Tax Act:
The AO disallowed Rs. 2,09,365 under Section 14A read with Rule 8D, arguing that the assessee incurred expenses to earn exempted income. The assessee contended that no direct or indirect expenditure was incurred for earning exempted income, as the funds were collected through a fresh public issue of equity capital. The assessee argued that Rule 8D, introduced in 2008, was not applicable for the assessment year 2007-08. The Bombay High Court in "Godrej and Boyce Manufacturing Co. Ltd. V. DCIT" held that Rule 8D is not applicable retrospectively. The Supreme Court in "CIT v. Reliance Petroproducts Pvt. Ltd." held that a mere unsustainable claim does not amount to furnishing inaccurate particulars. Thus, penalty on this disallowance was not justified.

3. Disallowance of Sales Promotion Expenses:
The AO made an ad-hoc disallowance of Rs. 60,000 out of the total sales promotion expenses of Rs. 1,70,22,630. The disallowance was made on an estimated basis without specific reasons. The assessee argued that all payments were made through account payee cheques and the amount was insignificant compared to the total expenses. The CIT(A) found no basis for the penalty, as the disallowance was not supported by positive material evidence.

4. Imposition of Penalty under Section 271(1)(c) of the Income Tax Act:
The AO imposed a penalty of Rs. 5,20,770, arguing that the assessee failed to substantiate claimed expenses and thus furnished inaccurate particulars of income. The CIT(A) cancelled the penalty, finding that the assessee provided detailed explanations and documents during penalty proceedings, which were neither false nor incorrect. The CIT(A) relied on "Kanbay Software India (P) Ltd. V. DCIT" and found no positive material evidence from the AO to establish that the assessee furnished inaccurate particulars to reduce taxable income. The explanation offered by the assessee was bona fide and reasonable.

Conclusion:
The appeal filed by the Department was dismissed, and the order of the CIT(A) cancelling the penalty was upheld. The Tribunal found that the assessee had not concealed particulars of income or furnished inaccurate particulars, and the explanations provided were bona fide and reasonable.