2014 (7) TMI 677 - AT - Income Tax

Penalty u/s 271(1)(c) of the Act - Loans and advances written off Held that - The payment was for protecting the business and not for curing the defect in the title of property - If the assessee had incurred this amount of ₹ 22.84 lakhs on curing the title of the property, the amount would certainly have assumed the character of a capital expenditure not eligible for deduction requiring imposition of penalty - the amount cannot be outrightly characterised as capital expenditure, ineligible for deduction Relying upon Minoo F Mehta vs. CIT 1994 (12) TMI 9 - BOMBAY High Court - If it is incurred by the assessee for the purpose of creating, curing or completing his title to capital, it must be regarded as capital expenditure - But, if it is for the purpose of protecting its business, it would be considered as revenue expenditure - whereas an expenditure incurred for creating, curing or completing title to the property is capital, any sum incurred to protect the business is revenue expenditure. Claim of the assessee for deduction of such expenses is neither barred by any direct judicial precedents nor is contrary to any specific statutory provision - the question as to whether deduction should be allowed for such write off falls in the realm of debate - the assessee kept on keeping this amount under the head Loans and advances in its balance sheets over the period with the hope of getting reimbursement from the seller of property - But for such chances of recovery to be effected from the seller, the assessee would have claimed deduction for the same on year to year basis, which might possibly have been allowed also - mere fact that the assessee lost the hope of recovering this amount and wrote it off in its books of account, can by no standard be considered as a case of concealment of income or furnishing of inaccurate particulars of income thus, the order of the CIT(A) is set aside Decided in favour of Assessee.

Summary

Issues:
1. Penalty imposed on the assessee for claiming deduction on loans and advances written off.
2. Whether the expenditure incurred by the assessee was capital in nature or revenue expenditure.
3. Sustainability of the penalty based on legal precedents and statutory provisions.
4. Consideration of the facts to determine if penalty imposition was justified.

Detailed Analysis:
1. The appeal was against the penalty imposed by the CIT(A) with reference to the addition of a specific amount on account of loans and advances written off by the assessee. The AO disallowed the amount, considering it capital in nature related to the acquisition of a capital asset, leading to the penalty imposition under section 271(1)(c) of the Income Tax Act.

2. The expenditure in question was incurred by the assessee to set aside a sale transaction and protect its business interests, not for curing defects in the title of the property. The lower authorities relied on judgments stating that expenditure for curing or protecting property title is capital in nature. However, the expenditure here was for business protection, making it revenue expenditure eligible for deduction. The Hon'ble Bombay High Court's decision highlighted the distinction between capital and revenue expenditure based on the purpose of expenditure.

3. The argument for sustaining the penalty was compared to a jurisdictional High Court case where penalties were upheld due to clear violations of legal provisions or settled precedents. In this case, the deduction claim was not contrary to any specific statutory provision or direct judicial precedent. The issue of deduction eligibility was debatable, and penalties cannot be imposed on debatable issues.

4. The assessee maintained the amount under 'Loans and advances' in the balance sheets with hopes of reimbursement from the property seller. Writing off the amount when recovery seemed unlikely was not considered concealment of income or furnishing inaccurate particulars. The Tribunal concluded that the penalty imposition was erroneous, leading to the deletion of the penalty.

In conclusion, the Tribunal allowed the appeal, ordering the deletion of the penalty imposed on the assessee for claiming deduction on loans and advances written off, considering the nature of the expenditure and the lack of clarity in legal precedents or statutory provisions justifying the penalty.