2015 (1) TMI 657 - AT - Income Tax

Penalty u/s 271(1)(c) - Computation of loss - addition made by the AO on the ground that expenditure were incurred prior to setting up of the business and are in nature of pre-operative expenses - Held that - No penalty u/s 271(1)(c) of the Act can be justifiably be levied on the facts present assessee. We also found that the case of the assessee is not that case where the revenue authority has found any facts had not been disclosed by the assessee. The revenue authority has also failed to establish that in the return of income the assessee has either been shown as incorrect or inaccurate particulars of its income. Thus merely because the expenditure incurred has been disallowed does not lead to an inference that, it is a case of furnishing inaccurate particulars of income. If an assessee has been able to offer an explanation, which is not found by the Revenue Authorities to be false, and assessee has been able to prove that such explanation is bonafide and that all the facts relating to the same have been disclosed by him, the assessee shall be out of the clutches of Explanation 1 to section 271(1)(c) of the Act and in such cases no penalty shall be imposed. - Decided in favour of assessee.

Issues Involved:
1. Legality of imposition of penalty under Section 271(1)(c) of the Income Tax Act, 1961.
2. Determination of whether the assessee furnished inaccurate particulars of income or concealed income.
3. Jurisdictional validity of the penalty proceedings initiated by the Assessing Officer (AO).

Issue-wise Detailed Analysis:

1. Legality of Imposition of Penalty under Section 271(1)(c):

The primary issue revolves around the imposition of a penalty of Rs. 39,09,662/- under Section 271(1)(c) of the Income Tax Act, 1961, for allegedly furnishing inaccurate particulars of income. The AO disallowed an expenditure of Rs. 1,11,70,464/- claimed by the assessee, considering it as pre-operative expenses incurred before the commencement of business. The AO's decision was upheld by the First Appellate Authority and the ITAT, leading to the initiation of penalty proceedings.

2. Determination of Whether the Assessee Furnished Inaccurate Particulars of Income or Concealed Income:

The assessee argued that all relevant facts were disclosed in the return of income and that there was no malafide intention. The expenditure was claimed based on the belief that the business was set up in June 1997, and the expenses incurred between 17/06/1997 and 25/09/1997 were allowable as revenue expenditure. The assessee supported this claim with various judicial pronouncements, asserting that the claim was bonafide.

The Tribunal noted that the assessee had disclosed all material facts and provided a detailed explanation for the claimed expenditure. The AO disallowed the expenditure on the grounds that it was incurred before the commencement of business, but the Tribunal found that the assessee's claim was not false or made with malafide intent. The Tribunal emphasized that a mere disallowance of expenditure does not automatically lead to the conclusion of furnishing inaccurate particulars of income.

3. Jurisdictional Validity of the Penalty Proceedings:

The assessee raised a jurisdictional objection, arguing that the AO did not record satisfaction before initiating penalty proceedings. However, the Tribunal found that this objection was not raised before the AO or the First Appellate Authority during the penalty proceedings. The Tribunal rejected the jurisdictional objection, stating that it was raised belatedly and was not substantiated with evidence that the AO failed to record satisfaction.

Conclusion:

The Tribunal, after considering the facts and the legal arguments, concluded that the penalty under Section 271(1)(c) was not justified. The assessee had disclosed all relevant facts and provided a bonafide explanation for the claimed expenditure. The Tribunal emphasized that the mere disallowance of an expenditure does not constitute furnishing inaccurate particulars of income. The Tribunal referred to various judicial precedents, including the Supreme Court and High Court rulings, supporting the view that a bonafide claim, even if disallowed, does not attract penalty under Section 271(1)(c).

Result:

The Tribunal allowed the appeal filed by the assessee, canceling the penalty imposed by the AO and upheld by the First Appellate Authority. The order pronounced in the open court on 29.10.2014 concluded that the penalty in dispute was not sustainable in law, and the appeal was accepted in favor of the assessee.

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