2015 (5) TMI 185 - AT - Income Tax

Penalty u/s 271(1)(c) - Disallowance on account of preliminary expenses written off and bad debts writing off - Bar of limitation - Held that - Assessee filed an appeal before the Tribunal, therefore, as per our considered view the time limit for imposition of penalty is governed by the main provisions of Section 275(1)(a) and no by the proviso to section 275(1)(a). Since the penalty order was passed well within the period of six months from the end of the month, order of ITAT was received by Chief Commissioner, we do not find any merit in the contention of ld. AR that order so passed was barred by limitation. Assessee was proportionately claiming preliminary expenses every year. During the year under consideration assessee has also claimed ₹ 1,10,000/-, which was disallowed by the AO. We found that similar expenses was allowed by the AO in the scrutiny assessment framed u/s.143(3) for immediately preceding year i.e. A.Y.2003-04. Since the department itself has accepted assessee s claim for such writing off of preliminary expenses in the immediately preceding assessment year, disallowance of similar claim in subsequent year will not make it a fit case for levy of penalty. Accordingly, we do not find any justification for levy of penalty in respect of disallowance of preliminary expenses of ₹ 1,10,000/- written off during the year under consideration. Since the advances were not recovered the same was written off as employees have left the job, which is clear from the page No.3 of the assessment order. However, the AO has disallowed assessee s claim of bad debts u/s.36(1)(viii) of the I.T.Act and levied penalty/s.271(1)(c) with reference to such disallowance. Similar issue has been dealt by the Hon ble Delhi High Court in the case of DCM Ltd., 2013 (9) TMI 760 - DELHI HIGH COURT , wherein it was held that mere disallowance of loss claimed in respect of advances given to subsidiaries which is disallowed in the course of regular assessment, will not entitle the AO to levy penalty for such disallowance. It was observed that law does not bar or prohibit an assessee for making a claim, which he believes may be accepted or is plausible. When such a claim is made during the course of regular or scrutiny assessment, penalty cannot be imposed as necessarily the claim was bound to be carefully scrutinized both on facts and in law. - Decided partly in favour of assessee.

Summary

Issues:
1. Imposition of penalty u/s.271(1)(c) for disallowance of preliminary expenses and bad debts.
2. Barred by limitation under Section 275(1)(a) for passing penalty order.
3. Justification for levy of penalty in the case of disallowance of expenses.

Analysis:
1. The appeal was against the penalty imposed u/s.271(1)(c) for disallowance of preliminary expenses and bad debts. The AO disallowed &8377; 1,10,000 for preliminary expenses and &8377; 8 lakhs for bad debts, alleging concealment of income. The CIT(A) confirmed the penalty. The assessee contended that the penalty order was beyond the limitation period as per Section 275(1)(a). The Tribunal held that the penalty order was within the time limit as the appeal was filed before them, dismissing the contention raised by the assessee.

2. Regarding the disallowance of preliminary expenses, the Tribunal noted that similar expenses were allowed in the preceding assessment year. The Tribunal observed that since the department accepted the claim in the previous year, disallowance in the subsequent year does not warrant a penalty. Therefore, the Tribunal found no justification for the penalty on the disallowed preliminary expenses.

3. Concerning the disallowance of bad debts amounting to &8377; 8 lakhs, the Tribunal found that the advances were given to employees in earlier years but were not recovered as the employees had left. The AO disallowed the claim under Section 36(1)(viii) and imposed a penalty. The Tribunal referred to a Delhi High Court case and held that mere disallowance of a claim during assessment does not automatically lead to a penalty. Citing the decision in Reliance Petroproducts Ltd., the Tribunal concluded that the disallowance of bad debts written off on account of loans to subsidiaries did not warrant a penalty. Therefore, the Tribunal found no merit in imposing a penalty for writing off advances to employees that could not be recovered due to their departure from the job.

4. Ultimately, the Tribunal allowed the appeal in part, indicating that the penalty imposed for the disallowance of preliminary expenses and bad debts was not justified. The order was pronounced on 25.3.2015.