2015 (9) TMI 333 - HC - Income Tax

Penalty levied u/s. 271(1)(c) - furnishing inaccurate particulars of income by making inadmissible claim on account of interest paid to foreign party - Tribunal deleted the penalty - Held that - It is a settled position in law that mere disallowance in quantum proceedings would not ipso facto lead to imposition of penalty. The tests to be applied in imposing penalty are different and distinct from the tests to be applied in disallowing an expenditure in quantum proceedings. In the present case, Respondent-Assessee has made a complete disclosure of particulars of income and expenditure by disclosing it in its account and also making a note in its Accounts viz. awaiting the permission of the RBI to make the payment. Moreover, the explanation offered by the Respondent-Assessee was not found to be false. The decision of the Apex Court held in CIT v/s. Reliance Petro Products (P) Ltd. 2010 (3) TMI 80 - SUPREME COURT has held that where details supplied in returns of Income are neither incorrect or false, penalty cannot be imposed. A mere making of an claim not sustainable in law, would not invite penalty. - Decided in favour of assessee. Furnishing inaccurate particulars of income by making inadmissible claim on account of compensation paid - non deduction of TDS - Tribunal deleted the penalty - Held that - Tribunal records the fact that due to the negotiation with the Shahs, the amount of compensation was reduced from ₹ 64.72 lakhs to ₹ 45 lakhs and the Respondent-Assessee had deducted the tax at the time of actual payment. The balance provision for compensation made in its account, was reversed. The impugned order to our mind correctly records the fact that disallowance in this case is not done on account of the expenditure being bogus but merely because the requirement of deducting tax at source had not been complied with by the Respondent-Assessee. The explanation offered by the Respondent-Assessee that no tax was deducted by it because no compensation was payable, as it was still under negotiation. It was only on the amount of compensation payable being determined and paid that tax was deducted. The decision of the Apex Court in Reliance Petro Products (supra) which Mr. Mohanty, sought to distinguish would continue to apply as the distinctions made do not touch the aspect with which we are concerned viz. Is penalty imposable if particulars are disclosed but the claim is disallowed. In such a case the Apex Court has held that penalty is not imposable. In this case, it has been held that claim made was on a bonafide view. The view taken by the Tribunal in the impugned order is a possible view to the effect that the Respondent-Assessee had a bona fide belief that they are not liable to deduct tax at the time of the making a provision as negotiations were still in progress. - Decided in favour of assessee.

Summary

Issues:
1. Whether the Tribunal was justified in deleting the penalty levied under Section 271(1)(c) of the Income Tax Act, 1961, for inaccurate particulars of income related to interest paid to a foreign party?
2. Whether the Tribunal was justified in deleting the penalty under Section 271(1)(c) of the Act for inaccurate particulars of income related to compensation paid?

Analysis:

Issue 1:
The Respondent-Assessee claimed a deduction of Rs. 64.02 lakhs for interest paid on an External Commercial Borrowing (ECB) loan without deducting tax at source, disallowed under Section 40(a)(i) of the Act. The penalty proceedings under Section 271(1)(c) were initiated by the Assessing Officer. The CIT(A) found that the Respondent-Assessee had made full disclosure and deducted tax upon obtaining RBI permission. The Tribunal upheld this finding, emphasizing the bona fide nature of the claim and the disallowance under Section 40(a)(i) does not render the expenses non-genuine. The Tribunal reasoned that penalty cannot be imposed if details in returns are not false, aligning with the Apex Court's decision in CIT v/s. Reliance Petro Products. The Tribunal's view was that the Respondent-Assessee's explanation was not false, and the claim was bona fide, leading to the dismissal of the Revenue's appeal.

Issue 2:
Regarding the compensation paid to individuals for project services, the Respondent-Assessee did not deduct tax at source on the compensation claimed. The disallowance under Section 40(a)(i) in quantum proceedings was upheld by the Tribunal. In the penalty proceedings, the Assessing Officer imposed a penalty, which was upheld by the CIT(A) on the grounds of premature expenditure realization and non-deduction of tax. However, the Tribunal found that the compensation was renegotiated, and tax was deducted on the revised amount upon payment. The Tribunal held that the disallowance was due to non-compliance with TDS requirements, not falsity of the claim. The Tribunal applied the principle from Reliance Petro Products, emphasizing that penalty is not warranted if particulars are disclosed but the claim is disallowed, especially when the claim is made in good faith. The Tribunal concluded that the Respondent-Assessee had a bona fide belief in not deducting tax during negotiations, leading to the dismissal of the penalty.

In both issues, the Tribunal's decisions were based on the principles of full disclosure, bona fide beliefs, and non-falsity of details, aligning with relevant legal precedents. The Appeals were dismissed, with no order as to costs.