2016 (11) TMI 441 - AT - Income Tax

Penalty u/s.271(1)(c) - expenditure incurred on account of capital assets was claimed as revenue expenditure and depreciation was also claimed - Indo- Mauritius DTAA - Held that - Intention of the assessees in claiming capital expenditure as allowable expenditure and further claiming depreciation is visible to the proverbial naked eyes ,so, if the AO/FAA decided not to remain a mute spectator to such an attempt, no fault can be found with them. The FAA has in his elaborate order clearly proved that as to how the explanation of the assessee was not genuine or bona fide and how it is not supported by any authority. Rather the available material was against the stand taken by the assessee. It is also a fact that the assessee not a small time trader running a proprietary concern or a shop in the remote part of the country and is not aware of the tax laws.It is supported by a team of professionals. Such assessees are expected to lead from front and not to claim deductions that are prima facie not admissible. Let us make it clear that we do not want to mix ethics and penalty matters. What we are emphasising is that assessee availing professional services should not make claims that are prima facie inadmissible to avoid penal consequences. We would also like to mention that the cases relied upon by the assessee are distinguishable on facts. N.G. Technologies (2013 (7) TMI 451 - KARNATAKA HIGH COURT ) is useful in deciding the issue In that matter the assessee had pleaded that claim made by it was bonafide and all the facts were disclosed. The FAA, upholding the order of the AO, had held that mistake committed by the assessee could not be said to be bonafide. However, the Tribunal reversed the order of the FAA. The Hon ble Apex Court 2016 (4) TMI 1152 - SUPREME COURT dismissed the SLP against High Court s ruling that where against basic principle of accountancy, assessee claimed capital loss on sale of fixed assets in profit and loss account and had not revised return voluntarily, penalty for concealment of income was justified - Decided against assessee

Summary

Issues Involved:
1. Nature of expenditure (capital vs. revenue)
2. Double deduction claims
3. Interpretation of Indo-Mauritius DTAA Article 7(3)
4. Penalty under section 271(1)(c) of the Income Tax Act
5. Bona fide belief and explanation by the assessee

Detailed Analysis:

1. Nature of Expenditure (Capital vs. Revenue):
The primary issue revolves around whether the expenditure of ?2.31 crores on acquisition of fixed assets by the assessee, a banking entity, should be treated as capital or revenue expenditure. The Assessing Officer (AO) determined that the expenditure was capital in nature and not deductible as revenue expenditure. This determination was upheld by the First Appellate Authority (FAA), who concluded that the assessee incorrectly claimed capital expenditure as a deductible item, which is not permissible under section 37 of the Income Tax Act.

2. Double Deduction Claims:
The AO found that the assessee had claimed both the full deduction for capital expenditure and depreciation on the same assets, amounting to a double deduction. This was deemed an attempt to furnish inaccurate particulars of income. The FAA supported this view, stating that such a claim was not supported by any accounting standards or principles and amounted to furnishing inaccurate particulars of income.

3. Interpretation of Indo-Mauritius DTAA Article 7(3):
The assessee argued that under Article 7(3) of the Indo-Mauritius DTAA, all expenses, including capital expenditure, should be deductible in computing business profits. However, the AO and FAA held that the treaty provisions did not override the domestic law regarding the treatment of capital expenditure. The FAA emphasized that Article 7(3) did not allow for capital expenditure to be treated as deductible and that the assessee's interpretation was incorrect and unsupported by any legal mandate.

4. Penalty under Section 271(1)(c) of the Income Tax Act:
The AO initiated penalty proceedings under section 271(1)(c) for furnishing inaccurate particulars of income. The FAA upheld the penalty, stating that the assessee had not provided a bona fide explanation for its claim and had failed to substantiate its interpretation of the DTAA. The FAA referred to various case laws and concluded that the assessee's claim was not based on any reasonable basis and amounted to a calculated risk to gain tax advantage.

5. Bona Fide Belief and Explanation by the Assessee:
The assessee contended that its claim was based on a bona fide belief and that it had made full disclosure of all relevant facts in its return. However, the FAA and the Tribunal found that the explanation was not genuine or bona fide, as it lacked support from any judicial precedent or expert opinion. The Tribunal noted that the assessee had acted as an interpreter of law, which is beyond its domain, and had made a claim that was prima facie inadmissible.

Conclusion:
The Tribunal upheld the orders of the AO and FAA, confirming the penalty under section 271(1)(c) for furnishing inaccurate particulars of income. It was held that the assessee's claim of capital expenditure as revenue expenditure and the subsequent claim of depreciation amounted to filing inaccurate particulars. The Tribunal emphasized that mere disclosure in the return does not protect the assessee from penalty if the claim is not bona fide. The appeals for the subsequent assessment years (2001-02, 2002-03, and 2004-05) were also dismissed based on the same reasoning.

Order Pronounced:
The appeals filed by the assessee were dismissed, and the order was pronounced in open court on 30th September 2016.