2017 (10) TMI 823 - AT - Income Tax

Penalty u/s 271(1)(c) - addition u/s 14A - proof of concealment of income - Held that - Disallowance of expenditure ipso facto does not mean concealment of income. We also observe that the assessee has itself made suo motu disallowance which is not totally devoid of any reasonable basis. Therefore, no culpability is attributable on the part of the assessee in the instant case. It is trite that a finding in the quantum proceedings on disallowance cannot be automatically adopted for the purposes of section 271(1)(c) of the Act. As noted above, the assessee have discharged primary burden lay upon it. The explanation offered by the assessee towards interest disallowance made under s.14A appears to be satisfactory and is perceived to bear trappings of bonafide. The aforesaid disallowance under s.14A of the Act thus cannot be equated with any concealment of income. In the totality of the circumstances, we are of the view that discretion available to the CIT(A) for imposition of penalty ought to have been exercised judiciously and in favour of the assessee. Accordingly, the penalty so imposed by the Revenue is cancelled.

Summary

Issues:
Penalty imposition under section 271(1)(c) for disallowance of expenditure under section 14A read with Rule 8D of the Income Tax Rules, 1962.

Analysis:
The appeals by the Assessee were against the Commissioner of Income Tax(Appeals) orders for the Assessment Years 2008-09 & 2011-12 regarding penalty imposition for disallowance of expenditure under section 14A read with Rule 8D. The CIT(A) enhanced the disallowance, which led to the penalty imposition. The assessee contended that the penalty was misdirected as it was the first year of Rule 8D applicability and the disallowance was based on a rational basis. The AO computed disallowance under Rule 8D, which was challenged by the assessee. The ITAT confirmed the disallowance principles but reduced the quantum. The penalty was imposed based on the enhanced income. The assessee argued that the disallowance was on direct expenditure towards interest costs, which was a bonafide computation. The Revenue contended that the penalty was warranted due to the direct nexus between interest-free funds and corresponding investments.

The ITAT considered both arguments and admitted the plea of the assessee for non-imposition of penalty. The ITAT noted that the assessee had mitigating circumstances with substantial own funds exceeding the interest-bearing funds. The ITAT found no motive for violation of Rule 8D and observed that the issue was debatable, pending adjudication in the High Court. The ITAT concluded that the assessee's explanation for interest disallowance was satisfactory and lacked concealment of income. The ITAT canceled the penalty, emphasizing that disallowance of expenditure did not equate to concealment of income.

In the result, the ITAT allowed the assessee's appeal for both Assessment Years 2008-09 and 2011-12, quashing the penalties imposed under section 271(1)(c) of the Income Tax Act. The ITAT held that the discretion for penalty imposition should have been exercised judiciously and in favor of the assessee, given the circumstances and the absence of concealment of income.