2017 (10) TMI 1213 - AT - Income Tax

Levy of penalty by the AO u/s 271(1)(c) - disallowance of expenditure towards due diligence and professional consultancy - Held that - We are of the view that the debentures whether convertible or non convertible are in the nature of loan at the time of their issuance and any expenditure incurred on issue of such debentures or bonds had to be regarded as part of the borrowing cost and have to be allowed as a deduction and as a revenue expenditure as held in the case of CIT vs. Secure Meter Ltd. (2008 (11) TMI 66 - HIGH COURT RAJASTHAN ) and CIT vs. ITC Hotels Ltd. (2009 (11) TMI 582 - Karnataka High Court). Once, the two high courts are in favour of assessee holding the Revenue in nature, the issue becomes highly debatable and two views are possible. Once two views are possible the penalty cannot be levied for furnishing of inaccurate particulars of income in view of case of CIT vs. Yahoo India Pvt. Ltd. (2013 (3) TMI 704 - BOMBAY HIGH COURT ). Hence, we are of the view that the CIT(A) has rightly deleted the penalty and we confirm the order of CIT(A). - Decided in favour of assessee.

Summary

Issues: Appeal against deletion of penalty under section 271(1)(c) of the Income Tax Act for due diligence and professional consultancy expenses.

Analysis:
1. Issue of Penalty Deletion: The primary issue in this case revolves around the deletion of penalty under section 271(1)(c) of the Income Tax Act by the CIT(A). The AO disallowed an expenditure of &8377; 71,81,942 incurred on the issuance of compulsorily convertible debentures, treating it as capital expenditure. Consequently, the penalty was imposed for furnishing inaccurate particulars of income. The CIT(A) deleted the penalty, citing that the expenditure was revenue in nature based on decisions by the Rajasthan High Court and Karnataka High Court, which considered similar expenditures as revenue. The CIT(A) deemed the issue debatable, following precedents from various High Courts, and canceled the penalty based on the principle that penalties cannot be levied on debatable issues. The Tribunal upheld the CIT(A)'s decision, emphasizing that since two High Courts considered the expenditure as revenue, the issue was debatable, and the penalty was unjustified, in line with the decision of the Bombay High Court.

2. Nature of Expenditure: The Tribunal analyzed the nature of the expenditure incurred by the assessee on compulsorily convertible debentures. It noted that such debentures, whether convertible or non-convertible, should be treated as part of borrowing costs and allowed as a deduction as revenue expenditure. Citing judgments by the Rajasthan High Court and Karnataka High Court, which supported the revenue nature of such expenditures, the Tribunal concluded that the AO's treatment of the expenditure as capital was incorrect. The Tribunal's decision was based on the understanding that the debentures were akin to loans at the time of issuance, justifying the treatment of associated expenses as revenue expenditure.

3. Debatable Issue and Precedents: The Tribunal highlighted the debatable nature of the issue, supported by conflicting decisions from various High Courts. The existence of differing views on the treatment of similar expenditures led to the conclusion that the penalty for furnishing inaccurate particulars of income was unwarranted. Relying on the principle that penalties cannot be imposed on debatable issues, the Tribunal affirmed the CIT(A)'s decision to delete the penalty. The Tribunal referenced the decisions of the Bombay High Court and other High Courts to emphasize that in cases where two views on an issue are plausible, penalties should not be levied, aligning with the legal precedent set by the judiciary.

4. Final Decision: Ultimately, the Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to delete the penalty imposed under section 271(1)(c) of the Income Tax Act. The Tribunal concurred with the CIT(A)'s reasoning that the expenditure in question was revenue in nature, as supported by judicial precedents, rendering the penalty unjustified. By emphasizing the debatable nature of the issue and the conflicting interpretations by different High Courts, the Tribunal concluded that the penalty could not be sustained, in line with established legal principles and precedents.

In conclusion, the Tribunal's detailed analysis and reliance on legal precedents from various High Courts led to the dismissal of the Revenue's appeal and the affirmation of the CIT(A)'s decision to delete the penalty, highlighting the importance of considering the nature of expenditures and the debatability of issues in tax penalty assessments.