2018 (8) TMI 1710 - AT - Income Tax

Levy of penalty u/s. 271(1)(c) - disallowance u/s 14A - Held that - When the A.O. has himself said that the assessee had borrowed huge amounts and it has made huge investments in shares and securities which did not yield any income and the interest so incurred is liable to disallowance u/s.14A where the question of disallowance on the premise that the assessee has not conducted any business arises. Conspicuously the A.O. himself has not mentioned that the penalty is being initiated for this aspect of the disallowance. Disallowance u/s. 14A in this regard is itself not sustainable on the touch stone of the Hon ble jurisdictional High Court decision in the case of Ballarpur Industries Ltd. (2016 (10) TMI 1039 - BOMBAY HIGH COURT). In this view of the matter also in the facts and circumstances of the case the penalty in this case is not at all leviable. Hence in our considered opinion the penalty levied u/s. 271(1)(c) in this case is liable to be deleted. We set aside the orders of the authorities below and delete the levy of penalty. We note that the assessee has also raised that the penalty is not leviable inasmuch as penalty notice did not specify the charge on which the penalty was being levied. We note that various case laws in this regard have also been mentioned in their respective favours by the ld. Counsel of the assessee and the ld. DR also. - Decided in favour of assessee

Summary

Issues Involved:
1. Legitimacy of the penalty levied under section 271(1)(c) of the Income Tax Act, 1961 for alleged concealment or furnishing inaccurate particulars of income.
2. Validity of the penalty notice issued without specifying the exact charge.
3. Merits of the disallowance of interest expenditure under section 36(1)(iii) and section 14A of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Legitimacy of the Penalty Levied Under Section 271(1)(c):
The core issue revolves around the penalty of ?4,16,98,978/- levied for alleged concealment or furnishing inaccurate particulars of income. The assessee claimed interest expenditure of ?12,26,80,137/-, which was disallowed by the Assessing Officer (A.O.) on the grounds that the interest expenditure was not incurred wholly and exclusively for the purpose of business, as the assessee had not earned any income from business activities. The A.O. initiated penalty proceedings under section 271(1)(c) for furnishing inaccurate particulars of income and/or concealment of income. The assessee contended that there was no concealment or furnishing of inaccurate particulars, arguing that the interest expenditure was genuine and the disallowance was based on a difference in interpretation or application of legal provisions. The assessee cited various case laws to support its claim that a mere disallowance does not automatically lead to penalty.

The Tribunal noted that all particulars of interest were duly disclosed and the veracity of the expenditure was not doubted. It was observed that the assessee’s explanation that the business was set up but not carried out due to uncontrollable factors was plausible. The Tribunal relied on the Supreme Court's decision in Reliance Petroproducts (P.) Ltd., which held that a mere wrong claim does not lead to penalty under section 271(1)(c). Consequently, the Tribunal concluded that the penalty was not sustainable on this ground.

2. Validity of the Penalty Notice Issued Without Specifying the Exact Charge:
The assessee challenged the penalty notice on the grounds that it did not specify whether the penalty was for concealment of income or for furnishing inaccurate particulars of income. The Tribunal noted that the notice issued to the assessee was vague and did not clearly specify the charge, which is a requirement for a valid penalty notice. The Tribunal referred to various case laws, including the decision of the Karnataka High Court in Manjunatha Cotton & Ginning Factory, which emphasized the need for clarity in the penalty notice. However, since the penalty was already deleted on merits, the Tribunal did not engage in a detailed adjudication on this issue, considering it of academic interest.

3. Merits of the Disallowance of Interest Expenditure Under Section 36(1)(iii) and Section 14A:
The A.O. disallowed the interest expenditure under section 36(1)(iii) on the grounds that the expenditure was not for business purposes as no income was earned from business activities. Additionally, the A.O. also disallowed the interest expenditure under section 14A, attributing it to investment activities that yielded no income. The Tribunal observed that the A.O. contradicted himself by stating that the assessee was not conducting any business while also acknowledging that the assessee made substantial investments. The Tribunal highlighted that the penalty was levied only with respect to the disallowance under section 36(1)(iii).

The Tribunal found the assessee’s explanation that the business was set up but not operational due to uncontrollable factors to be reasonable. It was noted that the A.O. himself admitted that the assessee had made investments, implying some business activity. The Tribunal concluded that the explanation provided by the assessee was plausible and could not be considered as furnishing inaccurate particulars or concealment of income. The Tribunal also referred to the decision of the jurisdictional High Court in Ballarpur Industries Ltd., which held that no disallowance under section 14A is permissible when no exempt income is earned. Thus, the Tribunal held that the penalty was not leviable on these grounds.

Conclusion:
The Tribunal set aside the orders of the lower authorities and deleted the penalty levied under section 271(1)(c), concluding that the penalty was not sustainable either on the merits of the case or due to the defect in the penalty notice. The appeal by the assessee was allowed.