2018 (9) TMI 1615 - AT - Income Tax

Penalty proceedings u/s 271(1)(c) - disallowance of ex-gratia payment to the staff in excess of entitlement of bonus which was 8.33 after invoking the provision of section 43B - Held that - AO has invoked the provision of section of 43B(c) holding that such a difference of ₹ 5,90,656/- falls within the ambit of scope of 43B r.w.s. 36(1)(ii). However it has not been pointed out by him that such an ex-gratia payment, whether falls within the provision of Bonus Act or not; or whether such a payment made to its labourers and staff was not during the course of carrying on the business or for commercial expediency. Here the payment has been treated as ex-gratia by the assessee which otherwise is allowable but AO has treated it as part of bonus and brought within the scope of section 43B denied simply because the AO has tried to bring such payment within the scope of section 43B, this action of the AO does not lead to an inference that either the assessee has furnished inaccurate particulars of income or has made any false claim. Even if such ex-gratia payment is in excess of the limit prescribed under the payment under Bonus Act or u/s 36(1)(ii), but same being in the nature of business expenditure cannot be held that claim of such expenditure warrants any levy of penalty u/s 271(1)(c). - Decided in favour of assessee.

Summary

Issues:
Penalty under section 271(1)(c) for disallowance of ex-gratia payment exceeding bonus entitlement under section 43B.

Analysis:
The appellant filed an appeal against the penalty imposed for disallowance of ex-gratia payment exceeding the bonus entitlement under section 43B for the assessment year 2009-10. The appellant contested that the amount in question was ex gratia and not part of the bonus payment. The Assessing Officer (AO) disallowed the excess amount under section 43B and levied a penalty on the grounds of incorrect expense claims. The Commissioner of Income Tax (Appeal) upheld the penalty, stating that the ex gratia payment should be treated as a payment under section 43B(c) and not allowed under section 37(1). The appellant did not appear during the proceedings, leading to a decision based on the arguments presented by the Departmental Representative (DR).

The Tribunal analyzed the case and found that the disallowance was based on the excess payment treated as ex gratia by the appellant, which the AO brought under section 43B. However, the Tribunal noted that the AO did not establish whether the payment was covered by the Bonus Act or whether it was a business-related expenditure. Section 43B deems certain payments as disallowable if not made within a specified period, but genuine business expenditures cannot be considered as inaccurate claims. The Tribunal highlighted that the ex gratia payment, even if exceeding bonus limits, was a legitimate business expense and not subject to penalty under section 271(1)(c).

The Tribunal referred to judicial precedents supporting the deductibility of ex gratia payments exceeding statutory limits under section 36(1)(ii) or section 37(1). Citing cases like CIT v. Maina Ore Transport P. Ltd. and others, the Tribunal concluded that if such payments were held to be deductible, there was no basis for imposing a penalty. Consequently, the Tribunal directed the deletion of the penalty imposed on the disallowed amount of ?5,90,656. The appeal of the assessee was allowed, and the penalty was revoked.

In conclusion, the Tribunal's decision emphasized the distinction between genuine business expenditures and inaccurate claims, highlighting that even if an ex gratia payment exceeded statutory limits, it could still be considered a legitimate business expense. The Tribunal's reliance on judicial precedents supported the deductibility of such payments, leading to the deletion of the penalty imposed by the AO and upheld by the CIT (A).