2019 (1) TMI 200 - AT - Income Tax

Penalty u/s 271(1)(c) - reopening of expenditure - Disallowance of capital loss treated as revenue expenditure - Held that - No new tangible incriminating material was received by the AO as the reopening was done based on the material already on record while framing original assessment u/s 143(3) and in first round the claim of the assessee was allowed when the original assessment u/s 143(3) was framed on 30-03-2013. No doubt the Revenue can rightfully open concluded assessment u/s 147 under the prevailing circumstances of the case as the reopening was done within four years from the end of the assessment year and first proviso to Section 147 is not applicable . There is no estoppels against law. So far as penalty u/s 271(1)(c) levied by Revenue is concerned in the instant case, the decision in the case of Reliance Petroproducts Private Limited 2010 (3) TMI 80 - SUPREME COURT is relevant as the assessee lodged its legal claim for allowability of loss on fixed assets written off as the said assets became unusable / damaged on a bonafide belief but the said claim was not accepted in reopening proceedings u/s 147 in the midst of concept of Block of assets u/s 32(1)(ii) read with Section 50 of the 1961 which was applicable to the instant case as the assessee is engaged in the business of shipping. As already seen above that there is lack of clarity in the placement of section 32 and its subsections. Merely because the legal claim filed by the assessee is not accepted by Revenue will not automatically make tax-payer liable for penalty u/s 271(1)(c). The assessee had a bonefide belief that its claim is allowable keeping in view provisions of Section 32(1)(iii) albeit assessee was governed by Block of assets as per provision of Section 32(1)(ii) and 50 of the 1961 Act but no doubt explanation offered by the assessee was bonafide and Explanation 1 to Section 271(1)(c) will be applicable which takes assessee out of penalty provisions as are contained in Section 271(1)(c). - Decided in favour of assessee.

Issues Involved:
1. Confirmation of penalty under Section 271(1)(c) of the Income-tax Act, 1961.
2. Disallowance of deduction claimed as revenue expenditure.
3. Bona fide belief in the claim of deduction.
4. Validity of the notice issued under Section 274 read with Section 271.
5. Applicability of Supreme Court judgment in CIT Vs. Reliance Petroproducts Limited.
6. Non-application of mind by the Assessing Officer (AO) in issuing the penalty notice.
7. Requirement to specify the charge in the penalty notice.

Detailed Analysis:

1. Confirmation of Penalty under Section 271(1)(c):
The primary issue was whether the penalty of ?14,42,920 levied under Section 271(1)(c) for filing inaccurate particulars of income was justified. The AO initiated penalty proceedings after disallowing the assessee's claim of ?42,45,129 as revenue expenditure, which was treated as a capital loss. The CIT(A) upheld the penalty, but the Tribunal found that the assessee had made adequate disclosures in its return and financial statements and had a bona fide belief in its claim.

2. Disallowance of Deduction Claimed as Revenue Expenditure:
The assessee claimed a deduction of ?42,45,129 for fixed assets written off as revenue expenditure under "Administrative Expenses." The AO disallowed this, treating it as a capital loss. The assessee argued that the write-off was due to the relocation of its office, which rendered some assets unusable. The Tribunal noted that the assessee had disclosed this in its financial statements and that the AO had initially accepted the claim in the original assessment.

3. Bona Fide Belief in the Claim of Deduction:
The assessee contended that it was under a bona fide impression that the deduction was allowable under Section 32(1)(iii). The Tribunal acknowledged that there was a lack of clarity in the placement of Section 32 and its sub-sections, which could lead to confusion. The Tribunal concluded that the assessee's claim, although not accepted, was made on a bona fide belief and did not warrant a penalty under Section 271(1)(c).

4. Validity of the Notice Issued under Section 274 Read with Section 271:
The assessee challenged the validity of the penalty notice, arguing that it did not specify whether the penalty was for concealment of income or furnishing inaccurate particulars. The Tribunal found merit in this argument, noting that the notice suffered from non-application of mind, making it invalid.

5. Applicability of Supreme Court Judgment in CIT Vs. Reliance Petroproducts Limited:
The assessee relied on the Supreme Court judgment in CIT Vs. Reliance Petroproducts Limited, which held that making a legal claim that is not accepted does not automatically lead to a penalty under Section 271(1)(c). The Tribunal agreed, stating that the assessee's claim was based on a bona fide belief and adequate disclosure, aligning with the principles laid out in the Supreme Court judgment.

6. Non-Application of Mind by the Assessing Officer in Issuing the Penalty Notice:
The Tribunal observed that the AO did not apply his mind while issuing the penalty notice, as the relevant words indicating the specific charge were not struck off. This non-application of mind rendered the notice invalid, supporting the assessee's case.

7. Requirement to Specify the Charge in the Penalty Notice:
The Tribunal emphasized the necessity for the AO to specify the exact charge—whether it was for concealment of income or furnishing inaccurate particulars—in the penalty notice. Failure to do so violated the principles of natural justice, further invalidating the penalty.

Conclusion:
The Tribunal ordered the deletion of the penalty of ?14,42,920 levied under Section 271(1)(c), setting aside the orders of the lower authorities. The appeal of the assessee was allowed, and the penalty was deemed not exigible under the given circumstances. The Tribunal's decision was pronounced in the open court on 14.11.2018.

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