2019 (4) TMI 98 - AT - Income Tax

Penalty u/s 271(1)(c) - complete disclosure the facts - taxability of excess contribution received by the assessee - taxable or not on the principles of mutuality - all the concurrent authorities starting from CIT A to the honourable High Court has decided this issue against the assessee holding that principle of mutuality does not apply on the facts of the case - SLP admitted - HELD THAT - During the course of assessment, proceedings the assessee made the complete disclosure explaining that why the above amount assessee claims to be tainted with mutuality and therefore is not chargeable to tax u/s 4 of the income tax act. Evidences and arguments placed before us shows that assessee has made a claim disclosing the complete facts about the same in its return of income putting notes in the computation of total income, corroborating it with its balance sheet, supporting it with judicial precedents of the honourable Supreme Courts. This show that assessee has completely disclosed the facts about its claim along with all the arguments. It is also the fate of the claim of the assessee that it has been concurrently rejected by all the appellate forums. However, mere rejection of the claim of the assessee cannot be invited with the penalty. Further more on this issue of the excess contribution received the learned AO has recorded his satisfaction that assessee has furnished inaccurate particulars of income in the assessment order. However, at the time of levy of the penalty as per para number 1 at page number 2 of the penalty order he levied penalty for concealment of income. This fact itself renders the penalty on this issue not sustainable. - Decided in favour of assessee. Disallowance of claim u/s 35D - The assessee has claimed expenses of INR 454992/ under section 35D as preliminary expenses however the capital employed of the assessee is only INR 10200/ and the claim is required to be restricted only to the extent of 5% of the capital employed for amortization - HELD THAT - The assessee explained as per letter dated 8/9/2003 before the AO that the total preliminary expenses are INR 568740/ out of which INR 113748/ being 1/5 of the total expenses were charged to the income and expenditure account for the year ended on 31st of March 2000. The balance amount of INR 454992/ has been charged to the income and expenditure account for the year ended 31st of March 2001 it was stated that as assessee has claimed that it is a mutual concern operating on a no profit basis the above preliminary expenses are merely form part of the expenses charged to the income and expenditure account incurred by the assessee in the ordinary course of business for carrying out the activities of the assessee and therefore such preliminary expenses have been rightly claimed in the impugned assessment year. The claim of the assessee was rejected for the reason that the assessee is not a mutual concern. Therefore for the reasons given by us in cancelling the penalty levied on addition of ₹ 4444002/ of the excess contribution received claimed as a mutual concern, we also cancel the penalty on the disallowance of INR 4 54482/ .- Penalty cancelled - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the penalty levied under Section 271(1)(c) of the Income Tax Act, 1961, for the Assessment Years 2001-02 and 2002-03 was justified.
2. Whether the receipts of the assessee are covered by the principles of mutuality.
3. Whether the disallowance of preliminary expenses under Section 35D of the Income Tax Act was justified.

Detailed Analysis:

1. Penalty under Section 271(1)(c):
The primary issue in both appeals is the penalty levied under Section 271(1)(c) of the Income Tax Act, 1961, for the Assessment Years 2001-02 and 2002-03. The penalties, amounting to ?19,37,351 and ?12,16,703 respectively, were confirmed by the CIT(A). The assessee contended that the penalty orders were time-barred under Section 275 of the Act and that the penalties were unjustified as there was no concealment of income or furnishing of inaccurate particulars.

2. Principles of Mutuality:
The core contention was whether the assessee's receipts were covered by the principles of mutuality, making them non-taxable. The assessee argued that the contributions received were not taxable under Section 4 of the Act, as they were covered by mutuality principles. This claim was consistently rejected by the AO, CIT(A), and the Delhi High Court. The matter reached the Supreme Court, which admitted the Special Leave Petition, indicating the debatable nature of the issue. The assessee maintained that the complete disclosure was made in the return of income and during assessment proceedings, thus the claim was bona fide and not a case of furnishing inaccurate particulars.

3. Disallowance under Section 35D:
The second issue pertained to the disallowance of preliminary expenses under Section 35D. The AO restricted the allowance to 5% of the capital employed, disallowing ?4,54,482 out of ?4,54,992 claimed. The penalty was initiated for furnishing inaccurate particulars of income. The assessee argued that the expenses were disclosed and claimed based on their understanding of the law, and thus the claim was bona fide.

Judgment Analysis:

Penalty under Section 271(1)(c):
The Tribunal noted that the penalty was levied for concealment of income, while the initiation was for furnishing inaccurate particulars. This discrepancy rendered the penalty unsustainable. The Tribunal emphasized that the assessee had made complete disclosures in the return of income and during assessment proceedings, and mere rejection of the claim did not warrant penalty. The penalty for the Assessment Year 2001-02 was canceled as the assessee had disclosed all relevant facts and the issue was debatable, evidenced by the Supreme Court admitting the Special Leave Petition.

Principles of Mutuality:
The Tribunal acknowledged that the issue of mutuality was debatable and had reached the Supreme Court. The complete disclosure made by the assessee in the computation of income and during assessment proceedings indicated that there was no concealment or furnishing of inaccurate particulars. The Tribunal held that the rejection of the assessee's claim by judicial forums did not justify the penalty.

Disallowance under Section 35D:
For the disallowance under Section 35D, the Tribunal found that the assessee had disclosed the preliminary expenses and claimed them based on their understanding of the law. The Tribunal held that the mere disallowance of the claim did not amount to furnishing inaccurate particulars. The penalty on this ground was also canceled.

Conclusion:
The Tribunal canceled the penalties for both Assessment Years 2001-02 and 2002-03, reversing the orders of the lower authorities. The appeals of the assessee were allowed, emphasizing that complete disclosure and the debatable nature of the issues precluded the imposition of penalties under Section 271(1)(c) of the Income Tax Act. The judgment underscores the importance of distinguishing between bona fide claims and concealment or furnishing of inaccurate particulars when considering penalties.