2019 (8) TMI 931 - AT - Income Tax

Penalty u/s 271(1)(c) - transfer pricing addition - ALP determination - HELD THAT - Tribunal in its order passed in quantum proceedings, it can be seen that the assessee computed the ALP of the international transaction as per the manner prescribed in the section. Such computation was done in good faith and due diligence. Simply because now there remains some difference in the manner of determination of the ALP, it cannot be held that the assessee either concealed the particulars of its income or furnished inaccurate particulars of income. CIT(A) was justified in deleting the penalty on this issue. Similar view has been taken by the Delhi Bench of the Tribunal in Mitsui Prime Advanced Composites India (P) Ltd. Vs. DCIT 2016 (6) TMI 588 - ITAT DELHI . Respectfully following the precedent, we uphold the impugned order on this score. Penalty for disallowance u/s 35DD - expenses incurred for increase in share capital after amalgamation - quantum addition deleted by Tribunal - HELD THAT - Since the very foundation for the imposition of penalty, being the addition made in the assessment, ceases to exist, there can be no question of imposition of any penalty thereon. We, therefore, accord our imprimatur to the view taken by the CIT(A) on the above issue. Penalty for disallowance of Miscellaneous Expenses - these expenses included Software development expenses, expenses on premises, warranty expenses, Gifts and Donation etc. - HELD THAT - Tribunal allowed full deduction towards software expenses and fees for handling share record and made full disallowance for warranty expenses, Gifts and Donation and restricted the addition to 15% of the balance expenses. From the above narration of facts, it is clear that the authorities below have made disallowance primarily on ad hoc basis. Even in respect of certain specific expenses for which the CIT(A) and the Tribunal sustained the disallowances, the reason is not the concealment by the assessee or furnishing of any inaccurate particulars by the assessee, but non-availability of relevant evidence to substantiate the claims. In such circumstances, we are satisfied that no fault can be found with the CIT(A) in deleting the penalty on addition towards disallowance out of Miscellaneous expenses. Penalty for addition towards expenses on premises - addition made by AO and confirmed in the first appeal @40% of expenses on premises - HELD THAT - Tribunal confirmed capitalization of expenses in relation to premises @ 40% but directed to allow depreciation on such capitalized account. It is observed that the addition has been made on estimate basis which again came to be reduced in the first appeal on estimate basis. Where income is estimated or disallowance of expenses is made on estimate basis, there can be no penalty. The reason for non-imposition of penalty in both the situations is that there is a lack of precision as to concealment of income or furnishing of inaccurate of particulars of income. It is only an estimation shorn of any certainty or accuracy. Reverting to the facts of the instant case, it is clearly established that sustenance of disallowance of expenses @ 40% is merely an estimation, which is devoid of any proper authentication. As such, it does not call for imposition of any penalty.

Summary

Issues:
1. Deletion of penalty under section 271(1)(c) of the Income-tax Act, 1961 for the assessment year 2005-06.
2. Transfer pricing addition and penalty imposition.
3. Disallowance of expenses incurred for an increase in share capital after amalgamation.
4. Disallowance of certain Miscellaneous Expenses and penalty imposition.
5. Addition towards expenses on premises and penalty imposition.

Issue 1: Deletion of Penalty under Section 271(1)(c):
The appeal was against the deletion of a penalty of ?1,66,08,506 imposed by the Assessing Officer under section 271(1)(c) for the assessment year 2005-06. The Commissioner of Income-tax (Appeals) had deleted the penalty, leading to the Revenue's appeal. The Tribunal upheld the deletion of the penalty based on detailed reasoning, stating that the assessee computed the Arm's Length Price (ALP) of the international transaction in good faith and due diligence. The Tribunal found no concealment of income or furnishing of inaccurate particulars by the assessee. Citing a precedent, the Tribunal held that the penalty deletion was justified.

Issue 2: Transfer Pricing Addition and Penalty Imposition:
The Assessing Officer imposed a penalty on a transfer pricing addition of ?15.58 crore, confirmed at ?2.24 crore in the first appeal. The Tribunal overturned the application of the Comparable Uncontrolled Price (CUP) method by the Transfer Pricing Officer, directing a fresh determination of the Arm's Length Price. The Tribunal held that the penalty imposition was not warranted as the ALP determination was done in good faith. The Tribunal's decision was supported by a precedent from the Delhi Bench, leading to the penalty deletion.

Issue 3: Disallowance of Expenses for Share Capital Increase:
The Assessing Officer made a disallowance towards expenses for an increase in share capital after amalgamation under section 35DD of the Act. The penalty imposed on this addition was deleted in the first appeal. The Tribunal also deleted this addition in its order during the quantum proceedings, leading to the deletion of the penalty as the foundation for penalty imposition ceased to exist.

Issue 4: Disallowance of Miscellaneous Expenses and Penalty Imposition:
The Assessing Officer disallowed certain Miscellaneous Expenses claimed by the assessee, leading to a penalty imposition. The Tribunal found that the disallowances were primarily made on an ad hoc basis and due to non-availability of relevant evidence. The penalty was deleted as the disallowances were not due to concealment or furnishing of inaccurate particulars by the assessee.

Issue 5: Addition towards Expenses on Premises and Penalty Imposition:
The Assessing Officer made an addition towards expenses on premises, confirmed in the first appeal. The Tribunal confirmed the capitalization of expenses at 40% but directed to allow depreciation on such capitalized account. As the addition was made on an estimate basis, the penalty imposition was not warranted. Citing legal precedents, the Tribunal held that no penalty can be imposed when additions are made on an estimate basis, leading to the dismissal of the appeal.

In conclusion, the Tribunal dismissed the appeal, upholding the deletion of penalties in various instances based on detailed analysis and legal precedents. The judgment emphasized the importance of good faith, due diligence, and lack of concealment or inaccurate particulars in determining penalty imposition under section 271(1)(c) of the Income-tax Act, 1961.