2020 (11) TMI 952 - HC - Income Tax

Levy and quantification of penalty and compounding fee - Addition of expenditure incurred as fee for minor deviation from the initially sanctioned plan and to bring the actually constructed structure in conformity with the modified plan as per building bye laws of the assessee on the ground that such payment amounted to penalty not falling under Section 37(1) - HELD THAT - Admittedly, the first substantial question of law has been answered against the assessee by a Bench of this Court vide order 2013 (10) TMI 1545 - KARNATAKA HIGH COURT It is also not in dispute that against the aforesaid order, an appeal has been filed which is pending before the Supreme Court. Therefore, in the facts and circumstances of the case, we deem it appropriate to direct the Assessing Officer to give effect to his order with regard to the issue involved in the first substantial question of law Disallowance u/s 14A invoking the provisions of Rule 8D(2)(iii) - HELD THAT - We we find from the order passed by the Tribunal that the submissions made by the Assessing Officer, particularly in the light of the decision of this Court in the case of CANARA BANK 2014 (1) TMI 1586 - KARNATAKA HIGH COURT and the decision of the Supreme Court in GODREJ BOYCE MANUFACTURING CO. LTD. 2017 (5) TMI 403 - SUPREME COURT have not been considered by the Tribunal. The order passed by the Tribunal as well as the Commissioner of Income Tax (Appeals) insofar as it pertains to the issue involved in the second substantial question of law, is hereby set aside and the matter is remitted to the Assessing Officer to decide the issue involved in the second substantial question of law in the light of the decision above.

Summary

Issues:
1. Allowability of penalty and compounding fee as a deduction under the Income Tax Act.
2. Justification of disallowance under Section 14A of the Act.

Issue 1: Allowability of penalty and compounding fee as a deduction under the Income Tax Act
The appeal under Section 260-A of the Income Tax Act, 1961 was preferred by the assessee concerning the Assessment Year 2010-11. The Assessing Officer disallowed the claim of ?56,45,810/- as expenditure incurred as a fee for minor deviation from the initially sanctioned plan, treating it as a penalty not falling under Section 37(1) of the Act. The Commissioner of Income Tax (Appeals) and the Tribunal upheld this decision. The assessee approached the High Court, where it was acknowledged that a similar issue was decided against the assessee in a previous order. However, as a special leave petition was filed before the Supreme Court challenging the previous order, the High Court directed the Assessing Officer to decide the issue after the Supreme Court's decision. The first substantial question of law was answered accordingly.

Issue 2: Justification of disallowance under Section 14A of the Act
Regarding the disallowance under Section 14A of the Act, the Assessing Officer disallowed proportionate interest and indirect expenditure under Rule 8D(2)(iii) of the Income Tax Rules. The Tribunal upheld this disallowance, including administrative expenses in respect of earning non-taxable income. The assessee contended that no direct or administrative expenditure was incurred for earning non-taxable income. The High Court noted that the Assessing Officer must establish that certain expenditure was incurred for earning exempt income, and since no such expenditure was incurred by the assessee, no notional administrative expenditure could be disallowed. Citing relevant case laws, the High Court set aside the Tribunal's order and remitted the matter to the Assessing Officer to decide the issue in light of the mentioned decisions, thereby not directly answering the second substantial question of law.

In conclusion, the High Court disposed of the appeal, directing the Assessing Officer to act in accordance with the decisions regarding the first substantial question of law and remitting the matter for the second substantial question of law to be decided based on the provided guidance from relevant case laws.