2021 (2) TMI 574 - AT - Income Tax

Penalty u/s 271(1)(c) - Disallowance u/s 14A - HELD THAT - When the disallowance under rule 8D(2)(i) r.w.s. 14A has been made on a purely estimate basis, that too, without establishing any direct/proximate nexus with the exempt income earned, in our considered opinion, the assessee cannot be accused of furnishing inaccurate particulars of income. Merely because the assessee has not contested the disallowance in appeal, for that reason alone assessee cannot be automatically visited with penalty under section 271(1)(c). In case of CIT vs. Reliance Petroproducts Pvt. Ltd. 2010 (3) TMI 80 - SUPREME COURT while dealing with the issue of imposition of penalty on the basis of disallowance made under section 14A of the Act has observed that when the assessee had furnished all the details of its expenditure as well as income in its return which were not found to be inaccurate, it cannot lead to furnishing of inaccurate particulars of income merely because the claim made by the assessee was not accepted by the department. In case of Sir Shadilal Sugar General Mills Ltd. vs. CIT 1987 (7) TMI 3 - SUPREME COURT has held that merely because the assessee agreed to certain addition, it will not follow that the assessee concealed income relating to such addition. At this stage, we must observe, irrespective of the fact whether or not the assessee has accepted the disallowance, in our considered view, the validity of the disallowance made under rule 8D(2)(i) is a highly debatable one on which more than one view is possible. In the present case, we hold that a case of furnishing of inaccurate particulars of income has not been made out against the assessee. As pointed out by the learned Counsel for the assessee and noted by us, though, similar disallowances were made by the Assessing Officer in preceding assessment years and accepted by the assessee, however, no penalty proceedings for imposition of penalty under section 271(1)(c) of the Act was initiated by the Assessing Officer. - Decided in favour of assessee.

Issues Involved:
1. Imposition of penalty under section 271(1)(c) of the Income Tax Act, 1961.
2. Disallowance of expenditure under section 14A of the Income Tax Act, 1961 read with Rule 8D.
3. Apportionment of expenditure between exempt income and taxable income.
4. Furnishing of inaccurate particulars of income.

Issue-wise Detailed Analysis:

1. Imposition of penalty under section 271(1)(c) of the Income Tax Act, 1961:
The appeal was filed by the assessee against the order confirming the penalty imposed under section 271(1)(c) for the assessment year 2013-14. The penalty was imposed on the grounds of furnishing inaccurate particulars of income and concealment of income. The assessee argued that it had made complete disclosure of its claim in the return of income, and hence, there was no concealment or furnishing of inaccurate particulars. The Tribunal noted that the Assessing Officer ultimately held that the assessee had furnished inaccurate particulars of income, not that it had concealed its income.

2. Disallowance of expenditure under section 14A of the Income Tax Act, 1961 read with Rule 8D:
The assessee had disallowed an amount of ?2,05,92,611 under section 14A read with Rule 8D(2)(iii) in the computation of total income. The Assessing Officer, however, apportioned a part of the fee paid to the Asset Management Company (AMC) towards expenditure for earning exempt income and disallowed ?13,66,39,477 under Rule 8D(2)(i) by treating it as direct expenditure for earning exempt income. The Tribunal observed that the disallowance under Rule 8D(2)(i) was made on a purely estimate basis without establishing any direct nexus with the exempt income earned, and hence, it could not be treated as direct expenditure for earning exempt income.

3. Apportionment of expenditure between exempt income and taxable income:
The assessee had apportioned an amount of ?27,62,69,137 towards earning of interest and other investment income offered to tax. The Assessing Officer was not convinced with the apportionment and observed that various expenditures, such as fees paid to AMC, were not properly apportioned between investments made for earning exempt income and other investments. The Assessing Officer apportioned 45.69% of the total fee paid to AMC towards investment in exempt income-yielding assets and disallowed it. The Tribunal noted that the apportionment was done on a purely estimate basis and could not be treated as direct expenditure for earning exempt income.

4. Furnishing of inaccurate particulars of income:
The Tribunal considered whether the disallowance made by the Assessing Officer could lead to the conclusion that the assessee had furnished inaccurate particulars of income. It was observed that the assessee had furnished all details of its expenditure and income in its return, and the disallowance was made on a purely estimate basis. The Tribunal referred to the Supreme Court's decision in CIT vs. Reliance Petroproducts Pvt. Ltd., which held that merely because a claim made by the assessee was not accepted, it could not lead to furnishing of inaccurate particulars of income. The Tribunal concluded that the assessee could not be accused of furnishing inaccurate particulars of income and deleted the penalty imposed.

Conclusion:
The Tribunal allowed the appeal, deleting the penalty imposed under section 271(1)(c) of the Income Tax Act, 1961, and concluded that the assessee had not furnished inaccurate particulars of income. The disallowance made under section 14A read with Rule 8D was found to be on a purely estimate basis, and the assessee had made complete disclosure of its claims in the return of income.

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