2021 (3) TMI 105 - AT - Income Tax

Penalty u/s 271(1)(c) - disallowance of depreciation on computers and the disallowance of expenses - CIT-A deleted the addition - HELD THAT - Disallowance of expenses cannot attract penal provisions due to the reason that assessee has claimed the expenses for maintaining the status and structure of the assessee company during the BIFR proceedings and part of which has been disallowed by the AO on only estimate basis. Similarly, depreciation claimed on computers, and other assets cannot be disallowed on proportionate basis, when the AO has admitted part of the depreciation as allowed. CIT(A) has relied on the decision of in the case of Reliance Petro Product Ltd. 2010 (3) TMI 19 - SUPREME COURT wherein it is held that merely rejection of the claim of the assessee cannot invite penalty under section 271(1)(c) - AO has failed to substantiate any failure on the part of the assessee in disclosing all material facts fully and truly. AO has also failed to substantiate, as how the contention of the assessee was not bona fide. As noticed that in the grounds raised, the Revenue has only contested penalty in respect of depreciation on computers, whereas there is no separate computation of the depreciation on computers, either in the assessment order or in the penalty order. The finding of the Ld. CIT(A) on the issue in dispute is well reasoned and we do not find any infirmity in the same - Appeal of the Revenue is dismissed.

Summary

Issues:
1. Whether penalty under section 271(1)(c) of the Income-tax Act, 1961 should be levied for disallowance of depreciation on computers and expenses when no business activity was carried out during the year under consideration.
2. Whether the deletion of penalty by the Ld. CIT(A) was justified based on the disclosure of material facts and the debatable nature of the issues involved.

Detailed Analysis:

Issue 1:
The case involved an appeal by the Revenue against the order of the Ld. CIT(A) regarding the penalty levied under section 271(1)(c) of the Income-tax Act, 1961 for the assessment year 2012-13. The penalty was imposed due to disallowance of depreciation on computers and certain expenses totaling to a significant amount. The Assessing Officer contended that since the company did not conduct any business activities, the depreciation on assets was not allowable. The penalty was calculated at 100% of the tax sought to be evaded. However, the Ld. CIT(A) deleted the penalty, stating that there was no failure on the part of the assessee in disclosing all material facts, and the issue was debatable.

Issue 2:
During the appellate proceedings, the appellant did not appear, and the arguments were presented by the learned DR. The Assessing Officer invoked Explanation 1 under section 271(1)(c) to levy the penalty, alleging that the assessee's contentions were not bonafide. However, the Ld. CIT(A) overturned the penalty, emphasizing that the assessee had disclosed all relevant facts fully and truly. The Ld. CIT(A) highlighted that the expenses claimed were essential for maintaining the company's structure during the BIFR proceedings, and the disallowance was based on estimates. Similarly, the depreciation on computers and other assets was not proportionately disallowed, as part of it was allowed by the Assessing Officer. The Ld. CIT(A) drew reference to the Supreme Court's decision in Reliance Petro Products Limited case, stating that mere rejection of claims does not warrant a penalty under section 271(1)(c) of the Act. The Tribunal concurred with the Ld. CIT(A)'s reasoning, upholding the deletion of the penalty and dismissing the Revenue's appeal.

In conclusion, the Tribunal affirmed the Ld. CIT(A)'s decision to delete the penalty, emphasizing that the assessee had disclosed all material facts and the issues were debatable, thereby ruling in favor of the assessee and dismissing the Revenue's appeal.