2022 (6) TMI 682 - AT - Income Tax

Penalty u/s 271(1)(c) - disallowance of business loss claimed as bad debts - Whether there was no concealment of particulars of its income on the part of the assessee nor the furnishing of inaccurate particulars of such income warranting levy of penalty under Section 271(1)(c) ? - HELD THAT - Such disallowance made originally at Rs. 1,38,45,181/- by the Assessing Officer was sustained by the Tribunal only to the extent of Rs. 5,02,181/- and while sustaining this very meager amount of disallowance, the claim made by the assessee was not found to be false and it was only that the explanation of the assessee was not found acceptable. As held by the Hon'ble Supreme Court in the case of CIT vs. Reliance Petroproducts P. Ltd 2010 (3) TMI 80 - SUPREME COURT , a mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars of his income attracting the penal provision of Section 271(1)(c) of the Act. Moreover, as held by Hon'ble Gujarat High Court in the case of Director of Income-Tax Vs. Skanska Cementation International Ltd 2016 (7) TMI 1647 - GUJARAT HIGH COURT .when substantial additions on merits have been deleted, nothing survives in favour of Revenue for levy of penalty under Section 271(1)(c). Disallowance u/s 14A r.w.r. 8D - Disallowance made originally by the Assessing Officer at Rs. 17,99,34,022/- was related to the interest to the extent of Rs. 11,04,23,814/- as worked out under Rule 8D(2)(ii). The Tribunal deleted entirely the disallowance on account of interest made as per Rule 8D(2)(ii) and also deleted a further disallowance of Rs. 1,56,62,640/- made under Rule 8D(2)(i). As regards the balance disallowance made under Section 14A as per Rule 8D(2)(iii) on account of common administrative expenses, the Tribunal directed the Assessing Officer to re-compute the said disallowance by taking into consideration only those investments which had actually yielded exempt income to the assessee in the year under consideration. As submitted by the learned Counsel for the assessee at the time of hearing before us and not disputed by the learned DR, the disallowance under Section 14A r.w. Rule 8D(2)(iii), as recomputed as per the direction of the Tribunal, would be less than the suo moto disallowance already offered by the assessee and thus there would be no question of imposing any penalty in respect of disallowance under Section 14A as finally sustained by the Tribunal. Moreover, as held by the Hon'ble Supreme Court in the case of Gruh Finance Limited 2018 (10) TMI 1674 - SUPREME COURT OF INDIA , penalty under Section 271(1)(c) of the Act is not justified in respect of disallowance made under Section 14A of the Act. We, therefore, find no justifiable reason to interfere with the impugned order of the learned CIT(A) cancelling the penalty imposed by the Assessing Officer under Section 271(1)(c) Appeal of revenue dismissed.

Issues Involved:
1. Transfer Pricing Adjustment
2. Disallowance of Prior Period Expenditure
3. Disallowance of Business Loss claimed as Bad Debts
4. Disallowance of M2M losses – Forex Derivative
5. Disallowance under Section 14A of the Income-tax Act, 1961

Detailed Analysis:

1. Transfer Pricing Adjustment:
The Assessing Officer (AO) made an addition of Rs. 4,51,82,460/- based on the Transfer Pricing Officer's (TPO) assessment of international transactions. This was later reduced by the CIT(A) to Rs. 3,05,70,000/-. Penalty proceedings were initiated under Section 271(1)(c) for concealment of income. However, the ITAT deleted the entire addition, rendering the penalty unjustifiable. The CIT(A) canceled the penalty on this basis.

2. Disallowance of Prior Period Expenditure:
The AO disallowed Rs. 32,63,473/- as prior period expenses, which was confirmed by the CIT(A). Penalty proceedings under Section 271(1)(c) were also initiated. The ITAT, however, deleted the entire addition, leading to the cancellation of the penalty by the CIT(A).

3. Disallowance of Business Loss claimed as Bad Debts:
The AO disallowed Rs. 1,38,45,181/- claimed as bad debts, which was reduced to Rs. 5,02,181/- by the CIT(A) and confirmed by the ITAT. The CIT(A) noted that the claim was not false but merely unaccepted, citing the Supreme Court's decision in Reliance Petroproducts Pvt. Limited, which states that a mere unsustainable claim does not amount to furnishing inaccurate particulars. Consequently, the penalty on this ground was canceled.

4. Disallowance of M2M losses – Forex Derivative:
The AO added Rs. 82,02,615/- as Marked to Market (M2M) losses, which was confirmed by the CIT(A). However, the ITAT deleted the entire addition, leading to the cancellation of the penalty by the CIT(A).

5. Disallowance under Section 14A:
The AO made a disallowance of Rs. 17,99,34,022/- under Section 14A, which was related to interest and administrative expenses. The ITAT deleted the disallowance of interest and a portion of the administrative expenses, directing the AO to re-compute the disallowance based on investments yielding exempt income. The CIT(A) noted that the recomputed disallowance would be less than the suo moto disallowance already offered by the assessee. Additionally, the Supreme Court's decision in Gruh Finance Limited held that penalty under Section 271(1)(c) is not justified for disallowance under Section 14A. Therefore, the penalty was canceled.

Conclusion:
The ITAT upheld the CIT(A)'s decision to cancel the penalty of Rs. 7,56,18,332/- imposed under Section 271(1)(c) of the Income-tax Act, 1961. The appeal of the Revenue was dismissed, and the order was pronounced in the open Court on 31st May, 2022, at Ahmedabad.

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