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TMI Blog2018 (10) TMI 487X X X X Extracts X X X X X X X X Extracts X X X X ..... for statistical purposes. Claim of deduction for the penalty expenses claimed in the income tax return - Held that:- It is fact on record that the penalties are not allowable for the deduction. But the assessee has claimed the deduction for the same despite the fact that these are not allowable for the deduction. Thus we confirm the penalty in view of the judgment of the Hon’ble Delhi High Court in the case of Zoom Communication Pvt. Ltd (Supra) on account of inaccurate particulars of income furnished in the income tax return. Accordingly we hold that the assessee is liable for penalty under Section 271(1)(c) of the Act. Deemed dividend under Section 2(22)(e) - Held that:- As relying on assessee's own case Both parties have given amounts to each other and these are adjustment entries. Considering the current account and number of transactions, and since the Hon’ble High Court has upheld the finding of the Tribunal in earlier years that these are not loans, which could be brought in the ambit of section 2(22)(e) of the Act for the purpose of treating it as deemed dividend. Thus once the quantum addition has been deleted then in our considered view the question of levying the penalty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... off against hat income. We hold that once the quantum addition has been deleted then the penalty under Section 271(1)(C) will not survive. Misc. Expenses return - sufficient details were not furnished - Held that:- Penalty on account of ad hoc disallowances cannot be made. Disallowances of depreciation - addition was made on account of rate applied by the assessee for charging the depreciation on the assets. The assessee has charged depreciation at the higher rate than the rate applied by the AO - Held that:- We note that the Hon’ble Courts in such kind of addition has deleted the penalty levied u/s 271(1)(c) of the Act. We find support and guidance from the judgment of Lala Harbhagwan Das & Memorial & Dr. Prem Hospital (P.) Ltd. Vs. CIT [2014 (1) TMI 1129 - ITAT DELHI] wherein held where higher depreciation was wrongly claimed under bona fide belief in respect of nature of equipment and its professional use, no penalty would be leviable. Disallowances u/s. 14A - Held that:- We note that the Hon’ble Supreme Court in the case of Reliance Petro Products Ltd..[2010 (3) TMI 80 - SUPREME COURT] has held that no penalty will be levied in case the addition is made on account of disallowan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wance of deduction of ₹ 10,74,790/- claimed u/s 80G/37 of the Act. 2. The levy of penalty being without jurisdiction and totally uncalled for, deserves to be quashed. 3. In any case, the impugned penalty order is barred by limitation and thus without jurisdiction and illegal. 4. In any case, quantification of the penalty is erroneous and excessive. 5. The learned CIT(A) has erred in law and on facts in confirming the action of AO in initiating and levying penalty under section 271(1)(c) of the Act without recording mandatory satisfaction as contemplated under the Act at the time of framing the assessment order. 6. Both the lower authorities have passed the orders without properly appreciating the fact and that they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. This action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed. The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y in respect of certain items of the additions made during the assessment proceedings on account of concealment of particulars of income/furnishing inaccurate particulars of income. 5.4 The additions in respect of which penalty was initiated among other additions are detailed as under: Amount (Rs.) 1 Provision for bad debts 10,52,773 2 Foreign Exchange Fluctuation Loss 18,77,000 3 Penalty Expenses 2000 4 Deemed Dividend u/s 2(22)(e) 3,10,08,567 5 Deduction u/s 80G 10,74,790 6 Transfer Pricing Addition 74,72,426 7 Prior Period Income 40,11,972 8 Misc. Exp. Written off 25,00,000 9 Excess Depreciation on Electric Installation 56,096 10 Disallowance u/s 14A 3,93,000 11 Disallowance u/s 40(a)(i) 1,56,69,776 12 Disallowance u/s 10B of the Act 6,84,63,318 5.5 The assessee in compliance to it submitted that there was neither furnished any inaccurate particulars of income nor concealed any particulars of income. All the additions made by the AO are debatable issue. Therefore, the assessee cannot be charged for any penalty u/s 271(1)(c) of the Act. The assessee also submitted that if any claim made in the return of income has not been substa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of Income Tax Act require converting its liability involving Foreign Exchange into rupees on the last day of previous year. As a result, if losses arise to the assessee then the same should be allowed as deduction. iii Penalty Expenses of ₹ 2000/- There was no inaccurate particular furnished by the assessee in its profit and loss accounts. It is because the penalty was duly claimed in the profit and loss account. Therefore, no penalty can be levied on the disallowance of the expenses. iv. Disallowances u/s 14A for ₹ 3,93,000/- The assessee submitted that no inaccurate particulars were furnished for the expenses incurred in relation to exempted income. Therefore there cannot be levied any penalty on account of disallowances made u/s 14A of the Act in view of the Hon'ble Jurisdictional Gujarat High Court in the case of CIT Vs. AIA Exports Pvt. Ltd. in Tax appeal No. 1408 of 2011. v. Disallowance on account of Non-Deduction of TDS u/s 40(a)(i) of the Act for ₹ 1,56,69,776/- The assessee submitted that no inaccurate particular of income has been furnished. Therefore no penalty can be levied on account of non-deduction of TDS. vi. Disallowance u/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e penalty deleted by the Ld. CIT(A). 8. The Ld. A. R. before us submitted as under:- "Penalty on "Provision for doubtful debts - ₹ 10,52,773/-: • It is submitted that assessee had debited provision for doubtful debts and the same was credited under the head Provision for Doubtful Debts from the sundry debtors in Balance-sheet and not individually from respective debtors. The said fact was evident from the grouping of Balance-sheet, profit & Loss a/c and relevant ledgers. Hence, such deduction was allowable in light of decision in the case of ''Vijaya Bank Vs. CT -190 Taxman 257 (SC)''. • In any case, the underlying amount has been duly reflected in the grouping of Balance-sheet and P&L a/c. Thus, all necessary facts were disclosed. • There is neither any concealment of income nor any inaccurate particulars of income have been furnished. Merely because an addition has been made. Penalty cannot be levied. Reliance is placed on "Reliance Petroproducts Pvt. Ltd.'' - 322 ITR 158 (SC). Hence, no penalty can be levied." Penalty on ''Penalty expenses - ₹ 2,000/- • There is neither any concealment of income nor any inaccurate particulars of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eserves to be deleted. Penalty on ''Prior Period income - ₹ 40,11,972/-: • ITAT held that PPI is to be set-off against PPE and only ''net differential sum'' is to be brought to tax. Accordingly, ₹ 7,22,725/- is to be allowed as deduction (Para 22-25 @ 25, Pgs. 28-30 of the Order). Penalty on ''Misc. expenses written off-Rs.25,00,000/- • Hon'ble ITAT restricted such disallowance to ₹ 10,00,000/- on adhoc basis (Para 31-34 @ 34 Pg.31 of the order). • It transpires that the addition has been eventually estimated at ₹ 10,00,000/- by Hon'ble ITAT on adhoc basis. • It is settled law that penalty u/s.271(1)(c) of the Act cannot be levied on addition made on estimated basis. Reliance is placed on ''Navjivan Oil Mills vs. CIT - 252 ITR 417 (Guj.)'' • All necessary facts have been disclosed. There is neither any concealment of income not any inaccurate particulars of income have been furnished. Merely because an addition has been made, penalty cant be levied. Reliance is placed on ''Reliance PetroproductsPvt.Ltd.'' - 322 ITR 158 (SC). • Under such circumstances, penalty deserves to be deleted. Penalty on ''Deprecia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of incomes for different kinds of addition. 9.1 Both the parties before us relied on the order of authorities below as favorable to them. 10. We have heard the rival contentions and perused the materials available on record. The facts of the case are not in dispute. Therefore we are not inclined to repeat the same for the sake of brevity, convenience and adjudication. 11. Now we proceed to adjudicate the issue raised by the assessee as well as by the revenue independently. i. Provision for doubtful debts of ₹ 10,52,773/- In the present case, the penalty was levied by the AO due to the fact that the assessee has claimed provision for doubtful debts as deduction in the income tax return. The view taken by the AO was subsequently confirmed by the Ld CIT(A). However, the ld. Counsel for the assessee before us claimed that the assessee has not furnished any inaccurate particulars of income. It was also submitted that the deduction was claimed in view of the judgment of Hon'ble Supreme Court in the case of Vijaya Bank (Supra). From the preceding discussion, we note that the Hon'ble ITAT in quantum proceedings has confirmed the addition on account of the deduction cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wances on Foreign Exchange Fluctuation Loss: At the outset, we note that the Hon'ble ITAT in the own case of the assessee in ITA no. 955/AHD/2012 & others vide order dated 20/06/2018 has set aside the proceedings for fresh adjudication to the AO as per the provision of the law. The relevant extract of the order is reproduced as under: "42. We have duly considered rival contentions and gone through the record carefully. Assessment order as well as order of the ld.CIT(A) are silent on the submissions made by the assessee. The assessee has contended that being company, it is required to prepare its accounts by following accounting standard AS-11 where it is required to restate all its foreign exchange assets and liabilities including loans and advances given, taken, receivables, payables etc. Gain or loss arising on transactions of foreign currency assets as on the date of balance sheet are charged to the revenue i.e. debited or credited to the profit & loss account. It is also pertinent to mention that the assessee has pointed out that in assessment year 2006-07 it has a gain of ₹ 12,41,640/- which was offered for taxation. Similarly, foreign exchange loan loss amounting t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the assessee is liable for penalty under Section 271(1)© of the Act. Thus, we do not find the any reason to interfere in the order of Ld. CIT(A). Thus, the ground of the appeal is dismissed. iv. Deemed dividend under Section 2(22)(e) of the Act: At the outset, we note that the above addition was deleted by the Hon'ble ITAT in the own case of the assessee in ITA No. 955/AHD/2012 & others. The relevant extract of the order is reproduced below: "58. So far as grounds of assessee are concerned, the ld.counsel for the assessee submitted that inter corporate deposits made by the assessee-company and the Bhadraja Holdings P.Ltd. are in the nature of current accommodation adjustment entries not in the nature of loans and advances so as to attract provisions of section 2(22)(e) of the Act. The assessee was maintaining a sort of current account with M/s.Bhadra Raj Holdings P.Ltd. and the assessee has not taken any loans and deposits from its sister concern during the year. It is therefore prayed that no addition be made under section 2(22)(e) of the Act. Alternatively, it is pleaded that at the most what could be added was only the accumulated amount of profit & loss account o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the question of levying the penalty does not arise. Hence, the ground of appeal of the assessee is allowed. v. Deduction under Section 80(G) for ₹ 10,74,790/- At the outset, we note that the above addition was deleted by the Hon'ble ITAT in the own case of the assessee in ITA No. 955/AHD/2012 & others. The relevant extract of the order is reproduced below: "30. We have duly considered rival contentions and gone through the record. This expenditure was incurred by the assessee in order to perform its corporate social responsibility. Expenditure was given to Municipal Corporation, Surat and Ahmedabad and Surat Diamond Association. According to the assessee there were heavy rains and request came from Municipal Corporation. In order to fulfill the social responsibility, it has given the amounts. On due consideration of the facts, we are of the view that there cannot be any doubt about the genuineness of the payment. The payment was made to Municipal Corporation towards corporate social responsibility. This is an essential expenditure for keeping relationship smooth and the society at large. This expenditure deserves to be allowed to the assessee. Therefore, we allow this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LIBOR is the prevailing rate and it has charged LIBOR plus 1%. No defect has been pointed out in this rate. Only thing is that one of the AEs has obtained loan from European market, therefore, the ld.TPO has applied that rate. To our mind this action of the ld.TPO could be justified if he has pointed out that a tested party in India has granted loan to its AE in dollar denomination at a higher rate than the LIBOR plus 1%. It is also pertinent to note the cost of the funds to the assessee. The assessee has contended that it has raised funds by issuing of FCCB at nominal cost 0.5% to 1% and it has given these funds to its AE. Thus, the assessee has demonstrated that the rate charged by it was at a market rate and its transactions were at arm's length. No adjustment can be made in the rate of interest charged by the assessee from its AE on providing loans in dollar denomination. We allow the appeal of the assessee on this aspect, and delete adjustment recommended by the ld.TPO." Therefore, we hold that once the quantum addition has been deleted then the penalty under Section 271(1)© will not survive. As regards, the penalty imposed on account of the adjustment in respect in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sallowed simply by observing that it is not ascertainable whether this expenditure were incurred for earning a particular receipts offered under the head "prior period income". According to the Tribunal, if an assessee is offering prior period income, then the expenditure which were incurred under different heads and crystalilised in this year ought to be set off against hat income. Considering our finding in the assessment year 2006-07, we partly allow all the grounds and direct the AO to tax only net differential amount. In other words, in any particular year, if there is a negative income, then that amount is to be debited to the profit & loss account. In other words, say, in the assessment year 2007-08, the assessee has income of ₹ 41,11,972/- and expenditure of ₹ 47,34,697/-; there is a negative amount of ₹ 7,22,725/-. This net amount is to be allowed as expenditure to the assessee. On same principle, the income of the assessee be computed in rest of two years. Thus, these grounds of appeal are partly allowed." In view of above, we hold that once the quantum addition has been deleted then the penalty under Section 271(1)© will not survive. Hence, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion In the instant case, the addition was made on account of rate applied by the assessee for charging the depreciation on the assets. The assessee has charged depreciation at the higher rate than the rate applied by the AO. Thus, the addition was made. We note that the Hon'ble Courts in such kind of addition has deleted the penalty levied u/s 271(1)(c) of the Act. In this regard, we find support and guidance from the judgment of Lala Harbhagwan Das & Memorial & Dr. Prem Hospital (P.) Ltd. Vs. CIT reported in 40 taxmann.com 150. The relevant extract of the head note of the order is reproduced below: "IT : Where higher depreciation was wrongly claimed under bona fide belief in respect of nature of equipment and its professional use, no penalty would be leviable." Respectfully following the order as discussed above, we do not want to disturb the finding of ld. CIT-A. Hence the ground of appeal of the Revenue is dismissed. x. Disallowances u/s. 14A of the Act: In this case, the penalty was levied on account of the disallowance of the expenses under Section 14A of the Act. However, we note that the Hon'ble Supreme Court in the case of Reliance Petro Products Ltd.(Supra) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d an amount of ₹ 1,56,69,776/- under section 40(a)(ia) of the Act, which was confirmed by the ld.CIT(A). 51. It has been brought to our notice that similar issue has already agitated in the assessment year 2006-07 before the Tribunal. Accordingly, both the parties reiterated their respective submissions as were made for the assessment year 2006-07. 52. After hearing both the sides, we find that similar issue arose in the case of assessee in the assessment year 2006-07 and the Tribunal in ITA No.773/Ahd/2011 order dated 23-5-2018 allowed the claim of the assessee. Both the parties before us agreed that facts in the present case also similar to the assessment year 2006-07. Therefore, we deem it appropriate to take note of the finding of the Tribunal in the assessment year 2006-07. It reads as under: "80.We have duly considered rival contentions and gone through the record. A perusal of the breakup of this expenditure would indicate that expenditure incurred by the assessee could be divided into three categories viz. (a) payments towards professional service charges, (b) reimbursement of administrative services to Dishman Europe Ltd., and (c) reimbursement of insurance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .AO has allocated this expenditure in this year also and worked out allowance expenditure out of ₹ 81,02,622/- debited under the head "Administrative services". He observed that it should be allowed at ₹ 49,89,517/-. A perusal of the assessment order would indicate that the ld.AO has assigned two reasons for making disallowance, viz. (i) non-deduction of tax, and (ii) higher allocation of expenditure in the hands of the assessee which were incurred on Dr.Henk Pluim. As far as first party is concerned, these are simply reimbursement of administrative expenses incurred by Dr.Henk Pluim outside India. They did not involve any element of income and TDS was not required to be deducted. As far as second party is concerned, the ld.AO failed to bring any material on record to justify the administrative expenses required to be incurred for availing services of Dr.Henk. It is totally in the domain of the businessman and the AO cannot dictate terms how much salary and other expenses are necessary for availing the services. This disallowance made by the AO is not sustainable. The ld.CIT(A) ought to have not confirmed disallowance made by the AO. We allow this ground of appeal and d ..... 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