SUNRAYS PROPERTIES & INVESTMENT CO. PVT. LTD.,NEW DELHI vs. ITO, WARD- 9(3), NEW DELHI

Briefly, the facts are that the assessee is a resident company engaged in the business of trading in shares and financing.

For the assessment year under appeal, assessee filed its return of income declaring loss of Rs.1,67,25,373.

In course of assessment proceedings, the assessing officer noticed that the assessee, though, has earned exempt income by way of dividend amounting to Rs.1,53,62,695, however, assessee has disallowed an amount of Rs.15,22,277 only. Therefore, he called upon the assessee to explain why disallowance should not be made in terms of section 14A read with Rule 8D. Though, the assessee objected to the proposed disallowance, however, the assessing officer rejecting the submissions of the assessee proceeded to make a net disallowance of Rs.1,82,95,666 comprising of interest expenditure of Rs.1,79,95,358 and administrative expenditure of Rs.17,30,222.

In further appeal, the Tribunal, partly allowed the appeal with a direction to the assessing officer to restrict the disallowance to the exempt income earned during the year. In the meanwhile, based on the disallowance made in the assessment order, the assessing officer initiated proceedings for imposition of penalty under Section 271(1)(c) of the Income-Tax Act,1961 alleging furnishing of inaccurate particulars of income. Ultimately, the assessing officer passed an order imposing penalty under Section 271(1)(c) of the Act on the disallowance made of Rs.1,82,95,666. While deciding assessee’s appeal on the issue, learned Commissioner of Income-Tax (Appeals) though upheld the decision of the assessing officer imposing penalty, however, he directed the assessing officer to recompute the penalty on the addition sustained by the Tribunal.

We have considered rival submissions and perused the material on record. The addition which formed the basis for imposition of penalty under Section 271(1)(c) of the Act is the disallowance of expenditure under Section 14A read with Rule 8D.

Undisputedly, on the exempt income earned during the year under appeal, assessing officer made disallowance at Rs.1.82 crores which was subsequently scaled down to the extent of exempt income earned by the assessee. It is further evident, the assessing officer has initiated proceeding for imposition of penalty under Section 271(1)(c) of the Act alleging furnishing of inaccurate particulars of income and has also imposed the penalty under the said limb. However, facts on record clearly reveal that not only the assessee furnished full particulars of the exempt income earned during the year but the assessee itself has voluntarily computed disallowance of expenditure attributable to the exempt income. It is not a case where the assessee did not furnish particulars of either the exempt income earned or did not disallow any expenditure at all. The assessee computed the disallowance of expenditure in a manner which was not acceptable to the Revenue. That, by itself, cannot lead to the conclusion that the assessee has furnished inaccurate particulars of income. In any case of the matter, disallowance under Section 14A read with Rule 8D is a statutory disallowance which has to be made on a notional basis by applying the methodology prescribed under Rule 8D. In the aforesaid scenario, only because some disallowance has been made on notional basis, it cannot be held that the assessee has furnished inaccurate particulars of income. Therefore, in our considered opinion, it is not a fit case for imposition of penalty under Section 271(1)(c) of the Act.

In the result, appeal is allowed.