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Facts
The assessee claimed interest expenditure as revenue, but the AO treated it as pre-operative expenditure, leading to a disallowance and a penalty notice. The assessee contended that the penalty proceedings were time-barred and that no inaccurate particulars were furnished, relying on various judicial precedents. The CIT(A) deleted the penalty.
Held
The Tribunal held that the CIT(A) was correct in deleting the penalty. The penalty notice did not specify the limb of Section 271(1)(c) under which it was initiated, and the AO's assessment order lacked the required satisfaction for penalty proceedings. Furthermore, even on merits, the disallowance of interest expenditure did not amount to furnishing inaccurate particulars, especially when the genuineness of the expenditure was not doubted.
Key Issues
Whether the penalty levied under Section 271(1)(c) is sustainable when the penalty notice lacks specificity and the assessment order does not record the AO's satisfaction for initiating penalty proceedings, and whether the disallowance of an expenditure as pre-operative instead of revenue constitutes furnishing inaccurate particulars.
Sections Cited
143(3), 271(1)(c), 37
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Income Tax Appellate Tribunal, BANGALORE BENCHES “B,” BANGALORE
Before: Shri Prashant Maharishi, Hon’ble & Shri Soundararajan K, Hon’ble
(A.Y.2012-13) DCIT – Central Circle – 1(2) vs. M/s. Manipal Hospitals Room No. 307, 3rdFloor. (Bangalore) Private Limited C.R. Building, Queens Road 98/2, The Annex Bengaluru – 560001 Ruso Bagh Karnataka Off. HAL Airport Road Bengaluru – 560017 Karnataka PAN: AACCV9562D (Applicant) (Respondent) Assessee Represented by: Sri S.K. Tulsiyan, Advocate Department Represented by: Smt Prajakta Thakur, JCIT Date of Hearing:09.07.2025 Date of Pronouncement 30.07.2025 O R D E R Per Prashant Maharishi, Vice President: 1. Captioned appeal is filed by DCIT – Central Circle – 1(2), Bengaluru against the Appellate Order passed by the Commissioner of Income Tax (Appeals)-15, Bengaluru (“the Ld.CIT(A)”) dated 28.02.2025 wherein the appeal filed by the assessee against the penalty order dated 25.03.2022 passed by DCIT – Central M/s. Manipal Hospitals (Bangalore) Private Limited Circle – 1(2), Bengaluru (“the Ld.AO”) levying the penalty of Rs.66,43,500/- was allowed and penalty was directed to be deleted.
Ld. AO is in appeal by raising the following grounds: - “1. Whether on the facts & circumstances of the case and in law, the Id. CIT(A)has erred in deleting the penalty-initiated u/s 271(1)(c) of the Act by Assessing Officer after recording proper reason and selecting appropriate limb as mentioned in section.
2. Whether on the facts & circumstances of the case and in law, the Id. CIT (AY/ has erred by not considering the due satisfaction recorded in assessment order and deleted the penalty proceedings by stating that no satisfaction has been recorded.”
Brief facts of the case shows that assessee filed its original return of income for the A.Y. 2012-13 at a total loss of Rs.27,63,57,618/- which was assessed under section 143(3) of the Act on 30.03.2015 wherein the addition of Rs.2,15,00,000/- with respect to the interest expenditure was made treating the above interest expenditure as pre-operative expenditure which was claimed by the assessee as revenue expenditure. Consequently, penalty notices were M/s. Manipal Hospitals (Bangalore) Private Limited issued under section 271(1)(c) of the Act for furnishing inaccurate particular of income. A show cause notice was issued on 30.03.2015. On the merits of the case, the addition was challenged before Ld.CIT(A)-7, Bengaluru who dismissed the appeal of the assessee vide Appellate Order dated 20.04.2018 and thereafter penalty proceedings were transferred to Faceless Penalty Scheme. Further, show cause notice was issued which was replied on 24.01.2022.
The assessee challenged that the penalty proceedings are barred on 30.09.2021 and cannot be levied now. Without prejudice, it also reiterated the submissions already made on 18.08.2021. It also relied upon various judicial precedents. It was also stated that the interest expenditure of Rs.2.15 Crores is treated as pre-operative expenditure and disallowed under section 37 of the Act, the genuineness of the expenditure has not been doubted, therefore, the Ld.AO has reached incorrect conclusion that assessee has furnished inaccurate particular of income. 3 M/s. Manipal Hospitals (Bangalore) Private Limited 5. The Ld. AO rejected all the explanations of the assessee and held that assessee has furnished inaccurate particular of income of Rs.2.15 Crores and thereafter levied penalty of Rs.66,43,500/- as per penalty order dated 25.03.2022.
The assessee challenged the same before Ld.CIT(A) wherein it was stated that merely because the treatment given to the interest income has not been accepted by the Ld. AO neither assessee has furnished inaccurate particular of income, nor is it liable for any penalty. Assessee further relied upon the decision of the Hon’ble Karnataka High Court in the case of CIT v. Manjunatha Cotton &Ginning Factory [35 taxmann.com 250 (kar.)] which held that when there is no specific charge in the notice, penalty levied on the basis of that notice is invalid. It further relied upon the decision of the Hon’ble Karnataka High Court in the case of CIT v. SSA’s Emerald Meadows [73 taxmann.com 241 (Karnataka)].
M/s. Manipal Hospitals (Bangalore) Private Limited 7. On the merits, it also relied on the decision of the Hon’ble Supreme Court in the case of CIT v. Reliance Petro Products (P.) Ltd., [189 taxman 322 (Sc)] stating that no penalty can be levied in respect of claim made by the assessee which has been denied by the Ld. AO.
Based on the above facts, Ld.CIT(A) deleted the penalty. Against this the Ld. AO is in appeal.
Ld. Departmental Representative supported the order of the Ld. AO and stated that the proper reasons are recorded by the Ld. AO for levy of penalty which is available in the assessment order and therefore the cancellation of penalty by the Ld.CIT(A) is not correct.
Ld. Authorized Representative vehemently supported the orders of the Ld.CIT(A) and referred to Para No.4.3 to 4.4 of the appellate order.
We have carefully considered the rival contentions and perused the orders of the Ld. Lower Authorities. The solitary issue in this appeal is whether the order of the Ld.CIT(A) is correct while 5
The Ld.CIT(A) has deleted the penalty as per Paragraph Nos. 4.3 to 4.4 as under: - “4.3 The above grounds and the submissions of the appellant have been carefully considered. On perusal of the details available on records it is noted that, the main contentions of the appellant are that; (i) The AO has not recorded its satisfaction in the assessment order for initiation of penalty proceedings. (ii) The AO in the penalty notice has not specified the limb of section 271(1)(c) for initiating penalty proceedings. The applicant places its reliance on the Hon’ble Jurisdictional High Court’s order in the case of Manjunatha Cotton &Ginning Factor. 4.3.1 The Assessment order, penalty order and material available on record have been carefully perused. It is noticed that in the assessment order, the AO has not recorded any satisfaction for initiation of penalty u/s 271(1)(c). It is seen that there is a mere mention as "Issue penalty notice u/s.271(1)(c) of the IT Act, 1961 accordingly." Further, the notice under 271(1)(c) has also been perused and it is seen that the appropriate limb has not been selected. 4.4. Therefore, respectfully following the Hon'ble Jurisdictional High Court's order it is held that penalty levied u/s.271(1)(c) of Rs.66,43,500/- is not 6 M/s. Manipal Hospitals (Bangalore) Private Limited sustainable and is liable to be deleted. Accordingly, the grounds of appeal
filed by the appellant are allowed.”
13. The order of the Ld.CIT(A) was with respect to the fact that in the penalty notice the Ld. AO has not specified the limb of section 271(1)(c) of the Act for which the penalty proceedings are initiated, in this regard Ld.CIT(A) has followed the decision of the Hon’ble Karnataka High Court in case of CIT v. Manjunatha Cotton & Ginning Factory [35 taxmann.com 250 (kar)] as well as CIT v. SSA’s Emerald Meadows [73 taxmann.com 241 (Karnataka)]. Therefore, the penalty was deleted following the decision of the Hon’ble Jurisdictional High Court on this ground.
14. Further, the levy of penalty on the merits was with respect to treatment of interest payment of Rs.2,15,00,000/- claimed by the assessee as revenue expenditure but according to the Ld. AO same was pre-operative expenditure. Thus, there was a disallowance of this interest income but treated the 7 M/s. Manipal Hospitals (Bangalore) Private Limited same as capital expenditure by the Ld. AO which is subject to depreciation. Thus, the penalty was levied because claim of expenditure as revenue expenditure was denied but was treated as capital expenditure. We do not find that the assessee has furnished any inaccurate particulars with respect to the claim of deduction of interest expenditure as revenue expenditure. In fact, it is mere denial of accepting the claim of the assessee whether the expenditure is capital or revenue in nature. On this aspect we do not find that a penalty under section 271(1)(c) of the Act could have been levied.
15. The Hon’ble Supreme Court in the case of CIT v. Reliance Petro Products (P.) Ltd., [189 Taxman 322(SC)] has held that no penalty can be levied in respect of any claim made which has been denied by the revenue. The Ld.CIT(A) though has not dealt with the merits but even on the merits penalty under section 271(1)(c) of the Act of Rs.66,43,500/- is not sustainable. Accordingly, we find no merit in the 8
In the result appeal of the Ld. AO is dismissed.
Order pronounced in the open court on 30th July 2025.