M/S NARAINA INSTITUTE OF MANAGEMENT STUDIES PVT. LTD.,KANPUR vs. DY. COMMISSIONER OF INCOME TAX-6 (4), KANPUR

PER T. S. KAPOOR, A.M.

This is an appeal filed by the assessee against the order of CIT(A) dated 04/10/2017 pertaining to assessment year 2013-14. In this appeal the assessee has raised the following grounds:

“1. Because the CIT(A) has erred on facts and in law in upholding the penalty of Rs.92,700/- imposed by the Assessing Officer under section 271(1)(c) of the IT. Act, 1961, which penalty is bad in law and be deleted.

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as all the necessary details were filed with the return of income and were explained to the Assessing Office. During the assessment proceedings and from the records of the assessee itself, the Assessing Officer came to the conclusion that the transaction of loan taken by the assessee was deemed dividend. Therefore, it was prayed that the penalty cannot be imposed as there was no concealment of income or no wrong particulars of income were filed and it was only because of the opinion of the Assessing Officer that the addition was made. It was argued that the assessment of deemed dividend is highly debatable and on a debatable issue, the penalty u/s 271(1)(c) cannot be imposed. Reliance in this respect was placed on the decision of Mumbai Bench of the Tribunal in the case of P. James vs. ACIT in I.T.A. No.982/Mum/2015, order dated 22/11/2017 where Hon'ble Tribunal had deleted the penalty imposed on assessee under similar facts and circumstances. Learned A. R. further argued that Hon'ble Supreme Court in the case of Reliance Petroproducts Limited has also clarified that penalty u/s 271(1)(c) cannot be imposed for a wrong claim. It was argued by Learned A. R. that even if the claim of the assessee was held to be wrong, penalty was not imposable.

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sheet itself, the Assessing Officer further enquired about the nature of the transaction. Therefore, it cannot be said that the assessee has furnished wrong particulars of income or had concealed any income. The penalty has been imposed only on account of difference of opinion between the Assessing Officer and the assessee. The assessee held it to be a loan taken from a sister concern whereas the Assessing Officer treated it as deemed dividend. In a debatable issue and in a case like this where the assessee had furnished complete details of the transaction, the penalty cannot be imposed as has been held by various decisions. The reliance placed by the assessee in the case of P. James (supra) supports the case of the assessee where Hon'ble Tribunal, while deleting the penalty, has held as under:

“4. None appeared for the assessee. We have heard the Ld.DR, perused the material available on record and gone through the orders of authorities below. The AO levied penalty u/s 271(1)(c) towards addition made on account of deemed dividend u/s 2(22)(e) of the Act. According to the AO, the assessee has failed to offer any explanation for not disclosing loans and advances received from a company in which he was a beneficial shareholder under the provisions of section 2(22)(e) of the Act. It is the contention of the assessee that penalty cannot be levied u/s 271(1)(c) towards addition made by invoking deeming provisions provided under the Act. The assessee further contended that the AO has made addition u/s 2(22)(e) for the first time in the impugned assessment year and such addition was made on the basis of information gathered during the course of assessment proceedings of AY 2008-09 from the financial statement filed by the assessee. The assessee has disclosed loan borrowed from the company, in his balance-sheet. The assessee further contended that deeming fiction provided under the provisions of section 2(22)(e) cannot be extended to the provisions of section 271(1)(c) to hold that the assessee has furnished inaccurate particulars of income, despite details of loan has been disclosed in the balance-sheet filed for the relevant assessment year.

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AY 2008-09 which revealed that the assessee has borrowed loan from a company for Rs.78,08,433 in which he was a beneficial shareholder. The said information has been gathered from the financial statement of the assessee. The assessee has disclosed loan borrowed from the company in his balance- sheet. We further notice that the AO has made addition u/s 2(22)(e) for the assessment year 2009-10 for the first time. 9 ITA No.982 /Mum/2015 No such addition has been made in the preceding financial years. The assessee claims that he was under a bonafide belief that deeming fiction provided u/s 2(22)(e) for the purpose of making addition towards loans and advances borrowed from a company in the hands of the director cannot be extended to penalty provisions provided u/s 271(1)(c) to hold that non disclosure of deeming dividends in the return of income would amount to furnishing of inaccurate particulars of income. We find force in the arguments of the assessee for the reason that deeming fiction provided u/s 2(22)(e) for making addition towards loans and advances from a closely held company in the hands of the directors cannot be considered as furnishing of inaccurate particulars of income; despite the assessee has disclosed borrowings from the company in its balance-sheet. We further observe that the AO has made addition for the first time in the financial year under consideration. Therefore, we are of the considered view that the explanation offered by the assessee that no penalty can be levied towards addition made by invoking deeming provisions for levying penalty appears to be bonafide. We further observe that whether the provisions of section 2(22)(e) is applicable or not to a particular loan and advance from a company in the hands of the director is a debatable issue and there is a possibility of two views. The AO has taken a view to bring it to tax loans and advances under the provisions of section 2(22)(e) of the Income-tax 10 ITA No.982 /Mum/2015 Act, 1961. Such deeming fiction provided u/s 2(22)(e) cannot be considered as furnishing of inaccurate particulars of income. We further observe that the ITAT, Indore Bench in the case of Sadhna Bros vs ACIT (2011) 46 SOT 1 (Ind)(URO) held that penalty u/s 271(1)(c) in respect of loans received by the assessee from a company in which he was holding beneficial shareholding which was brought to tax by invoking deeming provisions of section 2(22)(e) cannot be a ground for imposing penalty. The relevant portion of the order is extracted below:-

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For imposing a penalty under section 271(1)(c) either there should be concealment of income or furnishing of inaccurate particulars of income. In the instant appeal, the assessee company had neither concealed its income nor furnished the inaccurate particulars of income. Insofar as the assessee had disclosed all the particulars 0/transactions with the sister concern in the audited accounts as well as in the return of income, therefore it was not a good case for imposing penalty under section 271(1)(c). In the instant case, complete details were disclosed in the balance sheet and in the schedule annexed to tax audit report, meaning thereby that all material facts were disclosed to the department by the assessee and the additions had been made on legal interpretation of law.

There is no dispute to the well settled proposition that finding in the assessment proceedings are not conclusive for determining the imposition of penalty. Thus, while imposing penalty, the entirety of circumstances must reasonably point to the conclusion that there is a concealment or furnishing of inaccurate particulars.

It was apparent from the record that the assessee- company was neither holding any shares nor it was a registered share holder of 'R' Ltd. who had given loan to the assessee-company.

Assessing Officer had levied penalty with reference to the addition made on account of loans/advances received by the assessee company from 'R' Ltd., by bringing such loans and advances under the purview of section 2(22)(e). While levying the penalty, the deeming provisions can he applied to a limited extent and instant case was concerned with the imposition of penalty under section 271(1)(c), which was not sustainable insofar as the assessee-company was not a registered shareholder of 'R' Ltd. who had given loan/advance to the assessee- company.

In view of the above, it was not a fit case for levy of penalty under section 271(I)(c) in respect o/loans received by the assessee company from 'R' Ltd. which

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was brought to tax net by invoking the deeming provisions of section 2(22)(e).”

(Order pronounced in the open court on 17/05/2019)

Sd/. Sd/. ( A. D. JAIN ) ( T. S. KAPOOR ) Vice President Accountant Member

Dated:17/05/2019 *Singh

Copy of the order forwarded to : 1. The Appellant 2. The Respondent. 3. Concerned CIT 4. The CIT(A) 5. D.R., I.T.A.T., Lucknow Assistant Registrar