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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI B.R. BASKARAN
Per N.V. Vasudevan, Vice President & 268/Bang/2019 are appeals by the assessee against two orders both dated 27.12.2018 of the CIT(Appeals), Kalaburagi relating to assessment years 2011-12 and 2012-13.
In both the aforesaid appeals, the assessee has challenged the order of CIT(Appeals) whereby the CIT(Appeals) confirmed the order of AO
SP Nos. 88 & 89/Bang/2019 & & 268/Bang/2019 and 18 & 19/Bang/2019 Page 2 of 7 imposing penalty on the assessee u/s. 271(1)(c) of the Income-Tax Act, 1961 [“the Act”].
The assessee is a partnership firm engaged in the business of extraction and sale of iron ore. For the AY 2011-12, the assessee claimed deduction of a sum of Rs.10,82,84,400 under the head ‘’Corporate Social Responsibility’[“CSR”] -flood relief. The aforesaid sum was incurred by the assessee pursuant to a Memorandum of Understanding (MoU) dated 01.12.2019 entered into by the Assessee with Government of Karnataka (GoK). As per the MoU, the assessee agreed to construct 760 Aasare houses at Chickbellary village and 550 Aasare houses at Sreedhargadda village of Bellary Siruguppa Taluk for the flood affected. The aforesaid expenditure was claimed as deduction u/s. 37(1) of the Act.
According to the AO, the amount cannot be allowed as a deduction as a business expenditure, as it was not related to assessee’s nature of business and it was only incurred for relief on occurrence of natural calamity in the district. It is not in dispute that the assessee’s mines are located at Sandur which is close to the flood affected area.
The AO also found that the assessee had paid the following sum which was claimed as deduction u/s. 37(1) of the Act:-
Sl. Description Amount of No. expenditure 1. Penalty paid on rectification order passed by the 83,431 Commercial Tax Department 2. Penalty paid to Forest Department – 4050375 8,552,375 1000000 3502000
SP Nos. 88 & 89/Bang/2019 & & 268/Bang/2019 and 18 & 19/Bang/2019 Page 3 of 7
TOTALLY EXPENDITURE INCURRED 8,635,806 AS PENALTY
6. The claim for deduction was disallowed by the AO on the ground that the expenditure in question was penal in nature and therefore not allowable as a deduction u/s. 37(1) of the Act r.w. Explanation thereto. The aforesaid sum was also added to the total income of the assessee.
In respect of two additions made in the course of assessment proceedings, the AO initiated penalty proceedings u/s. 271(1)(c) of the Act and imposed penalty holding that the assessee was guilty of furnishing inaccurate particulars of income.
On appeal, the CIT(Appeals) confirmed the order of AO.
The facts for the AY 2012-13 are identical, except for change in the quantum of deduction claimed on account of corporate social responsibility (CSR)-Floor relief which was a sum of Rs.4,56,84,339 which was expenditure incurred in construction of houses as a corporate social responsibility and another addition on account of expenditure which was penal in nature and not allowable u/s. 37(1) Explanation. The details of the same are as follows:
Sl. Description of expenditure Amount of No. expenditure 1. Interest on TCS 11,709 2. Interest on TDS 42,792 3. Penalty paid u/s. 72(2) of the KVAT Act, 2003 for 87,344 the period 2006-07 4. Penalty paid u/s. 72(2) of the KVAT Act, 2003 for 47,305
SP Nos. 88 & 89/Bang/2019 & & 268/Bang/2019 and 18 & 19/Bang/2019 Page 4 of 7 the period 2007-08 5. Penalty paid u/s. 72(2) of the KVAT Act, 2003 for 41,516 the period 2009-09
Penalty paid u/s. 72(2) of the KVAT Act, 2003 for 49,572 the period 2009-10 TOTAL EXPENDITURE INCURRED AS 280,238 PENALTY In respect of the aforesaid two additions in the course of assessment proceedings, penalty was imposed on the assessee u/s. 271(1)(c) of the Act, which was confirmed by the CIT(Appeals) for AY 2012-13.
When these appeals were taken up for hearing, the ld. counsel for the assessee brought to our notice that the additions made in the aforesaid assessment years were all confirmed by the ITAT in the quantum proceedings. The assessee filed an appeal before the Hon’ble High Court against the orders of Tribunal in the quantum proceedings in to 10031/2017. The Hon’ble High Court of Karnataka by its order dated 22.01.2018 was pleased to admit the appeal of the assessee holding that the following substantial question of law arose for consideration from the order of Tribunal in the quantum proceedings for the AYs 2011-12 and 2012-13:-
“SSJ 86JMCJ: 22.01.2018 ORDER Heard. Appeals are admitted to consider the following substantial questions of law.
SP Nos. 88 & 89/Bang/2019 & & 268/Bang/2019 and 18 & 19/Bang/2019 Page 5 of 7
1) Whether on the facts and circumstances of the case. the Tribunal is justified in law in disallowing Rs. 10,82,84,400/- and Rs.4,56,84,339/- representing expenditure in providing houses to shelterless in the area of mining operation of the appellant, in pursuance to MOU with Government of. Karnataka during the AYs 2011-2012 and 2012-2013 respectively? 2) Whether on the facts and circumstances of the case, the Tribunal is justified in law in disallowing compensation of Rs.85,52,375/- paid by the Appellant to the Forest Department towards damages caused to the Forest by invoking Explanation 1 to Section 37 of the 1T Act for the AY 2011-2012?”
. The ld. counsel for the assessee thereafter drew our attention to the decision of the Hon’ble High Court of Karnataka in the case of CIT v. M/s. Ankita Electronics Pvt. Ltd., judgment dated 03.03.2015 wherein the Hon’ble High Court took the view that when the additions made in the quantum proceedings based on which the penalty is imposed, is subject matter of challenge before the Hon’ble High Court and the Hon’ble High Court has admitted substantial question of law on the additions which are subject-matter of imposition of penalty, then that circumstance would alone be sufficient to hold that the claim made by the assessee which was rejected by the revenue authorities were debatable and consequently no penalty could be imposed u/s. 271(1)(c) of the Act. The ld. counsel for the assessee submitted that the ratio of the aforesaid rule, if applied to the facts of the present case can only lead to a conclusion that the penalty imposed has to be cancelled.
SP Nos. 88 & 89/Bang/2019 & & 268/Bang/2019 and 18 & 19/Bang/2019 Page 6 of 7
The ld. DR, on the other hand, relied on the decision of the Hon’ble Bombay High Court in the case of Pr. CIT v. Rasiklal M. Parikh, judgment dated 19.03.2019, where a contrary view on the same issue has been taken by the Hon’ble Bombay High Court, following the decision of the Hon’ble Gujarat High Court in the case of CIT v. Dharamshi B. Shah, 366 ITR 140 (Guj). The view taken in the aforesaid decisions was that penalty cannot be deleted on the sole ground that the additions in respect of which penalty was imposed gave rise to substantial question of law and admitted for consideration by the High Court.
We have considered the rival submissions as also decisions cited by the ld. counsel for the assessee and the learned DR. We are of the view that the decision of the Hon’ble High Court of Karnataka is binding on this Tribunal as the said High Court is the jurisdictional High Court. Therefore, following the ratio laid down by the Hon’ble High Court of Karnataka, we hold that penalty cannot be imposed on the assessee in the given facts and circumstances of the case as the additions made in the quantum proceedings based on which the penalty was imposed, is subject matter of challenge before the Hon’ble High Court and the Hon’ble High Court has admitted substantial question of law on the additions which are subject- matter of imposition of penalty. We therefore direct that the penalty imposed in both the assessment years be cancelled and both the appeals of the assessee are allowed.
Since the appeals have been decided on the preliminary issue, the other grounds raised on merits on the imposition of penalty and other
SP Nos. 88 & 89/Bang/2019 & & 268/Bang/2019 and 18 & 19/Bang/2019 Page 7 of 7 technical grounds with regard to defective show cause notice issued u/s. 274 of the Act are not taken up for consideration.
Since the appeals of the assessee are allowed, the stay petitions filed by the assessee become infructuous and accordingly the same are dismissed as infructuous.
In the result, the appeals by the assessee are allowed, while stay petitions are dismissed.
Pronounced in the open court on this 24th day of April, 2019.