PDR INVESTMENTS PVT LTD,CHENNAI vs. DCIT, CORP CIR-5(2), CHENNAI

This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals) 3, Chennai, dated 28.09.2018 for the assessment year 2013-14 passed under section 271(1)(c) of the Income Tax Act, 1961 [“Act” in short] in levying penalty of ₹.87,26,857/-.

Brief facts of the case are that the during the course of scrutiny assessment proceedings, the Assessing Officer noticed from the financials of the company that the assessee has earned LTCG of ₹.15,37,773/- on sale of 45,570 shares of Panasonic Carbon India Company Limited during the A.Y.2013-14. Out of 45570 shares, 25100 shares were purchased in the financial year 1983-84, 15450 shares were purchased in financial year 1994- 95 and the remaining 5020 shares were bonus shares for which cost of acquisition was taken as NIL. The assessee requested that since the proof of acquisition of shares in financial year 1983-84 could not be retrieved, financial year 1990-91 may be considered as the base year for shares acquired in financial year 1983-84 for calculating the Indexed Cost of Acquisition. Hence considered the financial year 1990-91 & 1994-95 as the base years, the Indexed cost of Acquisition was calculated resulting in excess LTCG of Rs.2,64,560/- 2.1 Further, on perusal of the financials of the assessee company, the Assessing Officer noticed that the assessee has taken a loan of ₹.18,62,59,263/- from Kotak Mahindra Prime Ltd and from the Director. The total interest paid on the above loans amount to ₹. 2,89,13,152/-. The total investments made during the year was ₹.20,91,35,768/-. During the assessment proceedings, when the AR of the assessee was asked to explain as to why the entire interest expenditure of ₹.2,89,13,152/- should be not allowed under section 14A r.w.r. 8D as expenditure directly relatable to earning dividend income which is exempt, it was submitted that the entire loan has been invested in Sindya Power Generating Company Pvt Ltd in earlier year and no dividend has been received from the said company during the year. Since the assessee company is solely engaged in the business of making investment in shares and as all the expenses of the company are incurred only towards earning income from such shares which is exempt, by following the decision in the case of Chem invest Ltd v. ITO (2009) 121 ITD 318 (Delhi)(SB) and Circular No.5 of 2014 dated 11.02.2014 issued by the CBDT, the Assessing Officer disallowed the entire interest expenditure of ₹.2,89,13,152/- under section 14A r.w. Rule 8D and brought to tax.

For furnishing inaccurate particulars of taxable income, penalty proceedings under section 271(1)(c) of the Act. After considering the submissions of the assessee, the Assessing Officer was of the opinion that since dividend income is exempted from tax by virtue of section 10(34) of the Act, the interest paid on borrowed capital utilized in purchase of shares, being expenditure incurred in relation to dividend income not forming part of assessee's total income, cannot be allowed as a deduction and such disallowance under section 14A can be made even in a year in which no exempt income has been earned or received by assessee, that the assessee has furnished inaccurate particulars of income chargeable to tax to the extent of ₹.86,73,945 + 52,912 = ₹. 87,26,857/- for the assessment year 2013-14 and levied penalty under section 271(1)(c) of the Act at ₹.

On being aggrieved, the assessee is in appeal before the Tribunal. The ld. Counsel for the assessee has submitted that the assessee could not furnish the evidence for the cost of investment made in the financial year 1983-84 and 1994-95 since more than 25/30 years had lapsed. It was further submission that against the alternate claim for indexation of the year of investments as 1994-95, based on the audited statements available with the assessee, the assessee has paid tax of ₹.7,60,905 on 16.11.2012, which has not been given credit in the assessment. Therefore, the disallowance of interest and not considering the actual cost of acquisition due to adoption of different year as year of acquisition arising or made in the assessment would not amount to concealment of income or furnishing of inaccurate particulars. With regard to the disallowance of interest expenditure under section 14A r.w. Rule 8D, it was the submission of the ld. Counsel that the assessee has not earned any exempt income in the assessment year under consideration and thus, the assessment is in violation of the law laid down by the Hon’ble Madras High Court in the case of CIT v. Chettinad Logistics (P.) Ltd. reported in [2017] 80 taxmann.com 221 (Madras), as well as CIT v. Chettinad Logistics (P.) Ltd., reported in [2018] 95 taxmann.com 250 (SC and thus, prayed for deleting the penalty levied under section 271(1)(c) of the Act. The ld. DR would rely on the orders of authorities below.

We have heard both the sides, perused the materials available on record and gone through the orders of authorities below including paper book. In this case, the penalty under section 271(1)(c) of the Act was levied on two counts viz., furnishing of inaccurate particulars/not furnishing evidence for the cost of investment made in the financial year of 1983-84 and 1994-95, thereby, taking financial year 1994-95 as the base year for determining indexed cost of acquisition. The disability to produce direct evidence in support of the cost of acquisition of shares which related to more than 30 years ago cannot be viewed as concealment of income or furnishing of inaccurate particulars. The ld. CIT(A) has not given any findings on the submission before the ld. CIT(A), which was produced in the appellate order at page 7 that the assessee paid income tax of ₹.7,60,905/- even before the scrutiny assessment proceedings commenced. What was unearthed by the Department was not discussed in the penalty order. Moreover, the outcome of the rectification petition filed by the assessee under section 154 of the Act dated 29.09.2016 on the demand resulted due to assessment of long term capital gains arising on sale of shares was not discussed in the appellate order.

The additions made on the above two counts did not warrant levy of penalty under section 271(1)(c) of the Act. In order to attract the provisions of section 271(1)(c) of the Act, there has to be concealment of income or furnishing of inaccurate particulars of his income by the assessee. In the instant case, the assessee claims to have paid tax of ₹.7,60,905/- on 14.11.2012 even before the scrutiny assessment and challan for the said payment has been filed but has not been given credit. Despite the ld. CIT(A) reproduced the above submission at page 7 of the appellate order, he has not given any findings on the above submissions. Accordingly, the Assessing Officer is directed to effect the eligible refund along with interest after verification of the records. Once the assessee is not liable for taxation under section 14A r.w. Rule 8D, the question of furnishing of inaccurate particulars did not arise. The authorities below have not established that any details furnished by the assessee in its return were found to be incorrect or erroneous or false. Such not being the case, there would be no question of inviting the penalty under section 271(1)(c) of the Act. Under the above facts and circumstances, the penalty levied under section 271(1)(c) of the Act stands deleted.

In the result, the appeal filed by the assessee is allowed.