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Income Tax Appellate Tribunal, DELHI BENCH “D”: NEW DELHI
Before: SHRI AMIT SHUKLA & SHRI PRASHANT MAHARISHI
O R D E R PER PRASHANT MAHARISHI, A. M.
This is an appeal filed by the revenue against the order of the ld CIT(A), Faridabad dated 19.07.2016 for the Assessment Year 2009-10 wherein the Ld. CIT – A deleted the penalty levied under section 271 (1) (C) on 3 disallowances i.e. (i) disallowance under section 14 A of Rs. 5 3, 46, 460/– , (ii) disallowance of Rs. 5 75441/– and (iii) Further disallowance of Rs. 7, 05, 965/– under section 36 (1) (iii) of the act.
The revenue has raised the following grounds of appeal:- “1. Whether, on the facts and in circumstances of the case, the ld CIT(A) has erred in deleting the penalty imposed on disallowance of Rs. 5346460/- u/s 14A read with Rule 8D(2)(ii) and 8D(2)(iii), even through the disallowance on the same ground was confirmed by him in his earlier order.
2. Whether on the facts and circumstances of the case, the ld CIT(A) has erred in deleting the penalty imposed on disallowance of Rs. 575441/- u/s 36(1)(iii) of the Act on account of capitalization of interest on borrowing for accruing assets.
3. Whether, on the facts and in circumstances of the case, the ld CIT(A) has erred in deleting the penalty imposed on disallowance of Rs. 705965/- u/s 36(1)(iii) of the Act on account of capitalization of processing fee & LC charges for acquiring assets.” 3. The brief facts of the case are that assessee is a company, which is engaged in the business of manufacturing of footwear. It filed its return of income on 30/9/2009 declaring total income of Rs. 2, 34, 39,850/–. The assessment under section 143 (3) of the act was passed on 20/12/2011 by the Ld. Assistant Commissioner Of Income Tax, Circle –Ii, Faridabad (Ld. AO) determining total income of Rs. 3,10,64,318/–. The assessee challenged the appeal before the Ld. CIT – A who confirmed a. the disallowance under section 14 A of the income tax act of Rs. 5 346460/– holding that since the assessee has incurred the interest expenditure for financing the tax-free investment the Ld. assessing officer has rightly made the addition under rule 8D of the income tax rules. He further confirmed the disallowances of the expenses incurred in relation to earning tax-free income as per rule 8D (2) (iii) read with section 14 A of the act. b. The disallowance of interest of Rs. 575441/– holding that the assessee has incurred interest expenditure on the assets, which were not put to use for the purpose of the business during the year. It was held that the expenditure should have been capitalized by the assessee. c. The disallowance of processing fee and LC charges of Rs. 7 05965/– for obtaining term loan to make payment for the new machinery and building during the year for import. The assessee claimed those expenditure as revenue expenditure however the Ld. AO and the Ld. CIT – A confirmed the above sum as capital expenditure and disallowed it holding that since the disallowance on account of interest on funds borrowed for acquisition of capital asset has already been upheld as capital expenditure, the treatment needs to be given similarly to the service charges also.
4. Consequent to that the Ld. AO initiated the penalty proceedings under section 271 (1) © of the act holding that assessee has furnished inaccurate particulars of its income on all the above issues. The assessee replied on 17/2/2015 after several reminder notices reiterating its submissions which has already been made before the lower authorities during the assessment proceedings.
The Ld. assessing officer after consideration of the reply submitted by the assessee held that the assessee has furnished inaccurate particulars of income with respect to all the three above disallowances, which are contested in this appeal and further one more disallowance with respect to disallowance of depreciation on house property. He further held that the assessee has failed to submit any corroborative evidence to authenticate its claim and correctness of the income returned. He further held that as the Ld. CIT has confirmed the above disallowances/addition it shows that assessee has furnished inaccurate particulars of the income. Therefore vide order dated 23/3/2015 he levied a penalty of Rs. 33, 86, 920/- under section 271 (1) © of the income tax act.
The assessee challenged the order of the Ld. AO before the Ld. CIT – A who deleted the penalty with respect to the three disallowances stated above however he confirmed the penalty partially on depreciation claimed by the assessee on the house property, which was not used for the purposes of the business. The assessee contested the above penalty before the coordinate bench and it has been deleted by a separate order. Therefore, we are not concerned with the above penalty confirmed by the Ld. CIT appeal. Therefore on the above three disallowances on which the Ld. CIT – A has deleted the penalty, the revenue is in appeal before us.
The Ld. authorized representative vehemently supported the order of the Ld. AO and submitted that when the addition has been confirmed by the 1st appellate authority which are not contested by the assessee before the higher appellate authorities, it is apparent that assessee has furnished inaccurate particulars of income. He therefore submitted that the penalty has rightly been levied by the Ld. AO and wrongly deleted by the Ld. CIT – A. With respect to the disallowance of expenditure under section 14 A of the income tax act he submitted that the impugned assessment year is assessment year 2009 – 10 wherein rule 8D is mandatory and Ld. AO has Page | 3 applied the above rule which has also been confirmed by the 1st appellate authority. The assessee has not disallowed any expenditure incurred on exempt income therefore; there is a clear-cut furnishing of inaccurate particulars by the assessee for above disallowance. He further stated that the interest expenditure and the other expenditure which is incurred by the assessee are debited to the profit and loss account by the assessee claiming them to be revenue expenditure in nature but which are capital in nature and the assessee could not show that interest expenditure has been capitalized till the time these assets have been put to use during the year. He submitted that the claim of the assessee is wrong.
Despite notice, none appeared on behalf of the assessee. Hence, we proceed to decide the issue on the merits of the matter as per information available on record.
We have carefully considered the rival contention and also perused the orders of the lower authorities with respect to the assessment as well as the penalty proceedings under section 271 (1) © of the income tax act which is in challenge before us in the impugned appeal.
Coming to the first issue on which penalty has been deleted by the Ld. CIT – A is with respect to the disallowance confirmed by the Ld. CIT – A Under section 14 A of the income tax act. On careful perusal of the assessment order passed by the Ld. assessing officer it is apparent that in para No. 4 the assessee has contested that assessee company has not received any dividend income from these companies which is exempt and therefore there is no application of section 14 A of the income tax act. The Ld. CIT appeal has confirmed the disallowance but deleted the penalty on the disallowance relying on the decision of the Hon’ble Supreme Court in case of CIT versus Reliance Petro Products Ltd 322 ITR 158 (SC) as well as his order deleting the penalty on identical facts and circumstances in case of sister concern of the assessee. The Ld. departmental representative could not find any infirmity in the order of the Ld. CIT – A in deleting the penalty under section 271 (1) © of the income tax act in case of the assessee on disallowance of expenditure under section 14 A of the income tax act where the assessee has not Page | 4 earned any exempt income during the year. In such cases, even the addition cannot be upheld. As when the addition itself is improper, there cannot be any penalty for furnishing inaccurate particulars on such disallowances. In view of this we do not find any infirmity in the order of the Ld. CIT – A in deleting the penalty on this disallowance.
Penalty has been further levied on two disallowance of interest expenditure and letter of credit charges on the issue that the assessee could not show that borrowings with respect to the assets purchased by the assessee have been capitalized to the cost of assets of till those assets put to use during the year or not. The Ld. CIT – A deleted the penalty holding that this is the question of difference of opinion whether the expenses have been revenue expenses or capital expenditure. However, it cannot be said that assessee has furnished any inaccurate particulars with respect to above claim. During the course of assessment proceedings, the assessee was asked to furnish the details of the addition of plant and machinery of Rs. 2.28 crores. It was noted by the Ld. AO that assessee is also borrowed for purchase of plant and machinery and building and overdraft of banks and claimed interest as revenue deduction thereon. Assessee is paid the LC charges on import of machinery. The assessee was asked to explain whether the interest and other charges paid for the acquisition or fixed assets during the year for the period from the date of payment to the date on which such assets have been to use have been capitalized or not. The assessee submitted details that assets have been purchased from the term loan and internal accruals. The assessee further stated that accruals, reserves, and surplus of the assessee have been utilized of the purchase of machinery. The Ld. AO disbelieved the explanation of the assessee and stated that assessee has not substantiated how the internal accruals been utilized for the purposes of the payment made in case of the assets. Therefore, he disallowed Rs. 5.75 lakhs as interest charges and further working out LC charges payment of Rs. 7.05 Lacs. On reading of the reasons for making a disallowance it is apparent that there is a difference of opinion between the AO as well as the assessee that the money that been utilized for the Page | 5