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Income Tax Appellate Tribunal, DELHI BENCHES : E : NEW DELHI
Before: SHRI R.S. SYAL & MS SUCHITRA KAMBLE
ORDER
PER R.S. SYAL, AM:
This appeal by the assessee is directed against the order passed by the CIT(A) on 09.01.2014 confirming the penalty of Rs.39,80,878/- imposed by the Assessing Officer u/s 271(1)(c) of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) in relation to the assessment year 2005-06.
Briefly stated, the facts of the case are that the assessee purchased certain assets in an earlier year by taking loan from its parent company, namely, GEC. During the year under consideration, the assessee’s parent company waived loan amounting to Rs.3,41,11,391/-, which was reduced by the assessee from gross block of fixed assets in the Schedule of the Fixed Assets under Companies Act. Consequential adjustment to depreciation as per books of account was also made. The facts of loan waiver and reduction in depreciation under the Companies Act were also recorded in Notes to the Annual accounts. However, such waiver of loan was not reduced from the value of block of assets in the Schedule of fixed assets for the purposes of calculating depreciation under the Act. The Assessing Officer opined that the assessee ought to have reduced the amount of loan waived by its parent company from block of fixed assets for the purposes of depreciation under the Act as well. That is how, he disallowed depreciation amounting to Rs.85,27,847/- on the proportionate amount of loan waived by the parent company.
Thereafter, the Assessing Officer imposed penalty on this amount, which came to be sustained by the ld. CIT(A).
We have heard the rival submissions and perused the relevant material on record. There is no dispute on the fact that the parent company of the assessee waived loan to the tune of Rs.3.41 crore during the year which the assessee meticulously reduced from the gross value of assets from the Schedule of Fixed Assets under the Companies Act.
This fact was disclosed in Schedule 12 to the Annual Accounts viz., Significant Accounting Policy and Notes to the Accounts. A copy of such Note is available at page 38 of the paper book, as per which the disclosure was made about all the necessary facts concerning the waiver of loan and reduction of this amount from gross block of fixed assets.
The assessee did not reduce this amount from the value of block of assets in the Schedule of fixed assets for the purposes of depreciation under the Act. This was done primarily on the basis of the judgment of the Hon'ble Kerala High Court in CIT vs. Cochin Company (P) Ltd. (1990) 52 Taxmann 178 (Ker). As per this judgment, the actual cost of machinery was not to be reduced by the amount of liability remitted or waived. We find that similar view has been taken by the Bangalore Bench of the Tribunal in Akzo Nobel Coatings India Pvt. Ltd. vs. DCIT (2012) 28 taxmann.com 82 (Bangalore) in which it has been held that the concept of ‘actual cost’ is defined u/s 43(1) which is relevant only for the year of purchase of assets; and the waiver of loan in a later year cannot be covered u/s 43(6)(c). It is on this interpretation of the relevant provisions that the Tribunal deleted the disallowance of depreciation made by the authorities on the amount of loan waived. The facts of the instant case are on all fours with those considered and decided by the Bangalore Bench of the Tribunal. On the strength of certain decisions, as discussed above, an opinion was formed by the assessee that the amount of loan waived was not to be reduced for the purposes of calculating depreciation under the Act. This was a possible view taken by the assessee as supported by the judgments taken note of above.
The ld. DR emphatically contended and pressed for recording his contention in the order that when an incorrect claim is made by the assessee, which is also in its knowledge, then penalty must be imposed.
We fully agree with this contention. But this proposition cannot be extended to a claim, which may be possibly allowable. In other words, debatable issues are outside the ken of penalty provision. To put it simply, where an issue is debatable and the assessee adopts a legally possible view which is eventually upset by the authorities, no penalty can be imposed with reference to such disallowance.
It is seen that the assessee made due disclosure of the actual transaction of waiver of loan in its Annual Accounts and no information was withheld. The Hon’ble Supreme Court in the case of CIT Vs. Reliance Petro Products Pvt. Ltd. (2010) 322 ITR 158 (SC) has held that simply for the reason that the Assessing Officer did not find the claim of the assessee to be sustainable in law up to a certain extent, cannot be a case for penalty u/s.271(1)(c), more so, when the particulars furnished by the assessee were not inaccurate. In view of the foregoing discussion, we are satisfied that the ld. CIT(A) was not justified in sustaining the penalty u/s 271(1)(c) in respect of the disallowance of depreciation. We, ergo, order to delete the same.
The only other amount on which penalty has been imposed is disallowance of Rs.2,35,100/-, being Software expenses. The facts apropos this issue are that the assessee purchased application software from Oracle to carry out its business activities in a more efficient manner and claimed it as revenue expenditure. The Assessing Officer treated this amount as capital in nature. Thereafter, penalty was imposed which stood affirmed in the first appeal.
Here again, we find that the Revenue authorities were not justified in imposing and confirming penalty in respect of software expenses incurred by the assessee. The Hon’ble Delhi High Court in CIT vs. GE Capital Services Ltd. (2008) 300 ITR 420 (Del), upheld the view taken by the Tribunal in treating the expenses incurred on purchase of computer software as revenue expenditure. There is a thin line between software expenses falling on the revenue or the capital side. Taking into consideration the entirety of facts and circumstances of the instant case, we are satisfied that the view taken by the assessee in treating software expenses as revenue, cannot call for any imposition of penalty. We, therefore, overturn the impugned order on this score as well.
In the result, the appeal is allowed.
The order pronounced in the open court on 22.03.2017.