PORTAL PLAYER (INDIA) PRIVATE LIMITED,BANGALORE vs. CIT, BANGALORE

Ld. AR strongly assailing the levy of penalty which was confirmed by CIT (A) on appeal by the assessee, submitted that assessee had claimed ITA.9/Bang/2016 Page - 2 Rs.36,78,988/- as software expenditure. As per the Ld. AR, AO had in the assessment proceedings, after verification of the bills came to a conclusion that the claim was for hardware like exchange servers and software kits. Explanation of assessee was that such expenditure did not result in enduring benefit and was revenue in nature. However, AO was not impressed. He held that software and hardware purchased by assessee gave enduring benefit to it and therefore outgo has to be treated as capital expenditure. Addition was made but depreciation was allowed.

Thereafter proceedings were initiated u/s.271(1)(c) of the Act, for making a wrong claim. As per the AO assessee had furnished inaccurate particulars by claiming Rs.36,76,988/- as a revenue outgo, when it was a capital expenditure. Relying on judgment of Hon’ble Apex Court in the case of Union of India v. Dharmendra Textiles Processors and Others [306 ITR 277], AO levied a penalty on the said amount at the minimal level. Amount of penalty came to Rs.5,40,810/-.

Appeal of the assessee before CIT (A) did not meet with any success. According to him assessee could not give any explanation for the claim made by it.

Now before us, Ld. AR submitted that it was true that assessee had made a claim for software expenditure of Rs.36,76,988/-. However according to him it was a debatable issue whether software and hardware expenditure could be treated as revenue or capital. Relying on the judgment of Hon’ble Apex Court in the case of CIT v. Reliance Petro Products P Ltd, [322 ITR 158], Ld. AR submitted that preferring a claim of expenditure in good faith cannot be a reason for levying penalty, just for a reason that claim was disallowed.

Per contra, Ld. DR supported the order of lower authorities.

I have perused the orders and heard the rival submissions. Claim made by assessee as revenue expenditure comprised of the following items:

Though some of the items listed above do have a flavour of hardware, it is clear that substantial software content would also have been in-built in such hardware. Many of items were simple software service tools. The question whether expenditure incurred for acquiring software was capital or revenue in nature is not free from debate. Just because assessee made a claim, we cannot say that it had concealed any particulars or furnished inaccurate particulars. Disallowance of a claim by itself would not entail a penalty. Unless the claim was made with an intention to reduce the taxable income, there cannot be a levy of penalty. In my opinion this was not a fit case for levy of penalty u/s.271(1)(c) of the Act. Penalty stands deleted.

In the result, appeal of the assessee is allowed.