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Income Tax Appellate Tribunal, MUMBAI BENCH “E”, MUMBAI
Before: SHRI DK RAO & SHRI CN PRASAD
आदेश / O R D E R
PER C.N.PRASAD (J.M.) : Both these appeals are filed by the Revenue and Assessee against the order of the Ld. CIT (Appeals)-9, Mumbai dated 23.07.2014 for the assessment year 2008-09 in partly deleting the penalty levied under Section 271(1)(c) of the Act.
Briefly stated the facts are that the assessee engaged in the business of manufacturing of oxygen gas, trading of spares and letting out of surplus space filed its return declaring income of Rs.3,26,78,516/-. Assessment was completed under Section 143(3) determining taxable income at Rs.4,74,33,576/-. While completing the assessment, the assessing officer disallowed Rs.1,44,43,959/- under Section 14A of the Act and an amount of Rs.3,11,102/- was added on account of short term capital gains. The assessee preferred appeal before the Ld. CIT (Appeals) in respect of the disallowance made under Section 14A with reference to Rule 8D and accepted the addition made towards short term capital gain. The Ld. CIT (Appeals) partly sustained the disallowance under 14A of the Act.
The assessing officer initiated penalty proceedings under 271(1)(c) on the disallowance sustained by the Ld. CIT (Appeals) and on the addition made towards short term capital gains. With respect to the disallowance made under Section 14A, the assessee contended that it had incurred an amount of 3 M/s Spaco Technologies (I) Pvt. Ltd. & 5986 Rs. 60,265/- for earning exempt income and the same was disallowed by the assessee in its computation. Incurring of this expenditure was also disclosed in tax audit report. Therefore, it was submitted that it had disclosed all the necessary particulars in respect of the expenditure incurred in respect of exempt income and there is no concealing of income or furnishing of inaccurate particulars of such income. The assessee further contended that it had sufficient own funds in the form of reserves which is more than the investments, therefore, the disallowance computed under Section 14A is not proper and justified. Therefore, levy of penalty under Section 271(1)(c) is not correct.
With regard to the addition made on account of short term capital gains, the assessee contended that it had committed inadvertent and bonafide error in showing the short term capital gain as long term capital gain and this was corrected suo-moto in the course of assessment proceedings. However, the assessing officer rejected the explanation of the assessee and levied penalty under section 271(1)(c) on the disallowance sustained by the Ld. CIT (Appeals) under Section 14A of the Act and the penalty sustained in respect of the addition made towards short term capital gains. Both the assessee as well as the revenue are in appeal before us.
When the matter was posted for hearing on 09.11.16, the authorized representative by letter dated 07.11.16 requested for adjournment stating that due to personal difficulty and since he is travelling out of Mumbai, appeals be 4 M/s Spaco Technologies (I) Pvt. Ltd. & 5986 adjourned. This is not a reasonable cause for granting adjournment and therefore, we proceed to hear the Ld. DR and dispose of the appeals on merits.
The Ld. DR vehemently submits that the Ld. CIT (Appeals) is not justified in deleting the penalty in respect of the disallowance made under Section 14A read with Rule 8D(ii) and further supported the orders of the Ld. CIT (Appeals) in sustaining the penalty in respect of the disallowance made under Section 14A read with Rule 8D (iii) and the addition made towards the short term capital gains.
We have heard the Ld. DR and perused the orders of the authorities below, the assessee while computing the disallowance under Section 14A disallowed Rs.60,265/- as direct expenditure incurred for earning exempt income. The Assessing Officer however computed the disallowance at Rs.1,44,43,959/- consisting of direct expenditure of Rs.60,265/-, interest expenditure of Rs.92,25,260/- and indirect expenditure being 0.5% of average investments at Rs.51,58,434/- The penalty was also levied on the addition made by the assessing officer in respect of short term capital gains. On appeal, the Ld. CIT (Appeals) deleted the penalty in respect of disallowance made under Section 14A read with Rule 8D2(ii) but confirmed in respect of the disallowance made under Section 8D2(iii). He also confirmed the penalty in respect of the short term capital gain, observing as under :- “5.2. As regards the penalty u/s.271 (l)(c) in respect of the disallowance of Rs.1.44 crore u/s. 14 A of I.T Act is concerned, it is noticed that the appellant company has suo moto computed only the direct expenditure relatable to the earning of exempt income by way of salary of two persons
5 M/s Spaco Technologies (I) Pvt. Ltd. & 5986 amounting to Rs.52,400/- and interest on overdraft of bank of Rs. 7,864/- totaling to Rs.60,265/-, whereas while making the assessment order u/s.143(3) the AO has computed the proportionate disallowance of interest and other expenses as per the provisions of Rule 8D (ii) and (iii) which have worked out to Rs.92,23,260/- and Rs.51,58,434/- respectively totaling to Rs.I.44 crores in all. The AO has levied penalty on the addition on account of disallowance u/s.14A by holding that the appellant was liable to furnish the particulars of income in accordance with the provision of sec.14 A r.w. Rule 8D i.e. by making disallowance u/s.14 A by invoking rule 8 D as envisaged by the decision of Hon'ble Bombay High Court in the case of Godrej and Boyce Pvt. Ltd. 43 DTR 177. Since the assessee has not declared correct amount of expenditure incurred in earning of exempt income, therefore it has not furnished correct particulars of income, hence liable for levy of penalty u/s.271(1)(c). On the other hand, the appellant has primarily contented before the AO as well as in the present appeal proceedings that (i) disallowance u/s.14 A is highly debateable issue (ii) though similar disallowance was worked out and made by the AO in immediately preceding year, 2007-08 but no penalty proceedings were initiated in that year for the same default (iii) the appellant has repeatedly pointed out that its own fund were much more than the total investments, under such circumstances it cannot be presumed that borrowed funds have been utilized for the investment in shares and (iv) the appellant has suo- moto made disallowance out of administrative expenses, whereas the AO has mechanically applied Rule 8 D. Under these circumstances, the appellant has vehemently denied that the penalty proceedings are attractable in this case. After considering the material facts, rival submissions as well as plethora of case laws available on the issue of disallowance u/s.14 A r.w. Rule 8 D as well as levy of penalty u/s.271(1)(c), it is held that for levy of penalty, the AO has to show some substance that the appellant has furnished inaccurate particulars of income or has concealed any part of income. In the instant case the appellant since earlier years has taken the same stand that it has sufficient own funds in form of reserves of Rs.143.83 crore which are sufficient enough to explain the investment of Rs.112.76 crores and this stand was also accepted u/s.143(3) of I T Act in A.Y 2007-08 when no disallowance was made on account of proportionate interest, therefore it
6 M/s Spaco Technologies (I) Pvt. Ltd. & 5986 can safely be presumed that the disallowance made by the AO under Rule 8 D [ii] on account of proportionate interest does not attract penalty proceedings u/s.271(1)(c) because the appellant's contention was also a bonafide contention that its investment have come out of own funds and not from borrowed funds, therefore; penalty levied on disallowance u/s.Rule 8 D (ii) of Rs 92,25,260/- is directed to be deleted. As regards the penalty levied on the addition on account of disallowance under Rule 8D(iii), I agree with the contention of the AO that in A.Y 2008-09 i.e. the current year, once it was certain that the appellant has incurred administrative expenses for earning of its huge exempt income, then in the light of the decision of Hon'ble Bombay High Court in the case of M/ s. Godrej & Boyce Ltd. (Supra) it was required to work out the disallowance under Rule 8 D (iii). Since the appellant has failed to do so, this conduct of the appellant tantamount to furnishing incorrect particulars of income, therefore penalty on the addition worked out by disallowance under Rule 8 D (iii) is justified and the same is confirmed. Regarding the levy of penalty on short term capital gain of Rs. 3,11,102/- also, I agree with the AO that by wrongly claiming the short term capital gains as long term capital gains, the appellant has furnished wrong particulars of income. It is a fact that during the scrutiny proceedings, when the AO discovered that the long term capital gain disclosed by the appellant are actually short term capital gains, the appellant has admitted this fact, therefore there remains no doubt that by claiming the short term capital gains as long term capital gains the appellant has furnished inaccurate particulars of its income. Under these circumstances, penalty on tax sought to be evaded by making such wrong claim is clearly attractable, hence the same is also confirmed.”
On careful reading of the order of the Ld. CIT (Appeals) and the submissions of the assessee before the lower authorities, we do not see any concealment or furnishing of inaccurate particulars in respect of the 7 M/s Spaco Technologies (I) Pvt. Ltd. & 5986 disallowance made under Section 14A of the Act. Disallowance came to be made by invoking the provisions of Rule 8D. Here the assessee proved that it has own funds much more than investments and therefore there is no question of disallowance under 8D 2(ii). Coming to administrative expenses disallowed under Rule 8D 2(iii) we find that during the assessment proceedings, the assessee itself given the computation u/s 14A for disallowance of estimated expenditure under Rule 8D 2(iii). This expenditure came to be disallowed by the operation of law but not on account of the reason that the assessee furnished inaccurate particulars or concealment of income. Hence no penalty is attracted for such disallowance.
Coming to the addition made towards short term capital gains, the assessee in the course of assessment proceedings submitted that while computing the total income for the assessment year, it has taken profit on sale of investments as per profit and loss account which included short term as well as long term capital gains and the short term capital gains and computed capital gains accordingly. The short term capital gains included is Rs.3,11,102/-. It was contended that this was inadvertent and bonafide error and therefore the assessee had requested to rectify this in the assessment proceedings while completing the assessment. However, the assessing officer levied penalty, observing that the assessee has not admitted his mistake suo-moto but only after issue of notice under Section 143(2) and specific query was put to the assessee. The bonafide explanation of the assessee that it is an inadvertent mistake and bonafide error while computing the capital gains is not proved to be false by the assessing officer. The assessing officer could not prove that the explanation of the assessee was not genuine. The assessee computed long term
8 M/s Spaco Technologies (I) Pvt. Ltd. & 5986 capital gain taking the sale proceeds of entire investments which were shown in the profit and loss account may be by oversight or inadvertence. It is only a change in the head of income. It is not complete non disclosure by the assessee. Therefore, the explanation of the assessee since not proved to be non genuine, in our view, there is no concealment of income or furnishing of inaccurate particulars by the assessee in respect of computation of capital gains, thus we delete the penalty levied by the assessing officer on the addition of capital gains.
In the result, appeal of the revenue is dismissed and appeal of the assessee is allowed.
Order pronounced in the open court on the 3rd day of February 2017.