MOHAIR INVESTMENT AND TRADING COMPANY (P) LTD.,,NEW DELHI vs. DCIT, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH ‘E’ : NEW DELHI) BEFORE SHRI A.T. VARKEY, JUDICIAL MEMBER and SHRI O.P. KANT, ACCOUNTANT MEMBER ITA No.4677/Del./2009 (ASSESSMENT YEAR : 2001-02) M/s. Mohair Investment and Trading vs. DCIT, Circle 5 (1), Company (P) Limited, New Delhi. 15, Aurangzeb Road, New Delhi – 110 011.

(PAN : AAACM0345D) (APPELLANT) (RESPONDENT) ASSESSEE BY : Shri Gaurav Jain, Advocate and Bhavita Kumar, Advocate REVENUE BY : Shri P. Dam Kanunjna, Senior DR

Date of Hearing : 02.09.2015 Date of Pronouncement : 27.11.2015 O R D E R PER A.T. VARKEY, JUDICIAL MEMBER :

This appeal, at the instance of the Assessee, is directed against the order of the Commissioner of Income-tax (Appeals)-I, Dehradun dated

12.10.2009 for the assessment year 2001-02. 2. The solitary ground involved in this appeal is against confirmation of the penalty of Rs.1,49,38,148/- levied under section 271(1)(c) of the Income-tax Act, 1961 (hereinafter ‘the Act’) by the AO.

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jurisdictional High Court set-aside the order of the Tribunal which was

allowed in favour of the assessee on the ground that penalty proceedings are hit by limitation. The Hon’ble High Court has directed the Tribunal to

decide the issue on merits vide order dated 30.09.2011. The facts and

circumstances which led to the penalty is as follows :-

(i) The Assessee, which is a Company, operates in the business of

shares and securities.

(ii) The Assessee filed its return of income on 29.10.2001 declaring

income of Rs.3,84,75,860/- for the year under consideration i.e.

2001-02 and the same was assessed under section 143 (3) of the

Act.

(iii) During the relevant assessment year, the Assessee had received dividend income of Rs.3,11,85,522/- from various other

companies.

(iv) While dealing with the tax assessment of the Assessee, the

Assessing Officer noticed that the Assessee had claimed

exemption of an expenditure of Rs.4,15,86,591/- being interest

on loans raised for acquiring shares of various companies.

(v) The Assessing Officer vide assessment order dated 28.02.2003

came to the conclusion that as per Section 14A and Section

115-O(5), no deduction was allowable with respect to the

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expenditure incurred in relation to dividend income which was

exempted from tax.

(vi) On the basis of the relevant calculations, the Assessing Officer made a disallowance of Rs.3,07,77,285/- and as a consequence,

penalty proceedings were initiated against the Assessee under

Section 271(1)(c) of the Act. The Assessee was duly informed

about the initiation of penalty proceedings.

(vii) Aggrieved by the assessment order dated 28.02.2003 the

Assessee filed an appeal before the first appellate authority.

The CIT(A) confirmed the stand of the Assessing Officer vide

order dated 23.12.2005.

(viii) Thereafter, the assessee filed an appeal before the Tribunal and

the Tribunal also dismissed the quantum appeal of the assessee vide order dated 11.08.2008.

(ix) Vide order dated 26.02.2009, the Assessing Officer levied

penalty of Rs.1,49,38,148/- under Section 271(1)(c) of the Act

on the ground that the Assessee had furnished incorrect

particulars of his income. The penalty order was confirmed by

the CIT (A) vide order dated 12.10.2009. Consequently, the

Assessee approached the Tribunal and the Tribunal allowed the

Appeal of the Assessee vide order dated 30.04.2010. The

Tribunal quashed the penalty order on the ground that it was

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imposed beyond the period of limitation as prescribed under

Section 275(1)(a) of the Act.

(x) Against the aforesaid order dated 30.04.2010 of the Tribunal, the Revenue went in appeal before the Hon’ble jurisdictional

High Court and the Hon’ble High Court allowed the appeal of

the Revenue and directed the Tribunal to decide the appeal on

merits by observing as under :-

“The substantial question of law as framed is therefore decided in favour of the Revenue and against the Assessee. In the circumstances the impugned order is set aside and the matter is remitted back to the ITAT for a decision on the merits of the Appeal in accordance with law.”

(xi) Now, the appeal is before us to be decided on merits.

section 271(1)(c) of the Act in respect of the aforesaid addition without

judicially appreciating the facts of the case and the position of law and

contented that if the Assessing Officer or the Commissioner (Appeals) or the

Commissioner in the course of any proceedings under this Act is satisfied

that any person, has concealed the particulars of his income or furnished

inaccurate particulars of such income, then only AO may direct that such

person shall pay by way of penalty. According to the ld. AR, then only in

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the cases referred to in clause (c), in addition to any tax payable by him, a

sum which shall not be less than, but which shall not exceed three times, the

amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income. The ld. AR brought to our attention the “Explanation I. - Where in

respect of any facts material to the computation of the total income of any

person under this Act - such person fails to offer an explanation or offers an

explanation which is found by the Assessing Officer or the Commissioner

(Appeals) or the Commissioner to be false, or such person offers an

explanation which he is not able to substantiate and fails to prove that such

explanation is bona fide and that all the facts relating to the same and

material to the computation of his total income have been disclosed by him,

then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub-

section, be deemed to represent the income in respect of which particulars

have been concealed." The ld. AR further contended that on perusal of the aforesaid, section 271 (1) of the Act provides that the assessing officer may,

in the course of any proceedings under this Act, direct the imposition of

penalty under that section. According to him, the lawmakers have

deliberately used the word "may" in section 271 (I) of the Act, which shows

that discretion in this regard has been conferred on the assessing officer.

Merely because certain additions are made in the assessment, it does not

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necessarily follow that penalty is to be levied. The ld. AR contended that

while deciding the penalty proceedings, the AO has to decide whether the

appellant had, on the facts of the case and in view of the position in law, by

making a claim or not disclosing an amount, sought to conceal/file

inaccurate particulars of income. Ld AR wants us to appreciated that there

may be items in respect whereof there may be bona fide difference of

opinion between the assessee and the assessing officer or divergence of

judicial opinion, in which case there cannot be any charge of concealment or

filing of inaccurate particulars of income. Further, there may be items in

respect whereof particulars of income may be considered to have been

concealed and some other items in respect whereof inaccurate particulars of

income may have been filed; and the same is required to be so stated by the

assessing officer in the assessment order, as the two concepts 'concealment

of income' and 'filing of inaccurate particulars of income' are not

overlapping or interchangeable and have distinct connotation and meaning.

According to ld. AR, the assessee has not concealed any particulars of its

income nor furnished any inaccurate particulars of its income which may be

subjected to penalty under section 271(1)(c) of the Act. A perusal of the

return of income and the documents filed by the Appellant Company and the

order passed u/s. 143(3) on 28.02.2003 reveal that the above disallowances

are in the nature of difference of opinion as to the taxability of income /

allow ability of expenditure and no facts were concealed. The additions of

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Rs.3,77,70,285 are on account of debatable claims. These disallowances, it is submitted, should not lead to the conclusion that the assessee has, in any

way, concealed the particulars of its income or furnished inaccurate particulars of such income. The Ld. AR submitted that there was no warrant to levy / impose penalty under section 271(1)(c) of the Act primarily on the

ground that the claim of the appellant was a legal and bona fide claim backed by adequate/ necessary disclosure in the return of income/ accompanying documents. The ld. AR submitted a written synopsis, relevant submissions of which are as follows :- • On perusal of Explanation I to section 271(1)(c) of the Act it will be kindly noticed that the said Explanation has two limbs (A) and (B) as under: (A) fails to offer any explanation or offers an explanation which is found by the assessing officer to be false; or (B) offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to computation of his total income have been disclosed. Clause (A) cannot be applied in the present case since the appellant has offered explanation and the same cannot be regarded as false. Further, on dissecting the provisions of clause (8), it will be kindly noted that the following three conditions must cumulatively exist in order to levy penalty under that clause:

• Appellant offers an explanation which he is not able to substantiate; and

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• Appellant fails to prove that such explanation is bona fide; and

• All the facts relating to the same and material to computation of his total income have not been disclosed In the case of CIT V. Rahuljee & Co.: 250 ITR 225 the Delhi High Court upheld the deletion of penalty by the Tribunal holding that Explanation 1(B) to s. 271(1)(c) prescribed that penalty could be imposed only if (a) appellant had not been able to substantiate the explanation, (b) such explanation was not bona fide, and (c) all the facts relating to the same and material to the computation of his total income had not been disclosed by him. The Court held that since the aforesaid parameters were not applicable in the case of the appellant, the penalty levied had been rightly deleted by the CIT(A).

It is respectfully submitted that the aforesaid pre-requisite conditions for levying penalty under section 271(1)(c) of the Act are not satisfied in the present case. The claim of the appellant was a legal and bona fide claim. Therefore, in our respectful submission, neither of the two situations namely "furnishing of inaccurate particulars of income" or "concealment of income" existed so as to warrant the imposition of penalty under section 271(1 )(c) of the Act.

The allegation of the assessing officer that the appellant furnished inaccurate particulars of income is, in our respectful submission, not correct. The allegation of the assessing officer is merely based on the ground that according to the assessing officer the appellant claimed deduction of various expenditure, which it was not entitled to. The said basis of the assessing officer, as will be kindly appreciated from the elaborate submissions of the appellant on merits (below), is misplaced.

Reference in this regard may also be made to the following judicial precedents wherein it has been held that where disallowance / addition is made in respect of a bona fide claim, no penalty could be imposed under section 271 (1)( c) of the Act:

In the case of Bunnah Shell Oil Storage and Distributing Co. of India Ltd. v. ITO: 112 ITR 592 (Cal.) the appellant after filing full and detailed particulars with all material relevant to

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assessment before the ITO raised the legal contention before the [TO that the appellant was entitled to the benefit of devalued loss, increased depreciation and development rebate. The above claim was not accepted by the [TO and penalty proceedings under section 271(1)(c) of the Act were initiated. The Court noticed in the aforesaid case that the appellant had made the claim after pursuing the expert legal advice and the same was clearly based on cogent, legal ground and there was no authoritative judicial pronouncement covering the said question raised by the appellant. It was observed by the Court that the claim of the appellant for necessary deduction based on legal contentions put forward by it could never amount to concealment of any income of the company and it could never be said that the appellant had furnished inaccurate particulars of its income by seeking to raise the legal pleas.

It was held in the above case that the contention raised by the appellant did not in any way indicate that there had been any concealment of particulars of income or filing of inaccurate particulars of income by the appellant and that whether the said contentions are ultimately upheld or turned down, it could not be said that they were frivolous, dishonest or malafide. The rejection of the contention raised by the appellant, the court held could not lead to the conclusion that there had been any concealment of the particulars of income or filing of any inaccurate particulars of income by the appellant so as to result in levy of penalty u/s 27I(I)(c) of the Act. Legal contentions bona fidely raised, whether they are ultimately accepted or rejected by the appropriate authority will not be generally an act of fraud or gross or willful negligence, the Court further held.

The aforesaid decision of the single judge of the Calcutta High Court was affirmed by the Division Bench of the same Court in [TO v. Bunnah Shell Oil Storage and Distribution Co. of India Ltd. 163 ITR496.

MERE DISALLOWANCE OF EXPENDITURE NOT LIABLE TO PENALTY The assessee most respectfully submits that the mere disallowance of an expenditure claimed in the tax return does not amount to concealment of income. An analysis of the aforesaid provisions of section 271 (1)(c) read with Explanation 1 bring

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out the legal position that penalty for concealment can be levied if the assessee fails to offer an explanation or offers an explanation which IS found to be false by the income tax authorities. In other words, penalty provisions under section 271(1)(c) of the Act are triggered if there are deliberate attempts on the part of the assessee to withhold true facts and suppress true facts with a mala fide intention to evade taxes. As a corollary, penalty under section 27I(1)(c) cannot be levied if:

• the assessee acted on a bona fide belief and furnished the full facts relevant to the case or • the additions have been made on a ground on which there is difference of opinion.

In other words, before penalty can be levied under the provisions of section 271 (1)(c) of the Act, it is to be proved beyond doubt that additions made by the Assessing Officer were part of the conscious attempt on the part of the assessee to conceal his income.

In this context, we would like to draw your kind attention to the decision of the Punjab & Haryana High Court in Commissioner of Income Tax vs Ajaib Singh & Co. (170 CTR 489). In this case, the Hon'ble High Court has held that mere disallowance of an expense per se cannot mean that the assessee has furnished incorrect particulars of its income. Concealment invokes penal action and hence it has to be proved as a conscious act on the part of the assessee to hide or conceal an element of income. The essential pre-condition for invoking Explanation I to section 27I(1)(c) is that the assessee fails to offer an explanation or offers an explanation which is found to be incorrect by the tax authorities which is not the case in the matter under consideration.

We would also like to draw your kind attention to the decision of the Madhya Pradesh High Court in the case of CIT vs S.T.I. Biplus Tubing (India) Ltd. (247 ITR 426) wherein the Hon'ble Court affirmed the Tribunal's view that:

Quote .... simply because a claim not tenable in law has been made, one cannot be permitted to jump to the positive conclusion that all was deliberate. Accordingly, it held that where there is no

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positive evidence of wilful concealment, no penalty can be levied. Unquote

In Delhi Cloth and General Mills Company Limited vs. CIT (157 [TR 822), the Delhi High Court held as under: Quote .... the mere fact that a claim for expenditure stands disallowed does not by itself lead to the inference that the assessee had furnished inaccurate particulars to that item. The fact that the plea of the assessee that the expenditure in question was of revenue nature was not accepted, by itself did not mean that the assessee had furnished inaccurate particulars of its income by not adding that back to its total income. The question for consideration was as to whether, on the facts and circumstances of the case, the assessee could reasonably be under a bona fide belief that the expenditure in question was of a revenue nature and having regard to the manner in which the accounts were maintained by the assessee, the expenditure was not added back to its total income or was it so done to conceal the true nature of the expenditure. Unquote

On the same lines, the Hon'ble Madhya Pradesh High Court in J.K. Jajoo vs. CIT (181 ITR 410) has observed as under: Quote .... merely because a claim for certain expenditure is rejected, it cannot be held that the claim for expenditure made by the assessee was false or inaccurate to his knowledge or was as a result of gross negligence. Unquote

The Delhi Tribunal in ITO v R B G M Modi & Ors (P) Ltd. (31 ITJ 550) has held as under: Quote .... the mere holding of an addition made in the assessment proceedings would not ipso facto lead to the conclusion that there was concealment of income and for the purpose of levy on penalty the entire material is again to be apprised the explanation offered though rejected must be bona fide and all the facts relating to the same and material to the computation of total income are disclosed. Unquote

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In Nuchem Limited vs. DC[T (47 [TO 487) the jurisdictional Delhi Tribunal has held that difference of opinion will not justify the conclusion that the explanation given by the assessee was either unsubstantiated or mala fide. The Tribunal was categorical in holding that if the assessee has taken a stand that expenditure incurred is a revenue expenditure and if it is held otherwise as a capital expenditure, it cannot be said that the explanation given by the assessee was not bona fide. The Tribunal observed as under: Quote .... no penalty was leviable if after furnishing all the necessary particulars of income the assessee claimed benefit of certain provisions of the Act and raised contention but did not find favour with the authorities. It might be on difference of opinion on particular set of facts but it did not imply that there had been a concealment of particulars of income. If the assessee had taken a stand that the expenditure incurred was a revenue expenditure and if it was held otherwise as a capital expenditure, it could not be said that the explanation given by the assessee was not bona fide. Unquote

In this context, the assessee would also like to draw your attention to the decision of the Hon'ble Guwahati High Court in CIT vs Gurudayalram Mukhlal (190 ITR 39) wherein the Hon'ble High Court has observed as under (emphasis supplied): Quote

Even in case of stipulated difference between the assessed income and the returned income, the penalty under section 271 (I) (c) is not automatic …. The fact that certain income has been assessed by the Income-tax Officer in the assessment order by itself is not conclusive evidence that the amount assessed was the income of the assessee. In fact, in very many cases, the Assessing Officer can include certain amounts in the income of the assessee if the explanation given by the assessee in regard to the source thereof is not found to be satisfactory. That may be all right so far as the assessment is concerned but when the question of penalty comes, different considerations will apply and the Income-tax Officer will be required to put on record some further material other than the rejection of the explanation of the assessee in regard to its

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source to hold that the amount in question was the income of the assessee to justify imposition of penalty. Unquote

Recently, in Maxopp Investments Limited vs, DCIT Circle 6(1) (3672lDeI/2007) the jurisdictional Delhi Tribunal, has held that the issue of disallowance under section 14A of the Act has been a subject matter of a substantiated controversy and is highly debatable issue. It is further observed that on a debatable issue, it can not be said that the assessee has concealed its particulars of income and therefore, penalty under section 271(1)(c) of the Act can not be levied. A copy of the judgement is enclosed for your Honour's ready reference (Annexure - 6).

In view of the above submission, it is abundantly clear that merely because the claim of expenditure stands disallowed, it does not by itself lead to the inference that the assessee had furnished inaccurate particulars or concealed income in regard to that item. Where there is no finding that the assessee had either concealed the particulars of income or furnished inaccurate particulars of income or suppressed the material facts relating to the computation of income, penalty under section 271 (1) (c) of the Act cannot be imposed.

In the present case, none of the conditions precedent to the levy of penalty under section 27I(1)(c) of the Act were satisfied which could justify the levy of penalty. In the present case: • The assessee offered full explanations for the expenditure claimed in the tax return during assessment proceedings. • The explanations were not found to be false. • The statements/explanations made by the assessee with regard to the basis of the deductions (in dispute) were bona fide and were fully disclosed during the assessment proceedings. • The additions made during the assessment proceedings were on account of difference in opinion.

Further, we also invite your honour's kind attention towards various judicial rulings which have laid down the following ratios while deciding on whether the penalty under section 271(1)(c) of the Act is leviable: � Legal contention bona fide raised, whether it as ultimately accepted or rejected, will not generally be an act of fraud or

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willful negligence attracting the penal provision under section 271(1)(c) of the Act. � No question of any liability will arise where the assessee is merely contending for a particular position contrary to the view taken by the Assessing Officer. The assessee has a right to make any claim which may or may not be allowed. � Mere disallowance of a claim cannot by itself form the basis for initiating penalty proceedings in the absence of any material to show that the claim was made mala fide or deliberately under false premises with the ulterior intent to evade fiscal liability. � The assessing officer in the course of assessment has not recorded any satisfaction regarding concealment or furnishing of inaccurate particulars of income by the appellant in respect of the additions/ disallowances made by the assessing officer. � A mere mention at the end of the assessment order as a matter of routine that penalty proceedings have been initiated separately for filing inaccurate particulars of income cannot, it is respectfully submitted, tantamount to recording of satisfaction regarding concealment of income/submitting of inaccurate particulars of income or indicating that the assessing officer has applied his mind and formed an opinion in respect thereof, prior to initiating penalty proceedings. � The assessing officer has to be categorical and should be apparent on a bare reading of the assessment order and is not something which can be read. The satisfaction assumes importance because it forms the very basis for levy of penalty under section 271 (1)( c) of the Act. In absence of such a finding, in view of the decisions of the Delhi High Court (supra) initiation of the proceedings itself is vitiated. � Further, the assessing officer, without finding or recording that the appellant has concealed particulars of income or has filed inaccurate particulars or income, has levied penalty just because some of the additions made in the assessment order have been confirmed by the CIT(A).

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� In our respectful submission, mere confirmation or sustainment of the additions/disallowance by the CIT(A) does not attract levy of penalty under section 271(1)(c) of the Act. The assessing officer is required to establish that the assessee has concealed or filed inaccurate particulars of income. The Mumbai Bench of Tribunal in the case of Shirish R. Shah v. ACIT: 114 Taxman 33 (Mum) (Mag) has held likewise. It was observed by the Bench as under:

"It is well-settled that the penalty proceedings are different from the quantum proceedings and merely because an addition made by the Assessing Officer is sustained by the Appellate Tribunal, penalty cannot be automatically levied unless it is independently proved that the assessee concealed income or furnished inaccurate particulars of income ....."

In view of the aforesaid, it is the respectful submission of the appellant that the impugned penalty order, being without jurisdiction, bad in law and void-ab-inito, should be quashed. Without prejudice, it is the respectful submission of the appellant that on the facts and circumstances of the case and in law, penalty under section 271(1)(c) of the Act was not leviable for the reasons stated hereunder: Section 271 (1) of the Act, as reproduced above, provides that the assessing officer may, in the course of any proceedings under this Act, direct the imposition of penalty under that section. In our respectful submission the lawmakers have deliberately used the word "may" in section 271(1) of the Act which shows that discretion in this regard has been conferred on the assessing officer. Merely because certain additions / adjustments are made in the assessment, it does not necessarily follow that penalty is to be levied.

Based on the above, the assessee most respectfully submits that the mere disallowance of a claim of expenditure during the assessment proceedings based on difference of opinion does not tantamount to concealment of income to justify levy of penalty under section 271(1)(c) of the Act. Accordingly, no penalty should be levied on the assessee in the present case.

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CONCLUSION It is most humbly submitted that the assessee was under the bona fide belief that the revenue expenditure on interest being in the nature of normal business expenditure, was deductible under the provisions of law for determining the total taxable income of the assessee.

Notwithstanding the fact that the quantum appeal filed in your office has been decided against the Appellant and which is pending before Hon'ble ITA T, for penalty purposes your Honour would be entitled to consider the matter afresh and decide if penalty ought to have been levied. In the light of the aforesaid submissions, it is respectfully submitted that on the facts and circumstances of the case and in law no penalty under section 271(1)(c) of the Act was leviable. The penalty levied, therefore, calls for being deleted in its entirety.”

find that the appellant is a private limited company, was, inter alia, engaged

in the business of dealing in shares/securities and giving loans. As part of

the aforesaid activity the appellant held share/securities both as ‘trading

assets’(stock-in-trade) and ‘investments’(capital assets). The break-up of

shares held as capital assets’ and ‘trading assets’ has been perused at (page 4

of PB-1).

‘capital assets’ is that in the former case income arising from sale and

purchase of shares is taxable as business income whereas in the latter case

income arising from sale of shares is taxable as capital gains.

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appellant did not sell any shares held as capital assets and, therefore, no

income was disclosed under the head ‘capital gains’. However, certain shares held as trading assets were sold during the year and income/profit

arising therefrom was offered to tax as business income. (page 4 of PB-1)

perusal of the same gives the details of shares held as capital asset and

trading asset as also details of shares held as trading asset and sold during

the year; and perusal of (page 31of PB-1) discloses profit on sale of shares

aggregating to Rs. 1.29 crores as business income as also (page 2 of PB-1)

disclosing income under the head ‘business’.

classified under the category of ‘trading asset’ were held as stock-in-trade

with a view to deal therein, income wherefrom was taxable as business income. So according to the assessee, dividend income earned from such

shares, if any, was incidental and did not constitute the dominant motive of

the appellant when it filed the return of income and participated in the

assessment proceedings before to AO and other authorities. We find that

during the relevant assessment year, the appellant received dividend income

of Rs. 3,11,25,522/- from the shares of 15 companies which were held as

‘trading assets’. In other words, the appellant did not receive any dividend

from shares held as capital asset and received dividend only from share held

as trading assets which fact has been taken note at page 2 of the assessment

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order passed under section 143(3), wherein the aforesaid undisputed facts

were noted in the following words:

“The assessee has shown shares in the above-mentioned 15 companies from where dividend was received as ‘trading asset’….. Therefore, the portion of interest paid relating to 15 companies (from where dividends have been received) is disallowed) is disallowed.”

appellant had received dividend only from shares held as trading assets, in

the assessment order passed under section 143(3) of the Act the assessing

officer invoked provisions of section 14A and disallowed interest

expenditure incurred on borrowed funds utilized for acquiring such shares

under that section.

the quantum appeals. The assessing officer imposed penalty under section 271(1) (c) alleging furnishing of inaccurate particulars of income with

respect to the claim of interest expenditure, which has been challenged in

the present appeal before the Hon’ble Tribunal.

cannot be imposed on debatable issues and relied on the decision of the

Hon’ble High Court of Delhi in CIT vs. Electrolux Kelvenatro Ltd. 357 ITR

665 (Del) and CIT vs. Jaswinder Singh Ahuja 351ITR262(Del.)

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applicable in a case where shares are held as trading assets is clearly a

debatable issue, moreso at the time when the return of income for the relevant assessment year was filed for various reasons. Firstly the Impugned

assessment year, viz., AY 2001-02 which were undisputedly the first year of

application of section 14A of the Act. The Ld. AR pointed out that section

14A was inserted in the statute for the first time by the Finance Act, 2001,

which received the assent of the President on 11.05.2001 (Refer Circular

No. 14 of 2001 report in 252 ITR(St.) 65). Therefore, according to Ld. AR,

since it was the first year, it would be appreciated that the issue regarding

applicability of section 14A in various situations like shares held for

controlling interest, shares held as trading assets, etc. and the method of

computation of disallowance, etc. lacked clarity and so the action of the assessee was a bonafide action which cannot invite penalty.

there were substantial litigation on the aforesaid issue of application of

section 14A and several conflicting decisions were even rendered by the

various benches of Tribunal. And in order to reconcile conflicting decisions

from various benches of the Tribunal, a Special Bench was also constituted

in the case of IRO s. Daga Capital Management Pvt. Ltd.: 117 ITAT169

(SB). Our attention was brought in this regard to paragraph 6 of the order

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written by the minority view in the aforesaid decision, which has been

reproduced hereunder for ready reference:

“6. When the appeal came up before the Division Bench, it was notice that there was difference of opinion between the Benches on the issue involved in the appeal. The revenue had relied on the decision of the Tribunal dated 5/09/2006 in the case of Ridge investment Co. Ltd. v. Jt. CIT [ IT Appeal Nos. 4260-61 (Mum.) of 2003] as well as the decision of Delhi Bench of the Tribunal in the case of Ever Plus Securities & Finance Ltd. v. Dy. CIT [2006] 101ITD 151 wherein it was held that even if the main activity of the company was to make investments in holding company for retaining control over the group companies, the disallowance under section 14A can be made irrespective of the fact that dividend earnings were only incidental in nature. On the other hand, the assessee had relied on the decision of Delhi Bench of the Tribunal in the case of vidyut Investments v. Ito [2006] 10 SOT 284 wherein it was held that when shares are held as stock-in-trade with the object of trading in shares, and dividend income earning was only incidental in nature no part of the expenses could be disallowed under section 14A of the Act. In view of such difference of opinion, the Bench recommended the constitution of a Special Bench to decide the question mentioned in para I above. It is in the above circumstances that Hon'ble President has constituted the Special Bench to decide the said question as well as to dispose of the appeal."(emphasis supplied)

In view of the above, according to the Ld. AR, the issue of application of

section 14A was unclear, especially at the time of filing the return of income

for the relevant assessment year, being the first year of application of the

said section after insertion thereof in the statute.

Capital constituted precisely in the issue involved in the present case and

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took us to the issue framed which according to the Ld. AR is precisely the

issue which is in hand and the issue is reproduced below :-

"Whether, in the facts and in the circumstances of the case and in law, the provisions of section 14A of the Income-tax Act, 1961, are applicable with respect to dividend income earned by the assessee engaged in the business of dealing in shares and securities, on the shares held as stock-in-trade and when earning of such dividend income is, therefore, incidental to trading in shares?"

Bench as pointed out by the ld. AR, we find force in the contention that this

issue was a debatable issue and that the issue whether the provisions of

section 14A are applicable where shares were held as stock-in-trade was

clearly a debatable issue.

Bench, there was a dissent between the Minority and Majority view. The Minority view in the aforesaid decision at para 25 decided the aforesaid

issue in favour of the assessee. The relevant portion of the aforesaid order is

reproduced hereunder for ready reference:

“25. In view of the above legal position, the next question which arises for our consideration is whether any disallowance under section 14A can be made in the case of a dealer in shares. Generally, in our opinion, a dealer in shares does not acquire shares and securities to earn dividend income. The dominant and immediate object behind acquisition of shares is to earn profit on the sale of shares at the earliest point of time which is chargeable to tax under the Act. Sometimes, such person by chance may also get the dividend on the shares held by him as 'stock-in-trade'. Since such dividend income is never intended at the time of purchase of shares, in our opinion, the connection

22 ITA No4677 /Del./2009

between the expenditure incurred and the dividend income can be said to be incidental only since the dominant and immediate connection exists only between the expenditure incurred and profit on sale of shares. Since the existence of dominant and immediate connection is the condition precedent for invoking the provisions of section 14A of the Act, in our opinion, the mere receipt of dividend income incidentally in the case of dealer in shares would not be sufficient for invoking the provisions of section 14 A of the Act.

We take note that the Majority decision expressed in Paras 23.8 and 23.9 of

Special Bench order decided the aforesaid issue against the assessee. The

relevant portion of the aforesaid order is reproduced hereunder for ready

reference :-

" .... A great deal of emphasis has been laid on the establishing of dominant and immediate connection between the expenditure incurred and the exempt income. According to the ld. AR the expenditure of interest on investment in shares has direct and proximate link with the profit or loss from trading of shares and indirect link with the dividend income which was earned incidentally and hence no disallowance is warranted. In our opinion there is a basis fallacy in this argument. Dominant and immediate connection refers to first degree of relation between the two things. However, it would cease to be dominant if the degree of relationship slips from first to second. It is noticed that there is a dominant and immediate connection between the expenditure incurred by the assessee in the shape of interest on borrowings for purchase of shares and the dividend income. It is only due to the investment in the shares that the dividend income has resulted. Such investment results into two incomes, viz., the profit on its sale and the dividend. Both these incomes fall on the same platform and are the direct result of investment. If a person invests in the shares from which dividend income is earned and thereafter such dividend is deposited in the bank from where the interest income results, in such a situation the relation between the interest paid by the assessee on the borrowed funds for the purchase of shares with the dividend income is dominant and immediate, being that of the first degree but the relation of such interest paid with the interest

23 ITA No4677 /Del./2009

income earned on the amount invested in the bank, would be of second degree, being indirect and non-immediate. We therefore, do not find any force in this submission.

23.9 The learned Counsel for the assessee while inviting our attention to rule 8D(2)(ii) contended that it refers to the "value of investment". On this analogy it was urged that section 14A along with this rule cannot have any application where the shares are held. as stock-in-trade. The sum and substance of his submissions was that this section would apply only when the shares are held as 'Investment'. We are not impressed with this submission raised on behalf of the assessee for the out-and-out reason that the reference in this rule is to the 'value of investment' and not the assets 'held as investment'. A person may make investment in shares and the shares so purchased may be held either as "Stock-in-trade' or 'Investment'. The word "investment" in this rule refers to the making of purchase of shares and not holding it as investment."

the High Court as involving substantial question of law.

immediately succeeding assessment year, was admitted by the High Court

on the ground of involving substantial question of law was admitted and was

adjudicated vide the common order in the aforesaid decision, reported as

Maxopp Investment (supra) and in this regard, it can be seen at page 296 of

the aforesaid decision of the Delhi High Court reported at 347 ITR 272

though against the assessee. Further we find that the SLP filed against the

aforesaid decision of the Delhi High Court in the appellant's own case for

the assessment year 2002-03 has also been admitted by the Hon'ble Supreme

24 ITA No4677 /Del./2009

Court in CC No. 17279/2012. The Hon’ble Jurisdiction High Court has held that when an issue is admitted by the High Court on the ground that the

same involves substantial question of law, the same cannot be visited with penalty under section 271(1)(c) of the Act. The Hon'ble jurisdictional Delhi High Court in the case of Basti Sugar v. CIT rendered in ITA 232/2005,

observed as under: "The following questions were framed on 18th October, 2005: '(a) Whether the 1TAT was correct in law 'in holding that the issue regarding allowability of interest payable on late deposit of provident fund was a debatable issue and, therefore, could not be disallowed in the intimation issued order Section 143(1)(a) of the Income Tax Act? (b) Whether the ITAT was correct in law in holding that deleting the addition made by the Assessing Officer of an amount of Rs 18,02,0261- being interest payable on late deposit of provident fund under Section 43-8 of the Income Tax Act as the same was not paid during the year?' Insofar as question (a) above is concerned, we find that the issue regarding allowability of interest payable on late deposit of provident fund is a debatable issue. This conclusion of ours is fortified by the fact that the very issue is before us in ITA No.958/2007 in respect of the very year in question namely assessment year 1998-99. ITA No. 958/2007 arises out of the regular assessment completed under Section 143(3) of the Income Tax Act, 1961 (in short .. the said Act). The said question has travelled all the way upto the Tribunal and is now before us in the said ITA No.958/2007 as well as other connected appeals being ITA Nos.965/2007. 1248/2007. 646/2009 and 652/2009. It is therefore clear that the issue was debatable and, therefore, could not be disallowed while considering the intimation under Section 143(1)(a) of the said Act. Consequently, question (a) is decided in favour of the appellant and against the Revenue ... (Emphasis supplied) .

25 ITA No4677 /Del./2009

Hon'ble jurisdictional Delhi High Court [Refer Page 81 of case laws PB]

deleted the penalty levied by the assessing officer on the ground that the substantive appeal (being appeal under section 260A of the Act against the

disallowance made in quantum proceedings) had been admitted by the High

Court.

"Both the CIT(A) as well as the ITAT have set aside the penalty imposed by the Assessing Officer under Section 271(1)(c) of the Income Tax Act. 1961 on the ground that the issue of deduction under Section 14A of the Act was a debatable issue. We may also note that against the quantum assessment whereunder deduction under Section 14A of the Act was prescribed to the appellant. The appellant has preferred an appeal in this Court under Section 260A of the Act which has also been admitted and substantial question of law framed. This itself shows that the issue is debatable. For these reasons. we are o(the opinion that no question of law arises in the present case. This appeal is accordingly dismissed... (Emphasis supplied)” 21. A useful reference may also be made to the decision of Apex Court in

the case of CIT v. Reliance Petro products Private Limited: 322 ITR 158,

where the decision of Bombay High Court deleting the penalty imposed by

the assessing officer on the ground that quantum appeal was admitted by the

High Court on the ground of involving question of law, was affirmed by the

Apex Court. And we take note that various other Hon’ble High Courts and

Tribunals have decided the aforesaid issue in favor of the assessee. We take

note of the fact that other High Courts and various benches of Tribunal in

the following cases have decided the aforesaid issue in favour of the

26 ITA No4677 /Del./2009

assessee and held that section 14A cannot be invoked where shares are held

as stock-in-trade: • CCI Ltd. v. JCIT: 250 CTR (Kar.) [Refer pg. 90 to 92 of Case Laws PBl • CIT vs. Smt. Leena Ramachandran: 339 ITR 296 (Ker.) [Refer pg 94-96 of Case Laws PBl • DCIT v. M/s. India Advantage: ITA No. 6711lMuml 2011 (Mum. Trib.)- • Subsequently affirmed by the Bombay High Court in ITA No. 1131 of2013 [Copy of the decisions attached herewith) • Prescient Securities Pvt. Ltd. vs. ACIT: ITA No. 8361/Mum/2011 (Mum Trib.) [Refer Page 97-lOl of Case Laws PBl • Yatish Trading v. ACIT: 129 lID 237 (Mum. Trib.) • DCIT vs. Gulshan Investment Co Ltd.: ITA No. 666/Ko1l2012 (Kol.) [Refer Pgs 102- 108 of Case Laws PBl • Apoorva Patni v. ACIT: 54 SOT 9 (Pune Trib.) • MSA Securities Services P. Ltd. v. ACIT: 22 ITR (T) 400 (Mad. Trib.) • Ethio Plastics Pvt. Ltd. v. DCIT: ITA No. 8481 Ahdl2012 (Ahd. Trib.)

From the aforesaid decisions cited, it is clear that the present issue, viz.,

application of section 14A, especially in relation to shares held as trading

assets, was clearly debatable and so it cannot be visited with penalty under

section 271(1)(c) of the Act.

section 271(1)(c) has been deleted on the issue of disallowance u/s 14A on

the ground that the said issue is clearly debatable, which cannot be visited

with penalty under the former section :-

27 ITA No4677 /Del./2009

• CIT v. Jindal Equipment Leasing and Consultancy Services Ltd. ITA NO. 68/2012 (Del) (HC) (Refer pages 43-46 of Case Laws PB) • CIT v. Liquid Investments Ltd. ITA No. 2401/2009 (Del) (HC) (Refer pages 47 of Case Laws PB) • DCIT v. Nalwa Investment Ltd. ITA No. 3805/2010(Del) (ITAT) (Refer pages 48-59 of Case Laws PB) • ACIT v. A.T. Invofin India (P) Ltd. ITA No. 4479/2013

Sd/- sd/- (O.P. KANT) (A.T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated the 27th day of November, 2015 TS

28 ITA No4677 /Del./2009