High Court’s Admission of Quantum Appeal Weakens Penalty Proceedings: ITAT

The Income Tax Appellate Tribunal (ITAT) held that a penalty under Section 271(1)(c) of the Income Tax Act, 1961, cannot be sustained where the main issue has already been admitted by the Hon’ble High Court as a substantial question of law, thereby establishing that the matter is debatable in nature. The Bench quashed and set aside the penalties levied against the Small Industries Development Bank of India (SIDBI) for Assessment Years 2014-15 and 2015-16.

The case arose from the assessee’s claim of deduction towards proportionate amortisation of the lease premium paid to the Mumbai Metropolitan Regional Development Authority (MMRDA) in relation to the leasehold land. During scrutiny assessment proceedings, the AO treated the expenditure as capital in nature and disallowed the claim. Thereafter, penalty proceedings under Section 271(1)(c) were initiated, and penalties were levied on the ground that the assessee had furnished inaccurate and incorrect details of the income.

The Commissioner of Income Tax (Appeals) upheld the penalty orders. Aggrieved by the said order, the assessee filed an Appeal before the Tribunal.

Before the Tribunal, the assessee contended that the very issue regarding the allowability of lease premium as a revenue expenditure had already been admitted by the Hon’ble Bombay High Court as a substantial question of law in earlier years. It was argued that once the High Court has jurisdiction and admits the issue for consideration, the claim becomes debatable, and a penalty under Section 271(1)(c) cannot survive.

The Tribunal says, “It is a trite law that no penalty is leviable on an issue on which the appeal in the quantum proceedings has been admitted by the Hon’ble High Court.”

The Tribunal noted that the Honourable High Court had admitted the question of whether the lease premium paid to MMRDA constituted revenue expenditure eligible for proportionate deduction. It was observed that admission of the substantial question of law itself demonstrated the bona fide nature of the assessee’s claim.

Relying upon the decisions of the Apex Court in CIT v. Reliance Petroproducts Pvt. Ltd and the decisions of various High Courts in PCIT v. Harsh International (P.) Ltd and CIT v. Nayan Builders and Developers, the Tribunal reiterated that, “A mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee.”

The Bench held that since the issue involved was admittedly debatable and pending consideration before the High Court, the levy of a penalty under Section 271(1)(c) was unfair and unjustified. Thus, the ITAT quashed the penalties for both assessment years and allowed the appeals filed by the assessee.

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