ITAT Deletes Penalty on Excess Depreciation Claim, Holds Bona Fide Claim Cannot Attract Section 271(1)(c)

The Income Tax Appellate Tribunal (ITAT), Mumbai, held that a penalty under Section 271(1)(c) cannot be imposed where a depreciation claim was made on a bona fide basis in accordance with the legal position prevailing at the time of filing the return, and the subsequent disallowance arose solely due to appellate relief granted in earlier years.

Sharda Cropchem Limited filed its return of income for the assessment year 2015-16, declaring a total income of Rs 119.05 crore. During assessment proceedings under Section 143(3), the AO made a disallowance of excess depreciation of Rs 1.90 crore on account of product registration expenses treated as capital expenditure. Subsequently, penalty proceedings under Section 271(1)(c) were initiated, and a penalty of Rs 61.89 lakh was imposed on the assessee on the ground that it had furnished inaccurate particulars of income by claiming excess depreciation.

The assessee challenged the penalty before the CIT(A), who deleted the penalty.

The Tribunal noted that the depreciation disallowance arose only because appellate orders passed in earlier assessment years subsequently altered the tax treatment of product registration expenditure. As a result of the relief granted in those years, the opening Written Down Value for the assessment year 2015-16 stood reduced, which caused a reduction in allowable depreciation.

The Tribunal further emphasised that a mere change in the characterisation of an expenditure or a consequential disallowance resulting from later appellate developments does not automatically justify the levy of a penalty under Section 271(1)(c). The Tribunal upheld the deletion of the penalty and dismissed the Revenue’s appeal.