ITAT Holds Section 271(1)(c) Penalty Not Leviable for Consequential Depreciation Disallowance

The ITAT Mumbai, in a recent significant ruling, has upheld a penalty of Rs 61.89 lakh imposed by the tax authorities on the assessee company, Sharda Cropchem Limited, under Section 271(1)(c) of the Income Tax Act on the grounds of an excess depreciation claim amounting to Rs 1.90 crore. The case pertains to the Assessment Year 2015-16.

Initially, the assessee company had declared an income of Rs 119.05 crore in its income tax return (ITR). Subsequently, the tax authorities initiated tax proceedings in the case under Section 143(3) of the Act and completed the same, assessing the total income at Rs 160.84 crore.

Basically, the assessing officer had disallowed the product registration expenses treated as capital in nature, amounting to Rs 39.81 crore (previously deleted by the Lower Appellate Authority) and excess depreciation of Rs 1.90 crore (not challenged before the lower appellate authority), as it was resulting in a double claim. Thereafter, a penalty of Rs 61.89 lakh was imposed under Section 271(1)(c) on the ground that the assessee had furnished inaccurate particulars of income by claiming excess depreciation.

Thereafter, the assessee furnished an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)], challenging the Section 271(1)(c) penalty. The CIT(A) concluded to delete the impugned penalty.

The aggrieved tax authorities approached the ITAT Mumbai. The tribunal, when analyzing the case, noted that “the disallowance, which arose during the assessment proceedings, stood substantially altered on account of the appellate orders passed in the preceding assessment years.” As a consequence of the relief granted therein, the opening WDV for the year under consideration underwent reduction, and, consequently, the claim of depreciation also stood reduced. “ In such situations, the initial claim made by the assessee cannot be said to be lacking in bona fides so as to warrant levy of penalty under section 271(1)(c) of the Act. It was further noted that the assessee had neither furnished inaccurate particulars of income nor tried to hide any material particulars in regard to the impugned claim made by it.

The Tribunal flagged that a mere change in the characterisation of an expenditure or a consequential disallowance resulting from later appellate developments does not automatically justify the imposition of the Section 271(1)(c) penalty. Consequently, the tribunal allowed CIT(A)’s decision of upholding the deletion of the penalty and dismissed the tax authorities’ appeal.