Denial deduction on account of debatable issue not attract levy of Income Tax penalty: ITAT

The Income Tax Appellate Tribunal(ITAT Ahmedabad) in the matter Nirma Limited Vs. DCIT has said that denial of a claim of deduction will not be tantamount to concealment of income and/or furnishing of inaccurate particulars of income so as to attract a levy of penalty under section 271(1)(c) of the Act. The proposition of law in this regard has been settled by the Hon’ble Supreme Court in the case of CIT Vs. Reliance Petroproducts P. Ltd (supra).

Relevant Text:

Present appeal has been filed by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals)-9, Ahmedabad dated 11.07.2019 passed under section 250(6) of the Income Tax Act, 1961 (hereinafter referred to as “the Act” for short) vide which the ld.CIT(A) confirmed order of the AO passed, levying penalty for concealing/ furnishing inaccurate particulars of income under section 271(1)(c) of the Act for the Asst. Year 1997-98.

The grounds raised by the assessee are as under:

i) In law and in facts and circumstances of the appellant’s case, the ld.CIT(A) has grossly erred in points of law and facts.

ii) In law and in facts and circumstances of the appellant’s case, the ld.CIT()A) has grossly erred in dismissing appellant’s case ground regarding passing order u/s.271(1)(c) of the Act beyond the prescribed time.

iii) In law and in facts and circumstances of the Appellant’s case, the ld.CIT(A) has grossly erred in confirming penalty levied u/s.271(1)(c) of the I.T. Act for Rs.47,55,054/-.

We have heard both the parties. The fact relating to the levy of penalty u/s 271(1)(c) of the Act is as stated in the earlier portion of our order above that it was levied on account of disallowance of claim of deduction under section 80IA and 80HHC of the Act on the profits earned in the various divisions of the assessee-company, relating to the income which were found by the Revenue authorities as having no nexus with the business activities of the assessee.

As is evident from the details noted in the earlier part of our order, majority of the incomes denied deduction pertained to interest earned on FDs and loans, insurance claim and drivers salary.

As far as insurance claim received is concerned, we hold, that it is not in the nature of the income at all. It is a compensation which is awarded by the insurance company for the loss incurred by the assessee against which it was insured. Therefore, there arises no question for treating the insurance claim received as being in the nature of income and denying deduction under sections 80HH/80IA of the Act. Considering the nature of insurance claim being compensatory, there is no profit element involved in the same, and the assessee is only compensated for the loss that the insurance company evaluated the assessee to have incurred in such circumstances. The assessee cannot be said to have claimed any deduction on the income in the nature of insurance claim, therefore, there arises no question of excluding the entire insurance claim for the purpose of claiming deduction under section 80HH/ 80IA of the Act.

On merits, therefore, we hold that the disallowance of deduction of insurance claim was not in accordance with law, and therefore, there arises no question for levy of penalty under section 271(1)(c) of the Act on the same.

On the issue of driver’s salary, the assessee has repeatedly contended that it was merely a reimbursement of salary. Again, reimbursement of salary received is not in the nature of income, and following the reasoning given by us on the issue of insurance claim, there arises no question of disallowance of any deduction on the salary paid to the drivers and thus, no case for levy of penalty under section 271(1) (c) on the same.

Now, the only remaining addition, on which penalty has been levied, relates to interest income earned on FDs and on loans. Admittedly, the ITAT in the case of the assessee for the impugned year itself has held that the assessee be allowed benefit of netting of interest expenses against such income, and this order of the ITAT has been confirmed by the Hon’ble High Court. Therefore, in any case, the penalty, if any, which could be levied on the components of the interest income earned on FDs and loans is only on that which remains after netting of interest expenses. The ld.CIT(A), we have noted has given no credence to this fact pointed out by the ld.counsel for the assessee, noting that the Revenue has filed appeal against order of the Hon’ble High Court to the Supreme Court. This cannot be basis for denying the relief granted to the assessee by the Hon’ble High Court.

Having said so, we have also noted that on the issue of nature of interest income earned on FDs and loans there are decisions of Hon’ble High Courts holding that it is in the nature of business income more particularly where the FDs have been created for statutory components and regulations. Therefore, there is no doubt that the issue of denial of claim of deduction under section 80HH/ 80IA of the Act on interest on FDs and others, is a debatable issue, and considering the fact that it is not the case of the Revenue that the assessee has not furnished complete particulars relating to the same or has concealed any particulars of income relating to the same the mere denial of claim of deduction will not tantamount to concealment of income and/or furnishing of inaccurate particulars of income so as to attract levy of penalty under section 271(1)(c) of the Act. The proposition of law in this regard has been settled by the Hon’ble Supreme Court in the case of CIT Vs. Reliance Petroproducts P. Ltd (supra).

In view of the above, we see no reason to uphold order of the ld.CIT(A) and we direct the AO to delete the penalty levied in entirety. The grounds of appeal of the assessee are allowed.

For Official Judgment Download PDF Given Below: