ITAT Grants Relief; Unsustainable Claims Do Not Attract Penalty

The appeals were filed by Quant Transactional Services Private Limited before the Mumbai Bench of the Income Tax Appellate Tribunal against penalties levied for Assessment Years 2015-16 to 2018-19. The assessee, engaged in BPO and custodial services, had ceased active operations after its premises and records were taken over by creditors. Despite the dormant phase, it claimed depreciation on plant and machinery on the basis of “passive use”, along with administrative and statutory expenses, and a write-off in A.Y. 2018-19.

The Assessing Officer disallowed these claims in the quantum proceedings and levied penalties under Section 271(1)(c) for A.Ys. 2015-16 and 2016-17 and under Section 270A for A.Ys. 2017-18 and 2018-19, alleging the furnishing of inaccurate particulars and under-reporting of income.

Issue Before Court: Whether penalties under Sections 271(1)(c) and 270A can be sustained merely on account of disallowances of claims made by the assessee, particularly where full disclosure of facts was made?

Tribunal Decided: The ITAT partly allowed the appeals and deleted most of the penalties, emphasising that penalty provisions cannot be invoked mechanically upon every disallowance. The Tribunal held that claims for depreciation based on the concept of “passive use” were made on disclosed facts and involved a legal interpretation; therefore, rejection of such claims does not amount to furnishing inaccurate particulars or misreporting. Similarly, penalties on administrative and statutory expenses were deleted, as such expenses are necessary to maintain corporate existence even during non-operational periods, and disallowances based on estimation or an ad hoc basis cannot justify a penalty.

The write-off claim for A.Y. 2018-19 also did not warrant a penalty in the absence of any finding that it was false or fraudulent. However, the Tribunal upheld the penalty relating to foreign travelling expenses for A.Y. 2015-16, observing that the assessee failed to establish any nexus between such expenses and its business, which had no active operations. This claim was held to be untenable. The Tribunal reiterated the settled principle that a mere unsustainable claim in law, when supported by full disclosure of facts, does not automatically lead to a penalty under the Income Tax Act.

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