Wrong Claim for Income Tax Deduction can’t be a reason to invoke Penalty u/s 271(1)(c)

Short Overview of the case:

The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has recently held that the penalty under section 271(1)(c) of the Income Tax Act, 1961 cannot be imposed merely for the reason that the assessee has wrongly claimed for deduction of annual exchange service charge treating the same as revenue expenditure. The assessee is a real estate company. During the course of assessment, the Assessing Officer noted that the assessee company had made a payment of Rs.19,68,682/- to M/s. Nifinity Ltd. and Rs.15,60,782/- to M/s. Cobweb Solutions Ltd. as Exchange Server Services. It was noted that the said amount was disclosed as revenue expenditure instead of capital expenditure. While considering the second appeal filed by the assessee, the Tribunal bench comprising Judicial Member Pavan Kumar Gadale and Accountant Member Shamim Yahya observed that the assessee’s claim is that expenditure on account of annual exchange service charge is to be treated as revenue expenditure. Relying on various decisions, the bench said that “we are of the opinion that on the facts and circumstances of the case, the conduct of the assessee is not contumacious to warrant levy of penalty u/s.271(1)(c) of the Act. In this regard, we draw support from the decision of the larger bench of Hon’ble Supreme Court in the case of Hindustan Steel Ltd. vs. the State of Orissa [1972] 83 ITR 26 (SC) or the proposition that an authority may not levy penalty unless the conduct of the assessee is found to be contumacious.” “In our considered opinion, the aforesaid claim, by no stretch of imagination can be said to be ex-facie bogus. In this view of the matter, a disallowance of the same cannot lead to the conclusion that the assessee is guilty of furnishing of inaccurate particulars of income or concealment of income on the touchstone of aforesaid Hon’ble Supreme Court decision,” the bench said.

The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has recently held that the penalty under section 271(1)(c) of the Income Tax Act, 1961 cannot be imposed merely for the reason that the assessee has wrongly claimed for deduction of annual exchange service charge treating the same as revenue expenditure. The assessee is a real estate company. During the course of assessment, the Assessing Officer noted that the assessee company had made a payment of Rs.19,68,682/- to M/s. Nifinity Ltd. and Rs.15,60,782/- to M/s. Cobweb Solutions Ltd. as Exchange Server Services. It was noted that the said amount was disclosed as revenue expenditure instead of capital expenditure. While considering the second appeal filed by the assessee, the Tribunal bench comprising Judicial Member Pavan Kumar Gadale and Accountant Member Shamim Yahya observed that the assessee’s claim is that expenditure on account of annual exchange service charge is to be treated as revenue expenditure. Relying on various decisions, the bench said that “we are of the opinion that on the facts and circumstances of the case, the conduct of the assessee is not contumacious to warrant levy of penalty u/s.271(1)(c) of the Act. In this regard, we draw support from the decision of the larger bench of Hon’ble Supreme Court in the case of Hindustan Steel Ltd. vs. the State of Orissa [1972] 83 ITR 26 (SC) or the proposition that an authority may not levy penalty unless the conduct of the assessee is found to be contumacious.” “In our considered opinion, the aforesaid claim, by no stretch of imagination can be said to be ex-facie bogus. In this view of the matter, a disallowance of the same cannot lead to the conclusion that the assessee is guilty of furnishing of inaccurate particulars of income or concealment of income on the touchstone of aforesaid Hon’ble Supreme Court decision,” the bench said.