On statutory disallowances u/s 40(a)(ia) 40A(3) there cannot be any penalty u/s 271(1)(c) especially when assessee not claimed deduction of these expenses
ABCAUS Case Law Citation:
ABCAUS 3016 (2019) (06) ITAT
Important Case Laws Cited/relied upon by the parties:
CIT v. Manjunatha Cotton & Ginning Factory, 359 ITR 565 (Kar)
The assessee was a partnership firm engaged in the business of civil construction. There was a survey u/s 133A of the Income-Tax Act, 1961 [“the Act”] in the case of assessee.
On the date of survey, the assessee had not filed return of income for the relevant AY. In the course of survey it was noticed by the Officer conducting the survey that assessee had not deducted tax at source on expenditure on which tax was deductible as per the provisions of Chapter XVIIB of the Act.
It was also noticed at the time of survey that there were expenditure which were incurred in cash above the limits specified u/s. 40A(3) of the Act and was therefore liable to be disallowed.
Since the assessee had not filed return of income, notice u/s 148 was issued by the Assessing Officer (AO). In response to the same, assessee filed return of income. In the said return of income, the assessee had disallowed and added to the total income, expenditure disallowable u/s 40(a)(ia) and u/s 40A(3) of the Act.
The return filed by the assessee was accepted by the AO and an order of assessment was passed. In the order of assessment, the AO initiated penalty proceedings u/s. 271(1)(c) for furnishing inaccurate particulars.
The AO issued a show cause notice u/s. 274 of the Act for imposing penalty on the assessee u/s 271(1)(c) of the Act. The AO was of the biew that but for the survey u/s. 133A of the Act, the assessee would not have disallowed expenditure on which TDS was not deducted in view of the provisions of section 40(a)(ia) of the Act and expenses incurred in cash in violation of section 40A(3) of the Act.
The plea of the assessee was that when the assessee had declared in the return of income the total income after making disallowance u/s. 40(a)(ia) and 40A(3) of the Act and when such return of income is accepted by the AO, there was no case for imposition of penalty u/s. 271(1)(c) of the Act, as there was neither concealment of particulars nor furnishing of inaccurate particulars of income.
However, AO did not agree with the view taken by the assessee and held that the assessee concealed and furnished particulars of income and imposed penalty u/s. 271(1)(c).
Aggrieved by the action of CIT(A) in confirming the order of the AO imposing penalty, the assessee was in appeal before the Tribunal.
Before the Tribunal, the assessee pointed out that in the notice issued u/s. 274 before imposing penalty u/s. 271(1)(c) of the Act, the AO had not struck off the irrelevant portion viz., as to whether the penalty is being proposed for concealing particulars of income or furnishing inaccurate particulars of income.
The assessee also relied upon the decision of Coordinate Bench of the ITAT wherein the Tribunal on identical facts held that there should be no imposition of penalty when the income declared in the return of income is accepted as such by the AO.
The Tribunal opined that in the facts and circumstances of the case, the imposition of penalty could not be justified. Firstly, the disallowances u/s.40(a)(ia) and Sec.40A(3) of the Act are statutory disallowances and there was no dispute about the genuineness of these expenses or that they were unrelated to the business of the Assessee. On such statutory disallowances, there cannot be imposition of penalty, especially when the Assessee had not made claim for deduction of these expenses in a return of income filed.
Also, the Tribunal stated that there cannot be any penalty on income which is declared in a return of income. When an income which is ultimately brought to tax is declared in a return of income, there can be no question of treating the Assessee as having “concealed particulars of income or furnished inaccurate particulars of income”. The starting point of determining concealment for imposing penalty is the return of income. If the return of income declares income which is ultimately brought to tax there can be no complaint by the revenue that the Assessee is guilty of “concealing particulars of income or furnishing inaccurate particulars of income.
Further, the Tribunal noted that the show cause notice issued by the AO before imposing penalty did not specify the charge against the assessee for which the penalty is sought to be imposed viz., as to whether it is for concealing particulars of income or furnishing inaccurate particulars of income. In the circumstances, the decision of the Hon’ble High Court of Karnataka was applicable and imposition of penalty had to be held to be not sustainable.
Accordingly, the penalty was directed to be cancelled.