Penalty cannot be levied if claim was as per judicial precedents

Facts of the case :

The Assessee filed its return of income for AY 2003-04. The assessment was completed under Section 143(3) of the Act on 31/03/2006. After completion of the assessment, the AO initiated penalty proceedings u/s. 271(1)(c) of the Act. The penalty order was passed on 26/03/2008 levying penalty with respect to the following additions:-

(i)        Disallowance u/s. 80IA ;

(ii)      Rejection of assessee’s claim that sales tax incentive is in nature of capital receipt ; and

(iii)    Addition to the total income on account of items not considered to be eligible for 100 % depreciation.

In the first appeal, the CIT(A) deleted penalty with respect to additions on point nos. (i) and (ii) and confirmed addition mentioned at point no. (iii).

Aggrieved with the order of CIT(A), both AO and the Assessee filed appeal before ITAT. The ITAT deleted the penalty levied with respect to additions mentioned in point nos. (i) and (ii). The ITAT further deleted the penalty levied in respect of addition at point no. (iii) by placing reliance upon the decision of Bombay High Court in the case of CIT v. M/s. Nayan Builders and Developers and as well as decision of ITAT in Assessee’s own case for AYs 1999-2000 and 2000-01.

Questions before High Court :

(i)     Whether ITAT was correct in holding that since for the earlier year for similar disallowance no penalty was levied, hence no penalty can be levied for this year?

(ii)       Whether ITAT was correct in holding that since the appeal in quantum proceedings is admitted by the Hon’ble High Court, no penalty under Section 271(1)(c) can be levied? 

High Court’s verdict:

A. The hon’ble High Court held that the ITAT was fully justified in confirming the order of the CIT(A) for deleting the penalty as far point Nos. (i) and (ii) are concerned the appeals with reference to the quantum proceedings have been admitted by this Court on a substantial question of law.  

B. The Court held that issues were backed by judicial precedence for instances at the time of claiming deduction in the return of income, a favourable decision of Ahmedabad ITAT in the case of Kothari Products Ltd. vs. ACIT 37 ITD 285 (1991) was very much in force. Similarly, the claim that sales tax incentive is in nature of capital receipt was made on the basis of a decision of a Special Bench of ITAT, Mumbai in the case of DCIT vs. Reliance Industries Ltd. 88 ITD 273 (2004).

C. In respect of penalty on addition to the total income on account of items not considered to be eligible for 100 % depreciation being point no. (iii)  upheld the order of the ITAT wherein the ITAT deleted the said penalty on the basis that in the preceding assessment Year, on a similar disallowance, no penalty was levied by the AO. Apart from this, the ITAT also held that the Assessee has admitted that a genuine mistake was made in adopting 100% depreciation. This explanation was accepted by the ITAT and recorded that it was in the impugned assessment Year that the rate of depreciation was reduced from 100% to 80%.

D. The hon’ble High Court further held that the decision in the case of Pr. CIT vs. Shree Gopal Housing and Plantation Corporation bearing ITA no. 701 of 2015 (Bom.) decided on 6th February, 2018 wherein it has been held that merely because an appeal has been admitted by this Court in the quantum proceedings, would not automatically mean that the penalty ought to be deleted is wholly misplaced in the present case especially when the claims made by the Assessee were governed by judicial precedence of the Tribunal.e ITAT deleted the said penalty on the basis that in the preceding assessment Year, on a similar disallowance, no penalty was levied by the AO. Apart from this, the ITAT also held that the Assessee has admitted that a genuine mistake was made in adopting 100% depreciation. This explanation was accepted by the ITAT and recorded that it was in the impugned assessment Year that the rate of depreciation was reduced from 100% to 80%.