ITAT removes Section 14A Additions and Penalty on Income Tax Refund Interest
Fact and issue of the case
Present appeal has been filed by the assessee against order passed by the ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC) [hereinafter referred to as “Ld. CIT(A) under section 250(6) of the Income Tax Act, 1961 (“the Act” for short) dated 05.05.2022 pertaining to the Asst. Year 2014-15. By the impugned order, the ld. CIT(A) has confirmed levy of penalty under section 271(1)(c) of the Act.
The grounds raised in the appeal are as under:
The learned CITA) has erred in confirming the penalty to extent of Rs.87,096 under Section 271(1)(c) for the disallowance under Section 14A as per Rule 8D and addition of interest of income tax refund under Section 244A inasmuch as the assessee has disclosed both the figures of expenses as well as income in its Profit & Loss Account filed along with the return of income. There is no question of concealing or furnishing inaccurate particulars of income.
The learned CIT(A) has erred in confirming the penalty to extent of Rs.87,096 under Section 271[l)(c) for the disallowance under Section 14A as per Rule 8D and addition of interest of income tax refund under Section 244A inasmuch as:
the interest income is offered for tax by the assessee company during the next financial year.
the assessee company has neither furnished any inaccurate particulars of income nor concealed any income. The learned AO has erred in levying penalty inasmuch as the notice issued did not create any specific charges.”
As transpires from the order of the authority below, the penalty for concealing/furnishing inaccurate particularsof income under section 271(1)(c) of the Act was levied on account of following additions made to the income of the assessee:
Expenses incurred in relation to earning of exempt income as per the provisions of Rs.14A of the Act of Rs.2,04,741/-
Interest on income tax refund of Rs.77,176/-
On the aspect of disallowance of expenses made under section 14A of the Act, orders of the authority below reveal that initially the AO had made disallowance of both interest and administrative expenses computed as per Rule 8D of the Income Tax Rules, 1962, amounting in all to Rs.23,59,688/- comprising of Rs.21,54,947/- being interest component, and Rs.2,04,741/- being the administrative expenses. The matter traveled right upto the ITAT, who deleted in entirety the disallowance pertaining to interest component of expenses incurred for earning of exempt income< confirming the disallowance of administrative expenses to the tune of Rs.2,04,741/-.And it is on this addition confirmed right upto the ITAT that penalty under section 271(1)(c) of the Act has been confirmed by the ld.CIT(A) .
A perusal of order of the authorities below reveals that the exempt income earned by the assessee pertained to investment in shares of only one company i.e. Ganesh Housing Corporation Ltd., being 455102 shares of the said company valued at Rs.4,09,48,303/-. This was the only investment made by the assessee in relation to which the disallowance under section 14A of the Act was made. It is also afact on record that this investment was made by the assessee in the financial year 2012-13 pertaining to Asst.Year 2013-14 i.e. the year preceding the impugned assessment year before us, which is Asst.Year 2014-15. The Tribunal accepted the assessee’s contention that no new investment was made by the assessee during the year and the entire investment was sourced from tax free funds received from C.D. Integrated Services Ltd. The disallowance of administrative expenses which has been confirmed right upto the ITAT is only on account of the computation as provided under Rule 8D of the Rules. There is no dispute vis-à-vis this fact. What turns from the above is that there is no actual finding of any expenses incurred by the assessee for earning exempt income, and it is only on account of computational provision of Rule 8D read alongwithsection14A of the Act that the disallowance in the impugned case has been made. In such circumstances, considering the facts of the case that the investment made by the assessee was only in one share that too in the preceding year, and there is no finding of any actual incurrence of any expenses for earning income from the shares, the disallowance of expenses being made only on account of the computational provisions provided in the Rules, the assessee in such facts and circumstances, cannot be charged with having concealed or furnished inaccurate particulars of income vis-à-vis the expenses disallowed.
Observation of the court
In view of the above, penalty levied on account of the disallowance of expenses being administrative in nature amounting to Rs.2,04,741/- u/s 14A of the Act is we hold not sustainable in law and is directed to be deleted.
Vis-à-vis theother addition confirmed, relating to the interest earned on income-tax refund amounting to Rs.77,126/-, orders of the authorities below reveal that the assessee had received income tax refund during the year amounting to Rs.25,92,470/- which included interest component of Rs.1,69,596/- and the assessee had returned out of the same interest of Rs.92,470/- only. The balance of Rs.77,126/- was accordingly added to the income of the assessee and brought to tax. The assessee did not contest this addition either before theld.CIT(A) or before the ITAT acknowledging its mistake. Since the facts reveals that the assessee had offered part of the interest on refund by it, surely the balance of Rs.77,126/- was not offered to tax under a mistaken belief, which the assessee accepted and did not contest in appeal also. It is a fact on record that in the subsequent year, the assessee received another interest on refund of Rs.75,644/- which was duly returned to tax. During assessment proceedings, when confronted with the interest component not returned by the assessee of Rs.77,126/- ,the assessee offered an explanation to the effect that it was returned in the succeeding year. The reply of the assessee is reproduced in the assessment order. Therefore, it is only under a mistaken belief that the assessee failed to offer interest income during the impugned year amounting to Rs.77,126/-, and the assessee otherwise was vigilant to have duly returned whatever interest it received on refund . The assessee in such circumstances cannot said to have concealed or furnished inaccurate particulars of income so as to levy penalty under section 271(1)(c) of the Act. Penalty levied on this component of the addition made to the income of the assessee being interest on income-tax refund amounting to Rs.77,176/- is also held to be untenable in law, and therefore directed to be deleted.
In effect, entire penalty levied in the present case u/s 271(1)(c) of the Act is directed to be deleted. The grounds of appeal of the assessee are allowed.
In the result, the appeal of the assessee is allowed.
Order pronounced in the Court on 09th June, 2023 at Ahmedabad.
In the result, appeal of the assessee is allowed and ruled in favour of the assessee