Whether mere disallowance of legal claim can be made the basis for levy of penalty u/s 271(1)(c) - NO: ITAT

THE issue before the Bench is - whether mere disallowance of legal claim can be made the basis for levy of penalty u/s 271(1)(c). And the answer is NO.

Facts of the case

The assessee has paid a sum of Rs.42.00 lacs to Court Receiver as per direction of the High Court for calling bids from the partners for the purpose of fixing royalty and the higher bidder would be

appointed agent of receiver who shall carry on the business of Blood Bank which was being carried on by erstwhile partnership firm. The licence to operate the Blood Bank was obtained by the assessee in his individual capacity as agent of the Court Receiver and there was no user of such licence of the erstwhile partnership firm by the assessee. On the plea that assessee has not deducted tax at source u/s. 194J on the payment of royalty by invoking provisions of section 40(a )( ia ), AO disallowed payment for non-deduction of TDS. Similarly, AO disallowed rent payment of Rs.3.00 lacs on the plea that even though assessee had deducted tax at source he has not produced challan of the said TDS or copy of return of TDS to AO to show that the TDS on rent has been paid to the Government within stipulated period as provided in section 40(a )( ia ). The AO also levied penalty which was confirmed by the CIT( A).

The counsel of the assessee that penalty and quantum proceedings are separate and distinct proceedings. Therefore, mere disallowance in quantum proceedings cannot be made reason for levying penalty u/s. 271(1)(c). The counsel relied on the order of the Tribunal dated 20/04/2011 in ITA No.5945/M/2010 directing AO to restrict the disallowance in respect of royalty payment made after 13/07/2006.

Having heard the parties, the Tribunal held that,

++ there is no dispute to the proposition that penalty and quantum proceedings are separate and distinct. The argument of the Authorized Representative was that the provisions of section 194J were not applicable to an individual assessee in respect of payment of royalty. Royalty has been defined in Explanation 2 to section 9(1)(vi) of the Act. In the present case, as per the order of the Bombay High Court dated 18th June, 2003 the Court Receiver has allowed the Assessee to carry on the business of the erstwhile partnership firm as his agent. Therefore, the payment of Rs.42 lacs to the Court Receiver is for allowing the Assessee to carry on the business of the firm;

++ as per our considered view, mere disallowance of any claim will not make the case fit for levy of penalty as per verdict of Supreme Court in the case of Reliance Petro Products (P) Ltd. Full disclosure was made by the assessee with respect to the expenditure claimed;

++ therefore, mere disallowance of legal claim cannot be made the basis for levy of penalty u/s. 271(1)(c) of the Act. Thus, there was no justification for levy of penalty for such disallowance. Accordingly Assessing Officer is directed to delete the same. Similarly AO has also levied penalty by disallowing payment of rent of u/s. 40(a )( ia ). However, vide order dated 20/04/2011 Tribunal has restored the matter to the file of the AO "for passing a fresh order after allowing opportunity of hearing to assessee . As the matter has already been restored with respect to disallowance of rent made in quantum proceedings, the penalty imposed by AO has no legs to stand. In the fitness of things levy of penalty is also set aside to the file of Assessing Officer for deciding afresh after deciding quantum addition/disallowance, as set aside by the Tribunal in its order dated 20/04/2011.