S. 271(1)(c): Relief by CIT(A) on merits (though reversed by ITAT) means claim is debatable

Salman Khan vs. ACIT (ITAT Mumbai)

The assessee, a film actor, went to Jodhpur for shoot for a Hindi movie called “Ham Sath Sath Hain”. During his stay at Jodhpur, he was implicated in criminal proceedings on the allegation that he shot a black buck, an endangered specie. He was arrested by the local police and in order to get himself released, h e had to engage lawyers. The criminal proceedings as a result of this case have continued thereafter and the assessee has been regularly incurring legal expenses to defend himself and obtain exemptions from the personal hearings from this case. He contended that if he had not defended himself in the criminal proceedings and asked for personal exemptions, it would have resulted in his absence from all the movies/projects undertaken by him causing loss of revenue to him as well as to the producers of his films. He contended that it was thus necessary for him to incur the legal expenses during the years under consideration to preserve and protect his profession and the said expenses therefore were claimed by the assessee as deduction. The CIT(A) accepted the stand of the assessee and allowed deduction for the legal expenses. However, the Tribunal reversed the decision of the CIT(A) and disallowed the claim. The AO levied penalty u/s 271(1)(c) for furnishing inaccurate particulars of income. This was upheld by the CIT(A). On appeal by the assessee to the Tribunal HELD allowing the appeal:

The fact that the claim of the assessee was accepted by the CIT(A) on merit clearly shows that the claim made by the assessee was based on a possible view of the matter. It also shows that the claim for deduction on account of legal expenses was a bonafide claim. In subsequent years, the assessee has capitalized similar legal expenses after having come to know about the disallowance made in the years under consideration. This show the bonafides of the assessee. All material particulars relevant to the claim were fully and truly furnished by the assessee and there is no allegation made by the AO in the penalty order that any inaccurate particulars were furnished by the assessee while making the claim on account of deduction of legal expenses. It is also not in dispute that the legal expenses claimed by the assessee were actually incurred by him and it is not the case of the Revenue at any stage that the expenses so claimed by the assessee were bogus. When no information given in the return is found to be in-correct or in-accurate, the assessee cannot be held guilty of furnishing in-accurate particulars of its income and unless the case is strictly covered by the provision, penalty cannot be imposed. Where there is no finding that the particulars furnished by the assessee in the return are in-accurate or erroneous or false, there is no question of imposing penalty u/s 271(1)(c) of the act merely because the claim of the assessee for deduction is disallowed in the quantum proceedings (Reliance Petroproducts Ltd 322 ITR158 (SC) followed)