Disallowance made by Interpreting Revenue Expenditure as Capital Loss not Sustained: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT) in Delhi held that interpretation of the transaction of loss of security in the nature of revenue expenditure as a capital loss, not allowable against the business profit, by AO is not sustainable. Therefore, lower authorities were not justified in sustaining the penalty levied under Section 271(1)(c) of the Income Tax Act.

Facts of the case are that as against the return of income declared the total income of the assessee for the year under consideration was assessed under section 143(3) of the Act and penalty proceedings were initiated under section 271(1)(c) of the Act. On further appeal, the disallowance in respect of loss of security deposit was sustained by the Ld. CIT(A). In view of the disallowance sustained, the Ld. Assessing Officer issued show cause for levy of penalty and after considering the submission of the assessee, he held the assessee liable for penalty and levied penalty equivalent to hundred percentile of the tax sought to be evaded by the assessee in respect of the addition. On further appeal, the Ld. CIT(A) upheld the penalty. Aggrieved, by the order the assessee filed this appeal

The assessee, in the light of judgments in NTPC Vs. CIT, 229 ITR 383 and  Manjunath Cotton & Ginning Factory, 359 ITR 565 (Kar) submitted that the charges for initiation of penalty, whether for concealment of particulars of income or furnishing inaccurate particulars of income, was not struck down in the notice issued under section 274 read with section 271 of the Act. According to the assessee, the addition has been made merely on the difference of opinion, whether the loss of security deposit in respect of the asset which was taken on lease, would amount to revenue expenditure or capital expenditure. And submitted that the Assessing Officer has levied penalty on the ground of non-furnishing of explanation as to the default in declaring the income as provided under Explanation 1 of section 271(1)(c) of the Act. The assessee has offered the explanation for claiming the expenses as revenue expenditure and such explanation is bonafide and all the facts in relation to same and material to the computation of the total income have been disclosed by the assessee and therefore, lower authorities were not justified in sustaining the penalty levied under section 271(1)(c) of the Act.

The respondent submitted that charges on which penalty was initiated are clearly mentioned in the assessment order and, therefore, the assessee was aware of the charges, for the penalty was initiated. The department relied on the order of the Ld. CIT(A) and submitted that assessee deliberately not disclosed the facts in the return of income filed and complete facts regarding the issue of addition were not available on the return of income and document enclosed.

The bench comprising of Judicial Member Sudhanshu Srivastava and Accountant Member O.P. Kant held that the assessee has disclosed all the facts material to the computation of the income in the assessment proceedings. During the assessment proceedings, the Assessing Officer asked queries in respect of the claim of loss of security deposit claim and the assessee submitted all the detailed information in respect of the transaction and no facts have been found to be wrong by the Assessing Officer. The issue involved is only of the interpretation of the transaction of loss of security. According to the assessee, it was in the nature of revenue expenditure whereas according to the Assessing Officer, it is a capital loss, not allowable against the business profit. Accordingly, the findings of the Ld. CIT(A) on the issue in dispute is set aside and the penalty levied by the Assessing Officer is cancelled. The appeal of the assessee is allowed.