The Income Tax Appellate Tribunal (ITAT), Delhi Bench ruled that “Mere disallowance” of an expense does not warrant a penalty for filing inaccurate particulars of income.
The assessee, Ikea Trading (India) Private Limited is an Indian company incorporated in India on 13th June 1994. The assessee, a Merchant Exporter, granted a ‘Four Star’ export house status by the Government of India, is engaged in the trading of home furnishing products. The assessee purchases different home furnishing products like carpets, textile and metal etc. from various supporting manufacturers in India and exports the same outside India.
The assessment in this case was made at a loss of Rs.9,87,972 against the returned loss of Rs.7,82,35,830. The additions were made on account of transfer pricing adjustment in respect of sale of fixed assets amounting to Rs.6,17,03,289 and disallowance on account of expenses amounting to Rs.1,55,44,569.
The penalty proceedings were initiated during the course of assessment and penalty of Rs.2,62,56,547 was imposed vide order dated 29.10.2014 on the issue of adjustment on account of ALP of fixed assets and on the issue of disallowance of expenses. The Penalty on the issue of adjustment on account of ALP of fixed assets.
For arriving at the ALP of the international transaction pertaining to transfer of fixed assets to AEs, the assessee had relied upon a valuation report of an external valuer, who had valued these assets at Rs.57,501,821. The sale proceeds received from the AE were much higher at Rs.63,680,884/- than the valuation made of Rs.57,501,821.
During the assessment proceedings, the TPO disregarded the valuation report of an external valuer relied upon by the assessee and instead, used Written Down Value (WDV) of such assets for determining the arm’s length price. The TPO held that the ALP of the fixed assets sold should be taken as per the closing WDV of fixed assets computed under the Act, which was Rs.119,205,110 and not as per the valuation report carried out by external valuer. After taking into consideration, WDV of the assets and value of the assets as per the valuation certificate, the AO determined that the shortfall as per ALP of Rs.61,703,289 on adjustment of the ALP.
The coram of Amit Shukla and Dr. B.R.R. Kumar noted that the assessee has sold assets at the WDV of the assets as per company law whereas the TPO held that the assessee ought to have sold the assets at the value of the WDV of the block of assets as per the Income Tax Act. The WDV as per the Income Tax Act may not be /cannot be the fair market value of the assets. The assets were transferred at the book value as per the audited accounts of the assessee which is a recognized method of providing depreciation.
The ITAT said that such sale of assets after valuation and the adjustment by the TPO by resorting to CUP method cannot be a ground for levy of penalty under section 271(1)(c).
“The case of concealment or furnishing of inaccurate particulars of income cannot attract the provisions of penalty u/s 271(1)(c). Hence, we hold that penalty levied on this ground has been rightly deleted by the ld. CIT (A),” the ITAT ruled.
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