Penalty u/s 271(1)(c) of Income Tax Act Cannot be Imposed on Payment made under Cost Sharing Arrangements on Basis of Non-existing and Deleted Disallowance: ITAT [Read Order]

The Delhi Bench of Income Tax Appellate Tribunal (ITAT) held that disallowance/addition on account of payment made under cost sharing arrangements has been deleted by the Tribunal in previous Assesment Year(AY) therefore no penalty could have been imposed against the assessee on the basis of non-existing and deleted disallowance.

The assessee in this case is M/s. Johnson Matthey India Pvt. Ltd. During the assessment proceeding the Assessing Officer (AO) imposed penalty  under Section 271(1)(c) of the Income Tax Act,1961 levying penalty of Rs. 5,16,62,058/that the assessee has knowingly and willingly furnished inaccurate particulars of its income in respect of addition of Rs. 4,42,76,395 on account of payment made under cost sharing arrangements.

Aggrieved by the order the assessee filed an appeal before the Commissioner of Income Tax Appeals [CIT(A)] which deleted the penalty imposed under Section 271(1)(c) of the Income Tax Act.

The Revenue being aggrieved filed an appeal before the Tribunal. The Departmental Representative (DR) submitted that the CIT(A) has erred in deleting the penalty order under Section 271(1)(c) of the Income Tax Act levying penalty of Rs. 5,16,62,058 that the assessee has knowingly and willingly furnished inaccurate particulars of its income in respect of addition of Rs. 4,42,76,395/- on account of payment made under cost sharing arrangements.

The Assessee Representative (AR) supported the first appellate order and submitted that since the CIT(A) has taken note of the Tribunal order for Assessment Year (AY) 2007-08 and 2008-09,further he submitted that the disallowance/addition on account of payment made under cost sharing arrangements has been deleted by the Tribunal therefore no penalty could have been imposed against the assessee on the basis of non-existing and deleted disallowance.

The Bench comprising of Chandra Mohan Garg, Judicial Member and Dr. B.R.R. Kumar, Accountant Member observed that the CIT(A) set aside the penalty imposed by the AO under Section 271(1)(c) of the Income Tax Act on the ground that the issue of deduction under Section 14A of the Income Tax Act was a debatable issue. It was also note that against the quantum assessment where under deduction under Section 14A of the Income Tax Act was prescribed to the assessee, the assessee has preferred an appeal in this Court under Section 260A of the Income Tax Act which has also been admitted and substantial question of law framed.

It was further noted that undisputedly the coordinate bench of the Tribunal in the order in assessee’s own appeal for AY 2007-08 & 2008-09 has deleted the addition/disallowance on account of payment made under cost sharing arrangements therefore deletion of penalty by CIT(A) cannot be challenged or disputed as per settled principles of tax jurisprudence as and when the basis of penalty is not survive then consequent penalty also loses its legal existence.

The CIT(A) was right in holding that since the issue has become debatable after framing of substantial questions of law by High Court therefore penalty on debatable issue do not survive. Therefore the Tribunal unable to see any ambiguity perversity or any other valid reason to interfere with the findings of CIT(A) and thus upheld the same. Accordingly, grounds of revenue for AY 2011-12 are dismissed.

Therefore our conclusion for AY 2011-12 would apply mutatis mutandis to AY 2012-13. Thus, upheld the conclusion drawn by the CIT(A) deleting the penalty in the captioned appeals.

Hence the appeal of revenue was dismissed.

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