Penalty u/s 271(1)(c) cannot be levied on disallowance made u/s 40(a)(ia) by invoking legal fiction:

AO levied penalty u/s 271(1)(c) on disallowance made u/s 40(a)(ia). Hon’ble ITAT observed that the assessee had paid interest to a fiancé company but had not deducted tax at source u/s 194A since he was under a bona fide belief that provisions of TDS were not applicable on payment of interest to NBFC. AO had not alleged that the said payment was non-genuine, bogus, excessive or unreasonable. Disallowance u/s 40(a)(ia) was made by merely invoking the legal fiction. It was thus held that disallowance u/s 40(a)(ia) will not attract penalty for furnishing inaccurate particulars of income. Accordingly, the penalty was deleted. Reliance was also placed on the decision of the Hon’ble Apex Court in the case of “CIT vs. Mother India Refrigeration Pvt. Ltd. – 155 ITR 711 (SC)” wherein in was held that legal fictions are created for some definite purpose and the same must be limited to that purpose and should not be extended beyond that legitimate filed.

[ITO Vs. VISHAL MADHUSUDHANBHAI CHOKSI – ITA No.62/Ahd/2013]

No addition can be made u/s 40A(2) unless AO finds out Fair Market Value of the concerned goods or services and compares the same with payment made by assessee to related parties:

AO made disallowance u/s 40A(2) of part of the job charges paid by the assessee to a person covered vide S.40A(2)(b) since he considered it to be excessive. Hon’ble ITAT found that the appellant had paid texturizing labour charges at 15/kg to its sister concerns whereas its own cost of production was Rs.9.71/kg. Hence, AO took a view that the assessee had made excess payment of Rs.5.29/kg (i.e. Rs.15 – Rs.9.71) and hence, he disallowed corresponding labour charges. For working out such a disallowance, AO firstly needs to compare payment made by assessee with “Fair Market Value” (FMV) of such goods or services and then, if payment is found to be excessive or unreasonable as compared to FMV, then disallowance can be made to the extent of excessive or unreasonable sum paid. In the given case, AO compared the payment of labour charges with “Cost of production” of the assessee and not the “FMV”. Further, Revenue couldn’t controvert the fact that if octroi, freight and cartage are added to cost of production, assessee’s average cost works out to Rs.15.02/kg. In light of the aforesaid facts, the addition made u/s 40A(2) was deleted.

[M/S. J.J. TEXTURISERS Vs. ITO – ITA No.978/Ahd/2010]

S.194C is not applicable while making payment is respect of purchase of standardized materials available in market:

AO made disallowance u/s 40(a)(ia) since he was of the view that the assessee had not deducted tax u/s 194C while making payments in respect of packing materials. Hon’ble ITAT found that the concerned payment was in respect of purchase of plastic trays, cups, spoon and plastic dishes, etc. and the said items did not carry the logo of the assesse. Further, the said purchases were of the standardized materials available in the market. It was thus held that such purchases cannot be considered as being a case of contract which would require deduction of tax u/s 194C. Consequentially, disallowance u/s 40(a)(ia) was deleted.

[RASRANJAN FOOD PRODUCTS PVT. LTD. Vs. ITO – ITA No.1794/Ahd/2010 & CO No.188/Ahd/2010]

Depreciation on vehicles can be claimed by a company even if such vehicles are purchased in the names of its directors:

AO disallowed depreciation on vehicles on the count that the said vehicles were purchased in the name of the directors of the assessee-company. He was of the view that since the ownership of such vehicles did not belong to the company, it was not entitled to depreciation. Hon’ble ITAT observed that the assesse-company had made payments for such vehicles. The said vehicles were recorded in the books of assessee-company and were also used for the purpose of business of the assessee-company. In light of the aforesaid facts, Hon’ble ITAT rightly confirmed the order of CIT(A) allowing depreciation on such vehicles to the assessee-company.

[RASRANJAN FOOD PRODUCTS PVT. LTD. Vs. ITO – ITA No.1794/Ahd/2010 & CO No.188/Ahd/2010]

No addition can be made u/s 68 in respect of cash deposited in bank a/c out of earlier cash withdrawals:

AO made an addition u/s 68 in respect of cash deposited in bank account considering it to be unexplained. Hon’ble ITAT observed that the assessee had received sale proceeds of shares of ONGC on two occasions which were deposited in a bank account. On the very next of the said sale proceeds being credited in the bank account, sizable sum out of the same was withdrawn by the assessee. After few months, assessee re-deposited certain cash in the very same bank account and assessee claimed that the said deposit was out of the cash withdrawal made earlier. AO made addition u/s 68 in respect of the said cash deposit. Further, Hon’ble ITAT also observed that assessee was an employee of ONGC, had no other occupation and had already offered long term capital gain on sale of shares for tax. It was held that there could be various reasons for an assessee to keep liquid cash in his possession which is not unnatural. Moreover, revenue had not brought any material on record to establish that the assessee had deposited cash other than what he had withdrawn from his bank account. Since the addition u/s 68 was made merely on the basis of presumptions and assumptions, it was harsh and not justifiable. Accordingly, the addition was deleted by the Hon’ble ITAT.

[NAVINCHANDRA RAVJIBHAI CHAVDA Vs. ITO – ITA No.2335/Ahd/2012]

No penalty can be levied u/s 271AAA on the count that assessee failed to substantiate the manner in which undisclosed income was derived if the authorised officer doesn’t ask specific question w.r.t. manner in which such income was derived:

A search action was carried out during the course of which, certain cash, gold ornaments and jewellery were found. Hence, assessee made certain disclosure as his undisclosed income so as to cover the discrepancy in cash & jewellery on which AO levied penalty u/s 271AAA. Hon’ble ITAT observed that the assessee had specified in his statement recorded u/s 132(4) that such income was earned from medical profession. Moreover, the said income was duly offered in the return on income and tax on such disclosure was adjusted from seized cash. AO levied penalty u/s 271AAA since he was of the view that assessee didn’t substantiate the manner in which such income was derived. Hon’ble ITAT further observed that neither at the stage of recording assessee’s statement nor at the stage of assessment proceedings, assessee was asked either by the authorised officer or AO to substantiate the manner in which undisclosed income was derived. Hon’ble ITAT, following decision in the case of Radhakrishnan Goyal vs. CIT [278 ITR 454 (All)], held that u/s 132(4), unless authorised officer puts a specific question w.r.t. manner in which income has been derived, it is not expected from a person to make a statement in this regard. Having complied with the requirements of S.271AAA(2), it was held that assessee was eligible for immunity from penalty u/s 271AAA and CIT(A) was right in deleting such penalty.

[DCIT Vs. Dr. MUKESH S. SHAH – ITA No.1942/Ahd/2012]

Explanation 5 to S.271(1)(c) cannot be invoked to levy penalty on income disclosed during survey u/s 133A:

A survey u/s 133A took place at the assessee firm’s premises during the course of which certain excess stock and excess cash were found. AO levied penalty on the said amounts representing unaccounted stock and unaccounted cash by invoking Explanation 5 to S.271(1)(c). On appeal, the Hon’ble ITAT observed that the assessee firm had furnished its return of income which included the unaccounted income on account of excess stock and excess cash. Tax arising thereon was duly paid and the said return of income was accepted u/s 143(3). Further, the said disclosure was made during the course of survey u/s 133A and not during the course of search u/s 132. Explanation 5 can be invoked in case of search initiated u/s 132 and not in case of survey u/s 133A. Further, the said amounts were included in the return of income and the said return was accepted by AO. Hence, it cannot be said that the assessee had concealed its income or furnished inaccurate particulars of income. Also, there cannot be any concealment prior to furnishing return of income. In light of the above, the penalty was deleted.

[BHARAT STEEL SUPPLIERS VS. ACIT – ITA NOS.1546-47/Ahd/2010]