~Whether Sec 94 is attracted and penalty is justified when assessee sets o

Whether Sec 94 is attracted and penalty is justified when assessee sets off loss on sale of mutual fund units against profit on short-term investments but does not claim loss as deduction - YES, rules ITAT

MUMBAI, JUNE 13, 2011: THE issue before the Tribunal is - Whether section 94 is attracted and penalty is justified when assessee sets off the loss on sale of its mutual fund units against profit on short term investments but does not claim the loss as a deduction. YES is the Tribunal's answer.

Facts of the case

The assessee company revised its return of income declaring a slightly higher total income. However, the AO made certain additions and disallowances and completed the assessment under section 143(3). The CIT(A) confirmed the AO's order. Following disposal of the assessee's appeal by the Tribunal, the AO levied 100 per cent penalty on income sought to be evaded by the assessee, including short term capital loss incurred on sale of mutual fund units that were disallowed under section 94(7); SAP expenses incurred by the assessee; expenses relatable to investments under section 14A and deduction under section 80G and 80HHC, which was recomputed.

On appeal before the Tribunal, the assessee submitted that section 94 provisions were not attracted as the investment in units was made not with a view to incur loss and avoid tax. The assessee had set off the loss on sale of its units against profit on short term investments and not claimed the loss as a deduction. Therefore, what was offered to tax was only net short term capital gain whereby no penalty could be levied.

The assessee had also implemented the SAP project and claimed consultancy fees, professional charges and other incidental costs as deductible expenses. According to the assessee, it had been carrying on business for number of years and it had acquired and implemented various hardware and software systems from time to time, which required continuous upgradation and modification. Also, it had only claimed the net expenses, being revenue in nature, and which were not recovered from its various overseas branches, whereby penalty was not justified.

Deduction under 80G claimed on donation made by the assessee was disallowed in the absence of receipts and penalty levied on this amount. The CIT(A) confirmed the levy of penalty as the onus was on the assessee to prove the claim for deduction. According to the assessee, disallowance of deduction on account of non-production of receipts could not be considered as concealment of income or furnishing of inaccurate particulars of income.

DEPB benefits were excluded from business profits for computing deduction under section 80HHC, while excise duty and sales tax were added to the total turnover for computing the deduction. The CIT(A) had partly allowed the assessee's appeal but confirmed the levy of penalty on the excess deductions claimed under section 80HHC, including on indirect cost related to trading goods and interest received on income tax refund. Objecting to the penalty, the assessee submitted that the indirect cost of trading export had been computed on estimate basis and available data.

Having heard the parties, the Tribunal held that,

++ the CIT(A) had held that the assessee had adjusted the loss against profit on sale of short term capital gains which was illegal. Having furnished inaccurate particulars of income, the levy of penalty under section 271(1)(c) was justified. The order of the CIT(A) was confirmed as the assessee had wrongly claimed the loss when provisions of section 94 were clearly applicable to such transactions;

++ regarding penalty on SAP expenses, the CIT(A) had dismissed the appeal. However, in the quantum appeal as the issue had been set aside, along with issue of expenses on 14A investments, the penalty levied was also set aside;

++ regarding deduction under 80G, there was no infirmity in the CIT(A) order as the receipt had not been made available before more than one authority, in clear violation of the section. Penalty on this issue was confirmed;

++ computation of relief under section 80HHC was controversial as this section had undergone numerous amendments. The assessee had furnished all particulars of the individual components in computing the 80HHC relief. The particulars were accurate and supported by a certificate by the Chartered Accountant. Following the apex court decision, holding that as long as the assessee had not given any information in the return which were incorrect, making an incorrect claim in law was not tantamount to furnishing inaccurate particulars and penalty under section 271(1)(c) was not attracted, as well as the decision of the Delhi High Court, the penalty levied in respect of the disallowance under section 80HHC was deleted.