The “mere non-admission” of an expense doesn’t warrant a penalty for submitting inaccurate income data: ITAT

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Mere disallowance - expense - penalty - particulars of income - ITAT - Taxscan

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Mere non-admission - costs - penalty - information on income - ITAT - Taxscan

The Income Tax Appellate Tribunal (ITAT) in Delhi Bench ruled that “mere disapproval” of an expense does not warrant a penalty for submitting inaccurate income information.

Assessee, Ikea Trading (India) Private Limited, is an Indian company incorporated in India on June 13, 1994. The Assessee, a merchant-exporter, who has been awarded the status of a four-star export house by the Indian government, is active in the trade in home furnishings. The assessee buys various furnishings such as carpets, textiles and metal etc. from various supporting manufacturers in India and exports them outside of India.

The valuation in this case was made at a loss of Rs. 9,87,972 versus the returned loss of Rs. 7,82,35,830. The additions were made due to transfer pricing adjustments related to the sale of fixed assets in the amount of Rs. 6,17,03,289 and non-admission due to expenses in the amount of Rs. 1,55,44,569.

Criminal proceedings were initiated in the course of the assessment and a penalty of Rs. 2,62,56,547 was imposed by order of October 29, 2014 on the issue of adjustment due to the ALP of fixed assets and the issue of non-admission of costs. The penalty for the issue of adjustment due to ALP of fixed assets.

In order to arrive at the ALP of the international transaction related to the transfer of fixed assets to AEs, the assessee relied on a valuation report from an external appraiser who valued these assets at Rs. 57,501,821. The sales proceeds received by AE were at Rs. 63,680,884 / – much higher than the valuation of Rs. 57,501,821.

During the valuation process, the TPO ignored an external valuer’s valuation report on which the valuer relied and instead used the depreciated value (WDV) of these assets to determine the market price. The TPO was of the opinion that the ALP of the fixed assets sold should be determined according to the final WDV of the fixed assets calculated according to the law, which amounted to Rs. 119.205.110, and not according to the valuation report prepared by an external appraiser. Taking into account the WDV of the assets and the value of the assets according to the valuation certificate, the AO determined that the shortfall according to ALP of Rs. 61,703,289 when adjusting the ALP.

The Coram by Amit Shukla and Dr. BRR Kumar stated that the Assessee sold assets to the WDV of the assets under Company Law, while the TPO believed that the Assessee should have sold the assets at the value of the WDV of the block of assets under Income Tax Act. The WDV according to the income tax law can / cannot be the fair value of the assets. The assets were transferred at book value according to the appraiser’s audited accounts, which is a recognized method of providing depreciation.

The ITAT stated that such a sale of assets after valuation and adjustment by the TPO using the CUP method cannot be a reason for imposing a penalty under Section 271 (1) (C).

“The case of obfuscation or provision of inaccurate income information cannot result in the provisions of the penalty under 271 (1) (c). We are therefore of the opinion that the penalty levied for this reason has been rightly removed from the ld. CIT (A) ”, judged the ITAT.

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