A public limited Company was engaged in the manufacturing business and also undertook construction contracts. During the assessment of the year 2014-15, various additions were made in the assessee company’s order as per section 143(3) of the Income-tax Act, 1961 along with section 14A read with rule 8D of the Income-tax Rules, 1962. On an appeal before the Tribunal, the addition made under Section 14A was restricted to Rs. 5,00,000 on an estimated and lump sum basis. Following that, the Assessing Officer issued an order under Section 271(1)(c) and assessed a penalty of Rs. 1,54,500 on the restricted addition of Rs. 5,00,000, concluding that the Assessee had provided false information on his or her income. Without giving any justification, the Commissioner (Appeals) confirmed the penalty’s imposition. The assessee appealed the same and the Appellate tribunal held that:

1. Neither of the authorities specifically stated how the disallowance made by the Assessing Officer and confirmed by the Tribunal—even if it was for a small amount—led to the claim that the assessee had provided false information about his or her income.
2. The AO did not show how he had come to the conclusion about the administrative expenditure of the assessee as there was no examination of the books of account.
3. Regarding the disallowance under rule 8D(2)(iii), the assessment order did not dispute the assessee’s assertion that it had not incurred any administrative costs for managing the investments. Instead, the Assessing Officer used the standard formula of 0.5 percent of the average investment value specified in the rules to calculate the disallowance and made the disallowance under rule 8D(2)(iii). The phrase used by the assessing officer to express satisfaction that “the assessee has furnished inaccurate particulars of income by charging capital expense to the profit/loss account.” Separate penalty actions are being taken under Section 271(1)(c) of the Act, which demonstrated that the satisfaction with regard to recording capital expense in the profit and loss statement had been recorded.
4. The disallowance specified in rule 8D(2)(iii) was primarily due to the deeming fiction and basis on which the amount was computed, and even this deeming fiction had not been applied strictly and had been held amenable to the unique facts and circumstances of the case. As a result, it was not possible to conclude that the assessee had provided inaccurate income information in the return that was submitted.
5. The charge of furnishing inaccurate particulars of income could be levied on the assessee without leading any positive evidence to that effect. The Assessing Officer did not find that incorrect information had been provided regarding investments that had produced or might produce exempt income in the future and that certain administrative costs had actually been incurred for managing these investments during the relevant year, neither during the assessment proceedings nor even during the penalty proceedings. (2014-15)