2009 (1) TMI 537 - AT - Income Tax

Levy of Penalty u/s 271(1)( c ) - concealed income and furnished inaccurate particulars of income - HELD THAT - AO cannot invoke provision of section 271(1)( c ) on the basis routine and general presumptions. Whether it be a case of only concealment or of only inaccuracy or both, the particulars of income so vitiated would be specific and definite and be known in the assessment proceedings by the ITO, who on being satisfied about each concealment or inaccuracy of particulars of income would be in a position to initiate the penalty proceedings on one or both of the grounds of default as may have been specifically and directly detected. We find that the assessee has disclosed all the relevant material facts for the purpose of computation of total income. We also find that the assessee has offered explanation in this regard, which was not found false by AO. The explanation of assessee regarding claim of interest expenditures is bona fide . The assessee has substantiated his explanation. When the assessee has furnished all the material facts for the purpose of computation of total income the AO is duty bound to calculate correct total income in accordance with law, which may be different than the total income calculated by the assessee. Mere fact that AO while discharging his duty is recalculating the total income in accordance with law which is not the same as calculated by the assessee, it cannot be held that the assessee has concealed the particulars of his income or furnished inaccurate particulars of such income or there is a deemed concealment in accordance with Explanation 1 to section 271(1). This is not a fit case, where penalty under section 271(1)( c ) read with Explanation 1 can be invoked - the penalty of Rs. 9,21,803 levied by the Assessing Officer under section 271(1)( c ) of the Act is cancelled - the appeal of the assessee is allowed.

Summary

Issues Involved:
1. Levy of penalty under section 271(1)(c) of the Income-tax Act.
2. Disallowance of interest expenses under section 14A.
3. Assessment of dividend income under section 56.
4. Determination of whether the assessee concealed income or furnished inaccurate particulars of income.

Detailed Analysis:

1. Levy of Penalty under Section 271(1)(c) of the Income-tax Act:
The primary issue in this appeal is the levy of penalty amounting to Rs. 9,21,803 under section 271(1)(c) of the Income-tax Act. The penalty was imposed by the Assessing Officer (AO) on the grounds that the assessee allegedly concealed income and furnished inaccurate particulars of income. The CIT(A) upheld the penalty, asserting that the assessee had concealed its income and provided inaccurate particulars.

2. Disallowance of Interest Expenses under Section 14A:
During the assessment proceedings, the AO noticed that the assessee had earned dividend income of Rs. 24,04,485, which is exempt from tax, and interest income of Rs. 77,000, totaling Rs. 24,84,485. The assessee had incurred interest expenditure of Rs. 41,97,000 on unsecured loans amounting to Rs. 4.62 crore. The AO disallowed a proportionate amount of interest expenses attributed to earning the exempt income, adding Rs. 38,31,322 to the total income on a pro-rata basis.

3. Assessment of Dividend Income under Section 56:
The assessee, an investment company, argued that the interest paid on borrowed funds used for purchasing shares and securities or for granting loans should be allowable under section 36(1)(iii) of the Income-tax Act. The company contended that the dividend income, although assessed under section 56, should not affect the allowance of interest expenses under section 36(1)(iii). The assessee cited the Calcutta High Court decision in CIT v. Kanoria Investments (P.) Ltd., which held that interest payment is deductible under section 36(1)(iii) if the capital was borrowed for business purposes.

4. Determination of Concealment or Furnishing Inaccurate Particulars:
The Tribunal examined whether the assessee had concealed income or furnished inaccurate particulars. It noted that the terms "conceal" and "furnish inaccurate particulars" are not defined in section 271(1)(c) but imply hiding or withholding information and providing incorrect details, respectively. The Tribunal emphasized that the penalty provisions operate when there is a failure to disclose fully and truly the particulars of income.

The Tribunal observed that the assessee had disclosed all relevant material facts and provided a detailed note along with the return of income, explaining the interest disallowance under section 14A. The assessee's explanation was found to be bona fide and substantiated with evidence. The Tribunal concluded that the AO's recalculation of total income did not imply that the assessee had concealed income or furnished inaccurate particulars.

Conclusion:
The Tribunal held that the assessee had not concealed the particulars of income or furnished inaccurate particulars. The explanations provided by the assessee were bona fide and substantiated. Therefore, the penalty under section 271(1)(c) read with Explanation 1 was not applicable. The Tribunal canceled the penalty of Rs. 9,21,803 levied by the AO, allowing the appeal in favor of the assessee.