2000 (7) TMI 918 - AT - Income Tax

Summary

Issues:
- Disallowance of interest on unsecured loans to sister concern
- Change in method of accounting from mercantile to cash system
- Penalty under section 271(1)(c) for assessment years 1987-88 and 1989-90

Analysis:
The appeals were filed by the Revenue against the orders passed by the Commissioner of Income-tax (Appeals) for the assessment years 1987-88 and 1989-90 regarding the disallowance of interest on unsecured loans to a sister concern. The Assessing Officer found that the assessee had advanced interest-free loans to the sister concern from interest-bearing funds, leading to disallowance of proportionate interest at 18%. The Commissioner of Income-tax (Appeals) upheld this disallowance. The penalty proceedings under section 271(1)(c) were initiated against the assessee for both years. The assessee contended that the loans were given for business purposes to support the financially troubled sister concern, justifying the change in accounting method from mercantile to cash system. The Commissioner of Income-tax (Appeals) canceled the penalty orders, leading to the appeal.

The Tribunal observed that the assessee provided interest-free advances to the sister concern due to its financial difficulties, aiming to support the business. The Tribunal confirmed the addition made by the Assessing Officer regarding the interest disallowance. The Tribunal highlighted that changing the accounting method after the accounting period was not in line with income tax laws. The Tribunal upheld the Commissioner of Income-tax (Appeals)'s decision to confirm the addition of interest amount. The penalty order for the assessment year 1987-88 was based on the interest-free loans provided to the sister concern and the subsequent addition confirmed by the Assessing Officer. However, the Tribunal noted that there was no evidence of concealment of income or submission of inaccurate particulars by the assessee.

In the assessment year 1989-90, it was mentioned that the assessee furnished inaccurate particulars of income. The Tribunal referenced legal precedents stating that assessment and penalty proceedings are separate, emphasizing that additions in assessment do not automatically warrant penalty imposition. The Tribunal highlighted that the mere addition by the Assessing Officer, without evidence of concealment, is not sufficient for penalty imposition. It was concluded that the assessee's change in accounting method was done in good faith due to the inability to realize interest from the sister concern. The Tribunal dismissed the appeals, stating that there was no concealment of income justifying penalty imposition under section 271(1)(c) of the Act. The penalty order for the assessment year 1987-88 was deemed mechanical without proper application of mind.