2015 (3) TMI 1188 - AT - Income Tax

Penalty under section 271(1)(c) - disallowance of interest on borrowed capital - Held that - When the Assessing Officer himself was not sure whether assessee has concealed the particulars of income or has furnished inaccurate particulars of income, the imposition of penalty under section 271(1)(c) of the Act is invalid. Addition on account of proportionate disallowance of interest on borrowed capital is concerned, in our view such addition does not call for imposition of penalty under section 271(1)(c) of the Act. There is no dispute to the fact that the assessee has borrowed the fund of ₹ 10.50 crores from the Punjab National Bank. Proportionate disallowance of interest on such borrowed fund is being done from assessment year 2006-07 on the reasoning that the assessee has utilized an amount of ₹ 7,21,14,405 for construction and not the entire borrowed funds. Though, assessee might have agreed for such proportionate disallowance of interest on borrowed fund for whatever may be the reason, but it is a fact on record that assessee s claim that an amount of ₹ 1.20 crores was utilized for purchase of land has not been controverted by the Department. In fact, the learned CIT (A) while considering the validity of penalty imposed under section 271(1)(c) of the Act on similar disallowance of interest on borrowed capital for assessment years 2007-08 and 2008-09 deleted the penalty by observing that the disallowance of proportionate interest on borrowed fund is on notional or estimate basis and as such penalty cannot be imposed under section 271(1)(c). The decision of the learned CIT (A) was upheld by the ITAT while dismissing the appeals of the Department. Therefore, on merits also penalty under section 271(1)(c) could not be imposable, at least, to the extent of addition made on disallowance of proportionate interests on borrowed funds. In view of the foregoing discussions, we delete the penalty imposed under section 271(1)(c) of the Act. - Decided in favour of assessee.

Issues Involved:
1. Legality of the penalty imposed under section 271(1)(c) of the Income Tax Act.
2. Validity of the show cause notice issued under section 271 r.w.s. 274.
3. Proportionate disallowance of interest on borrowed capital.
4. Addition of unexplained cash deposits under section 68 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Legality of the Penalty Imposed under Section 271(1)(c):
The assessee contested the penalty imposed under section 271(1)(c) for the assessment year 2010-11, arguing that the Assessing Officer's satisfaction regarding concealment of income or furnishing inaccurate particulars was not discernible from the assessment order. The Tribunal noted that the Assessing Officer had observed the assessee's failure to disallow proportionate interest on borrowed funds, despite having done so in previous years. Furthermore, the addition of Rs. 15,60,000 under section 68 was due to the assessee's inability to explain the source of the deposits. The Tribunal concluded that the satisfaction for imposition of penalty was discernible from the assessment order, thus rejecting the assessee's contention.

2. Validity of the Show Cause Notice Issued under Section 271 r.w.s. 274:
The Tribunal examined whether the show cause notice specified the grounds for penalty-whether for concealment of income or furnishing inaccurate particulars. Citing the Karnataka High Court's decision in CIT vs. Manjunatha Cotton & Ginning Factory, the Tribunal emphasized that the notice must clearly state the grounds for penalty to allow the assessee to furnish an effective explanation. The Tribunal found that the notice was defective as it did not specify the grounds, rendering the penalty proceedings invalid. This defect was also noted in the penalty order, where the Assessing Officer did not conclusively state whether the penalty was for concealment or furnishing inaccurate particulars.

3. Proportionate Disallowance of Interest on Borrowed Capital:
The Tribunal considered the addition of Rs. 54,74,678 due to the proportionate disallowance of interest on borrowed capital. The assessee had borrowed Rs. 10.50 crores from Punjab National Bank but utilized only Rs. 7,21,14,405 for construction, leading to the disallowance of interest on the unutilized portion. The Tribunal noted that the disallowance was on a notional or estimate basis and that the assessee's claim of utilizing Rs. 1.20 crores for land purchase was not contested by the Department. The Tribunal highlighted that similar disallowances in previous years did not attract penalties, as upheld by the CIT (A) and the ITAT. Consequently, the Tribunal ruled that the penalty under section 271(1)(c) was not imposable for this addition.

4. Addition of Unexplained Cash Deposits under Section 68:
The Tribunal acknowledged the addition of Rs. 15,60,000 under section 68 due to unexplained cash deposits in the assessee's bank account. The assessee failed to provide credible evidence to explain the source of these deposits. However, given the defective show cause notice and the lack of conclusive findings in the penalty order, the Tribunal concluded that the penalty under section 271(1)(c) could not be sustained.

Conclusion:
The Tribunal found the penalty proceedings under section 271(1)(c) to be invalid due to the defective show cause notice and the lack of conclusive findings in the penalty order. Additionally, the proportionate disallowance of interest on borrowed capital did not warrant a penalty. Therefore, the Tribunal allowed the assessee's appeal and deleted the penalty imposed under section 271(1)(c).

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