2013 (8) TMI 1039 - AT - Income Tax

Levy of penalty u/s.158BFA (2) - Held that - Facts and circumstances of the case do not warrant levy of penalty u/s.158BFA(2). We, therefore, set-aside the order of the CIT(A) and direct the AO to cancel the penalty levied u/s.158BFA(2) on account of disallowance of interest expenditure.

Summary

Issues Involved:
1. Levy of penalty under Section 158BFA(2) of the Income Tax Act.
2. Disallowance of accrued interest claimed by the assessee.
3. Validity of penalty based on retrospective amendments to Section 158B(b).

Detailed Analysis:

Levy of Penalty under Section 158BFA(2):
The primary issue in this case is the levy of penalty amounting to Rs. 61,70,000 under Section 158BFA(2) of the Income Tax Act by the Assessing Officer (AO), which was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee, engaged in the business of developers and real estate agents, was subjected to a search and seizure operation under Section 132 of the Income Tax Act. The assessee filed a return declaring an undisclosed loss of Rs. 75,39,357 for the block period. The AO determined the total undisclosed income at Rs. 58,67,526, disallowing accrued interest of Rs. 90,77,000 claimed by the assessee, among other adjustments. The CIT(A) partially allowed the interest and other expenses, but the Tribunal reversed the CIT(A)'s decision on interest, leading to a revised income of Rs. 16,38,620.

Disallowance of Accrued Interest:
The assessee claimed accrued interest of Rs. 90,77,000 on advances received from society members, which was disallowed by the AO due to lack of evidence found during the search. The CIT(A) allowed interest to the extent of Rs. 9,07,700 based on documentary evidence, but the Tribunal disallowed the entire interest. The AO initiated penalty proceedings under Section 271(1)(c), arguing that the interest claim was not bona fide and was based on books of accounts prepared post-search. The AO noted that the assessee's claim of interest was not supported by evidence found during the search and that the liability was not genuine. Consequently, the AO imposed a penalty of Rs. 61,67,600 under Section 158BFA(2).

Validity of Penalty Based on Retrospective Amendments:
The assessee argued that the penalty under Section 158BFA(2) was unwarranted as the disallowance of interest was based on the return filed and not on any document found during the search. The assessee contended that the provisions of Section 158B(b) were amended by the Finance Act, 2002, with retrospective effect from 01-07-1995, which was after the date of the search (29-08-2000). The assessee relied on the decision of the Mumbai Bench of the Tribunal in the case of Super Metal Industries, which held that penalty under Section 158BFA(2) could not be imposed based on disallowances of expenditure claimed and rejection of business loss set-off, as the amendment was not in effect at the time of filing the return.

Tribunal's Decision:
The Tribunal considered the rival arguments and various decisions cited. It noted that the assessee's claim for interest payable was disallowed by the AO, and the penalty was imposed based on the disallowance. The Tribunal observed that the amendment to Section 158B(b) was not in effect at the time of the search and filing of the return. The Tribunal found merit in the assessee's submission, citing the Mumbai Bench's decision in Super Metal Industries, which stated that penalty under Section 158BFA(2) could not be imposed based on disallowances made after the retrospective amendment. The Tribunal held that the facts and circumstances did not warrant the levy of penalty under Section 158BFA(2) and directed the AO to cancel the penalty.

Conclusion:
The Tribunal set aside the order of the CIT(A) and directed the AO to cancel the penalty levied under Section 158BFA(2) on account of disallowance of interest expenditure. The appeal filed by the assessee was allowed, and the penalty of Rs. 61,70,000 was canceled.