2010 (1) TMI 787 - AT - Income Tax

Penalty u/s 271 (1) (C) of the Income Tax Act - disallowances on account of Foreign Usance Bill Interest and Prior Period expenses - claim of prior period expenses was disallowed on the ground that the expenditure does not pertain to the instant assessment year - Held that - interest paid on Usance Bill through the bankers is not allowable whereas the assessee is under bonafide belief that the expenses are allowable. assessee was followed with full disclosure in the tax audit report and therefore there was no furnishing of inaccurate particulars. The particulars were properly disclosed in the tax audit report as well as during the assessment proceedings. The AO has not been able to prove that the explanation offered by the assessee was false. In such circumstances even under explanation 1 to section 271(1)(C) penalty is not leviable, appeal dismissed.

Summary

Issues:
Appeal against penalty u/s 271(1)(C) of the Income Tax Act - Disallowances on Foreign Usance Bill Interest and Prior Period expenses.

Analysis:
1. The appeal was against the penalty imposed under section 271(1)(C) of the Income Tax Act due to disallowances made on Foreign Usance Bill Interest and Prior Period expenses. The AO disallowed a certain amount of interest paid on Foreign Usance Bill, which was rectified under section 154 after seeking no objection from the assessee. The AO initiated penalty proceedings for the remaining disallowed amount, leading to the appeal.

2. The assessee contended that the interest paid was eligible for exclusion from tax deduction at source under section 194A(3)(iii) as it was paid to a bank. The assessee followed a legally tenable claim, supported by a legal opinion and tax auditors' views, leading to full disclosure during assessment proceedings. The assessee argued that there was no furnishing of inaccurate particulars, as the claim was based on a debatable issue.

3. The CIT(A) analyzed the case and held that the addition on disallowance of Foreign Usance Bill Interest was not justifiable for penalty under section 271(1)(C). The CIT(A) considered the debatable nature of the issue and the recent reversal of a relevant High Court decision by the Supreme Court, leading to the deletion of the penalty. Similarly, the penalty on the smaller amount disallowed for Prior Period expenses was also deleted as it was a debatable issue, not amounting to furnishing inaccurate particulars.

4. The Tribunal further examined the case and noted that the assessee had a bonafide belief that the expenses were allowable, despite the AO's different view based on a now-reversed High Court decision. The Tribunal emphasized that full and true disclosure was made, and the AO failed to prove the explanation offered by the assessee was false. As per settled law, penalty under section 271(1)(C) is not automatic, and in this case, the criteria under explanation 1 to the section were not fulfilled, leading to the rightful deletion of the penalty.

5. Consequently, the Tribunal dismissed the appeal, upholding the decision to delete the penalties imposed under section 271(1)(C) for the disallowances on Foreign Usance Bill Interest and Prior Period expenses. The Tribunal's decision was based on the debatable nature of the issues, the recent legal developments, and the lack of evidence to prove false explanation by the assessee.

This comprehensive analysis of the judgment highlights the key legal arguments, interpretations, and conclusions made by the authorities involved in the case regarding the penalty under section 271(1)(C) of the Income Tax Act.