2012 (1) TMI 24 - HC - Income Tax

Penalty for concealment u/s 271(1)(c) Business of money-lending share application money deposited converted into loan in A.Y. 98-99 non-acknowledgement of debt by receiver company(DISL) no interest charged on such converted loans wrote off loan as bad debts deduction of bad debts disallowed by Department Held that - Though assessee furnished the director s report, the actual write off, filing of balance sheets, memorandum and articles of association, letter to DISL etc. however, the assessee did not bring to the notice of the A.O. that no interest from the converted loan had been offered and assessed to income tax in any of the earlier previous years. If no interest was charged the amount cannot be considered as a money lending advance since the essence of money lending business is the charging of interest. When one of the important conditions for the allowability of bad debt u/s 36(2)(i) was not satisfied and the same was within the knowledge of the assessee, it was duty bound to disclose the same in order to show its bonafide. The particulars furnished by the assessee were thus not complete, and were, therefore, inaccurate. Order of the Tribunal restoring the penalty is upheld. - Decided against the Assessee.

Issues Involved:
1. Legitimacy of the penalty for concealment under Section 271(1)(c) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

Legitimacy of the Penalty for Concealment under Section 271(1)(c) of the Income Tax Act, 1961

Background and Facts:
The assessee, a domestic company, filed a return of income for the assessment year 2000-01 declaring an income of Rs.1,43,40,680/-. During the scrutiny, the assessing officer noticed a claim of Rs.2,38,32,392/- as bad debts, which included Rs.50 lacs in the account of M/s Dimension Investments and Securities Ltd. (DISL) initially deposited as share application money and later claimed to be converted into a loan. The assessing officer rejected this claim, treating it as a capital loss instead of a bad debt, and subsequently imposed a penalty for furnishing inaccurate particulars of income.

CIT(Appeals) and Tribunal Findings:
1. CIT(Appeals): Allowed the assessee's claim for bad debts based on the prudence in converting the share application money into a loan and the subsequent write-off due to non-recovery. The CIT(Appeals) found the claim to be in the ordinary course of business.
2. Tribunal: Reversed the CIT(Appeals) decision, holding that the assessee was not authorized to deal in shares as per its Memorandum of Association and that the loan had not been taken into account in computing the income of any earlier years, thus failing the conditions under Section 36(2)(i) of the Act.

Penalty Proceedings:
The assessing officer initiated penalty proceedings under Section 271(1)(c) on the grounds of furnishing inaccurate particulars. The CIT(Appeals) canceled the penalty, noting the difference of opinion at various levels and the bonafide belief of the assessee in making the claim. However, the Tribunal restored the penalty, leading to the present appeal.

Legal Principles:
1. Assessment vs. Penalty Proceedings: Assessment and penalty proceedings are distinct, and findings in the former do not conclusively determine the latter (CIT v. Anwar Ali, CIT v. Khoday Eswarsa and Sons, and Anantharam Veerasinghaiam & Co. v. CIT).
2. Incorrect Claims: Mere incorrect claims do not amount to furnishing inaccurate particulars of income if all material facts are disclosed (Cement Marketing Co. of India Ltd. v. Asst. Commissioner of Sales Tax, ITO v. Burmah Shell Oil Storage & Distributing Co. of India Ltd., Delhi Cloth and General Mills Co. Ltd. v. Commissioner of Income Tax, and CIT v. G.D.Naidu).
3. Bonafide Belief: Claims made under a bonafide belief, even if unsustainable in law, do not attract penalty unless the claim is malafide (CIT v Reliance Petroproducts P. Ltd.).

Court's Analysis:
1. Disclosure and Bonafide: The assessee disclosed some details but failed to inform the assessing officer that no interest from the Rs.50 lacs advanced to DISL was offered for taxation. This omission was critical, making the particulars filed inaccurate.
2. Genuineness of Intent: The assessee did not charge interest as per its letter dated 6th July, 1998, raising doubts about the genuineness of its intent to convert the share application money into a loan.
3. Conditions under Section 36(2)(i): The Tribunal found that the conditions for bad debt deduction were not met, as the debt was not taken into account in computing the income of any prior year.
4. Alternative Plea: The alternative plea for capital loss was deemed an act of despair, further indicating a lack of bonafide.

Conclusion:
The court concluded that the assessee furnished inaccurate particulars of income by not disclosing all relevant facts and failing to meet the conditions for bad debt deduction. The Tribunal's order restoring the penalty was upheld, and the appeal was dismissed. The substantial question of law was answered in the affirmative, confirming the legitimacy of the penalty under Section 271(1)(c).

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