2013 (1) TMI 394 - AT - Income Tax

Penalty u/s. 271(1)(c) - interest income assessed by the AO as income from other sources and not as business income - non-indication per its return of income by the assessee that the said income stands imbedded in its (reduced) claim for interest expenditure on borrowings income for which is exigible to deduction u/ss. 10A & 10B - Held that - With regard to the assessment of the impugned income as from other sources, as against from business, which is a prerequisite for it to be considered as exigible for deduction u/s. 10A(1) or s.10B(1), what is relevant and is to be seen is the assessee s return of income, per which the claim stands made, and not its treatment by the AO, which though not disputed by the assessee, would yet not detract from the merits of the assessee s explanation in having returned it only as business income and, further, as derived by its eligible undertaking, so as to be eligible for deduction u/s. 10A(1) or, as the case may be, s.10B(1), in view of ss. 10A(4) and 10B(4) respectively. The issue qua head of income under which the same is to assessed stands clarified by the hon ble jurisdictional high court in the case of CIT vs. Indo Swiss Jewels Ltd. (2005 (9) TMI 47 - BOMBAY HIGH COURT ), since followed by the tribunal in Tropicate Textiles Pvt. Ltd. (2012 (7) TMI 57 - ITAT, MUMBAI) wherein held that the interest earned on the short-term deposits of the money kept apart for the purpose of business has to be treated as income earned on business and cannot be treated as income from other sources Thus the impugned penalty is liable to be deleted also drawing support from the decisions in the case of ITO v. Jewelex International Pvt. Ltd. (2010 (9) TMI 906 - ITAT MUMBAI) and ITO v. Greytrix (I) Pvt. Ltd. (2013 (1) TMI 381 - ITAT MUMBAI) .

Issues Involved:
1. Levy of penalty under section 271(1)(c) of the Income Tax Act, 1961.
2. Classification of interest income for the purpose of deductions under sections 10A and 10B.
3. Furnishing of inaccurate particulars of income by the assessee.

Issue-wise Detailed Analysis:

1. Levy of Penalty under Section 271(1)(c):

The appeal concerns the confirmation of a penalty levied by the Assessing Officer (AO) under section 271(1)(c) of the Income Tax Act, 1961. The penalty was imposed for the Assessment Year (A.Y.) 2007-08. The assessee argued that their case was similar to the case of ITO v. Jewelex International Pvt. Ltd., Mumbai, where the tribunal deleted the penalty under similar circumstances. The tribunal in Jewelex International Pvt. Ltd. held that penalty under section 271(1)(c) could not be levied due to the provisions of section 10B(4), which prescribes a formula for determining profits derived from export activities.

2. Classification of Interest Income for Deductions under Sections 10A and 10B:

The core issue was whether the interest income received on margin money kept for obtaining letters of credit for business purposes should be classified as business income or income from other sources. The AO assessed the interest income as income from other sources and disallowed deductions under sections 10A and 10B. The assessee contended that the interest income should be considered as business income due to its direct nexus with the business operations, referencing the tribunal's decision in the case of Tropicate Textiles Pvt. Ltd., where interest on margin money was assessed as business income.

The tribunal noted that the AO had assessed the interest income as income from other sources, which was not disputed by the assessee in appeal. The tribunal emphasized that the interest income did not qualify as income derived from the export by eligible undertakings, as per the Supreme Court's interpretation in cases like Pandian Chemicals Ltd. and Liberty India.

3. Furnishing of Inaccurate Particulars of Income:

The tribunal examined whether the assessee had furnished inaccurate particulars of income by netting interest income against interest expenditure. The tribunal found that the assessee's failure to explicitly disclose the interest income in the return amounted to furnishing inaccurate particulars. The tribunal highlighted that there is no accounting rule that supports netting income against expenditure, especially when the income is claimed as exempt under sections 10A and 10B. The tribunal noted that the issue of netting interest income against interest expenditure has been addressed by higher courts, which allowed netting only in cases of direct nexus, which was absent in this case.

Conclusion:

The tribunal concluded that the penalty under section 271(1)(c) should be deleted. The tribunal recognized that sections 10A(4) and 10B(4) inject ambiguity in the matter, as they provide a formula for determining profits derived from export activities, which could include interest income directly related to the business. The tribunal noted that the Revenue had not provided any decision from the Supreme Court or jurisdictional High Court interpreting these sections in the context of such interest income. The tribunal also referenced decisions like Vegetable Products Ltd. v. CIT and Hindustan Steel Ltd. v. State of Orissa, which support the deletion of penalty in cases of ambiguity.

Final Decision:

The appeal by the assessee was allowed, and the impugned penalty was directed to be deleted. The tribunal drew support from the decisions in ITO v. Jewelex International Pvt. Ltd. and ITO v. Greytrix (I) Pvt. Ltd. The order was pronounced in the open court on December 5, 2012.

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