2014 (6) TMI 42 - HC - Income Tax

Deletion of penalty u/s 271(1)(c) of the Act Debt not written off even after the amendment of Section 36(1) (vii) and 36(2) of the Act - No material to show that the Government had refused to pay any amount - Held that - The Tribunal was of the view that the assessee has credited a sum of Rs. 3.5 crores towards interest on advances given to Government of Punjab and CONWARE Relying upon South India Surgical Co. Limited 2006 (1) TMI 111 - MADRAS High Court - penalty proceedings are not automatic in the sense that once addition is made, the same will not be followed by penalty - the assessee has furnished the explanation which seems to be bonafide before the AO for making this entry for provision towards interest - The penalty cannot be levied unless and until there is concealment or when the explanation which has been filed before the AO and which is found not bonafide - wherever assessee might have made a claim on bonafide basis and that claims is ultimately found to be incorrect, the same will not lead to the penal consequence. The Tribunal noticed that the entry towards interest on advances given to Government of Punjab and CONWARE was made by the assessee - principal amount due from Punjab Government as well as CONWARE was written off in the next subsequent year i.e. AY 2005-06 - The assessee was not hoping to recover the interest and entry of interest was made only for memorandum purposes - the explanation furnished by the assessee appeared to be bonafide in making entry for provision towards interest - The assessee provided the interest on accrual basis but simultaneously made a debit entry against such interest which was accepted to be purely bonafide thus, the order of the Tribunal is upheld Decided against Revenue.

Summary

Issues:
- Whether the Tribunal was correct in deleting the penalty imposed under Section 271(1)(c) of the Income Tax Act, 1961, which was upheld by the CIT(A).

Analysis:

Issue 1: Tribunal's Justification for Deleting the Penalty
The Tribunal noted that the assessee credited Rs. 3.5 crores towards interest on advances to the Government of Punjab and CONWARE, which were later written off in the subsequent year. It was established that the assessee had no expectation of recovering the interest and the entry was made for memorandum purposes only. The explanation provided by the assessee was deemed bonafide, as the principal amount itself was written off. The Tribunal emphasized that penalty proceedings are not automatic after an addition is made, and a bonafide claim that is ultimately found to be incorrect does not lead to penal consequences. The Tribunal referred to legal precedents to support its decision, highlighting that making an incorrect claim does not equate to furnishing inaccurate particulars, and penalty provisions cannot be invoked without strict adherence to the law.

Issue 2: Relevance of Legal Precedents
The Tribunal cited the case of Cement Marketing Co. of India Limited vs. ACIT to emphasize that penal consequences do not apply when an assessee raises a bonafide contention that is later found to be incorrect. Additionally, the Tribunal referred to the case of CIT Reliance Petro Products (P) Limited to clarify that inaccurate particulars must be furnished to attract a penalty, which was not the case in the present scenario. The Tribunal concluded that the claim made by the assessee was bonafide, and the penal provision could not be applied in such circumstances.

Issue 3: Dismissal of Appeal
The Tribunal dismissed the appeal, stating that the judgment of the Madras High Court in South India Surgical Co. Limited was not applicable to the penalty under Section 271(1)(c) of the Act. Consequently, no substantial question of law was found to arise in the appeal, leading to its dismissal.

In conclusion, the Tribunal's decision to delete the penalty imposed under Section 271(1)(c) was based on the bonafide nature of the claim made by the assessee and the absence of inaccurate particulars furnished. The legal precedents cited supported the Tribunal's stance, leading to the dismissal of the appeal due to the lack of merit.