2014 (7) TMI 5 - AT - Income Tax

Penalty u/s 271(1)(c) of the Act Addition of interest Held that - Although the disallowance made by the AO on account of interest expenditure is accepted by the assessee apparently for the reason that there was a huge loss resulting into no tax liability even after the disallowance, all the facts relevant to the issue as borne out from the record are not very clear the claim of the assessee was brushed aside by the AO simply on the ground that every assessment year is separate without looking into as to how and on what ground the claim of the assessee for interest paid on the same loan amount was allowed in the earlier years even on scrutiny in the assessments completed u/s 143(3) of the Act - This aspect was relevant to find out the bonafide of the assessee to claim deduction for interest expenditure claimed in the year especially in the context of imposition of penalty u/s 271(1)(c) of the Act - new contention raised also requires verification for deciding the issue relating to imposition of penalty u/s 271(1)(c) of the Act thus, it would be fair and proper to remit back the matter to the AO for fresh verification of all the relevant facts and giving a clear finding Decided in favour of Assessee.

Issues Involved:

1. Disallowance of interest expenditure claimed under "income from other sources."
2. Imposition of penalty under section 271(1)(c) of the Income Tax Act, 1961.

Detailed Analysis:

1. Disallowance of Interest Expenditure:

The assessee, an individual engaged in business and partnership, filed a return declaring a loss and claimed a deduction for interest expenditure amounting to Rs. 22,55,829/- under "income from other sources." The Assessing Officer (A.O.) disallowed this claim during assessment proceedings. The A.O. found that Rs. 9.43 lakhs of the interest expenditure related to a loan for purchasing shares of M/s Nayana Plastics, which was not reflected in the assessee's books, and no income from this investment was offered for tax. Consequently, this interest was deemed not allowable. The remaining Rs. 13.12 lakhs was also disallowed as it was claimed as business expenditure of the proprietary concern, amounting to a double deduction. The assessee did not appeal against this assessment order.

2. Imposition of Penalty under Section 271(1)(c):

The A.O. initiated penalty proceedings under section 271(1)(c) for furnishing inaccurate particulars of income. The assessee explained that the loan and interest were consistently allowed in earlier years' assessments. However, the A.O. rejected this explanation, emphasizing that each assessment year is separate and imposed the penalty for the disallowed interest expenditure.

The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], arguing that complete details were provided, and there was no double deduction claim. The assessee reiterated that the interest expenditure related to separate loans and that similar interest was allowed in earlier assessments. However, the CIT(A) upheld the penalty, stating that the interest expenditure was not allowable under any provision of the Act and that the assessee furnished inaccurate particulars of income.

CIT(A) Reasoning:

- For Rs. 9.43 lakhs: The borrowings were for investment in shares, not for earning income assessable under "income from other sources." The claim was untenable in law, and the assessee failed to substantiate the explanation or show it was bona fide.
- For Rs. 13.12 lakhs: The interest expenditure was identical to that claimed as a business deduction, amounting to a double deduction. The assessee provided no evidence to substantiate the claim or show it was bona fide.

Tribunal's Decision:

The Tribunal considered the submissions and found ambiguity in the facts. The assessee initially agreed to the double deduction claim but later contended it was for separate loans. The consistent allowance of similar interest in earlier years' assessments was not adequately considered by the A.O. The Tribunal noted the need to verify the assessee's new contention that the loan amount was also used for giving loans on interest, which was offered to tax in earlier and subsequent years but not recovered during the year in question.

Due to the lack of clarity and the need for verification of relevant facts, the Tribunal set aside the CIT(A)'s order and remitted the matter to the A.O. for fresh consideration, directing a thorough verification of all relevant facts and providing the assessee with a proper opportunity to be heard.

Conclusion:

The appeal was treated as allowed for statistical purposes, and the matter was remanded to the A.O. for a fresh decision after verifying all relevant facts. The order was pronounced in the open court on 18th June 2014.

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