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2014 (11) TMI 90 - AT - Income TaxPenalty u/s 271(1)(c) Penalty levied on interest disallowance Held that - The assessee has furnished all the details relating to the interest claim - the assessee has mainly used the borrowed funds for making investments in proprietary concerns, partnership concerns and the private limited companies, wherein he is substantially interested - the AO has worked out the disallowance by considering the investments made in one of the concerns only CIT(A) rightly was of the view that the additions made during assessment proceedings would not automatically give rise to penalty proceedings - CIT(A) was justified in deleting the penalty levied on the interest disallowance Decided against revenue. Penalty on cash credits u/s 68 Held that - The penalty u/s 271(1)(c) is not levy-able merely on the reasoning that the assessee has agreed for assessment of the loan amount as his income - The assessee has furnished reasons as to why he accepted for the assessment of the loan amount as his income - Though the assessment has been made on the basis of statement given by the lender, yet it cannot be taken as a strong ground for levying penalty - Relying upon SHREE NIRMAL COMMERCIAL LTD. Versus COMMISSIONER OF INCOME-TAX 2008 (8) TMI 158 - BOMBAY HIGH COURT thus, the order of the CIT(A) is set aside and the AO is directed to delete penalty levied on the loan amount Decided in favour of assessee.
Issues Involved:
1. Penalty levied on interest disallowance for AY 2006-07. 2. Penalty levied on loan receipt assessed u/s 68 for AY 2006-07. 3. Penalty levied on interest disallowance for AY 2007-08. Detailed Analysis: 1. Penalty Levied on Interest Disallowance for AY 2006-07: The AO disallowed a sum of Rs. 48,53,168 out of the gross interest claim of Rs. 59,47,369, allowing only Rs. 10,94,201 as the allowable interest expenditure based on the proportion of borrowed funds used in the business. The Ld CIT(A) deleted the penalty on this disallowance, noting that the assessee had furnished all relevant details and that the disallowance was a debatable issue involving commercial expediency. The CIT(A) emphasized that penalty proceedings and assessment proceedings are independent, and an addition does not automatically result in penalty u/s 271(1)(c). The CIT(A) found no falsity in the amounts of interest expenses claimed and noted that the assessee's investments were made out of commercial expediency. The Tribunal agreed with the CIT(A), stating that the assessee did not hide any details and the investments could not be considered as diversion of interest-bearing funds for interest-free advances. The Tribunal confirmed the deletion of the penalty, emphasizing the necessity of examining issues afresh during penalty proceedings and acknowledging the commercial expediency of the investments. 2. Penalty Levied on Loan Receipt Assessed u/s 68 for AY 2006-07: The AO assessed a loan of Rs. 25,00,000 received from Smt. Latika Dhamne as income, based on her statement denying knowledge of the loan and her financial capacity to extend such a loan. The Ld CIT(A) confirmed the penalty, citing the loan as bogus and the assessee's failure to substantiate the explanation. The assessee argued that the loan was arranged through brokers, received, and repaid by account payee cheques, and that the lender's statement was conflicting and unreliable. The Tribunal noted that the assessee had provided a confirmation letter and the lender's PAN, and that the AO had not cross-verified these details or allowed the assessee to cross-examine the lender. The Tribunal found the explanations given by the assessee to be reasonable and noted that the AO had not disproved them during penalty proceedings. Citing relevant case law, the Tribunal held that penalty u/s 271(1)(c) was not justified merely because the assessee agreed to the assessment of the loan amount as income. The Tribunal directed the deletion of the penalty on the loan amount and the associated interest disallowance. 3. Penalty Levied on Interest Disallowance for AY 2007-08: The AO disallowed the interest claimed by the assessee on the loan taken from Smt. Latika Dhamne. Following the reasoning applied to the similar issue in the immediately preceding year, the Tribunal set aside the order of the Ld CIT(A) and directed the AO to delete the penalty on the interest disallowance for AY 2007-08. Conclusion: The Tribunal allowed the appeals filed by the assessee for both AY 2006-07 and AY 2007-08 and the appeal filed by the revenue, directing the deletion of penalties levied on interest disallowance and loan receipt assessed u/s 68. The Tribunal emphasized the independence of penalty proceedings from assessment proceedings and the necessity of examining issues afresh during penalty proceedings, recognizing the commercial expediency of the assessee's actions and the reasonableness of the explanations provided.
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