2016 (1) TMI 1072 - AT - Income Tax

Penalty u/s 271(1)(c) - no nexus between borrowed funds and the investment made by the assessee and further huge interest expenditure was disallowed by the Assessing Officer - CIT(A) deleted the addition - Held that - Section 36(1)(iii) has to be read on its own terms as it is a code by itself. All that section requires is that the assessee must borrow capital for business purposes, carried out by the assessee in the year of account. Unlike section 37, which expressly excludes an expense of capital nature, section 36(1)(iii) emphasizes the user of the capital and not the user of the asset which comes into existence as a result of the borrowed capital. Where the money borrowed had been utilized for the business purposes as also earning income under the residuary head income from other sources the interest paid on the money so borrowed should be bifurcated proportionately between the business income and other source of income H.K (Investment) Company pvt. Ltd. vs CIT (1993 (12) TMI 19 - GUJARAT High Court ). The totality of facts clearly indicates that the assessee did not establish the nexus between the borrowed funds and the investment so made with a clear intention to conceal the income by furnishing inaccurate particulars of such income, therefore, in our view, penalty was rightly imposed by the Assessing Officer. The stand of the Revenue is further fortified by the fact that even the assessee did not file appeal against the disallowance of huge interest expenditure while deciding the quantum addition and accepted the same. - Decided against assessee.

Summary

Issues:
1. Deletion of penalty under section 271(1)(c) of the Income Tax Act, 1961.

Analysis:
The judgment by the Appellate Tribunal ITAT Mumbai involved a dispute regarding the deletion of a penalty amounting to Rs. 25,48,706 imposed under section 271(1)(c) of the Income Tax Act, 1961. The Revenue challenged the impugned order of the First Appellate Authority, Mumbai, which had deleted the penalty. The core argument revolved around the nexus between borrowed funds and investments made by the assessee, particularly focusing on the disallowed interest expenditure. The Revenue contended that the onus was on the assessee to demonstrate that advances for acquiring fixed assets were from own funds, especially when funds were mixed. Conversely, the assessee's counsel argued that while it might be a case for quantum, it did not warrant a penalty. The Tribunal considered various precedents and the specific circumstances of the case to reach a decision.

The Tribunal analyzed the facts, noting that the assessee, engaged in the diamond business, had significant borrowed funds with substantial interest payments. The assessee failed to establish the nexus between funds advanced for property purchases and whether they originated from own or borrowed funds. Despite the Assessing Officer's requests, this nexus was not proven. The Tribunal highlighted that separate accounts were not maintained, and funds were commingled. The Tribunal also referenced legislative provisions, emphasizing that interest paid on borrowed capital for asset acquisition should not be allowed as a deduction. The Tribunal found that the assessee's failure to establish the connection between borrowed funds and investments indicated an intention to conceal income, justifying the penalty imposition. Additionally, the Tribunal noted that the assessee did not appeal the disallowed interest expenditure during the quantum assessment, suggesting acceptance of the same. Consequently, the Tribunal upheld the Revenue's appeal, reinstating the penalty.

In conclusion, the Tribunal's detailed analysis considered the lack of nexus between borrowed funds and investments, legislative provisions, and the assessee's actions during the assessment process. The decision underscored the importance of establishing clear connections between funds and investments to avoid penalties for concealing income.