2016 (9) TMI 651 - AT - Income Tax

Penalty imposed under section 271(1)(c) - AO was opinion that the assessee has reduced the incidence of tax by claiming deduction of interest expenditure against salary income, and thus, he deserves to be visited with penalty - Held that - . In the first round of litigation upto the level of the Tribunal, it has been held that interest expenditure cannot be allowed as set off against salary income, but this order was recalled by the Tribunal in Misc. Application, as noticed by the ld.CIT(A) in the finding extracted supra. The Tribunal has allowed set off of the interest expenditure against interest income of ₹ 35,203/-. This reasoning of the Tribunal would indicate that interest bearing funds were used by the assessee for making investment in the company. In other words, he would earn interest income. It is a different matter that in this year, the income was to the extent of ₹ 35,203/-. Had there been more interest income, then, the total claim of interest expenditure would have been set off. So, the question is whether the claim of the assessee was not tenable at all or it was not allowed because sufficient interest income was not there for a set off. Even if a part of the interest expenditure is being set off against alleged interest income, it would falsify the reasoning of the AO. The assessee, as such exclusively not claimed the interest expenditure against the salary income, rather, his stand is to be construed that he claimed interest expenditure on the ground that such interest bearing funds were used for making investment in the company. To my mind, in such situation, he cannot be visited with penalty under section 271(1)(c) of the Act. - Decided in favour of assessee.

Summary

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

Detailed Analysis:
The appeal before the Tribunal was against the order of the ld.CIT(A)-IV, Baroda dated 20.2.2013 for the Asstt.Year 2004-05, specifically regarding the penalty imposed under section 271(1)(c) of the Income Tax Act, 1961. The assessment resulted in additions to the income of the assessee, leading to the initiation of a penalty of &8377; 83,000. Notably, the disallowance of brokerage amounting to &8377; 1,42,890 was deleted by the Tribunal, affecting the penalty decision. The ld.CIT(A) highlighted the lack of a cash flow statement and failure to substantiate arguments regarding interest-free funds advanced as deposits, leading to the confirmation of penalty on certain additions. The Tribunal's observations emphasized the incorrectness and lack of genuineness in the appellant's claims, particularly concerning interest expenditure against salary income, which attracted the provisions of section 271(1)(c) of the IT Act.

The Tribunal's decision was influenced by the appellant's failure to establish a nexus between interest paid and borrowed funds, ultimately confirming the penalty on the net disallowance of interest. The Tribunal's detailed analysis and subsequent orders provided a basis for confirming penalties on specific additions while deleting penalties on others. The Tribunal's rationale focused on the correctness and genuineness of the appellant's claims, aligning with the provisions of the IT Act. The appellant's arguments regarding interest expenditure against salary income were scrutinized, leading to a nuanced decision on penalty imposition based on the merits of the case.

The Tribunal's assessment considered the appellant's actions and intentions regarding interest expenditure and income, emphasizing the need for a valid explanation and substantiation of claims. The penalty imposition under section 271(1)(c) was deemed unsustainable due to insufficient evidence of concealing income, as highlighted in the penalty order. The Tribunal's decision to allow the appeal and delete the penalty was supported by legal precedents, including the Karnataka High Court's ruling in a similar case. The final outcome of the appeal favored the assessee, resulting in the deletion of the penalty under section 271(1)(c) of the IT Act.