2017 (3) TMI 1171 - AT - Income Tax

Penalty u/s 271(1)(c) - disallowance of interest u/s 36(1)(iii) - Held that - We notice that the disallowance of interest made u/s 36(1)(iii) on account of finance provided by way of share application/loan to its subsidiaries/sister concerns out of commercial expediency has been deleted stating the money was advanced by the assessee holding company to its subsidiaries for business expediency , which has to be judged by the business man itself. The facts brought before us are that the assessee has pleaded before the lower authorities that the amount invested has been used by the subsidiaries for the purpose of business. The assessee has significant interest in the business of subsidiaries, as these subsidiaries are in same business as that of assessee. It is further noted that major portion of the amounts were invested in the earlier years. No disallowance has been made in assessment year 2007-08 or earlier. Thus, keeping in view, the legal position as discussed above and facts of this case, it can be said that amount invested in the subsidiaries company was arising out of commercial expediency and was thus for the purpose of business of the assessee. Therefore, we reverse the decision of the ld. Commissioner of Income Tax (Appeals) and allow the appeal of the assessee Since, the addition on the basis of which the penalty was levied has been deleted by the co-ordinate Bench of the Tribunal, the impugned order confirming the penalty levied by the AO does not survive. - Decided in favour of assessee.

Summary

Issues: Appeal against penalty u/s 271(1)(c) of the Income Tax Act, 1961 for inaccurate particulars of income.

Analysis:
1. The appellant, an assessee, filed a return of income declaring a loss under regular provisions and u/s 115JB of the Act. The assessment order made an addition on account of disallowance of interest u/s 36(1)(iii) of the Act.
2. The CIT(A) confirmed the addition, leading to penalty proceedings u/s 271(1)(c) where a penalty of &8377; 2,25,60,040/- was levied for furnishing inaccurate particulars of income.
3. The appellant challenged the penalty order on the grounds that the disallowance of interest did not amount to concealment of income or furnishing inaccurate particulars.
4. The ITAT, Mumbai, in a quantum appeal, deleted the addition made u/s 36(1)(iii) of the Act, stating that the disallowance was not justified as the borrowed funds were used for business purposes.
5. As the addition forming the basis of the penalty was deleted, the ITAT set aside the penalty order, thereby allowing the appeal for the assessment year 2008-09.

This judgment highlights the importance of establishing a valid business purpose for financial transactions to avoid penalties under the Income Tax Act. The decision emphasizes that funds utilized for genuine business exigencies, even if involving subsidiaries or sister concerns, should not attract penalties if supported by commercial expediency. The case law cited underscores the need for a factual basis to disallow interest payments, ensuring that transactions are not colorable or sham. Ultimately, the ITAT's decision to delete the addition led to the cancellation of the penalty, emphasizing the significance of legal and factual justifications in tax assessments and penalty levies.