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2017 (7) TMI 175 - AT - Income TaxPenalty u/s 271(1)(c) - addition u/s 36(1)(iii) - Held that - As no part of the interest bearing funds available with the assessee could be related to the making of such investment and in light of the availability of sufficient interest free funds and the profits/surplus generated during the year which all could justifiably explain the investment made in the property at BDB therefore no penalty u/s 271(1)(c) as regards the same was called for in the hands of the assessee. We however in all fairness and appreciation of the facts in totality restore the matter to file of the A.O for fresh adjudication and direct him to verify from the records of the assessee the factum of availability of sufficient interest free funds with the assessee from where the aforesaid investment made towards purchase of property at BDB could safely be explained as had been so claimed and projected before us by the Ld. A.R. That needless to say the A.O during the course of the set aside proceedings shall afford reasonable opportunity to the assessee to substantiate its contention.
Issues Involved:
1. Disallowance under Section 36(1)(iii) for interest related to the investment made towards the purchase of property at Bharat Diamond Bourse (BDB). 2. Penalty under Section 271(1)(c) for furnishing inaccurate particulars of income. Issue 1: Disallowance under Section 36(1)(iii) The assessee, a Private Limited Company engaged in the manufacturing and export of cut and polished diamonds, filed its return of income for A.Y. 2007-08 declaring a total income of ?6,25,26,230/-. The Assessing Officer (A.O) disallowed ?17,59,299/- under Section 36(1)(iii) for interest related to the investment in the property at BDB, among other disallowances. The assessee appealed to the CIT(A), who upheld the disallowance of ?17,59,299/-. The assessee accepted this decision, and it attained finality. Issue 2: Penalty under Section 271(1)(c) The A.O initiated penalty proceedings under Section 271(1)(c) for furnishing inaccurate particulars of income regarding the disallowed interest of ?17,59,299/-. The assessee argued that the investment in BDB was made from its own surplus funds and profits, not from borrowed funds. The assessee cited the judgment of the Bombay High Court in CIT vs. Reliance Utilities and Power Limited (2009) 313 ITR 340 (Bom), which held that if interest-free funds are available and sufficient to meet the investments, it can be presumed that the investments were made from these funds. The A.O, however, imposed a penalty of ?6,25,000/- stating that the assessee failed to substantiate that the investment was made from its own funds. The assessee appealed to the CIT(A), reiterating its arguments and highlighting the availability of substantial interest-free funds and profits. The CIT(A) upheld the penalty, relying on the judgments in Power Drugs Limited vs. CIT (2011) 245 CTR (P&H) 623 and CIT vs. Vardhaman Polytex Limited (2008) 214 CTR (P&H) (FB) 561. Tribunal's Analysis and Decision: The Tribunal noted that the assessee had substantial interest-free funds and profits, which could justify the investment in BDB. The Tribunal emphasized that penalty proceedings are distinct from assessment proceedings, and merely because an addition was made or upheld does not automatically justify a penalty. The Tribunal referenced the Supreme Court's judgment in Hindustan Steels Limited vs. State of Orissa (1972) 83 ITR 26 (SC), which stated that penalty proceedings are quasi-criminal and require proof of concealment or furnishing of inaccurate particulars. The Tribunal found that the lower authorities did not consider the Bombay High Court's judgment in Reliance Utilities and Power Limited, which was pertinent to the issue. The Tribunal concluded that the availability of substantial interest-free funds and profits could justify the investment in BDB, and no part of the interest-bearing funds was used for this investment. The Tribunal restored the matter to the A.O for fresh adjudication, directing the A.O to verify the availability of sufficient interest-free funds. If the assessee substantiates this, the penalty under Section 271(1)(c) should not survive. The Tribunal allowed the appeal for statistical purposes and directed the A.O to follow the principles laid down in the Reliance Utilities and Power Limited case. Conclusion: The Tribunal allowed the appeal for statistical purposes, directing the A.O to reassess the availability of interest-free funds and reconsider the penalty under Section 271(1)(c) based on the principles established in the Reliance Utilities and Power Limited judgment.
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