2017 (10) TMI 164 - AT - Income Tax

Levy of penalty u/s 271(1)(c) - denial of deduction under section 10B on interest income - Held that - We find that the assessee has claimed deduction under section 10B of the act on interest amount of loans and advances and AO brought to tax the excess claim of deduction of ₹ 7,26,926/- under the head income from other sources. The assessee claimed that admissibility of deduction u/s. 10B on the component of interest receipt was from funds advanced that were used in the business Since the funds were temporarily available out of business, the same were deployed as a matter of prudence in order not to keep the funds idle. It was brought to notice of the AO that assessee did not have surplus funds that were deployed to earn interest and thus the funds were business funds only and income there from constituted profits and gains of business. It was also explained to the AO that, the assessee paid interest of ₹ 140,526/- on funds borrowed and this was allowed by the AO as business expenditure. To reduce this interest burden, the assessee deployed funds available on a temporary basis for fruitful purposes rather than keeping the funds idle. - Decided in favour of assessee.

Summary

Issues:
1. Levy of penalty under section 271(1)(c) of the Income Tax Act on denial of deduction under section 10B of the act on interest income.

Analysis:
The appeal before the Appellate Tribunal arose from the order of CIT(A) confirming the penalty under section 271(1)(c) of the Income Tax Act. The Assessee's claim for deduction under section 10B on interest income was denied, leading to the penalty imposition. The Assessee had accepted the assessment of interest income as taxable, and no appeal was filed against the assessment. The AO initiated penalty proceedings for furnishing inaccurate particulars of income, which was upheld by the CIT(A), prompting the Assessee to appeal before the Tribunal.

The Tribunal analyzed the facts and contentions presented. The Assessee had claimed deduction under section 10B on interest from loans and advances, which the AO disallowed, bringing the excess claim of deduction to tax under income from other sources. The Assessee argued that the interest income was from funds advanced for business purposes, as there were no surplus funds available. The funds were temporarily utilized to avoid idleness, with interest paid on borrowed funds being allowed as a business expenditure. The Tribunal noted a similar case precedent where penalty was deleted due to a possible bona fide view on the eligibility of interest income for deduction under section 10A/10B, despite the claim not being accepted in quantum proceedings.

Relying on the precedent, the Tribunal decided to delete the penalty imposed on the Assessee. It emphasized that the mere making of a claim, even if not legally sustainable, does not automatically attract penalty under section 271(1)(c). As the Assessee had disclosed all necessary particulars and the eligibility of interest income for deduction was not free from doubt, the Tribunal concluded that the Assessee was not liable for penalty under the circumstances.

Therefore, the Tribunal allowed the Assessee's appeal, deleting the penalty under section 271(1)(c) of the Income Tax Act. The decision was in line with the principle that a possible view on the eligibility of an amount for deduction, even if not accepted, does not amount to concealment of income or furnishing inaccurate particulars, as long as all relevant details are disclosed.

This judgment serves as a reminder that penalty under tax laws is not automatically attracted by a claim that is not legally sustainable, especially when the Assessee has provided all necessary details and the eligibility of the claim is debatable.