2017 (10) TMI 372 - AT - Income Tax

Penalty u/s. 271(1)(c) - addition on account of decapitalization of interest to assessee s Orissa Project - Held that - It is notable that the fact of amounts borrowed for Orissa Project, interest cost on such borrowed amounts, their partial utilization in the project and its partial deployment in investment, the interest earned thereon, setting off of this interest earned from the interest incurred on borrowed funds and capitalization of remaining amount of interest to the cost of Orissa Project, stand fully and truly disclosed before the Assessing Officer, as also reflected from the books of account of the assessee. The addition of interest earned amounting to ₹ 6,11,95,775/- was made by the AO treating the same as income from other sources. The contention of the assessee before the ld. CIT(A) was also that similar disallowances were also made by the AO in A. Yrs. 2006-07 and 2007-08 against the same loan and the CIT(A) in both the case had deleted the disallowance made by AO holding that interest received on the borrowed fund exclusively for the purpose of setting up of a unit at Orissa is not taxable as interest income. Nothing is addressed by the Revenue against this contention of the assessee. In presence of all these facts and the issue being debatable at various stages, we are of the opinion that it can hardly be said that the assessee had furnished inaccurate particulars of its income. Therefore, the penalty saddled against the assessee has rightly been deleted by the ld. CIT(A). - Decided in favour of assessee.

Summary

Issues:
Challenge to deletion of penalty u/s. 271(1)(c) of the IT Act based on the addition of interest earned on temporary deployment of borrowed funds in investments.

Analysis:
1. The appeal by the Revenue challenges the deletion of penalty imposed by the Assessing Officer u/s. 271(1)(c) of the IT Act concerning the addition of interest earned on temporary deployment of borrowed funds in investments. The facts reveal that the assessee used borrowed funds for short-term investments due to incomplete utilization in the Orissa Project, resulting in interest earned. The AO treated this interest as income from other sources and imposed a penalty for inaccurate particulars of income.

2. The ld. CIT(A) deleted the penalty, citing various judicial decisions, which the Revenue contested before the Tribunal. The Revenue argued that the penalty deletion was unjustified as the assessee furnished inaccurate particulars by offsetting interest earned against interest incurred on borrowed funds. Conversely, the assessee contended that the issue was debatable, with various forums supporting the assessee's approach, hence no inaccurate particulars were furnished.

3. The Tribunal examined the case, finding no reason to interfere with the CIT(A)'s decision. The assessee fully disclosed the financial transactions related to the Orissa Project, including interest earned, in its books and before the AO. The Tribunal noted the conflicting views on the treatment of interest income, with the CIT(A) emphasizing the absence of revenue loss due to the accounting method adopted by the assessee.

4. Moreover, the Tribunal referenced the ITAT's acceptance of the assessee's alternative plea regarding the interest earned on temporary funds, recognizing the link between interest expenditure and income. The Tribunal highlighted that similar disallowances in subsequent assessment years were overturned by the CIT(A), further supporting the debatable nature of the issue.

5. Considering the debatable nature of the issue, the Tribunal upheld the deletion of the penalty by the CIT(A), concluding that the penalty imposition lacked merit. Therefore, the Revenue's appeal was dismissed, affirming the decision to delete the penalty u/s. 271(1)(c) of the IT Act.

This detailed analysis provides a comprehensive overview of the judgment, addressing the issues involved and the Tribunal's reasoning behind upholding the deletion of the penalty.