2018 (3) TMI 40 - AT - Income Tax

Penalty levied u/s 271(1)(c) - Nature of interest expenditure - disallowance of finance charges on the ground that the expenditure incurred under the head Finance Charges is not incurred wholly and exclusively for the purpose of business of the assessee - Held that - No merits in the arguments of the assessee for the reason that the activity carried out by the assessee i.e. investment in shares of Anand Group of Companies for holding controlling interest cannot be considered as main business activity of the assessee in the nature of trade or commerce. The assessee itself has admitted that it is in the activity of investment in group companies for acquiring controlling interest and such investment has been treated as long term investment in its financial statements. The statutory auditors of the company have reported that the company is not engaged in carrying on any business or as part of its business activity of acquisition of shares except making long term investments - AO and CIT(A) were right in treating the activity carried out by the assessee as investment activity and accordingly finance charges is not deductable under section 36(1)(iii). Also the assessee has made an alternate plea in as much as finance charge incurred shall be deductable u/s 57(iii) as its dividend income is taxable under the head Income from other sources , the facts remain that the assessee has failed to furnish any details in respect of investments which earned income and investments which do not earn dividend income for the year under consideration. The assessee itself had admitted that all its investments are not earned dividend income. CIT(A), after considering relevant facts, has directed the AO to allow finance charges on proportionate basis in respect of investments which earned dividend income after verifying the facts. CIT(A) has given factual finding, after considering the relevant facts of the case. We do not find any error or infirmity in the order of the Ld. CIT(A), hence, we are inclined to uphold the findings of the Ld. CIT(A) and reject grounds raised by the Revenue as well as the assessee. For Penalty u/s 271(1)(c) an order imposing or enhancing or reducing or cancelling penalty or dropping the proceedings for the imposition of penalty may be passed on the basis of assessment as revised by giving effect to such order of the appellate authorities. The proviso provided further stated that no order of imposing or enhancing or reducing or cancelling penalty or dropping the proceedings for the imposition of penalty shall be passed unless the assessee has been heard or has been given a reasonable opportunity of being heard and after the expiry of six months from the end of the year of which the order of the appellate authority has been received by the Commissioner. In this case, the AO has levied the penalty without waiting for the outcome of the orders of the appellate authorities. Therefore, we are of the considered view that the issue needs to be reexamined by the AO in the light of provisions of section 275(1A) of the Act. Hence, we set aside the issue to the file of the AO and direct him to reconsider the issue

Summary

Issues Involved:
1. Disallowance of finance charges under Section 36(1)(iii) and Section 57(iii) of the Income Tax Act, 1961.
2. Penalty under Section 271(1)(c) of the Income Tax Act, 1961.

Detailed Analysis:

1. Disallowance of Finance Charges:
The assessee, engaged in investment in group companies for controlling interest, filed a return declaring nil income under normal provisions and book profit under Section 115JB. The assessment was completed with additions for disallowance of miscellaneous and staff welfare expenses and finance charges. The CIT(A) allowed partial relief but confirmed the disallowance of finance charges. The ITAT set aside the issue of finance charges for re-examination by the AO, noting that the facts differed from a previous year where dividend income was exempt under Section 10(34).

Upon re-examination, the AO disallowed the finance charges, arguing that the assessee did not carry out any business activity during the year except for holding investments in group companies, which was not considered a business activity under the Memorandum of Association. The AO also rejected the alternate plea for deduction under Section 57(iii), as the assessee failed to provide a breakup of investments and funds borrowed.

The CIT(A) upheld the AO's decision, stating that the investment activity was not in the nature of business and therefore, finance charges could not be allowed under Section 36(1)(iii). However, the CIT(A) directed the AO to allow a pro-rata deduction under Section 57(iii) for finance charges related to investments that earned taxable dividend income.

The ITAT agreed with the CIT(A), rejecting the assessee's appeal for full deduction under Section 36(1)(iii) or Section 37(1). The ITAT upheld the pro-rata deduction under Section 57(iii), as the assessee failed to provide details of investments earning dividend income.

2. Penalty under Section 271(1)(c):
The AO levied a penalty for furnishing inaccurate particulars of income, based on disallowances of miscellaneous expenses, staff welfare expenses, and finance charges. The CIT(A) confirmed the penalty, referencing the Supreme Court's decision in Union of India vs. Dharmendra Textile Processors, but noted that the penalty might be reconsidered based on the revised assessment following the ITAT's directions.

The ITAT observed that the penalty was levied before the ITAT's order setting aside the assessment was received. The ITAT noted that under Section 275(1A), the AO should reconsider the penalty after revising the assessment as per the ITAT's directions. Consequently, the ITAT set aside the penalty issue to the AO for re-examination in light of Section 275(1A) and the CIT(A)'s observations.

Conclusion:
- The appeals concerning the disallowance of finance charges were dismissed, upholding the pro-rata deduction under Section 57(iii).
- The penalty issue was remanded to the AO for reconsideration following the revised assessment.