2018 (6) TMI 163 - AT - Income Tax

Penalty u/s 271(1)(c) - additions due to difference in rate of interest - Held that - There is no denial of the fact that the assessee has incurred the interest expenditure which has been claimed as a deduction. Perusal of the chart showing details of loan availed and loan advanced appears that there is linkage between loan availed and loan advanced. Though, the assessee has ultimately offered the disallowed amount as income in a return of income filed under section 153A however, penalty under section 271(1)(c) being a separate and independent proceeding, the facts and evidences have to be considered and looked into afresh to find out whether the conditions of the penalty provision are satisfied or not. In any case of the matter, it is a case of deduction claimed by the assessee which has been disallowed by the Assessing Officer. That being the case, there is no concealment of income Addition of deemed dividend under section 2(22)(e) - Held that - The assessee has advanced loan to M/s. Green Bird Developer Pvt. Ltd. and has received interest from the said company. In the aforesaid circumstances, the charge of concealment of income as made by the Assessing Officer is not established. That being the case, learned Commissioner (Appeals) was justified in deleting the penalty imposed under section 271(1)(c) of the Act in respect of the addition of deemed dividend under section 2(22)(e) of the Act. Addition of interest - assessee has availed loan from different persons at a higher rate of interest ranging between 12% and 18% it has charged interest on loan advanced @ 12% and 9% - Held that - Assessing Officer has restricted the interest paid on loan availed at 12% resulting in the addition. Thus, from the facts on record it is very much clear that Assessing Officer has made the addition only on the basis of reasonableness. Thus, in effect, it is a notional addition and the assessee has not concealed any part of its income. That being the case, the provisions of section 271(1)(c) of the Act cannot get attracted to such addition even though the assessee might have accepted such addition. - Decided in favour of assessee

Issues Involved:
1. Imposition of penalty under section 271(1)(c) of the Income Tax Act, 1961.
2. Disallowance of interest expenditure under section 57(iii) of the Act.
3. Addition of deemed dividend under section 2(22)(e) of the Act.
4. Addition of interest amounting to ?2,72,391 on account of difference in the rate of interest.

Detailed Analysis:

1. Imposition of Penalty under Section 271(1)(c) of the Act:

The Revenue initiated penalty proceedings under section 271(1)(c) of the Act based on three specific additions made by the Assessing Officer (AO):
- Addition of ?2,72,391 due to the difference in the rate of interest.
- Disallowance of interest expenditure under section 57(iii) amounting to ?1,42,55,358.
- Addition of deemed dividend under section 2(22)(e) amounting to ?1,17,50,000.

The AO imposed a penalty alleging concealment of income. However, the Commissioner (Appeals) deleted the penalty related to the disallowance of interest under section 57(iii) and the deemed dividend addition but sustained the penalty for the interest addition of ?2,72,391.

2. Disallowance of Interest Expenditure under Section 57(iii) of the Act:

The AO disallowed ?1,42,55,358 of the total interest expenditure claimed by the assessee, citing the failure to establish a nexus between the loan received and loan given. The assessee had disclosed all relevant information about the loans and interest. The Commissioner (Appeals) found that the assessee had shown net interest income and had not concealed any income. The Tribunal upheld the deletion of the penalty, referencing the Supreme Court decision in CIT v/s Reliance Petroproducts, which held that disallowance of a deduction does not necessarily imply concealment of income.

3. Addition of Deemed Dividend under Section 2(22)(e) of the Act:

The AO added ?1,17,50,000 as deemed dividend, as the assessee held substantial shares in both companies involved in the loan transaction. The Commissioner (Appeals) deleted the penalty, noting that the assessee had disclosed all relevant information and that the lending company was in the business of lending. The Tribunal agreed, citing that the issue was debatable and that the assessee did not conceal income. It referenced the Bombay High Court decision in CIT v/s Parle Plastics Pvt. Ltd., which held that lending by a company in the business of lending cannot be regarded as deemed dividend.

4. Addition of Interest Amounting to ?2,72,391:

The AO made this addition because the assessee paid higher interest rates on loans received but charged lower rates on loans given. The AO restricted the interest paid to 12%, resulting in the addition. The Tribunal found that this was a notional addition based on reasonableness and not concealment of income. It deleted the penalty, reversing the Commissioner (Appeals) decision to sustain it.

Conclusion:

The Tribunal dismissed the Revenue’s appeal and partly allowed the assessee’s cross-objection. It upheld the deletion of penalties related to the disallowance of interest under section 57(iii) and the deemed dividend addition, and it reversed the penalty on the interest addition of ?2,72,391. The Tribunal emphasized that the assessee had not concealed income and that the issues were either debatable or based on reasonableness rather than factual concealment.

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