2018 (12) TMI 681 - AT - Income Tax

Penalty u/s. 271(1)(c) - additions on account of disallowance of interest expenditure and notional house property income - Held that - For disallowance of interest expenditure the assessee has availed of overdraft facility from Dena Bank and out of the funds borrowed from overdraft account investment was made in taxable bonds of RBI as well as fixed deposit - as against the interest income earned from taxable bonds and fixed deposits, which was offered as income, assessee has set off the interest expenditure incurred on account of funds borrowed from the overdraft account. This claim of set off of interest expenditure against interest income has been rejected by the Assessing Officer in course of assessment proceedings. Thus, under a bona fide belief that interest expenditure incurred on the overdraft facility is allowable against the interest income earned by investing the funds borrowed from the overdraft account assessee has claimed the expenditure. This, in our view, neither leads to furnishing of inaccurate particulars of income nor concealment of income. As regards imposition of penalty on the addition made on account of notional house property income, it goes without saying that in reality the assessee has not earned any income from house property. The Assessing Officer himself has observed that the addition made on account of income from house property is notional. Penalty u/s. 271(1)(c) cannot be imposed in respect of addition made on account of notional income from house property. - Decided in favour of assessee.

Summary

Issues:
- Confirmation of penalty under section 271(1)(c) of the Income Tax Act for assessment years 2009-10 and 2011-12.

Analysis:

Confirmation of Penalty by CIT(A):
The appeals were filed against the orders of the CIT(A) confirming the penalty imposed under section 271(1)(c) of the Income Tax Act for the assessment years 2009-10 and 2011-12. The appellant did not appear for the hearing despite notices. The Assessing Officer disallowed interest expenditure and added notional income from house property, resulting in the determination of total income for both years. The penalty was imposed alleging concealment of income and furnishing inaccurate particulars, which the appellant objected to but was rejected. The CIT(A) upheld the penalty in both assessment years.

Imposition of Penalty - Disallowance of Interest Expenditure:
The penalty was imposed based on disallowance of interest expenditure and notional house property income. The appellant had availed an overdraft facility and invested borrowed funds in taxable bonds and fixed deposits. The Assessing Officer disallowed the set off of interest expenditure against interest income, leading to the penalty imposition. The Tribunal found that the appellant's belief that interest expenditure was allowable was not indicative of concealment or furnishing inaccurate particulars. Therefore, the conditions of section 271(1)(c) were not met, justifying the deletion of the penalty related to interest expenditure.

Imposition of Penalty - Notional House Property Income:
Regarding the addition of notional income from house property, it was evident that no actual income was earned. The Assessing Officer acknowledged the notional nature of the income. The Tribunal concluded that penalty under section 271(1)(c) could not be justified for such notional income. Considering the overall facts and circumstances, the Tribunal held that the penalty imposition was unwarranted. Consequently, the penalties imposed for both assessment years were deleted, and the appeals were allowed.

This judgment highlights the importance of assessing the circumstances and intentions behind income-related claims before imposing penalties under section 271(1)(c) of the Income Tax Act. The Tribunal's decision focused on the genuineness of the appellant's claims and the absence of deliberate concealment or inaccurate reporting, leading to the deletion of the penalties.