2019 (1) TMI 207 - AT - Income Tax

Penalty u/s 271(1)(c) - as per AO interest paid on the unsecured loan should be capitalized and the same cannot be allowed as deduction u/s 36(1)(iii) - whether the assessee has furnished inaccurate particulars of income by claiming a deduction on account of interest expenses on the loan which was utilized for investing in the properties? - Held that - It is a settled law that the interest on loan used for investment purposes should be capitalized. Thus, interest expenses claimed in the Profit and Loss Account was added to the value of the investment. Accordingly, the value of the investment was enhanced. If investments are subject to depreciation, then the assessee will be entitled to claim the deduction of the interest in the form of depreciation u/s 32 of the Act. If the investments are not subject to depreciation, then the assessee will be entitled to deduction of interest expenses at the time of sale of such investment in the market. Therefore, in either case, the assessee was eligible for the deduction of the expenses in the different form. It could not be concluded that the assessee deliberately claimed the interest as revenue expenditure. The assessee has filed its return of income declaring loss of ₹ 8,52,704/-. Therefore if the assessee treats the interest expenses as capital in nature then also there was also no tax liability on the part of the assessee. Therefore, we are of the view there was no deliberate act on the part of the assessee to escape from the tax liability by claiming interest expenses as revenue. The claim made by the assessee in the return of income on account of interest expenses can be an inaccurate claim which cannot be equated with the inaccurate particulars of income - No penalty to be imposed u/s 271(1)(c) - decided in favour of assessee.

Summary

Issues:
- Appeal against penalty order under s.271(1)(c) of the Income Tax Act, 1961.
- Condonation of delay in filing the appeal.
- Disallowance of interest expenses claimed by the assessee.
- Confirmation of penalty by the ld. CIT(A).
- Whether the assessee furnished inaccurate particulars of income.

Analysis:
1. The appeal was filed against the penalty order under s.271(1)(c) of the Income Tax Act, 1961. The delay in filing the appeal was condoned after the assessee filed a petition for the same. The grounds of appeal raised by the assessee challenged the order of the ld. CIT(A) confirming the penalty levied by the Assessing Officer on disallowance of interest expenses.

2. The main issue raised was the confirmation of the penalty u/s 271(1)(c) for disallowance of interest expenses of ?6,40,587. The AO disallowed the claim of interest expenses on an unsecured loan utilized for investment in immovable properties, adding it to the total income of the assessee. The penalty was initiated for furnishing inaccurate particulars of income.

3. The ld. CIT(A) confirmed the penalty, stating that the assessee failed to justify the explanation offered and disregarded the claim made by the assessee regarding the treatment of interest as revenue expenses. The ld. CIT(A) relied on precedents and held that the penalty was justified due to inaccurate particulars of income furnished by the assessee.

4. The Tribunal considered whether the assessee deliberately claimed interest as revenue expenditure, concluding that the interest on the loan used for investment should be capitalized. The Tribunal noted that the assessee declared a loss, so even if the interest expenses were treated as capital, there was no tax liability. The Tribunal also emphasized that the incorrect claim of expenditure did not amount to furnishing inaccurate particulars of income.

5. Citing a judgment of the Hon’ble Gujarat High Court, the Tribunal held that the penalty imposed by the AO and confirmed by the ld. CIT(A) was not sustainable. The Tribunal set aside the order of the ld. CIT(A) and directed the AO to delete the penalty, allowing the appeal of the assessee.

6. Ultimately, the Tribunal found that the penalty under s.271(1)(c) was not justified, as the incorrect claim of expenditure did not constitute furnishing inaccurate particulars of income. The Tribunal ruled in favor of the assessee, allowing the appeal and directing the deletion of the penalty imposed by the AO.

This detailed analysis covers the issues raised in the legal judgment comprehensively, highlighting the key arguments and decisions made by the authorities involved.