2019 (2) TMI 896 - AT - Income Tax

Penalty u/s 271(1)(c) - disallowance of interest expenditure restricted partly by passing an rectification order u/s 154 - AO rejected the contention of the assessee by observing that the total interest received on loans and advances is less than deduction of interest expenditure u/s. 57(iii) which was claimed which is against the principle of prudency and normal business practice that assessee will pay more interest than interest earned on loans Held that - AO has invoked principles of prudency and normal business conduct of the tax-payer that no businessman can pay higher interest expenditure than the interest income but the entire aforesaid conclusion arrived at by the AO is based upon conjectures and surmises without bringing on record any cogent incriminating evidences and material on record. It is not the case of the revenue that assessee has not incurred or not paid this interest expenditure of ₹ 31,91,743/- to the persons from whom borrowing were made. Nothing on record by the AO these borrowings were made for reasons other than commercial expediency but merely on conjectures and surmises, the conclusions are drawn by the AO against the assessee. Merely averred by the AO that assessee has paid more interest on unsecured loans raised than what was earned on these loans advanced by the assessee. The findings of the AO may be sufficient to make disallowance in quantum on the theory of preponderance of probabilities but it is not sufficient to fasten and saddle the assessee with penalty provisions as are enshrined u/s. 271(1)(c) of the Act as it could not be said based on the factual matrix of the case that the assessee submitted inaccurate particulars of income while filing return of income with Revenue or any attempt was made by the assessee to conceals its income from Revenue to evade taxes. there is no cogent incriminating material/evidence on record to justify levy of penalty within provisions of Section 271(1)(c) - Decided in favour of assessee.

Issues Involved:
1. Legitimacy of the penalty levied under Section 271(1)(c) of the Income Tax Act, 1961.
2. Justification of disallowance of interest expenditure claimed under Section 57 of the Income Tax Act, 1961.
3. Validity of the assessee's claim of interest expenditure vis-à-vis interest income.
4. Applicability of the principles of prudency and normal business practice in assessing interest expenditure claims.
5. Consideration of whether the assessee concealed income or furnished inaccurate particulars of income.

Issue-wise Detailed Analysis:

1. Legitimacy of the penalty levied under Section 271(1)(c) of the Income Tax Act, 1961:
The core issue in this appeal was whether the penalty of ?9,28,569/- levied under Section 271(1)(c) of the Income Tax Act, 1961, for concealment of income or furnishing inaccurate particulars of income was justified. The tribunal observed that the assessee had filed a return declaring nil income and had not attempted to carry forward losses. The tribunal noted that the assessee had filed a belated return of income and, as per Section 139(3), losses were not allowable to be carried forward. The tribunal concluded that there was no attempt by the assessee to conceal income or furnish inaccurate particulars, and thus, the penalty was not justified.

2. Justification of disallowance of interest expenditure claimed under Section 57 of the Income Tax Act, 1961:
The assessee had claimed a deduction of ?1,16,53,956/- under Section 57 towards interest expenditure, which was more than the interest income of ?41,68,122/- earned. The Assessing Officer (AO) disallowed the excess interest expenditure of ?74,85,834/- on the grounds that it was against the principles of prudency and normal business practices. However, the tribunal noted that the AO had later rectified the assessment and allowed an interest expenditure of ?42,94,091/-, bringing the taxable income to nil. The tribunal found that the disallowance of the remaining interest expenditure of ?31,91,743/- was not justified as the assessee did not attempt to carry forward this loss.

3. Validity of the assessee's claim of interest expenditure vis-à-vis interest income:
The AO observed that the assessee had paid higher interest on loans than the interest earned, which was not a normal business practice. The tribunal, however, noted that the AO did not bring any incriminating evidence to prove that the interest expenditure was not incurred or was bogus. The tribunal concluded that the assessee's claim of interest expenditure was valid and no attempt was made to conceal income.

4. Applicability of the principles of prudency and normal business practice in assessing interest expenditure claims:
The AO had disallowed the interest expenditure based on the principles of prudency and normal business practice, arguing that no businessman would pay higher interest than earned. The tribunal, however, held that such conclusions were based on conjectures and surmises without any cogent evidence. The tribunal emphasized that the penalty provisions under Section 271(1)(c) require proof on a higher pedestal, which was not met in this case.

5. Consideration of whether the assessee concealed income or furnished inaccurate particulars of income:
The tribunal found that the assessee had filed a return declaring nil income and had not attempted to carry forward the disallowed interest expenditure as losses. The tribunal noted that the AO did not provide any evidence that the interest expenditure was not incurred or was for non-business purposes. The tribunal concluded that the assessee did not conceal income or furnish inaccurate particulars, and thus, the penalty under Section 271(1)(c) was not warranted.

Conclusion:
The tribunal allowed the appeal of the assessee, setting aside the penalty levied under Section 271(1)(c) and the appellate order passed by the CIT(A). The tribunal found that the assessee's explanation was bona fide and that no prejudice was caused to the revenue, leading to the deletion of the penalty. The appeal was pronounced in the open court on 08.02.2019.

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