2019 (4) TMI 609 - AT - Income Tax

Levy of penalty u/s. 271(1)(c) - interest on borrowed funds, interest on the said capital was disallowed u/s. 36(1)(iii) - as alleged furnishing of inaccurate particulars of income - HELD THAT - No change in the circumstances between October, 2004 and August, 2005, has been stated. Why, she did not have sufficient funds to buy the land, deploying borrowed capital for the purpose, much less to set-up an industrial unit? Why, the document executed in her favour in October, 2004, i.e., the GPA along with the affidavit, as admitted, itself prevented the assessee from registering the land in her name, a fact of which she would not but be aware of while making the investment, clearly indicting the assessee s explanation. Further still, the assessee being short of funds and other resources, including time, yet does not transfer the land to her son for a consideration, but without it. The recoupment of cost from her son by the assessee would not have attracted any additional stamp duty nor any gain in the assessee s hands. The aspect of it being for a new project, so that the interest expense was not admissible, would in any case obtain. The levy of penalty for furnishing inaccurate particulars of income is, in principle, valid. At the same time, as observe two major inconsistencies in the penalty as levied, also pointed out during the hearing. Firstly, the investment by the assessee is in October, 2004, i.e., midway during the current year, though the interest disallowed is for the full year. The interest disallowed has necessarily to be for the period during the relevant year for which the investment obtains. Two, the assessee has repeatedly, both in the quantum and penalty proceedings, stated that the interest allowed on unsecured loans is at 9% p.a, while the interest disallowed has been worked out @ 12% p.a. AO is accordingly directed to, after verifying the assessee s claim as to the rate of interest, modify the penalty, working out the same at the same rate of tax at which it stands levied, i.e., after making adjustment for the two factors i.e., period of investment and the rate of interest, for which reasonable opportunity of hearing shall be allowed to the assessee. Assessee s appeal is partly allowed.

Summary

Issues:
1. Confirmation of penalty under section 271(1)(c) of the Income Tax Act, 1961 for Assessment Year 2005-06.
2. Alleged misrepresentation of facts by the assessee regarding investment in property and subsequent transfer to son.
3. Disallowance of interest on borrowed funds and penalty imposition for furnishing inaccurate particulars of income.
4. Inconsistencies in the penalty calculation regarding the period of investment and rate of interest.

Analysis:
1. The appeal was against the confirmation of penalty under section 271(1)(c) of the Income Tax Act, 1961 for the Assessment Year 2005-06. The issue revolved around the alleged misrepresentation of facts by the assessee regarding the investment in a property and its subsequent transfer to her son. The penalty was imposed based on the contention that the assessee furnished inaccurate particulars of income, as per the decision in CIT vs. Reliance Petro Products Pvt. Ltd. The penalty was upheld, leading to the appeal.

2. The assessee's principal argument was that there was no furnishing of inaccurate particulars of income. The investment in the property was initially made by the assessee but later transferred to her son due to operational reasons. The land was leasehold and intended for business purposes. The explanation provided by the assessee was not accepted, and it was deemed that the interest cost should have been capitalized, not treated as an expenditure of the existing business.

3. The judgment highlighted that even if the land was purchased genuinely by the assessee, the interest cost should have been capitalized as it was for a new project. The transfer of the property to the son was seen as a conscious decision due to the inability to manage two projects simultaneously. The penalty for furnishing inaccurate particulars of income was deemed valid, considering the circumstances and the lack of funds and resources on the part of the assessee.

4. However, inconsistencies were noted in the penalty calculation. The investment was made midway through the year, but the interest disallowed was for the full year. Additionally, discrepancies were found in the interest rate used for the penalty calculation. The assessing officer was directed to verify the interest rate claimed by the assessee and adjust the penalty accordingly, providing a reasonable opportunity for the assessee to be heard. The appeal was partly allowed based on these inconsistencies and adjustments made to the penalty calculation.