2019 (5) TMI 342 - AT - Income Tax

Penalty u/s 271(1)(c) - disallowance of proportionate interest expenditure incurred on borrowed funds - HELD THAT - A conspectus of the Explanation Section 271(1)(c) makes it clear that the statute visualized the assessment proceedings and penalty proceedings to be wholly distinct and independent of each other. AO may be justified in making estimated disallowance in quantum proceedings, such disallowance of expenses, that too on estimated basis, could not automatically fall within mischief of Section 271(1)(c). While a claim towards expenditure may not found acceptable in quantum proceedings, such disallowance cannot invite by way of penalty. When all material facts relevant to the said claim were placed on record, the presence or absence of commercial instinct in a given case is a matter of inference. Such adverse inference against assessee would not attract imposition of penalty. The claim of expenditure towards interest made at best be taken as erroneous claim by the assessee. Such claim made in a bonafide manner cannot lead imposition of penalty. Although such claim may not be maintainable for the purposes of quantum proceedings however, in the absence of any falsity per se in such claim, making an incorrect claim for deduction is not at par with concealment or inaccurate particulars of income. Decision in the case of CIT vs. Dalmia Dyechem Industries Ltd. 2015 (7) TMI 619 - BOMBAY HIGH COURT relied to submit that the penalty cannot be imposed unless the action of the assessee per se is dishonest, malafide and amounting to concealment of facts. There, being no concealment of fact per se imposition of penalty is not justified. The penalty, in our view, is clearly not maintainable in the absence of any contumacious or dishonest conduct. Consequently, we set aside the order of the CIT(A) and direct the AO to delete the penalty on disallowance of estimated interest expenditure - Appeal of the assessee is allowed.

Summary

Issues:
1. Imposition of penalty under section 271(1)(c) of the Income Tax Act concerning AY 2002-03.
2. Disallowance of proportionate interest expenses on borrowed funds.
3. Confirmation of penalty by the Commissioner of Income Tax (Appeals).
4. Appeal before the Tribunal challenging the penalty imposition.

Issue 1: Imposition of Penalty under Section 271(1)(c) of the Income Tax Act:
The appeal was filed against the penalty order passed by the Assessing Officer (AO) under section 271(1)(c) of the Income Tax Act concerning the Assessment Year 2002-03. The grounds of appeal raised by the assessee primarily argued against the imposition of the penalty, stating that there was no concealment of income on their part.

Issue 2: Disallowance of Proportionate Interest Expenses on Borrowed Funds:
During the scrutiny assessment, an addition was made on account of disallowance of proportionate interest expenditure incurred on borrowed funds. The AO disallowed interest expenses on the amount advanced free of interest by the assessee, alleging lack of commercial expediency in such advances. This disallowance led to the imposition of penalty under section 271(1)(c) of the Act.

Issue 3: Confirmation of Penalty by the Commissioner of Income Tax (Appeals):
The CIT(A) confirmed the penalty imposed by the AO, upholding the disallowance of estimated interest expenses. The penalty was maintained despite the assessee's arguments regarding the commercial nature of the advances made and the claim of expenses filed during the appellate proceedings.

Issue 4: Appeal Before the Tribunal:
The assessee, further aggrieved by the penalty imposition, appealed before the Tribunal. The Tribunal considered the rival submissions and the orders of the authorities below. It emphasized that for penalty under section 271(1)(c) to be imposed, there must be concealment of income or furnishing of inaccurate particulars by the assessee.

The Tribunal noted that the disallowance of expenses on an estimated basis does not automatically amount to concealment of income. It highlighted the distinction between quantum proceedings and penalty proceedings, emphasizing that an incorrect claim for deduction, if made in good faith, does not equate to concealment or furnishing of inaccurate particulars. The Tribunal referenced the decision of the Hon’ble Bombay High Court to support the view that penalty cannot be imposed without evidence of dishonest or malafide conduct amounting to concealment of facts.

In conclusion, the Tribunal set aside the order of the CIT(A) and directed the AO to delete the penalty imposed on the disallowance of estimated interest expenditure. The appeal of the assessee was allowed, emphasizing the absence of contumacious or dishonest conduct warranting the penalty.

This detailed analysis of the judgment highlights the issues involved, the arguments presented, and the Tribunal's decision regarding the imposition of penalty under section 271(1)(c) of the Income Tax Act.