2019 (8) TMI 103 - AT - Income Tax

Penalty 271(1)(c) - deduction of interest out of income from other sources - HELD THAT - The fact of the incurring of expenditure was also supported with the relevant evidences. The disallowance was sustained in the quantum proceedings as the assessee did not succeed in proving how the borrowed funds from Kotak Mahindra Bank were utilized. The nexus was not proved for utilization of money from borrowed funds. The penalty has been imposed as the expenditure claimed was not found to be allowable. We note the observations of the Hon ble Supreme Court in the case of CIT vs. Reliance Petro Products Pvt. Limi ted 2010 (3) TMI 80 - SUPREME COURT that no penalty is justified where all the details of expenditure as well as income in its return, which details, in themselves, were not found to be inaccurate nor could be viewed as the concealment of income on its part. It was up to the authorities to accept its claim in the return or not. Merely because the assessee had claimed the expenditure which claim was not accepted or was not acceptable to the Revenue, by itself, would not attract penalty u/s 271(1)(c). We notice that similar circumstances exist in the present case. Guided by the principles laid down by the Hon ble Supreme Court (supra), we find merit for non-applicability of penalty in the absence of any falsity in the particulars furnished. The AO has admitted the claim of interest expenditure to the extent of interest income and therefore one cannot definitely say that interest expenditure was not utilized for the purpose of earning interests. The disallowance of excess expenditure over and above similar income generated, cannot, in our view, invite penal action in the form of penalty. The order of the CIT(A) is accordingly set aside and the AO is directed to delete the penalty.

Summary

Issues:
Penalty under section 271(1)(c) of the Income Tax Act, 1961 for disallowance of interest expenses.

Detailed Analysis:

1. Background and Appeal: The appeal was filed by the assessee against the penalty order passed by the Assessing Officer (AO) under section 271(1)(c) of the Income Tax Act, 1961 concerning Assessment Year 2010-11. The assessee contested the penalty of ?2,05,000 imposed by the Commissioner of Income Tax (Appeals) for claiming deduction in respect of interest paid to Kotak Mahindra Bank Ltd.

2. Ex Parte Proceedings: During the hearing, the assessee did not appear despite proper service of notice. Consequently, the matter proceeded ex parte in the absence of the assessee. The learned DR for the Revenue supported the decision of the lower authorities.

3. Disallowed Deduction: The assessee had claimed deduction for interest paid to the bank against income from other sources. However, the AO disbelieved the explanation provided by the assessee regarding the utilization of borrowed funds and disallowed the deduction to the extent it exceeded the interest income declared. The penalty was imposed based on this disallowance.

4. Legal Precedent: The Tribunal considered the case law of CIT vs. Reliance Petro Products Pvt. Limited where the Hon’ble Supreme Court held that penalty under section 271(1)(c) is not justified if the details of expenditure and income in the return are not inaccurate or concealment of income. In this case, the Tribunal found no falsity in the particulars furnished by the assessee.

5. Decision: The Tribunal noted that the assessee disclosed all relevant facts without reservation and supported the expenditure with evidence. Since the AO had accepted the claim of interest expenditure to the extent of interest income, the Tribunal found no basis for penal action. Following the principles laid down by the Supreme Court, the Tribunal set aside the order of the CIT(A) and directed the AO to delete the penalty.

6. Conclusion: The appeal of the assessee was allowed ex parte, and the penalty under section 271(1)(c) was deemed inapplicable due to the absence of falsity in the furnished particulars. The Tribunal emphasized that disallowance of excess expenditure over income does not warrant penal action if the details provided were not inaccurate or misleading.

This detailed analysis of the legal judgment highlights the issues involved, the arguments presented, the legal precedent considered, and the ultimate decision rendered by the Appellate Tribunal ITAT Ahmedabad.