1987 (5) TMI 41 - AT - Income Tax

Summary

Issues Involved:
1. Cancellation of penalty imposed under section 271(1)(c) of the Income Tax Act.
2. Applicability of section 40(b) of the Income Tax Act regarding interest paid to a partner.
3. Reopening of assessments under sections 148/147(a) of the Income Tax Act.
4. Bona fide belief and disclosure of primary facts by the assessee.

Detailed Analysis:

1. Cancellation of Penalty Imposed under Section 271(1)(c) of the Income Tax Act:
The primary issue in these appeals is the cancellation of penalties imposed by the Income Tax Officer (ITO) under section 271(1)(c) of the Income Tax Act for the assessment years 1974-75 to 1980-81. The ITO had imposed penalties on the assessee for not adding back the interest paid to a partner, Shri Dilipkumar K. Shah, in his Account No. 2, under the provisions of section 40(b) of the Act. The Appellate Assistant Commissioner (AAC) and the Commissioner (Appeals) canceled these penalties, concluding that the assessee had a bona fide belief that the interest paid was a business expenditure and not subject to section 40(b).

2. Applicability of Section 40(b) of the Income Tax Act:
The ITO initially accepted the assessee's contention that the interest paid to Shri Dilipkumar K. Shah in Account No. 2 was not subject to section 40(b) of the Act. However, during the assessment for the year 1978-79, the ITO changed his opinion and applied section 40(b), leading to the reopening of assessments for previous years. The AAC and Commissioner (Appeals) found that the assessee had disclosed all primary facts and that there were conflicting judicial decisions on the applicability of section 40(b) to such interest payments. Therefore, they concluded that the penalties under section 271(1)(c) were not justified.

3. Reopening of Assessments under Sections 148/147(a) of the Income Tax Act:
The ITO reopened the assessments for the years 1974-75 to 1977-78 under sections 148/147(a) to invoke the provisions of section 40(b) regarding the interest paid to Shri Dilipkumar K. Shah in Account No. 2. The assessee resisted this action, arguing that the reopening was based on a mere change of opinion since all primary facts had been disclosed during the original assessments. The AAC and Commissioner (Appeals) agreed with the assessee, noting that the ITO had initially accepted the assessee's treatment of the interest payments and that the reopening was not justified.

4. Bona Fide Belief and Disclosure of Primary Facts by the Assessee:
The AAC and Commissioner (Appeals) emphasized that the assessee had disclosed all primary facts regarding the interest payments to Shri Dilipkumar K. Shah in both accounts. The assessee had also deducted tax at source under section 194A, indicating no intention to defraud the revenue. The AAC concluded that the assessee had a bona fide belief that the interest paid in Account No. 2 was a business expenditure and not subject to section 40(b). The penalties under section 271(1)(c) were therefore canceled, as the assessee had not concealed income or furnished inaccurate particulars.

Conclusion:
The Tribunal upheld the orders of the AAC and Commissioner (Appeals), concluding that the penalties under section 271(1)(c) were not justified. The Tribunal noted that the assessee had a bona fide belief regarding the applicability of section 40(b) and had disclosed all primary facts. The reopening of assessments based on a change of opinion was not warranted, and the penalties were rightly canceled. All appeals by the revenue were dismissed.