2012 (7) TMI 338 - AT - Income Tax

Penalty u/s. 271(1)(c) - CIT(A) deleted levy - ITAT reversed the order of CIT(A) and upheld the AO s view that interest earned from fixed deposits is liable to be assessed as income from other sources and not Business Income - Held that - The issue resulting in the determination of higher income u/s 143(3) was clearly debatable, penalty is not imposable on debatable issues or claims/deductions disallowed on account of varying legal interpretations it is held that penalty u/s 271(1)(c) is not imposable in the present case - penalty u/s 271(1)(c) will not lie merely if an incorrect or inadmissible claim has been made in the return and when all material facts having been disclosed in the return of income - in favour of assessee.

Summary

Issues:
Challenge against deletion of penalty imposed under section 271(1)(c) of the IT Act, 1961 for assessment year 2001-02 based on interest income treatment.

Analysis:
1. Facts and Background: The assessee disclosed income as business income but faced an addition of interest income on short-term deposits as 'income from other sources,' leading to a penalty under section 271(1)(c).

2. Appellate Proceedings: The CIT(A) initially allowed the interest income to be treated as business income, but the ITAT reversed this decision based on a jurisdictional High Court ruling, leading to the penalty imposition by the AO.

3. Assessee's Arguments: The assessee contended that the issue was debatable, as past practices and legal interpretations supported treating the interest income as business receipts. The assessee disclosed all particulars in the return, and the variance was due to subsequent legal interpretations.

4. Legal Precedents: Various judicial authorities were cited, emphasizing that penalties under section 271(1)(c) are not applicable when the issue is debatable or when two views are possible. The courts highlighted that incorrect legal claims do not amount to furnishing inaccurate particulars unless information is factually incorrect.

5. Decision: The Ld. CIT(A) deleted the penalty, considering the debatable nature of the issue and past practices. The ITAT concurred with this decision, upholding the Ld. CIT(A)'s order and dismissing the appeal by the Revenue.

This judgment underscores the importance of considering the debatability of issues and past practices in tax matters when determining the applicability of penalties under the IT Act, 1961. The decision aligns with established legal principles that penalties should not be imposed when issues are subject to varying legal interpretations and when all relevant information is disclosed in the return, even if legal claims are later deemed incorrect.