2012 (8) TMI 180 - AT - Income Tax

Penalty u/s. 271(1)(c) of the Income-tax Act - disallowance of interest expenditure - Assessing Officer disallowed the expenditure on the ground that the assessee claimed the set off against the interest income of the minors. Since the assessee could not explain the loans and utilization of the funds, the Assessing Officer disallowed the same Held that - If the assessee has explained the fact during the penalty proceedings, which are neither found bogus nor false, then the explanation of the assessee has to be considered on the parameters of bonafide. The assessee has disclosed all these fact before the Assessing Officer that the interest expenditure pertains to the borrowed funds, which was utilised for investment in the shares - mere disallowance of claim of expenditure would not lead to attract penalty provisions u/s 271(1)(c) of the act - appeal filed by the assessee is allowed.

Summary

Issues:
- Confirmation of penalty order u/s 271(1)(c) for AY 2004-05 by CIT(A)
- Disallowance of business loss and interest expenditure leading to penalty

Analysis:
1. The appeal challenged the penalty order u/s 271(1)(c) for AY 2004-05. The appellant contended that inaccurate particulars of income were not furnished, justifying the penalty. The assessment showed disallowances of business loss, low withdrawal addition, and interest disallowance.

2. The penalty was initiated for disallowance of business loss and interest expenditure. The appellant argued that fixed expenses were claimed under 'profit and gains of business' due to market volatility. The Assessing Officer disallowed the business loss as disproportionate to income, though the expenditure's genuineness was not disputed.

3. Regarding interest expenditure, the appellant borrowed funds for share investment, claiming it under sec. 57. The Assessing Officer disallowed it, stating it wasn't related to assessable income. The appellant's explanation was considered bonafide, supported by the Supreme Court's decision in CIT v. Reliance Petroproducts (P.) Ltd.

4. The Assessing Officer only initiated penalty proceedings for business loss disallowance, not for other additions. The appellant argued that penalty satisfaction wasn't recorded for other disallowances. The Assessing Officer found the expenses excessive and not commensurate with income, justifying the penalty.

5. The Tribunal noted that the appellant's expenditure claims weren't found bogus but excessive concerning trading activity. The disallowance under sec. 14A would have been appropriate for trading and investment activities. The disallowance didn't imply concealment of income.

6. Regarding interest expenditure, the appellant's explanation was considered bonafide, supported by facts of fund utilization for share investment. The Assessing Officer's satisfaction for penalty initiation was deemed sufficient, and the penalty was unjustified based on the facts and the Reliance Petroproducts case.

7. The Tribunal concluded that the appellant disclosed primary facts, and the genuineness of the expenditure wasn't in dispute. Mere disallowance of claims didn't warrant penalty under sec. 271(1)(c). Consequently, the penalty was deleted, and the appeal was allowed.