2014 (11) TMI 20 - HC - Income Tax

Deletion of penalty u/s 271(1)(c) - Capitalization of interest Held that - The Tribunal was rightly of the view that the changes in capitalization or de- capitalization of interest were effected by the assessee consequent to well controlled and regulated statutory regime under the aegis of Central Government - The assessee s book results after statutory audit are subjected to audit and correction of CVC and CAG - The changes carried out by the assessee are in consonance to the recommendations of CVC and CAG - these details were filed along with the return of income - Penalty imposed under section 271(1)(c) is a civil liability - The section is enacted as a provision to assist and to vigorously check and prevent loss of revenue, but penalty for concealment can be imposed after noticing and applying the provisions of Section 271 (1)(c) of the Act including Explanation 1 - This is the primary and the basic flaw in the penalty orders passed by the AO - the Tribunal take due notice of the factual matrix and examine the question of bonafides - It stands recorded that the returns filed and income declared was as per the statutory audit report and the interest paid had been capitalized. Subsequently, audit objections that excessive interest had been capitalized, were raised by CVC and CAG - a part of interest so capitalized should have been treated as revenue expenditure - In order to comply with the said objections, excess interest was decapitalised - The assessee had given truthful and cogent explanation without concealing or hiding facts why interest relating to earlier years, which was capitalized, had been accounted for as a liability in the current years - It cannot be doubted or even questioned that the assessee had disclosed all facts relating to the explanation offered - The Tribunal after examining the factual matrix and the explanation given by the assessee, have come to the conclusion that the explanation of the assessee was bona fide thus, the order of the Tribunal is upheld Decided against revenue.

Summary

Issues:
1. Appeal against penalty under Section 271(1)(c) of the Income Tax Act for concealment of income.
2. Justification of interest claimed as an "Adjustment relating to earlier years."
3. Assessment of bonafide explanation given by the assessee.

Issue 1: Penalty under Section 271(1)(c) of the Income Tax Act

The High Court addressed the penalty imposed by the Assessing Officer under Section 271(1)(c) for concealment of income by claiming prior period expenses. The Assessing Officer disallowed the interest claimed by the assessee, leading to the penalty. The Court noted the failure of the Assessing Officer to consider the justification given by the assessee and the provisions of Explanation 1 to Section 271(1)(c) of the Act. The penalty was deemed unjust as the Assessing Officer did not adequately apply the provisions and failed to consider the reasons provided by the assessee.

Issue 2: Interest claimed as an "Adjustment relating to earlier years"

The case involved the assessee claiming interest as an "Adjustment relating to earlier years" in the assessment years 1999-2000 and 2000-2001. The interest capitalized on assets was challenged by audit objections, leading to decapitalization to comply with the audit findings. The Assessing Officer disallowed the claimed interest, resulting in the penalty under Section 271(1)(c). However, the CIT (A) and the Tribunal found the explanation given by the assessee to be bona fide, considering the adjustments made in compliance with audit recommendations. The Court upheld the findings, emphasizing that the assessee disclosed all relevant facts and acted in good faith.

Issue 3: Assessment of bonafide explanation

The Court examined the bonafide nature of the explanation provided by the assessee regarding the interest claimed as an "Adjustment relating to earlier years." The assessee's justification for capitalization and subsequent decapitalization of interest was found to be reasonable and disclosed in the returns. The Tribunal and CIT (A) concluded that the explanation was bona fide, considering the statutory audit process and compliance with audit recommendations. The Court upheld the decision, emphasizing that the assessee acted transparently and in accordance with accounting principles.

In conclusion, the High Court dismissed the appeals, upholding the findings of the Tribunal and CIT (A) regarding the bonafide nature of the assessee's explanation for the interest claimed as an "Adjustment relating to earlier years." The Court emphasized the importance of considering justifications provided by taxpayers and applying the provisions of the Income Tax Act accurately before imposing penalties for concealment of income.