2017 (4) TMI 104 - AT - Income Tax

Penalty u/s 271(1)(c) - Addition u/s 41(1) - Held that - We find that the assessee has disclosed all the facts and substantiated the same with the letter issued by the Bank on 30.06.2004 and 08.08.2005, wherein the Bank has given details of amount waived without any bifurcation of interest and principal amount. Therefore, the addition made on the basis of deeming provisions of Section 41(1) of the Act does not attract penalty u/s 271(1)(c) and its case is not covered by Explanation Clause B to Section 271(1)(c) as the assessee has substantiated its explanation that it was bona fide and all the facts relating to the same have been disclosed and as appearing from the profit and loss account and balance sheet. Based on the above facts of the case, it can be held that the assessee has made all the necessary disclosure on a bona fide belief which is not agreeable to the AO, which does not automatically lead to the case for penalty u/s 271(1)(c) The assessee is a sick company and has brought forward business losses from the earlier years and after making disallowance on account of interest also, the income comes to loss figure leaving further set off for brought forward losses. Therefore, there appears no motive to reduce the tax liability by not showing interest amount. We are, therefore, of the considered view that the penalty is not sustainable in law. Moreover, in the light of the decision of Hon ble Supreme Court in the case of CIT vs. Reliance petro Products Limited, (2010 (3) TMI 80 - SUPREME COURT ), wherein it was held that merely because the assessee has claimed expenditure, which claim was not accepted or was not found acceptable by the Revenue, penalty u/s 271(1)(c) cannot be attracted. - Decided in favour of assessee

Summary

Issues Involved:
1. Cancellation of penalty on estimated figure of interest.
2. Disclosure of facts related to waiver of interest in the return of income.
3. Apportionment of waiver amount between principal and interest.
4. Applicability of Section 41(1) of the Income Tax Act.
5. Justification for penalty under Section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Cancellation of Penalty on Estimated Figure of Interest:
The Revenue contended that the CIT(A) erred in canceling the penalty of ?55,34,753 on the grounds that no penalty could be levied on an estimated figure of interest. The CIT(A) observed that the assessee had fully disclosed the waiver amount in the profit and loss account, and the pro-rata bifurcation of the waiver amount by the AO was merely an estimation. Thus, such estimation could not be a ground for the levy of concealment penalty under Section 271(1)(c) of the Act.

2. Disclosure of Facts Related to Waiver of Interest in the Return of Income:
The CIT(A) noted that the assessee had disclosed the waiver of ?2.54 crores in the profit and loss account as income related to the previous year. The assessee contended that no facts were concealed, and no inaccurate particulars were furnished. The waiver was shown in the return of income and the annexed final accounts, indicating a one-time settlement with the bank.

3. Apportionment of Waiver Amount Between Principal and Interest:
The AO had apportioned the waiver amount between principal and interest based on a pro-rata calculation. The AO's method was found to be an estimation, as the bank did not provide a clear bifurcation of the principal and interest in the settlement letter. The CIT(A) and the Tribunal found that the AO's estimation could not be a basis for imposing a penalty.

4. Applicability of Section 41(1) of the Income Tax Act:
The AO invoked Section 41(1) of the Act, which deals with the remission or cessation of trading liabilities, to add the interest component of the waiver amount to the assessee's income. The CIT(A) and the Tribunal observed that the assessee had disclosed all relevant facts and the waiver amount in the profit and loss account. The addition made by the AO was based on an estimation, and the assessee's explanation was not found to be false.

5. Justification for Penalty Under Section 271(1)(c) of the Income Tax Act:
The Tribunal noted that penalty proceedings are distinct from assessment proceedings, and the findings in the assessment order are not conclusive for imposing a penalty. The assessee had disclosed all relevant facts and provided a bona fide explanation. The Tribunal held that the penalty under Section 271(1)(c) was not justified, as the addition was based on an estimation and the assessee had not concealed any particulars of income or furnished inaccurate particulars.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to cancel the penalty of ?55,34,753, concluding that the estimation of the interest component of the waiver amount could not be a ground for imposing a penalty. The assessee had disclosed all relevant facts, and the addition made by the AO was based on an estimation. The penalty under Section 271(1)(c) was not justified, and the appeal of the Revenue was dismissed.

Order Pronouncement:
The order was pronounced in the open court on 14.03.2017.