2020 (1) TMI 817 - AT - Income Tax

Penalty u/s 271(1)(c) - assessee has not declared interest income on loans and advances on accrual basis , even though the assessee was following mercantile system of accounting - HELD THAT - Assessee has not declared interest accrued but not received by it in its return of income and the same was declared only during the course of assessment proceedings. As explained that, as per the Circulars issued under Karnataka Society s Act and Rules, NABARD and RBI, it was required to account for the interest income on realization basis. There is some valid reason for the assessee in not declaring interest accrued but not received by it. There is also no dispute with regard to the fact that the assessee has offered interest income whenever it has realized it. Before the CIT(A) the assessee has furnished details of interest adjustments required to be made u/s 145 of the Act in the financial year 2010-11 and 2011-12 relevant to the asst. years 2011-12 and 2012-13 Interest adjustments warranted an addition of ₹ 209.81 lakhs during the year under consideration and, while in the succeeding asst. year i.e. asst. year 2012-13, it warrants reduction of the total income by ₹ 363.76 lakhs. According to the assessee it has not claimed deduction of above said amount in asst. year 2012-13. These facts would show to that the interest income is not altogether concealed, but accounted for in the succeeding years on receipt basis , According to the assessee, the above system is followed in consonance with certain principles directed to be followed by its controlling authorities. In effect, it results in shifting of income from one year to another year only. Hence explanations furnished by the assessee cannot be said to be false. We also notice that the AO has also not found it to be false or fount it to be not bonafide. In any case, the system so followed by the assessee results in shifting of income from one year to another year and the said practice, according to the assessee, is supported by the directions given by the controlling authorities. The impugned addition would not give rise to levy of penalty u/s 271(1)(c) - Decided in favour of assessee.

Summary

Issues:
Penalty under section 271(1)(c) of the Income Tax Act for furnishing inaccurate particulars of income.

Analysis:
The appellant, a Co-operative Central Bank, challenged a penalty of ?64.83 lakhs imposed by the Assessing Officer (AO) under section 271(1)(c) of the Income Tax Act for the assessment year 2011-12. The AO noticed that the appellant did not declare interest income on loans and advances on an accrual basis despite following the mercantile system of accounting. The AO assessed the unaccounted interest accrued by the appellant, leading to the penalty initiation. The appellant argued that it was bound by the Karnataka Co-operative Society's Act and Rules, requiring interest income to be accounted for on a realization basis. The appellant provided detailed explanations during assessment proceedings, emphasizing compliance with statutory provisions and the method of accounting prescribed by controlling authorities.

The AO, however, was unconvinced by the explanations and levied the penalty, which was upheld by the ld CIT(A). The appellant contended that the penalty should be deleted as the explanations were reasonable and based on facts. The appellant cited legal precedents supporting their position, including the decision of the Hon'ble Karnataka High Court and the principles of the "real income theory." The ld AR argued that the penalty was unjustified given the circumstances and compliance efforts of the appellant. On the contrary, the ld DR asserted that the appellant deliberately omitted declaring accrued interest, justifying the penalty imposition.

Upon review, the Tribunal acknowledged the appellant's adherence to the Co-operative Society's Act and Rules but noted the requirement of declaring interest income under the Income Tax Act. The Tribunal recognized the validity of the appellant's explanations and the practice of shifting income between years as per regulatory guidelines. Considering the circumstances, the Tribunal concluded that the penalty under section 271(1)(c) was unwarranted and directed the AO to delete the penalty. Additionally, a legal issue regarding the sanction by the Joint Commissioner of Income Tax was raised by the appellant but not addressed due to the merit-based resolution.

In conclusion, the Tribunal allowed the appeal, setting aside the penalty and emphasizing the appellant's compliance with regulatory provisions and the practice of income recognition based on specific guidelines. The judgment was pronounced on 17th January 2020.