Penalty u/s 271(1)(c) on notional interest on debit balances in capital account of some partners deleted

Penalty u/s 271(1)(c) on disallowance of notional interest on debit balances in capital account of some of the partners deleted as in totality, partners capital had net credit balance.

ABCAUS Case Law Citation:
ABCAUS 3158 (2019) (09) ITAT

In the instant case, the appeal was filed by the assessee against the order of Commissioner of Income Tax (Appeals) in confirming the penalty levied by Assessing Officer u/s. 271(1)(c) of the Income Tax Act, 1961 (the Act).

The assessee was a partnership firm engaged in the business as a Transport Contractor. The return of the firm was selected for scrutiny.

During the course of assessment proceedings on perusal of the Balance-Sheet, Assessing Officer (AO) noticed that six partners of the firm were having debit balances in their respective capital accounts. The AO noted that on the aforesaid debit balances in their capital account, no interest was paid by them to the firm. Therefore, he worked out the interest at 12% on the debit balance of the partners and to that extent disallowed the interest paid to partners as claimed in the profit and loss account.

On the aforesaid disallowance, penalty u/s 271(1)(c) of the Act was levied by AO.

The CIT(A) confirmed the penalty. Aggrieved by the order of CIT(A), assessee was in appeal before the Tribunal.

The assessee submitted that assessee did not challenge the additions made by the AO in quantum proceedings as it was having huge carry forward losses.

He further submitted that the addition had been made on notional basis on the interest of the debit balance of the partners. He submitted that if the capital balance of all the 14 partners were considered then it was not the case of negative capital balance in the partners account in aggregate.

He therefore submitted that in such a situation, no penalty for concealment or furnishing of inaccurate particulars of income is leviable.

The Tribunal noted that the penalty had been levied on the disallowance of notional interest on the debit balances in the capital account of some of the partners. The capital account of all the partners when seen in totality revealed that it was not a case where the aggregate capital account of the partners was having debit balance but it was only in some of the cases where there is debit balance.

It was a case where the capital balance of six partners were having debit balances and the balance 12 partners had credit balance in their account and when the capital balance of all the partners were considered in totality, the partners capital showed net credit balance.

In view of the aforesaid facts, the Tribunal opined that no penalty was leviable in the instant case because it could not be said that assessee had concealed its income or furnished inaccurate particulars of income.

Accordingly, the penalty was directed to be deleted.

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