Penalty u/s 271(1)(c) on disallowance of interest expenses towards interest free advances deleted

Penalty u/s 271(1)(c) on proportionate disallowance of interest expenses towards interest free advances given by the assessee deleted

ABCAUS Case Law Citation:
ABCAUS 2941 (2019) (05) ITAT

Important Case Laws Cited/relied upon by the parties
CIT vs. Dalmia Dyechem Industries Ltd.

The assessee had filed an appeal against the order of the Commissioner of Income Tax (Appeals) confirming the penalty order passed by the Assessing Officer (AO) under section 271(1)(c) r.w.s. 274 of the Income Tax Act, 1961 (the Act).

In the course of the scrutiny assessment, the AO inter alia observed that assessee had given interest free advances to certain parties. The assessee was found to have lent the advances to the parties free of interest while it has debited interest expenses on money borrowed by him.

The AO therefore disallowed proportionate interest expenses on the amount advanced free of interest and worked out disallowance of interest expenses on estimated basis. According to the AO, the assessee could not prove the commercial expediency in such advances.

The aforesaid estimated disallowance also invited penalty u/s 271(1)(c) of the Act @ 100% thereon.

The Tribunal noted that that in order to attract penalty u/s 271(1)(c) of the Act, it is necessary that there must be concealment by the assessee of the particulars of his income or furnishing of inaccurate particulars.

The Tribunal pointed out that the disallowance of certain expenditure on estimated basis actually incurred on the grounds of lack of commercial expediency is neither concealment of any particulars of income per se nor furnishing of inaccurate particulars as such.

The Tribunal further stated that before penalty can be imposed, the entirety of circumstances must reasonably point to the conclusion that the disputed amount represents income and the assessee has concealed the particulars thereof or furnished inaccurate particulars.

The Tribunal noted that the AO, in the instant case had disallowed a portion of interest expenditure on proportionate basis on the ground that assessee had lent money without charging interest. It was not the case of the AO that assessee had in fact not incurred any interest expenditure as claimed.

The Tribunal observed that a conspectus of the Explanation – 1 to Section 271(1)(c) of the Act makes it clear that the statute visualized the assessment proceedings and penalty proceedings to be wholly distinct and independent of each other. While the AO may be justified in making estimated disallowance in quantum proceedings, such disallowance of expenses, that too on estimated basis, could not automatically fall within mischief of Section 271(1)(c) of the Act.

The Tribunal explained that while a claim towards expenditure may not found acceptable in quantum proceedings, such disallowance cannot invite by way of penalty. When all material facts relevant to the said claim were placed on record, the presence or absence of commercial instinct in a given case is a matter of inference. Such adverse inference against assessee would not attract imposition of penalty.

The Tribunal opined that in the instant case, the claim of expenditure towards interest made at best be taken as erroneous claim by the assessee. Such claim made in a bonafide manner cannot lead imposition of penalty. Although such claim may not be maintainable for the purposes of quantum proceedings however, in the absence of any falsity per se in such claim, making an incorrect claim for deduction is not at par with concealment or inaccurate particulars of income.

The Tribunal also took note of the decision of the Hon’ble High Court wherein it was held that the penalty cannot be imposed unless the action of the assessee per se is dishonest, malafide and amounting to concealment of facts.

The Tribunal opined that in the case in hand, there, being no concealment of fact per se imposition of penalty was not justified. The penalty was clearly not maintainable in the absence of any contumacious or dishonest conduct.

Consequently, the Tribunal we set aside the order of the CIT(A) and directed the AO to delete the penalty on disallowance of estimated interest expenditure.

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