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2006 (3) TMI 229 - AT - Income TaxDeduction of interest paid on monies borrowed for purchase of shares - distributed profits of domestic companies - Penalty levied u/s 271(1)(c) - For Concealment Of Income - HELD THAT:- The crux of the findings is that there is a direct nexus established between the interest bearing loans taken by the assessee and the investment made in the equity shares. The only income arising from the holding of the shares is dividend income which is exempt u/s 10(33). The assessee incurred expenditure for earning exempted dividend income. Section 14A which has been inserted by the Finance Act, 2001 with effect from 1-4-1962 laying down that no deduction would be allowed in respect of the expenditure incurred by the assessee in relation to the income, which does not form part of the total income under this head. The assessee is, therefore, not entitled for the above deduction of interest u/s 36(1)(iii) of the Income-tax Act. The authorities below, therefore, rightly disallowed the amount against the assessee. It is also established that the dividend income was earned by the assessee out of the investment in shares. Merely because the assessee did not earn dividend out of the investment in certain shares by itself would not prove that the provisions of section 14A are not applicable in this case. It is not a hard and fast rule that on each and every investment in shares, the assessee would earn dividend. The earning of the dividend is not certain, unless the concerned company declared and distributed the dividend because it depends on various factors. The established facts are that the entire borrowed unsecured loans have been invested in the shares for the purpose of earning dividend. Therefore, once the assessee claims exemptions on dividend income u/s 10(33) of the Income-tax Act then such dividend is directly related to the investment made in the entire shares. As such it is not possible to accept the alternative contention of the learned counsel for the assessee that part of the interest may be disallowed. This contention of the learned counsel for the assessee is also rejected. No other point is argued or pressed. Thus, we do not find any merit in the appeal of the assessee. The same is, therefore, dismissed. Penalty levied u/s 271(1)(c) - For Concealment Of Income - HELD THAT:- It is well-settled law that the quantum and penalty are independent proceedings. Section 271(1)(c) of the Act provides that if the Assessing Officer or the CIT(A) or the Commissioner in the course of any proceedings under this Act is satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty. The bare reading of the aforesaid provisions would make it clear that the Assessing Officer has to form his own opinion and record his satisfaction before initiating penalty proceedings. Merely because the penalty proceedings have been initiated, it cannot be assumed that such a satisfaction was arrived at in the absence of the same being spelt out by the order of the Assessing Authority. In the present case before us, the Assessing Officer has nowhere recorded his satisfaction with regard to the concealment of the particulars of income or furnishing inaccurate particulars of income in the assessment order or while dealing with the addition on account of disallowance of the interest paid on the borrowed funds by the assessee. As is noted, the assessment order passed by the Assessing Officer clearly shows that the satisfaction for initiating the penalty proceedings u/s 271(1)(c) was not recorded by the Assessing Officer in the assessment order and, therefore, we hold that the initiation of the penalty proceedings was not in accordance with law as envisaged by Delhi High Court in the cases of Ram Commercial Enterprises Ltd.[1998 (10) TMI 13 - DELHI HIGH COURT], B.R. Sharma [2005 (2) TMI 50 - DELHI HIGH COURT] and Super Metal Re-Rollers (P.) Ltd [2003 (9) TMI 51 - DELHI HIGH COURT] and as such penalty imposed in pursuance of such invalid proceedings is liable to be cancelled on this ground alone. The same is taken by the I.T.A.T., Delhi 'E' Bench in the case of Balka Services (P.) Ltd.[2005 (4) TMI 266 - ITAT DELHI-E]. Thus, the penalty is cancelled u/s 271(1)(c) of the Income-tax Act. As a result, the appeal by the assessee is allowed.
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