2025 (5) TMI 1485 - AT - Income Tax

Penalty u/s 270A - denial of Claim of interest on housing loan against a rental income - AO denied the benefit of carry forward of the loss as assessee has not substantiated that the property was actually let out and that the assessee owns the property with his parents and therefore cannot claim the entire interest. HELD THAT - The assessee during the year under consideration filed the return declaring Nil income and the loss under the head Income from House Property was not set off against any income resulting in any benefit to the assessee. The carry forward loss under the head Income from House Property can be set off only against the income under the head Income from House property. Therefore there is merit in the argument of assessee has not derived any benefit by the alleged non-genuine rental income to claim huge loss. Assessee has not preferred any further appeal against the denial of carry forward of loss. Mere fact that there exists a provision for levy of penalty it does not mean that the levy of penalty is mandatory. Whether penalty should be imposed is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances as has been held in the case of Hindustan Steel Ltd. v. State of Orissa 1969 (8) TMI 31 - SUPREME COURT . The discretionary power under the penalty provisions is not arbitrary and has to be guided by well-established principles depending upon the facts and circumstances of each case. We find that this is a fit case where the AO could have exercised the discretion not to impose penalty - Assessee appeal allowed.

The core legal questions considered by the Tribunal in this appeal are:

1. Whether the assessee's claim of loss under the head "Income from House Property" by carrying forward interest on housing loan against rental income was justified and correctly disallowed by the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) (CIT(A)) due to lack of documentary evidence of actual rental activity and joint ownership of the property with parents?

2. Whether the denial of carry forward of loss on these grounds constitutes misreporting of income warranting penalty under section 270A of the Income Tax Act, 1961?

3. Whether the penalty imposed under section 270A for alleged misreporting was justified, considering the facts that the assessee is a non-resident individual with exempt income and no taxable income in India, and that the loss was not set off against any income?

4. Whether the delay of 75 days in filing the appeal before the Tribunal should be condoned?

Issue-wise Detailed Analysis

1. Justification for denial of carry forward of loss under Income from House Property

The relevant legal framework includes the provisions under the Income Tax Act relating to computation of income from house property, conditions for claiming interest deduction on housing loans, and rules governing carry forward and set off of losses under this head. The AO disallowed the carry forward of loss primarily on two grounds: (i) the assessee failed to prove that the property was actually rented out as no formal rental agreement or documentary evidence was furnished, and (ii) the property was jointly owned by the assessee and his parents, yet the entire interest on the housing loan was claimed by the assessee, which was not substantiated by the loan certificate showing three names.

The assessee contended that the property was rented from January to April 2020 at Rs. 40,000 per month, but no formal agreement was executed as the assessee was working on a ship and the parents, who are super senior citizens, were unable to comply with formalities. The assessee also submitted that the loan was funded entirely by him and the parents' names were added only nominally. The Tribunal noted that the property was primarily for the parents' use and the assessee had no taxable income in India, thus no real benefit was derived from the claimed loss. The loss under house property can only be set off against income from the same head, and since the assessee declared nil income, the loss was not utilized.

The Tribunal recognized that the AO and CIT(A) had denied the carry forward due to lack of documentary proof and joint ownership issues, but also observed that the assessee had furnished all relevant details during assessment proceedings. The Tribunal emphasized that the absence of a formal rental agreement alone cannot be treated as misreporting. The factual position that the assessee was on sail and the property was used by the parents was accepted as reasonable explanation.

2. Legitimacy of penalty under section 270A for misreporting of income

The penalty provisions under section 270A are invoked for misreporting of income, which includes underreporting or overstating losses. The AO initiated penalty proceedings on the basis that the assessee had misreported income by claiming a large loss without substantiation and by claiming entire interest deduction despite joint ownership. The assessee argued that there was no deliberate misreporting or concealment, and that all information was furnished during assessment. It was also pointed out that the AO did not doubt the genuineness of the interest claim but disallowed the loss carry forward on technical grounds.

The Revenue argued that mens rea (intent) is not required for penalty under section 270A, which is civil in nature, and that the assessee's failure to substantiate rental income and interest claim amounted to misreporting.

The Tribunal referred to the Supreme Court's decision in Hindustan Steel Ltd. v. State of Orissa, which held that imposition of penalty is discretionary and must be exercised judicially considering all facts and circumstances. The Tribunal found that the assessee had not derived any tax benefit from the claimed loss, had disclosed all relevant facts, and that the denial of carry forward was not tantamount to deliberate misreporting. Consequently, the Tribunal held that the AO could have exercised discretion not to impose penalty and that the penalty levy was not justified in the facts of this case.

3. Condonation of delay in filing appeal

The Tribunal considered the application for condonation of delay of 75 days in filing the appeal. Relying on the Supreme Court precedent in Collector, Land Acquisition Vs. MST. Katiji & Ors., the Tribunal found sufficient cause for the delay and condoned it, admitting the appeal for adjudication.

Significant Holdings

The Tribunal held that "mere fact that the rental agreement was not made available was only reason for denial of carry forward of loss under the head 'Income from House Property' and that the same cannot be treated as misreporting of income by the assessee."

It further observed that "whether penalty should be imposed is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances," and that "the discretionary power under the penalty provisions is not arbitrary and has to be guided by well-established principles depending upon the facts and circumstances of each case."

On the question of penalty, the Tribunal concluded: "Considering the overall facts and circumstances of the present case, we find that this is a fit case where the AO could have exercised the discretion not to impose penalty."

Regarding the delay in filing the appeal, the Tribunal stated: "Having heard both the parties and perused the material on record, we are of the view that there is a reasonable and sufficient cause for the delay in filing the appeal before the Tribunal," and accordingly condoned the delay.

Ultimately, the Tribunal allowed the appeal, set aside the penalty imposed under section 270A, and directed the AO to delete the penalty.

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