2025 (7) TMI 443 - AT - Income Tax

Penalty levied u/s 271(1)(c) - disallowance u/s. 43B - HELD THAT -Assessee had claimed deduction for interest disallowed u/s. 43B in assessment year 2007-08 in the current year under bonafide belief on treating the unpaid interest as income. It is relevant to consider that disallowance made in A.Y. 2007-08 was not allowed as relief in appeal at the time when the return for A.Y. 2012- 13 was filed. Therefore the claim of the assessee as made in the return for assessment year 2012-13 cannot be held as outrightly inaccurate. In view of these facts the AO was not correct in imposing penalty u/s. 271(1)(c) of the Act in respect of this claim. Thus invocation of Section 271(1)(c) is not justified and hence the appeal of the assessee is allowed.

Summary

Issues Presented and Considered

The core legal questions considered by the Appellate Tribunal were:

• Whether the penalty under Section 271(1)(c) of the Income Tax Act was rightly imposed on the assessee for allegedly furnishing inaccurate particulars of income in relation to the deduction claimed for interest payments in the assessment year 2012-13.
• Whether the claim of deduction of interest amounting to Rs. 1,11,96,029/- relating to assessment year 2007-08, which was disallowed in that year but subsequently allowed by the Tribunal and rectification order, could be considered as furnishing inaccurate particulars of income in the assessment year 2012-13 when claimed as deduction.
• The validity of the Assessing Officer's disallowance of the interest deduction and the consequent initiation of penalty proceedings under Section 271(1)(c).
• The correctness of the CIT(A)'s dismissal of the assessee's appeal against the penalty order.

Issue-wise Detailed Analysis

Issue 1: Legitimacy of penalty under Section 271(1)(c) for furnishing inaccurate particulars of income in AY 2012-13

Relevant Legal Framework and Precedents: Section 271(1)(c) empowers the Assessing Officer to levy penalty where a person is found to have concealed income or furnished inaccurate particulars of income. The provision requires a willful act of misreporting or concealment. The legal principle is that bona fide claims or bona fide errors do not attract penalty.

Court's Interpretation and Reasoning: The Tribunal noted that the interest amount of Rs. 1,11,96,029/- disallowed in AY 2007-08 was subsequently allowed by the Tribunal's order dated 10-07-2015 and the rectification order under Section 154 dated 10-02-2016. The assessee had withdrawn the appeal for AY 2012-13 before the CIT(A) since relief was obtained in the earlier years. The Tribunal emphasized that at the time of filing the return for AY 2012-13, the disallowance for interest in AY 2007-08 was still in place and the assessee had claimed the deduction under a bona fide belief treating the unpaid interest as income due to one-time settlement in AY 2012-13.

Key Evidence and Findings: The assessee had credited income of Rs. 6,70,05,849/- relating to interest waived under one-time settlement in AY 2012-13. The interest disallowed earlier was claimed as deduction in AY 2012-13 on the basis of this settlement. The Tribunal found that the claim was made in good faith and was not an attempt to conceal or furnish inaccurate particulars.

Application of Law to Facts: Since the disallowance in AY 2007-08 was not yet reversed at the time of filing AY 2012-13 return, the claim of deduction in AY 2012-13 could not be treated as inaccurate or concealment. The one-time settlement and subsequent relief granted by the Tribunal and Revenue justified the assessee's position. Therefore, invocation of penalty under Section 271(1)(c) was not warranted.

Treatment of Competing Arguments: The Revenue argued that the interest difference was not paid and hence penalty was justified. The Tribunal rejected this, holding that the assessee's treatment was bonafide and supported by the subsequent relief granted. The Tribunal found the Revenue's reliance on penalty order and CIT(A) order unconvincing in light of the facts.

Conclusions: The penalty under Section 271(1)(c) was not justified as the assessee did not furnish inaccurate particulars or conceal income in AY 2012-13.

Issue 2: Validity of disallowance of interest deduction and subsequent withdrawal of appeal before CIT(A)

Relevant Legal Framework and Precedents: The disallowance under Section 43B relates to interest payments not actually paid during the year. The legal principle is that deduction under Section 43B is allowed only when payment is made.

Court's Interpretation and Reasoning: The Tribunal noted that the Assessing Officer initially disallowed the interest claimed for AY 2007-08 and 2009-10. However, the Tribunal's order and rectification under Section 154 allowed the interest deduction. The assessee withdrew the appeal for AY 2012-13 before CIT(A) since relief was obtained through these orders.

Key Evidence and Findings: The rectification order dated 10-02-2016 allowed the interest deduction previously disallowed. The withdrawal of appeal before CIT(A) indicated acceptance of relief granted. The one-time settlement in AY 2012-13 was a new event justifying the accounting treatment adopted.

Application of Law to Facts: The withdrawal of appeal and rectification order effectively settled the issue of interest deduction. The disallowance in AY 2012-13 was thus not sustainable.

Treatment of Competing Arguments: The Revenue's insistence on penalty was based on the premise that interest was not paid. The Tribunal held that the one-time settlement and subsequent relief undermined this argument.

Conclusions: The disallowance of interest deduction for AY 2012-13 was not justified and the appeal withdrawal was appropriate in view of relief obtained.

Significant Holdings

The Tribunal held that:

"The treatment given in the profit and loss account for the present assessment year i.e. 2012-13 which was filed along with the returns filed on 11-09-2012 by the assessee cannot be treated as furnishing inaccurate particulars of income or concealment of income as at that point of time, the assessee was not allowed deduction of the interest of Rs. 1,11,96,029/- in respect of assessment year 2007-08."

"Since the assessee has entered into one time settlement in the assessment year 2012-13, and had credited income of Rs. 6,70,05,849/- being interest not paid as one time settlement, in the Profit and Loss Account. Therefore, the assessee had claimed deduction for interest of Rs. 1,11,96,029/- disallowed u/s. 43B in assessment year 2007-08, in the current year, under bonafide belief, on treating the unpaid interest as income."

"In view of these facts, the Assessing Officer was not correct in imposing penalty u/s. 271(1)(c) of the Act, in respect of this claim. Thus, invocation of Section 271(1)(c) is not justified and hence the appeal of the assessee is allowed."

The core principle established is that bona fide claims based on the circumstances prevailing at the time of filing return, especially where subsequent relief is granted, cannot be treated as furnishing inaccurate particulars or concealment attracting penalty under Section 271(1)(c). The Tribunal emphasized the importance of considering the factual matrix and subsequent developments before imposing penalty.

Final determinations:

• The penalty imposed under Section 271(1)(c) for AY 2012-13 was quashed.
• The claim of deduction of interest relating to AY 2007-08 in AY 2012-13 was held to be bonafide and not inaccurate.
• The withdrawal of appeal before CIT(A) was justified and the disallowance of interest was not sustainable.