2025 (7) TMI 670 - AT - Income Tax

Penalty proceedings u/s 271(1)(c) - addition of the interest on FDR with cooperative bank by treating the same as Income from Other sources - assessee submits that the income of the assessee on FDRs with Co-operative Bank was exempted u/s 80P - HELD THAT - As in assessee s case 2025 (5) TMI 618 - ITAT DELHI has already deleted the penalty levied by observing that the addition cannot be sustained at this stage but once deduction is allowable to the assessee where the FDR were maintained in Co-operative Bank penalty u/s 271(1)(c) cannot be levied. Thus we hold that in this year there is no change in the facts and circumstances of the case where the income on which penalty is levied is with respect to the interest on FDRs with Co-operative Bank and the thus by following the ratio laid down by the Co-ordinate Bench as stated above penalty levied u/s 271(1)(c) of the Act in the year under appeal is hereby deleted. Accordingly all the grounds taken by the assessee are allowed.

Summary

The core legal questions considered in this appeal are:

1. Whether the interest income earned by the assessee society on Fixed Deposit Receipts (FDRs) maintained with a Co-operative Bank is taxable as "Income from Other Sources" or exempt under section 80P of the Income Tax Act, 1961.

2. Whether penalty under section 271(1)(c) of the Income Tax Act is leviable on such interest income, particularly when the assessee claims exemption based on judicial precedents and the concept of mutuality applicable to cooperative societies.

3. The legal effect of the assessee not filing further appeal against the order confirming the addition of interest income and whether such omission amounts to acceptance of concealed income attracting penalty.

4. The applicability and relevance of precedents, including decisions of coordinate benches of the Tribunal and the Supreme Court, in determining the levy of penalty under section 271(1)(c).

Issue-wise Detailed Analysis:

Issue 1: Taxability of Interest Income on FDRs Maintained with Co-operative Bank

The relevant legal framework involves section 80P of the Income Tax Act, which provides exemption to income of cooperative societies from certain specified sources, including interest on deposits with cooperative banks. The assessee society, registered under the Cooperative Societies Act as a no-profit-no-loss entity operating on the principle of mutuality, contended that the interest income on FDRs with a cooperative bank is exempt under section 80P.

The Assessing Officer (AO) treated the interest income as taxable under the head "Income from Other Sources" and made an addition of Rs. 52,90,600. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this addition. However, the assessee did not file further appeal against this order.

The assessee relied on decisions of coordinate benches of the Tribunal in its own case for other assessment years, where similar additions were deleted, and the exemption under section 80P was recognized. The Tribunal noted that in those decisions, the Tribunal held that interest income earned on FDRs with cooperative banks was eligible for exemption, and accordingly, additions were deleted.

The Court observed that the facts in the present year remain unchanged and that the coordinate bench decisions provide a binding precedent on the issue. Therefore, the addition of interest income as taxable income is not sustainable.

The Revenue's argument was that since the assessee did not challenge the addition in the present year, it amounted to acceptance of the addition and concealed income, thus justifying penalty. However, the Court distinguished this factual matrix from the Supreme Court decision in Mak Data Pvt. Ltd. vs CIT, where the assessee had initially offered additional income during a survey but later retracted and accepted the assessment, justifying penalty. Here, the income was not accepted as taxable but was omitted from appeal, and subsequent decisions held the income exempt.

Issue 2: Levy of Penalty under Section 271(1)(c)

Section 271(1)(c) penalizes concealment of income or furnishing inaccurate particulars of income. The AO levied penalty equal to 100% of the tax sought to be evaded on the addition of interest income.

The assessee argued that mere claim of exemption based on a bona fide interpretation of law supported by Supreme Court judgments cannot attract penalty. The Tribunal relied on coordinate bench decisions where penalty under section 271(1)(c) was deleted in similar circumstances involving interest income from cooperative bank FDRs.

The Tribunal emphasized that since the income was ultimately held exempt in other years and the addition was not sustained on merits, it cannot be regarded as concealed income. The assessee's failure to file further appeal did not amount to acceptance of concealment or furnishing inaccurate particulars.

The Revenue's reliance on the Supreme Court decision in Mak Data Pvt. Ltd. was found inapplicable due to materially different facts. The Court held that penalty cannot be imposed merely because the assessee did not pursue further appeal when the underlying addition itself is not sustainable and the income is exempt.

Issue 3: Effect of Non-Appeal Against Addition

The Revenue contended that non-filing of further appeal by the assessee amounted to acceptance of the addition and concealed income, justifying penalty. The Tribunal rejected this contention, noting that the subsequent and preceding years' decisions in the assessee's own case held the addition of interest income as not sustainable and exempt under section 80P.

The Court reasoned that the factual and legal position remained unchanged, and the non-appeal cannot be construed as acceptance of concealment or inaccurate particulars. The Tribunal distinguished this from cases where the assessee explicitly accepted concealed income, as in Mak Data Pvt. Ltd.

Issue 4: Precedents and Judicial Interpretation

The Tribunal relied heavily on coordinate bench decisions in the assessee's own case for other assessment years, where penalty was deleted on similar facts. The key observation from one such order was:

"In case the deposits are kept with FDRs with Delhi State Cooperative Bank, Darya Ganj branch and it means that the assessee has kept FDRs with a cooperative bank, the assessee is eligible for deduction. However, the addition is not challenged by the assessee. Hence, the addition cannot be questioned at this stage, but, once deduction is allowable to the assessee in case the assessee kept FDRs and earned interest on FDRs maintained with cooperative bank, penalty under Section 271(1)(c) or under Section 271A cannot be levied."

The Tribunal also distinguished the Supreme Court ruling in Mak Data Pvt. Ltd. on the basis of factual dissimilarity, emphasizing that penalty is leviable only when there is clear concealment or furnishing of inaccurate particulars, which was not the case here.

Conclusions:

The Tribunal concluded that the interest income earned on FDRs with cooperative banks is exempt under section 80P of the Income Tax Act, and the addition made by the AO and upheld by CIT(A) was not sustainable. Consequently, the income cannot be considered concealed income.

Accordingly, penalty under section 271(1)(c) cannot be levied merely because the assessee did not file further appeal against the addition, especially when coordinate benches have held the addition to be unsustainable and the income exempt.

The Tribunal deleted the penalty levied by the AO and confirmed by CIT(A), allowing all grounds of appeal taken by the assessee.

Significant Holdings:

"Once deduction is allowable to the assessee in case the assessee kept FDRs and earned interest on FDRs maintained with cooperative bank, penalty under Section 271(1)(c) or under Section 271A cannot be levied."

"The facts of the present case are totally distinguishable where the income added is finally held as exempt in other years and merely because no further appeal was filed, the AO observed that assessee has accepted the addition which was not the case of the assessee."

"Penalty under section 271(1)(c) is leviable only when there is concealment of income or furnishing of inaccurate particulars of income. Mere claim of exemption based on bona fide interpretation of law supported by judicial precedents cannot lead to levy of penalty."

The Tribunal established the principle that exemption under section 80P for interest income on FDRs with cooperative banks must be recognized, and penalty cannot be imposed where the addition is not sustainable on merits and the income is not concealed.

The final determination was to delete the penalty under section 271(1)(c) and allow the appeal of the assessee on all grounds.