M/S. C.U. Built Engineers,, Pune vs Assessee

M/s C. U. Built Engineers, 513/2J Block, MIDC Bhosari, Pune - 411 026. PAN : AAAFC7483M .... Appellant

Vs.

Asstt. Commissioner of Income Tax, Circle- 8, Pune. .... Respondent

Assessee by : Mr. Kishor Phadke Department by : Mrs. Sunita Rao Date of hearing : 20-01-2015 Date of pronouncement : 18-03-2015

ORDER

PER G. S. PANNU, AM

The captioned appeal by the assessee is directed against the order of

the Commissioner of Income Tax (Appeals)-V, Pune dated 16.08.2013 which,

in turn, has arisen from an order dated 29.06.2012 passed by the Assessing

Officer u/s 271(1)(c) of the Income-tax Act, 1961 (in short "the Act") pertaining

to the assessment year 2009-10.

2. In this appeal, the only grievance of the assessee is against the action

of the lower-authorities in levying penalty of Rs.5,70,358/- u/s 271(1)(c) of the

Act.

3. In brief, the relevant facts are that assessee is a partnership firm

engaged in the business of manufacturing of Automatic Welding

Machine/Rotators and material handling systems. For the assessment year

under consideration, the return of income was filed declaring a total income of

Rs.6,49,49,564/- which was subject to a scrutiny assessment u/s 143(3) of the

Act dated 29.12.2011 and the total income was assessed at Rs.6,70,18,820/-. 2 ITA No.2006/PN/2013

The finally assessed income was higher than the returned income and

accordingly the Assessing Officer proceeded to hold assessee guilty of

furnishing inaccurate particulars of income within the meaning of section

271(1)(c) of the Act qua an amount of Rs.16,78,018/-. In an order dated

29.06.2012 passed u/s 271(1)(c) of the Act, the Assessing Officer has levied a

penalty of Rs.5,70,358/- on the above income for which assessee was stated

to have furnished inaccurate particulars of income in the return of income filed.

The penalty so imposed by the Assessing Officer has also been affirmed by

the CIT(A) and assessee is presently in appeal before us against the orders of

the lower authorities.

4. The penalty has been levied with respect of two additions made in the

quantum assessment proceedings, namely, Rs.16,31,668/- representing

interest paid to the partners disallowed; and, Rs.46,350/- representing

unsubstantiated purchases. In so far as the first addition is concerned, the

Assessing Officer found that the deduction claimed by the assessee on

payment of interest to the partners was wrongly calculated. The assessee firm

had claimed deduction for interest paid to partners at Rs.85,42,337/- whereas

as per the Assessing Officer only a sum of Rs.69,10,669/- was allowable

thereby resulting in a disallowance of Rs.16,31,668/-. The assessee had paid

interest to the partners @ 12% as per the partnership deed on which there is

no dispute. However, while calculating interest payable, assessee computed

interest @ 12% on the opening balance standing to the credit of the partners

as on 01.04.2008 i.e. at the beginning of the previous year relevant to the

assessment year under consideration. However, the Assessing Officer

computed the interest payable to the partners on the basis of working of

interest on day-to-day basis which resulted in a disallowance of

Rs.16,31,668/-. The aforesaid action of the Assessing Officer in the quantum

proceedings has since become final. As per the Revenue, the difference in

the amount of interest calculated by the assessee and that allowed by the 3 ITA No.2006/PN/2013

Assessing Officer constitutes furnishing of inaccurate particulars of income

within the meaning of section 271(1)(c) of the Act.

5. On this aspect, the Ld. Representative for the assessee submitted that

there was only a difference of opinion between assessee and the Assessing

Officer and that in-effect there was no attempt to conceal any income because

the income of the assessee firm as well as the individual partners was taxable

@ 30%. Therefore, the excess deduction on account of interest claimed in the

hands of the assessee firm has resulted in corresponding higher assessed

income in the hands of the individual partners and since the rate of taxation

was same being 30%, there was no attempt to save any taxes. At the time of

hearing, it was also submitted that the methodology adopted by the assessee

to compute interest was same as was done in earlier years and that the

dispute represented a bona-fide difference of opinion between assessee and

the Revenue.

6. On the other hand, the Ld. Departmental Representative appearing for

the Revenue has relied upon the orders of the authorities below in support of

the case of the Revenue and in-particular it is submitted that the error in

question was a factual error which cannot be held to be a bona-fide mistake.

According to the Ld. Departmental Representative, assessee has inflated

interest amount payable to the partners by calculating interest on the basis of

opening balance of the capital account and it was a deliberate action to claim

higher deduction on account of interest expenditure.

7. We have carefully considered rival submissions. Ostensibly, the claim

of the assessee for deduction of interest payable to the partners is in-principle

in conformity with the provisions of 40(b) of the Act. The payment of interest

to the partners is authorized by the partnership deed and such interest is

payable @ 12%, which is also in conformity with the requirements of section 4 ITA No.2006/PN/2013

40(b)(iv) of the Act. No doubt, the manner of calculation of interest payable to

the partners adopted by the assessee has been found to be unacceptable by

the Assessing Officer. So however, whether the methodology adopted by the

assessee to compute the interest payable to the partners is efficacious or not,

is not the issue presently before us. The Assessing Officer worked out the

interest payable to the partners on the basis of the day-wise balance

appearing in the capital account of the partners. No doubt, the methodology

adopted by the Assessing Officer is more amenable to prudence rather than

the methodology adopted by the assessee but there is nothing to suggest that

methodology adopted by the assessee was a deliberate attempt to claim

higher deduction on account of interest. Ostensibly, if in the hands of the

assessee firm higher deduction for interest outgo to partners was claimed, the

corresponding amount was also assessable in the hands of the individual

partners; and, it has been asserted before us that the rate of taxation in the

hands of the assessee firm as well as the individual partners is 30%, which

would show that there is no attempt to evade taxes. Moreover, it has also

been pointed out by the Ld. Representative for the assessee before us that

even in the earlier years assessee firm had calculated the interest payable to

the partners in the similar manner as done in this assessment year, with no

adverse comment from the Assessing Officer. This aspect of the matter has

not been negated by the Revenue before us. Moreover, the charge made

against the assessee that the methodology adopted by it to calculate interest

would result in a higher claim of deduction would only be true in situations

where the balance in the capital account of the partners decrease vis-à-vis the

balance standing on the opening day of the relevant year. Whereas, in

situation when there is a increase in the capital account of the partners vis-à-

vis the opening balance at the beginning of the year, then the methodology

adopted by the assessee to calculate interest would actually result in lower

deduction on account of the interest. Therefore, it cannot be said that the

claim made by the assessee in the return of income was lacking in bona-fides 5 ITA No.2006/PN/2013

or that it was a deliberate attempt to claim higher deduction on account of

interest. We therefore hold that the said addition would not constitute

furnishing of inaccurate particulars of income within the meaning of section

271(1)(c) of the Act.

8. The other disallowance subjected to penalty is a sum of Rs.46,350/-

with respect to the purchase of 20 Nokia handsets. The assessee could not

substantiate the said purchase except furnishing the invoices of the supplier.

On this count also, we find it is a case where the claim was found to be

unsubstantiated and it is not a case where the claim was found to be false or

bogus and therefore on this aspect also penalty u/s 271(1)(c) of the Act is not

imposable. Thus, we set-aside the order of the CIT(A) and direct the

Assessing Officer to delete the penalty of Rs.5,70,358/-.

9. In the result, the appeal of the assessee is allowed.

Order pronounced on 18 th March, 2015.

Sd/- Sd/- (SUSHMA CHOWLA) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER

Pune, Dated: 18 th March, 2015. Sujeet

Copy of the order is forwarded to: - 1) The Assessee; 2) The Department; 3) The CIT(A)-V, Pune; 4) The CIT-V, Pune; 5) The DR "B" Bench, I.T.A.T., Pune; 6) Guard File. By Order //True Copy// Assistant Registrar I.T.A.T., Pune