Naresh Kumar, New Delhi vs Assessee

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH 'E', NEW DELHI Before Sh. N. K. Saini, AM And Sh. A. T. Varkey, JM ITA No. 6000/Del/2010 : Asstt. Year : 2007-08 Mr. Naresh Kumar, Vs Asstt. Commissioner of Income- A-6/3, Vasant Vihar, tax, Circle 24(1), New Delhi New Delhi (APPELLANT) (RESPONDENT) PAN No. AANPK6173D Assessee by : Sh. Salil Kapoor, Adv. & Sh. Sanat Kapoor, Adv. Revenue by : Sh. P. Dam Kanunjha, Sr. DR Date of Hearing : 05.02.2015 Date of Pronouncement : 27.04.2015

ORDER Per N. K. Saini, AM:

This is an appeal by the assessee against the order dated 27.10.2010 of ld. CIT(A)-XXIII, New Delhi.

2. Following grounds have been raised in this appeal:

"1. That the Authority below has erred both in law in imposing penalty u/s 271(1)(c) of I. T. Act amounting to Rs. 10,89,123/-

2. That the authority below has failed to consider that mere disallowance claim of interest does not tantamount to concealment of particulars/income.

3. That the appellant reserves its rights to amend, alter or raise any other additional grounds of appeal before or during the course of appellate proceedings."

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3. From the above grounds it would be clear that only grievance of the assessee relates to the confirmation of penalty levied by the AO u/s 271(1)(c) of the Income Tax Act, 1961 (hereinafter referred to as the Act). The facts of the case in brief are that the assessee filed the return of income on 16.11.2007 declaring an income of Rs. 2,44,55,373/-. However, the assessment was framed by the AO u/s 143(3) of the Act on 24.12.2009 at an income of Rs. 2,76,91,030/-. The AO made the addition of Rs. 32,35,660/- and initiated the penalty proceedings u/s 271(1)(c) of the Act. The AO pointed out that the assessee had shown income from other sources at Rs. 42,276/-, however, on perusal of the TDS certificates attached with the return of income relating to TDS on payment of interest u/s 194A of the Act, it was noticed that the assessee had also received interest from various companies amounting to Rs. 55,30,390/-. The AO asked the assessee to explain the discrepancy. In response the assessee submitted that the interest received, had been netted against the interest paid and filed the details of reconciliation of interest paid and received. From the said details, the AO found that against the rental income of Rs. 4,09,99,503/-, the assessee had not only claimed interest on housing loan taken from the bank amounting to Rs. 79,16,523/- but the net interest outflow derived by netting the total interest paid by the assessee to 3 concerns and the interest received from 8 concerns had also been set off against the income from House Property. The AO observed that since the interest paid on housing loan amounting to Rs. 79,16,523/- was only 3 ITA No.6000/Del/2010 Naresh Kumar

deductible u/s 24 of the Act, he, therefore, required the assessee to give justification in respect of balance interest payment of Rs. 70,22,831/- which had been reduced from the interest income of Rs. 55,30,319/- and set off wrongly against income from House Property. The AO was of the view that the interest received from and interest paid to companies should be hived off from the calculations under the head 'Income from House Property' and be separately dealt under the head 'Income from Other Sources, especially as the assessee was not carrying on any business. The AO observed that section 57(iii) of the Act, permits deduction in respect of an expenditure which was incurred solely for the purpose of earning the income that has been subjected to tax and the dominant purpose of the expenditure incurred must be to earn such income. A reference was made to the following case laws:

Ø Smt. Virmati Ramakrishna Vs CIT 131 ITR 659 (Guj.) Ø CIT Vs Sponge Iron India Ltd. (1992) 201 ITR 770 (AP) Ø Venkestwara Real Estate and Enterprise Ltd. Vs CIT 151 ITR 729 (Karnataka) Ø Smt. Slandamma Vs CIT 164 ITR 446 (Karnataka)

4. The AO asked the assessee to establish the nexus between the loans received and the loans given. In response, the assessee furnished copies of ledger accounts of respective concerns and claimed that the funds were arranged from various companies to whom interest had been paid, as well as the amount had been forwarded to the companies from whom the interest had been charged. The AO observed that the details furnished by 4 ITA No.6000/Del/2010 Naresh Kumar

the assessee revealed that the utilization of interest bearing loans towards extension of interest bearing advances to a certain extent which were not for the year under consideration but also pertained to Financial Years 2005-06 and 2004-05. The AO noticed that the total interest bearing loans which could have been held to have nexus with the loans advanced were of Rs. 4,20,80,000/- and the assessee himself had stated that interest @ 9% was payable on the loan amounts. The AO allowed the interest @ 9% of the above said amount and worked out the allowable interest of Rs.

37,80,200/- as against the claimed interest of Rs. 70,22,831/-. The AO also worked out the interest income from companies at Rs. 55,30,319/- and allowed the deduction u/s 57 of the Act for Rs. 37,87,200/-, the balance amounting to Rs. 17,43,119/- was held to be income from other sources and the deduction of Rs. 70,22,831/- claimed against income from House Property was disallowed in totality. Accordingly, impugned penalty u/s 271(1)(c) of the Act was levied.

5. The assessee in the penalty proceedings submitted to the AO that the complete details in respect of interest were furnished alongwith the return of income and that the interest received from different parties was subject to TDS. It was further stated that the complete details of interest paid were filed and net of interest had been claimed against income from House Property. It was further stated that the assessee had not concealed any income and nor furnished any particulars of income. Therefore, no penalty u/s 271(1)(c) of the Act was leviable. It was further stated that 5 ITA No.6000/Del/2010 Naresh Kumar

mere making of claim which was not sustainable in law by itself would not amount to furnishing of inaccurate particulars regarding income of the assessee. The reliance was placed on the following case laws:

Ø CIT Vs Reliance Petro Products Pvt. Ltd. (2010) 322 ITR 73 (SC) Ø CIT Vs Shahabad Co-op Sugar Mills (2002) 253 ITR 630 (Punj.& Har.) Ø CIT Vs Ajaib Singh & Co. (P&H)

6. The AO however did not find merit in the submissions of the assessee and observed that the assessee furnished inaccurate particulars of income to the extent of Rs. 32,35,660/- and the assessee had not filed any appeal against the said addition before the ld. CIT(A). Therefore, the deliberate misadventures invite penal action. The AO levied the penalty of Rs. 10,89,123/- u/s 271(1)(c) of the Act, reliance was placed on the following case laws:

Ø K. P. Madhusudanan Vs CIT 251 ITR 99 (SC) Ø CIT Vs Anwar Ali (1970) 76 ITR 696 (SC) Ø CIT Vs Gates Foam & Rubber Co. (1973) 91 ITR 467 (Kerala)

7. Being aggrieved the assessee carried the matter to the ld. CIT(A) who discussed the facts relating to the quantum addition in para 2, submissions of the assessee in penalty proceedings and the conclusion of the AO in paras 3 & 4 respectively of the impugned order. Thereafter in paras 5 & 6 of the impugned order the ld. CIT(A) made his observations and confirmed the penalty as under:

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"(5) I have considered the facts of the case and the basis of Assessing Officer to consider this a fit case for imposition of penalty under section 271(l)(c). The Authorized Representative of the appellant has relied upon the judgment of Apex Court in the case of CIT Vs Reliance Petroproducts Pvt. Ltd. 322 ITR

158. The Apex Court has held "A glance at the provision of section 271(1)(c) would suggest that in order to be covered, there has to be concealment of the particulars of income of the assessee. Secondly, the assessee must have furnished inaccurate particulars of income. Present is not the case of concealment of the income. That is not the case of Revenue either. As per Law Lexicon, the meaning of the word 'particular' is a detail or details (in plural sense); the details of a claim, or the separate items of an account. Therefore, the word 'particulars' used in s.

271(1)(c) would embrace the meaning of the details of claim made. It is an admitted position in the present case that no information given in the return was found to be incorrect or inaccurate. Hence, at least, prima facie, the assessee cannot be held guilty of furnishing inaccurate particulars. The words are plain and simple. In order to expose the assessee to the penalty unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing inaccurate particulars. Therefore, it is obvious that it must be shown that the conditions under section 271(1)(c) must exist before the penalty is imposed. There can be no dispute that everything would depend upon the return filed because that is the only document, where the assessee can furnish the particulars of his income.

Reading the words 'inaccurate' and 'particulars' in conjuction, they must mean the details supplied in the return, which are not accurate, not exact or correct, not according to truth or erroneous; In this case, there is no finding that any details 7 ITA No.6000/Del/2010 Naresh Kumar

supplied by the assessee in its return were found to be incorrect or erroneous or false. Such not being the case, there would be no question of inviting the penalty under section 271(l)(c). A mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such claim made in the return cannot amount to the inaccurate particulars. The assessee had furnished all the details of its expenditure as well as income in its return, which details, in themselves, were not found to the authorities to accept its claim in the or not. Merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the Revenue, that by itself would not attract the penalty under section 271(1)(c). If the contention of the Revenue is accepted then in case of every return where the claim made is not accepted by Assessing Officer for any reason, the assessee will invite penalty under section 271(l)(c). That is dearly not the intendment of the legislature. The Tribunal as well as the CIT(A) and the High Court have correctly reached this conclusion - Sree Krishna Electricals vs. State of Tamil Nadu & Am. (2009) 23 VST 249 (SC) applied; Reliance Petroproducts (P) Ltd. (judgment dated 23rd October, 2007 of the Gujarat High Court in Tax Appeal No. 1149 of 2007) affirmed."

(6) It is a question of fact whether there is a nexus between the interest paid and interest earned and the assessee was in the knowledge of the same at the time of filing of return of income. The Assessing Officer conducted intensive examination of various loans raised and given and utilization thereof to prove that there was no nexus between the interest debited and interest earned. It is riot a case where the assessee has made a legal claim and same has been disallowed instead the assessee has made a factually wrong claim by claiming an expense of interest which has not been incurred for earning the income under section 57. The assessee has also not submitted any 8 ITA No.6000/Del/2010 Naresh Kumar

logical explanation for doing same in the penalty proceedings. The primary onus is on the assessee to prove that inaccurate particulars have not been filed' or there is no concealment of income and this has not been discharged by the assessee. His reliance on Apex Court's judgment quoted above is misplaced as in this there is no legal disallowance. The Assessing Officer has proved beyond doubt that interest claimed was factually not allowable and the same has been accepted as correct by the assessee."

8. Now the assessee is in appeal. The ld. Counsel for the assessee submitted that the assessee neither concealed the income nor furnished inaccurate particulars of income, therefore, penalty u/s 271(1)(c) of the Act was not leviable. It was further stated that the assessee claimed the netting of the interest, however the AO did not allow the claim and disallowed a part of interest, the assessee did not prefer any appeal, therefore on this basis that a claimed the assessee was not accepted, penalty u/s 271(1)(c) of the Act was not leviable. Reliance was placed on the judgment of the Hon'ble Supreme Court in the case of CIT Vs Reliance Petro Products Pvt. Ltd. 322 ITR 158.

9. It was further stated that for levying the penalty u/s 271(1)(c) of the Act, the AO was required to record the satisfaction that the assessee concealed the income or furnished inaccurate particulars of income. However, the AO nowhere in the assessment order dated 24.12.2009 stated that he was satisfied that the assessee concealed the income or furnished inaccurate particulars of income. The ld. Counsel for the 9 ITA No.6000/Del/2010 Naresh Kumar

assessee drew our attention towards page no. 5 of the assessment order and stated that the AO while making the addition of Rs. 32,35,660/-, simply stated that penalty for furnishing of inaccurate particulars of income is initiated, therefore, the penalty u/s 271(1)(c) of the Act was not leviable. The reliance was placed on the judgment of the Hon'ble Jurisdictional High Court in the case of Ms. Madhushree Gupta Vs Union of India and Another (2009) 317 ITR 107. It was further stated that the AO while levying the penalty u/s 271(1)(c) of the Act held that the assessee intentionally furnished inaccurate particulars of income, the penalty proceedings were initiated for furnishing of the inaccurate particulars of income but the penalty was levied for concealment of income. Therefore, the AO wrongly applied the provision of Explanation 1 of section 271(1)(c) of the Act which applies only to the concealment of income and not for furnishing of inaccurate particulars of income. It was stated that in the earlier years similar claim of the interest was allowed so, the assessee was under a bonafide belief to make the claim of interest, therefore, penalty u/s 271(1)(c) of the Act was not leviable. The reliance was placed on the judgment of the Hon'ble Delhi High Court in the case of AT & T Communication Services India (P) Ltd. Vs DCIT (2010) 42 DTR 22. It was further stated that in subsequent year also similar addition was made but the penalty proceedings u/s 271(1)(c) of the Act were dropped. Accordingly, it was submitted that the ld. CIT(A) 10 ITA No.6000/Del/2010 Naresh Kumar

was not justified in confirming the action of the AO for imposing the penalty u/s 271(1)(c) of the Act.

10. In his rival submissions the ld. DR strongly supported the order of the authorities below and further submitted that the assessee concealed the income which was clear from this fact that no appeal was filed against the addition made by the AO which clearly established that the assessee himself admitted that the income shown by him was wrong. It was further stated that as per Explanation 1(b) to section 271(1)(c) of the Act, the penalty u/s 271(1)(c) of the Act was leviable to the facts of the present case and the ld. CIT(A) rightly confirmed the penalty levied by the AO.

11. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is noticed that the assessee claimed interest amounting to Rs. 79,16,523/- as deductible u/s 24 of the Act. The assessee also claimed interest of Rs. 70,22,831/- on the loans from certain companies which were utilized for purchase of property, investment in companies and giving loans etc. The assessee also received interest amounting to Rs. 55,30,319/- from different companies. The AO limited the interest @ 9% on the loans advanced amounting to Rs. 4,20,80,000/- and worked out the interest of Rs. 37,87,200/- which was allowed as deduction u/s 57 of the Act against the interest income of Rs. 55,30,319/-.

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12. From the above facts it is clear that the AO allowed the interest on estimate basis i.e. @ 9% amounting to Rs. 37,87,200/- as against the interest claimed at Rs. 70,22,831/-. In the present case, the assessee furnished all the particulars relating to the interest earned and paid but the claim of the assessee was not accepted in toto. Now question arises as to whether penalty u/s 271(1)(c) of the Act is leviable when the claim of the assessee is partly allowed. In this regard the Hon'ble Supreme Court in the case of CIT Vs Reliance Petro Products Pvt. Ltd. (2010) 322 ITR 158 (supra) held as under:

"A glance at the provisions of section 271(1)(c) of the Income- tax Act, 1961, suggests that in order to be covered by it, there has to be concealment of the particulars of the income of the assessee. Secondly, the assessee must have furnished inaccurate particulars of his income. The meaning of the word "particulars" used in section 271(1)(c) would embrace the details of the claim made. Where no information given in the return is found to be incorrect or inaccurate, the assessee cannot be held guilty of furnishing inaccurate particulars. In order to expose the assessee to penalty, unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By no stretch of imagination can making an incorrect claim tantamount to furnishing inaccurate particulars. There can be no dispute that everything would depend upon the return filed by the assessee, because that is the only document where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. To attract penalty, the details supplied in the return must not be accurate, not exact or correct, not according to the truth or erroneous.

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Where there is no finding that any details supplied by the assessee in its return are found to be incorrect or erroneous or false there is no question of inviting the penalty under section 271(1)(c). A mere making of a claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such a claim made in the return cannot amount to furnishing inaccurate particulars."

13. From the ratio laid down by the Hon'ble Supreme Court in the aforesaid referred to case it can be held that the penalty u/s 271(1)(c) of the Act was not leviable to the facts of the present case because the AO disallowed the claim of the assessee in part. In other words the AO estimated the interest payable on the loans @ 9% i.e. Rs. 37,87,200/- instead of actual amount paid at Rs. 70,22,831/-. However, all the particulars relating to the payment of interest were furnished to the AO., therefore, the penalty u/s 271(1)(c) of the Act was not leviable because the AO did not accept full claim of the assessee. In the present case, it is also noticed that the AO in the assessment order nowhere recorded his satisfaction that the assessee concealed the income or furnished inaccurate particulars of income, he simply stated as under:

"Penalty u/s 271(1)(c) of the Act for filing inaccurate particulars of income is being initiated separately."

14. From the above observation, it cannot be said that the AO was satisfied that the assessee concealed the income. On a similar issue the 13 ITA No.6000/Del/2010 Naresh Kumar

Hon'ble Jurisdictional High Court in the case of Ms. Madhushree Gupta Vs Union of India and Another (2009) 317 ITR 107 held as under:

"The legal position that power to impose penalty under section 271 of the Act depends upon the satisfaction of the Income-tax Officer in the course of the proceedings under the Act remains the case even after the insertion of section 271(1B). Prima facie satisfaction of the Assessing Officer as reflected in the record as against his "final conclusion" should be discernible clearly from the order passed during the course of such proceedings. The provision only provides that an order initiating penalty cannot be declared bad in law only because it states that penalty proceedings are initiated, if otherwise it is discernible from the record, that the Assessing Officer has arrived at prima facie satisfaction for initiation of penalty proceedings. The issue is of discernibility of the "satisfaction" arrived at by the Assessing Officer during the course of proceeding before him. Section 271(1)(c) has to be read in consonance with section 271(1B). The presence of prima facie satisfaction for initiation of penalty proceedings was and remains a jurisdictional fact. The contention that prima facie satisfaction of the Assessing Officer need not be reflected at the stage of initiation but only at the stage of imposition of penalty would render the provision arbitrary. The assessing Officer would in such a situation be in a position to pick a case for initiation of penalty merely because there is an addition or disallowance without arriving at a prima facie satisfaction with respect to infraction by the assessee of clause (c) of sub-section (1) of section 271 of the Act."

15. Similarly the Hon'ble Gujarat High Court in the case of CIT Vs Lakhdhir Lalji (1972) 85 ITR 77 held as under:

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"That the penalty proceedings had been commenced against the assessee on a particular footing, viz., concealment of particulars of income, but the final conclusion for levying the penalty was based on a different footing altogether, viz., on the footing of furnishing inaccurate particulars of income. Under the circumstances, it could not be said that the assessee had been given a reasonable opportunity of being heard before the order imposing the penalty was passed."The very basis for the penalty proceedings against the assessee initiated by the Income-tax Officer disappeared when the Appellate Assistant Commissioner held that there was no suppression of income by the assessee. The conclusion of the Tribunal that the Inspecting Assistant Commissioner had no jurisdiction to impose a penalty under section 271(1)(c) for concealment of income was correct."

16. In the present case also the AO in the course of assessment proceedings had not recorded any satisfaction while initiating the penalty proceedings, therefore, the penalty u/s 271(1)(c) of the Act was not leviable. In the present case, this contention of the ld. Counsel for the assessee that in the subsequent year similar claim was although disallowed but penalty proceedings were dropped was not rebutted. Therefore, on the identical facts in the year under consideration vis-à-vis the subsequent year penalty u/s 271(1)(c) of the Act was not leviable, particularly when the department itself dropped the penalty in the subsequent year in similar facts. In the instant case the assessee claimed the deduction on account of interest u/s 24 of the Act because it was claimed and allowed in the preceding year, therefore, the claim of the assessee was a bonafide claim based on a similar claim of the earlier year, 15 ITA No.6000/Del/2010 Naresh Kumar

the assessee disclosed all the facts relating to the payment of interest and claim of deduction before the AO. Therefore, only on this basis that the claim in full was not accepted by the AO, it cannot be said that the assessee concealed the particulars of his income or furnished inaccurate particulars of his income. As such the penalty u/s 271(1)(c) of the Act was not leviable. We, therefore, by considering the peculiar facts of this case as discussed hereinabove delete the penalty sustained by the ld. CIT(A).

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

(Order Pronounced in the Court on 27/04/2015)

Sd/- Sd/- (A. T. Varkey) (N. K. Saini) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 27/04/2015 *Subodh* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5.DR: ITAT ASSISTANT REGISTRAR