SHRI NISHITH PRABHATBHAI DESAI,,AHMEDABAD vs. THE INCOME TAX OFFICER, WARD-5(2)(3),, AHMEDABAD

The captioned appeal has been filed at the instance of the assessee against the order of the Commissioner of Income Tax (Appeals)-5, Ahmedabad (‘CIT(A)’ in short), dated 12.12.2017 arising in the penalty order dated 31.03.2016 passed by the [Nishith P. Desai Vs. ITO] A.Y. 2010-11 - 2 - Assessing Officer (AO) under s. 271(1)(c) of the Income Tax Act, 1961 (the Act) concerning AY 2010-11.

As per the grounds of appeal, the assessee has impugned the action of the CIT(A) in sustaining the penalty of Rs.2,05,000/- under s. 271(1)(c) of the Act.

When the matter was called for hearing, none appeared for the assessee. It is seen from the record that the notice was properly served on the assessee, therefore, the matter is proceeded ex parte in the absence of the assessee.

The learned DR for the Revenue relied upon the lower authorities.

We have considered the submissions made on behalf of the Revenue as well as perused the orders of the authorities in quantum proceedings and in penalty proceedings. The relevant facts are that the assesse had claimed deduction in respect of interest paid to Kotak Mahindra Bank Ltd. amounting to Rs.7,85,850/- out of ‘income from other sources’. The assessee has declared interest income of Rs.1,25,000/- under the head ‘income from other sources’. The assessee explained before the AO that he procured a secured term loan from Kotak Mahindra Bank alongwith family members in the earlier years on mortgage of joint property. It was contended that the loan was applied and utilized for the purposes of earning interest income. The AO disbelieved the narrative of the assessee and rejected the deduction claimed against the interest income to the extent [Nishith P. Desai Vs. ITO] A.Y. 2010-11 - 3 - incurred in excess of interest income of Rs.1,25,000/-. The penalty was consequently imposed on such disallowance.

The subject matter of penalty under s. 271(1)(c) of the Act is disallowance of the aforesaid interest expenses of Rs.6,60,850/-. It is noticed from the case records that the assessee has duly disclosed relevant facts before the AO without any reservation. The fact of the incurring of expenditure was also supported with the relevant evidences. The disallowance was sustained in the quantum proceedings as the assessee did not succeed in proving how the borrowed funds from Kotak Mahindra Bank were utilized. The nexus was not proved for utilization of money from borrowed funds. The penalty has been imposed as the expenditure claimed was not found to be allowable. In this regard, we note the observations of the Hon’ble Supreme Court in the case of CIT vs. Reliance Petro Products Pvt. Limited (322 ITR 158) (SC). The Hon’ble Supreme Court has observed that no penalty is justified where all the details of expenditure as well as income in its return, which details, in themselves, were not found to be inaccurate nor could be viewed as the concealment of income on its part. It was up to the authorities to accept its claim in the return or not. Merely because the assessee had claimed the expenditure which claim was not accepted or was not acceptable to the Revenue, by itself, would not attract penalty under s. 271(1)(c) of the Act. We notice that similar circumstances exist in the present case. Guided by the principles laid down by the Hon’ble Supreme Court, we find merit for non-applicability of penalty in the absence of any falsity in the particulars furnished. The AO has admitted the claim of interest expenditure to the [Nishith P. Desai Vs. ITO] A.Y. 2010-11 - 4 - extent of interest income and therefore one cannot definitely say that interest expenditure was not utilized for the purpose of earning interests. The disallowance of excess expenditure over and above similar income generated, cannot, in our view, invite penal action in the form of penalty. The order of the CIT(A) is accordingly set aside and the AO is directed to delete the penalty.

In the result, the appeal of the assessee is allowed ex parte.