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Income Tax Appellate Tribunal, “C” BENCH, AHMEDABAD
Before: SHRI PRADIP KUMAR KEDIA & SHRI MAHAVIR PRASAD
PER PRADIP KUMAR KEDIA - AM: The captioned appeals have been filed at the instance of the captioned assessees against the respective orders of the Commissioner of Income Tax (Appeals)-10, Ahmedabad (‘CIT(A)’ in short), all dated 24.03.2017 arising in the penalty orders dated 12.03.2015 (same in case of first assessee’s both years) & 05.03.2015 (in case of Inamulhaq S. Iraki) passed by the Assessing Officer (AO) under S. 271(1)(c) of the Income Tax Act, 1961 (the Act) concerning AYs. 2008-09, 2009-10 (both assessment years in case of Abdulhaq S. Iraki) & 2009-10 (in case of Inamulhaq S. Iraki).
Ground of appeal raised by the assessee in ITA No. 1334/Ahd/2017 reads as under:
“The learned CIT(A) has erred in law and on facts in holding that the AO has rightly levied penalty on account of disallowance of interest claimed u/s. 36(1)(iii) of the Act and thereby confirming the penalty to that extent.
Briefly stated, the assessee, an individual is a proprietor of M/s. Tarun Enterprises. The assessee filed return of income for AY 2008-09 in question declaring total income at Rs.52,37,940/-. The case was subjected to scrutiny assessment. In the course of the scrutiny assessment, the AO inter alia observed that assessee has given interest free advances to certain parties aggregating to Rs.42,26,366/-. The assessee was found to have lent the advances
ITA Nos. 1344 to 1346/Ahd/17 [Abdulhaq S. Iraki & Inamulhaq S. Iraki vs. DCIT] - 3 -
to the parties free of interest while it has debited interest expenses of Rs.22,56,050/- on money borrowed by him. The AO therefore disallowed interest expenses @ 12% on the amount advanced (Rs.42,26,366/-) and worked out disallowance of interest expenses at Rs.5,07,164/- on estimated basis. While doing so, it was alleged that assessee could not prove the commercial expediency in such advances and accordingly treated the interest expenses to the extent of Rs.5,07,164/- to be for non-business purposes. The aforesaid estimated disallowance also invited penalty under s.271(1)(c) of the Act @ 100% thereon.
In the first appeal, the CIT(A) also confirmed the penalty so imposed.
Further aggrieved, the assessee preferred appeal before the Tribunal.
We have considered the rival submissions and perused the orders of the authorities below. The controversy involves imposition of penalty u/s.271(1)(c) of the Act on disallowance on estimated interest expenses in proportion to the corresponding interest free advances given by the assessee. We straightway note that in order to attract penalty u/s.271(1)(c) of the Act, it is necessary that there must be concealment by the assessee of the particulars of his income or furnishing of inaccurate particulars. The disallowance of certain expenditure on estimated basis actually incurred on the grounds of lack of commercial expediency is neither concealment of any particulars of income per se nor furnishing of inaccurate particulars as such. Needless to say, before penalty can be imposed, the entirety of circumstances must
ITA Nos. 1344 to 1346/Ahd/17 [Abdulhaq S. Iraki & Inamulhaq S. Iraki vs. DCIT] - 4 -
reasonably point to the conclusion that the disputed amount represents income and the assessee has concealed the particulars thereof or furnished inaccurate particulars. The AO in the instant case has disallowed a portion of interest expenditure on proportionate basis on the ground that assessee has lent money without charging interest. It is not the case of the AO that assessee has in fact not incurred any interest expenditure as claimed. A conspectus of the Explanation – 1 to Section 271(1)(c) of the Act makes it clear that the statute visualized the assessment proceedings and penalty proceedings to be wholly distinct and independent of each other. While the AO may be justified in making estimated disallowance in quantum proceedings, such disallowance of expenses, that too on estimated basis, could not automatically fall within mischief of Section 271(1)(c) of the Act. While a claim towards expenditure may not found acceptable in quantum proceedings, such disallowance cannot invite by way of penalty. When all material facts relevant to the said claim were placed on record, the presence or absence of commercial instinct in a given case is a matter of inference. Such adverse inference against assessee would not attract imposition of penalty. The claim of expenditure towards interest made at best be taken as erroneous claim by the assessee. Such claim made in a bonafide manner cannot lead imposition of penalty. Although such claim may not be maintainable for the purposes of quantum proceedings however, in the absence of any falsity per se in such claim, making an incorrect claim for deduction is not at par with concealment or inaccurate particulars of income. The penalty, in our view, is clearly not maintainable in the absence of any contumacious or dishonest conduct.
ITA Nos. 1344 to 1346/Ahd/17 [Abdulhaq S. Iraki & Inamulhaq S. Iraki vs. DCIT] - 5 -
Consequently, we set aside the order of the CIT(A) and direct the AO to delete the penalty on disallowance of estimated interest expenditure.
In the result, appeal of the assessee is allowed.
The other two appeals of the respective assessees in ITA No. 1345/Ahd/2017 (in case of Abdulhaq S. Iraki) & ITA No. 1346/Ahd/2017 (Inamulhaq S. Iraki) stand on identical facts and raises identical controversy. In parity with the reasonings adopted in ITA No.1345/Ahd/2017, the penalty on disallowance of estimated interest expenditure is not sustainable in law.
In the combined result, all the three appeals of respective assessees are allowed.
This Order pronounced in Open Court on 30/04/2019
Sd/- Sd/- (MAHAVIR PRASAD) (PRADIP KUMAR KEDIA) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad: Dated 30/04/2019 True Copy S. K. SINHA आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. राज�व / Revenue 2. आवेदक / Assessee 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाइल / Guard file. By order/आदेश से,
उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद ।