FOODS AND INNS LIMITED ,MUMBAI vs. DCIT, CIRCLE 2(1)(1), MUMBAI

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ITA 4926/MUM/2025Status: DisposedITAT Mumbai15 December 2025AY 2015-166 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the levy of penalty under Section 271(1)(c) was not justified. The Tribunal noted an initial ambiguity in the AO's notices regarding the specific limb of Section 271(1)(c) under which the penalty was levied, which vitiated the proceedings. On merits, the Tribunal found that the assessee had disclosed all material facts concerning the interest expenditure claim. The disallowance arose from a difference of opinion regarding the allowability of interest under Section 36(1)(iii), specifically whether the asset acquisition constituted business extension or expansion. The Tribunal considered the claim not to be ex facie false or baseless, and the AO had not provided material to demonstrate concealment or inaccurate particulars. Citing the Supreme Court's decision in Reliance Petroproducts Pvt. Ltd., the Tribunal reiterated that mere disallowance of a claim, even if unsustainable, does not automatically attract penalty if the claim is bona fide and all particulars are disclosed. Consequently, the penalty imposed by the AO and confirmed by the CIT(A) was deleted. The grounds of appeal were allowed.

What were the facts?

The assessee, Foods and Inns Ltd., is appealing an order dated 16.06.2025 by the CIT(A) - NFAC, Delhi, which confirmed a penalty levied under Section 271(1)(c) of the Income-tax Act, 1961, for Assessment Year 2015-16. The penalty stemmed from the disallowance of ₹3,09,360/- in interest expenditure on borrowed funds used for capital assets, which the Assessing Officer (AO) deemed not allowable under Section 36(1)(iii) until the assets were put to use. This disallowance was confirmed in quantum proceedings. The AO subsequently initiated penalty proceedings, alleging the assessee furnished inaccurate particulars of income. The penalty amount was ₹1,19,060/-. The CIT(A) confirmed the penalty, relying on the sustained quantum addition.

What were the issues?

1. Whether the CIT(A) erred in confirming the penalty order passed under Section 271(1)(c) of the Income-tax Act, 1961, when the disallowance of interest expenditure under Section 36(1)(iii) was based on a difference of opinion regarding capitalization and the assessee had not furnished inaccurate particulars of income as per Explanation 1 to Section 271(1)(c)? Assessee's Contention: The assessee argued that the claim for interest expenditure was made bona fide, and no false or inaccurate particulars were furnished. The borrowed funds were used for expansion and improvement of existing business operations, not a new line of business, making the claim debatable. Reliance was placed on the Supreme Court's decision in CIT v. Reliance Petroproducts Pvt. Ltd. (322 ITR 158), stating that mere rejection of a claim does not constitute furnishing inaccurate particulars. The assessee also contended that the penalty order lacked specific findings and reasons, was mechanical, and failed to establish the falsity of the assessee's explanation, disregarding the principles laid down in Reliance Petro Products Pvt. Ltd. and Dilip N Shroff vs JCIT. Revenue's Contention: The revenue, through the CIT(A)'s order, contended that since the disallowance of interest expenditure was sustained in quantum proceedings, the levy of penalty was justified. The CIT(A) found no infirmity in the AO's penalty order.

Which sections of the Income-tax Act were involved?

Section 271(1)(c),Section 36(1)(iii)

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Income Tax Appellate Tribunal, MUMBAI BENCH “F” MUMBAI

Before: SHRI OM PRAKASH KANT & SHRI RAJ KUMAR CHAUHAN

For Appellant: Mr. Nitin Kulkarni
For Respondent: Ms. Kavita Kaushik, Sr. DR
Pronounced: 17/09/2025

ORDER PER OM PRAKASH KANT, AM

This appeal by the assessee is directed against order dated 16.06.2025 passed by the Ld. Commissioner of Income-tax (Appeals) – National Faceless Appeal Centre, Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2015-16 in relation to penalty u/s 271(1)(c) of the Income-tax Act, 1961 (in short ‘the Ld. CIT(A)’] levied by the Assessing Officer.

2.

The grounds raised by the assessee are reproduced as under: ITA No.

On the facts and circumstances of the case and in law CIT (A) has On the facts and circumstances of the case and in law CIT (A) has On the facts and circumstances of the case and in law CIT (A) has erred in confirming the penalty o erred in confirming the penalty order passed u/s 271(1) (C) of the rder passed u/s 271(1) (C) of the Income Tax Act by the National Faceless Assessment Centre Income Tax Act by the National Faceless Assessment Centre Income Tax Act by the National Faceless Assessment Centre - a. On the issue of disallowance of Rs 3,85,310/ a. On the issue of disallowance of Rs 3,85,310/- being the interest being the interest (net) on the borrowed funds u/s 36(1)(iii) of the Income Tax Act 1961 (net) on the borrowed funds u/s 36(1)(iii) of the Income Tax Act 1961 (net) on the borrowed funds u/s 36(1)(iii) of the Income Tax Act 1961 on account of capitaliza on account of capitalization without appreciating that deduction for tion without appreciating that deduction for depreciation is allowed by AO from the disallowed interest and the depreciation is allowed by AO from the disallowed interest and the depreciation is allowed by AO from the disallowed interest and the fact that no inaccurate particulars of income have been furnished by fact that no inaccurate particulars of income have been furnished by fact that no inaccurate particulars of income have been furnished by the assessee within the meaning of Explanation 1 to subsection (1) the assessee within the meaning of Explanation 1 to subsection (1) the assessee within the meaning of Explanation 1 to subsection (1) of section 271(1)(c) of the Income Tax Act. on 271(1)(c) of the Income Tax Act. b. without appreciating that the penalty order had not given any b. without appreciating that the penalty order had not given any b. without appreciating that the penalty order had not given any finding or reasons of coming to the conclusion that assessee had finding or reasons of coming to the conclusion that assessee had finding or reasons of coming to the conclusion that assessee had furnished inaccurate particulars of income or the particulars furnished inaccurate particulars of income or the particulars furnished inaccurate particulars of income or the particulars furnished by the assessee furnished by the assessee are false or misleading or erroneous. are false or misleading or erroneous. c. In disregarding that penalty order has been passed in a c. In disregarding that penalty order has been passed in a c. In disregarding that penalty order has been passed in a mechanical and routine manner without application of mind and mechanical and routine manner without application of mind and mechanical and routine manner without application of mind and without establishing that the explanation offered by the assessee is without establishing that the explanation offered by the assessee is without establishing that the explanation offered by the assessee is incorrect or false. incorrect or false. d. In upholding the penalty order by ignoring the decisions of upholding the penalty order by ignoring the decisions of upholding the penalty order by ignoring the decisions of Honourable Apex Court in the cases of Reliance Petro Products Honourable Apex Court in the cases of Reliance Petro Products Honourable Apex Court in the cases of Reliance Petro Products Private Limited (2010) 322 ITR 158 (SC) and Dilip N Shroff vs JCIT Private Limited (2010) 322 ITR 158 (SC) and Dilip N Shroff vs JCIT Private Limited (2010) 322 ITR 158 (SC) and Dilip N Shroff vs JCIT 161 Taxmann 161 Taxmann 218 (SC).

3.

Briefly stated, the assessee company is Briefly stated, the assessee company is engaged in the engaged in the business of manufacturing and export of fruit powder, egg powder, business of manufacturing and export of fruit powder, egg powder, business of manufacturing and export of fruit powder, egg powder, aseptic fruit pulp and canned vegetables. The assessment for the aseptic fruit pulp and canned vegetables. The assessment for the aseptic fruit pulp and canned vegetables. The assessment for the year under consideration was completed under section 143(3) of the year under consideration was completed under section 143(3) of the year under consideration was completed under section 143(3) of the Income-tax Act, 1961 on 08.12.2017. tax Act, 1961 on 08.12.2017.

3.1 During the assessment proceedings, the Assessing Officer ing the assessment proceedings, the Assessing Officer ing the assessment proceedings, the Assessing Officer disallowed an amount of ₹3,09,360/- being interest expenditure disallowed an amount of being interest expenditure incurred on borrowed funds utilised for acquisition of capital incurred on borrowed funds utilised for acquisition of capital incurred on borrowed funds utilised for acquisition of capital assets, holding the same to be not allowable under section 36(1)(iii) assets, holding the same to be not allowable under section 36(1)(iii) assets, holding the same to be not allowable under section 36(1)(iii) of the Act. The said disallowance was confirmed by the learned first Act. The said disallowance was confirmed by the learned first Act. The said disallowance was confirmed by the learned first authority in the quantum proceedings. No further appeal appellate authority in the quantum proceedings. No further appeal appellate authority in the quantum proceedings. No further appeal was preferred by the assessee against the quantum addition. was preferred by the assessee against the quantum addition. was preferred by the assessee against the quantum addition.

3.2 Consequently, the Assessing Officer issued a show Consequently, the Assessing Officer issued a show Consequently, the Assessing Officer issued a show-cause notice dated 30.11.2021 proposing levy of penalty under section dated 30.11.2021 proposing levy of penalty under section dated 30.11.2021 proposing levy of penalty under section 271(1)(c) of the Act. The Assessing Officer observed that the 271(1)(c) of the Act. The Assessing Officer observed that the 271(1)(c) of the Act. The Assessing Officer observed that the assessee had claimed interest expenditure on borrowed funds assessee had claimed interest expenditure on borrowed funds assessee had claimed interest expenditure on borrowed funds utilised for acquisition of capital assets, which, according to him, utilised for acquisition of capital assets, which, according to him, utilised for acquisition of capital assets, which, according to him, was not allowable till the date such assets were put to use. Holding allowable till the date such assets were put to use. Holding allowable till the date such assets were put to use. Holding that the assessee had furnished inaccurate particulars of income, that the assessee had furnished inaccurate particulars of income, that the assessee had furnished inaccurate particulars of income, the Assessing Officer levied penalty at 100% of the tax sought to be the Assessing Officer levied penalty at 100% of the tax sought to be the Assessing Officer levied penalty at 100% of the tax sought to be evaded, amounting to ₹1,19,060/-. evaded, amounting to

4.

Before the learned Comm Before the learned Commissioner of Income-tax (Appeals), the tax (Appeals), the assessee contended that the claim of interest expenditure was made assessee contended that the claim of interest expenditure was made assessee contended that the claim of interest expenditure was made bona fide and that no false or inaccurate particulars were bona fide and that no false or inaccurate particulars were bona fide and that no false or inaccurate particulars were furnished. It was submitted that the borrowed funds were utilised furnished. It was submitted that the borrowed funds were utilised furnished. It was submitted that the borrowed funds were utilised for acquisition of assets for acquisition of assets forming part of the existing business and forming part of the existing business and that the investment represented expansion and improvement of the that the investment represented expansion and improvement of the that the investment represented expansion and improvement of the ongoing manufacturing process, and not extension of a new line of ongoing manufacturing process, and not extension of a new line of ongoing manufacturing process, and not extension of a new line of business. It was, therefore, argued that the claim was a debatable business. It was, therefore, argued that the claim was a debatable business. It was, therefore, argued that the claim was a debatable one and disallowance thereof could not ipso facto attract penalty ance thereof could not ipso facto attract penalty ance thereof could not ipso facto attract penalty under section 271(1)(c). Reliance was placed on the judgment of the under section 271(1)(c). Reliance was placed on the judgment of the under section 271(1)(c). Reliance was placed on the judgment of the Hon’ble Supreme Court in Hon’ble Supreme Court in CIT v. Reliance Petroproducts Pvt. Ltd. CIT v. Reliance Petroproducts Pvt. Ltd. (322 ITR 158), to contend that mere rejection of a claim does not (322 ITR 158), to contend that mere rejection of a claim does not (322 ITR 158), to contend that mere rejection of a claim does not to furnishing of inaccurate particulars of income. amount to furnishing of inaccurate particulars of income. to furnishing of inaccurate particulars of income. ITA No. 4.1 The learned CIT(A), however, rejected the contentions of the The learned CIT(A), however, rejected the contentions of the The learned CIT(A), however, rejected the contentions of the assessee and confirmed the penalty, holding that since the assessee and confirmed the penalty, holding that since the assessee and confirmed the penalty, holding that since the disallowance had been sustained in quantum proceedings, the levy disallowance had been sustained in quantum proceedings, the levy disallowance had been sustained in quantum proceedings, the levy of penalty was justified. ustified.The relevant finding of ld CIT(A) is The relevant finding of ld CIT(A) is reproduced as under as under:

In view of above order of CIT Appeal In view of above order of CIT Appeal-4, Mumbai it is established 4, Mumbai it is established that the appellant is not lastly opposed the observation and decision that the appellant is not lastly opposed the observation and decision that the appellant is not lastly opposed the observation and decision of the AO in as much as the amount of Rs. 3,85,310/ of the AO in as much as the amount of Rs. 3,85,310/- - on account of interest incurred on the funds borrowed for acquiring capital assets interest incurred on the funds borrowed for acquiring capital assets interest incurred on the funds borrowed for acquiring capital assets being treated as disallowable expenses and attracts initiation of being treated as disallowable expenses and attracts initiation of being treated as disallowable expenses and attracts initiation of penalty for furnishing inaccurate particulars of income Therefore, I penalty for furnishing inaccurate particulars of income Therefore, I penalty for furnishing inaccurate particulars of income Therefore, I find no infirmity in the penalty ord find no infirmity in the penalty order of the AO. Accordingly penalty er of the AO. Accordingly penalty of Rs. 1,19,060/ of Rs. 1,19,060/- imposed invoking provision of section 271(1)(c) of imposed invoking provision of section 271(1)(c) of the I.T Act stand confirmed. Accordingly the grounds the I.T Act stand confirmed. Accordingly the grounds of of appeal are dismissed.

5.

We have heard the rival submissions and carefully perused the We have heard the rival submissions and carefully perused the We have heard the rival submissions and carefully perused the material available on record. available on record.

5.1 At the outset, we find that though the Assessing Officer, in the At the outset, we find that though the Assessing Officer, in the At the outset, we find that though the Assessing Officer, in the initial notice, referred to initiation of penalty proceedings for initial notice, referred to initiation of penalty proceedings for initial notice, referred to initiation of penalty proceedings for furnishing inaccurate particulars of income, the subsequent show- furnishing inaccurate particulars of income, the subsequent show furnishing inaccurate particulars of income, the subsequent show cause notice as well as the penalty cause notice as well as the penalty order do not clearly specify the order do not clearly specify the exact limb under section 271(1)(c) under which the penalty was exact limb under section 271(1)(c) under which the penalty was exact limb under section 271(1)(c) under which the penalty was levied. Such ambiguity in the foundation of the penalty proceedings levied. Such ambiguity in the foundation of the penalty proceedings levied. Such ambiguity in the foundation of the penalty proceedings vitiates the levy itself. vitiates the levy itself.

5.2 Even otherwise, on merits, we find that the assessee had Even otherwise, on merits, we find that the assessee had Even otherwise, on merits, we find that the assessee had disclosed all material facts relating to the claim of interest losed all material facts relating to the claim of interest losed all material facts relating to the claim of interest expenditure. The disallowance arose out of a difference of opinion expenditure. The disallowance arose out of a difference of opinion expenditure. The disallowance arose out of a difference of opinion the allowability of interest under section 36(1)(iii) of the regarding the allowability of interest under section 36(1)(iii) of the regarding the allowability of interest under section 36(1)(iii) of the Act, particularly on the question whether the acquisition of assets Act, particularly on the question whether the acquisition o Act, particularly on the question whether the acquisition o constituted extension of business or merely expansion of the constituted extension of business or merely expansion of the constituted extension of business or merely expansion of the existing business operations. existing business operations.

5.3 The claim made by the assessee cannot be said to be ex facie The claim made by the assessee cannot be said to be ex facie The claim made by the assessee cannot be said to be ex facie false or devoid of any basis. No material has been brought on record false or devoid of any basis. No material has been brought on record false or devoid of any basis. No material has been brought on record by the Assessing Offic by the Assessing Officer to demonstrate that the assessee had er to demonstrate that the assessee had either concealed particulars of income or furnished inaccurate either concealed particulars of income or furnished inaccurate either concealed particulars of income or furnished inaccurate particulars thereof. The issue is essentially interpretational and particulars thereof. The issue is essentially interpretational and particulars thereof. The issue is essentially interpretational and debatable in nature.

5.4 It is well-settled by the Hon’ble Supreme Court in settled by the Hon’ble Supreme Court in Reliance settled by the Hon’ble Supreme Court in Petroproducts Pvt. Ltd. (supra) that mere disallowance of a claim, (supra) that mere disallowance of a claim, Petroproducts Pvt. Ltd. even if the claim is ultimately found to be unsustainable in law, even if the claim is ultimately found to be unsustainable in law, even if the claim is ultimately found to be unsustainable in law, does not automatically attract penalty under section 271(1)(c), so does not automatically attract penalty under section 271(1)(c), so does not automatically attract penalty under section 271(1)(c), so long as the claim is bona fide and all relevant particulars have been long as the claim is bona fide and all relevant particul long as the claim is bona fide and all relevant particul disclosed.

5.6 In view of the above discussion, we are of the considered In view of the above discussion, we are of the considered In view of the above discussion, we are of the considered opinion that the levy of penalty under section 271(1)(c) of the Act in opinion that the levy of penalty under section 271(1)(c) of the Act in opinion that the levy of penalty under section 271(1)(c) of the Act in the present case is not justified. Accordingly, the penalty imposed the present case is not justified. Accordingly, the penalty imposed the present case is not justified. Accordingly, the penalty imposed by the Assessing Officer and c by the Assessing Officer and confirmed by the learned CIT(A) is onfirmed by the learned CIT(A) is deleted. ITA No. 5.7 The grounds of appeal of the assessee are The grounds of appeal of the assessee are accordingly accordingly allowed.

6.

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

Order pronounced in the open Court on ounced in the open Court on 15/12/2025. /12/2025.

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