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Facts
The assessee debited Rs.56,28,900/- towards settlement of its sister concern's loan, which was disallowed as not being for the assessee's business. This disallowance led to penalty proceedings under Section 271(1)(c) for alleged concealment of income.
Held
The Tribunal held that the Assessing Officer (A.O.) was in doubt regarding the specific limb of Section 271(1)(c) applicable, as evidenced by the mismatch between the assessment order and the penalty order. The Tribunal further noted that claiming a non-allowable expenditure does not amount to concealment of income.
Key Issues
Whether penalty under Section 271(1)(c) is sustainable when there is a mismatch in the grounds for initiation and imposition of penalty, and whether claiming a disallowed expenditure constitutes concealment of income.
Sections Cited
271(1)(c), 115JB
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
(Assessment Year: 2016-17) Khanna Rayon Industries Pvt. Ltd. Dy. CIT – 4(2)(1) 6/7, Silk House, Silk Bazar, JSS Road, Room No. 422, Aayakar Bhavan, Girgaon, Mumbai-400 002 Vs. M. K. Road, Churchgate, Mumbai-400 020 PAN/GIR No. AAACK 1890 P (Appellant) : (Respondent) Appellant by : Ms. Ritu Punjabi, Adv. Respondent by : Shri Hemanshu Joshi, Sr. DR Date of Hearing : 03.12.2025 Date of Pronouncement : 03.12.2025 O R D E R
Per Saktijit Dey, Vice President:
The present appeal has been filed by the assessee, challenging the order dated 26.08.2025, passed by National Faceless Appeal Centre (‘NFAC’ for short), Delhi, confirming the penalty imposed of Rs.16,88,670/- u/s. 271(1)(c) of the Income Tax Act, 1961 (‘the Act’ for short) for the assessment year (A.Y.) 2016-17.
We have considered the rival submissions and perused the materials available on record. Briefly stated, the assessee is a resident corporate entity. For the assessment year under dispute, the assessee filed its return of income on 15.10.2016, declaring Nil income under the normal provisions and book profit of Rs.9,12,562/- u/s. 115JB of the Act. The return so filed by the assessee was selected for scrutiny. In course of assessment proceeding, the Assessing Officer (A.O. for short) noticed that an amount of Rs.56,28,900/- (A.Y.2016-17) Khanna Rayon Industries Pvt. Ltd. vs. Dy. CIT was debited to the profit and loss account towards expenditure. To verify the nature of expenditure, the A.O. called for the necessary details. In response, the assessee submitted that its sister concern M/s. Krimpex Synthetics Ltd. engaged in the activity of manufacturing and processing of texturing and twisting of yarn, had procured business loan of Rs.60 lacs from Bank of Credit and Commerce International (Overseas) Ltd. The said bank was later on taken over by State Bank of India. To secure the said loan availed by the sister concern, the assessee become a guarantor and also provided a land owned by it as security. Subsequently, the sister concern ran into huge losses and, ultimately, had to be wound up. The assessee being the guarantor, State Bank of India filed a suit against the assessee for recovery of the dues. Ultimately, to settle the debt, the assessee paid an amount of Rs.56,28,900/- including interest and other charges of Rs.1,28,900/-. The assessee claimed the said amount paid to the bank as ‘expenditure’, by debiting it to the profit and loss account. After examining the nature of payment, the A.O. was of the view that the payment made by the assessee to bail out the sister concern cannot be considered for the purpose of assessee’s business. Hence, he disallowed the expenditure and initiated proceedings for imposition of penalty u/s. 271(1)(c) of the Act, alleging concealment of income.
Though, the assessee contested the disallowance before ld. first appellate authority and, thereafter, before the Tribunal, however, ultimately, assessee withdrew its appeal since there was no tax implication arising out of such disallowance. Basis the disallowance made, the A.O. initiated proceedings for imposition of penalty u/s. 271(1)(c) of the Act and ultimately passed an order on 27.12.2018, imposing penalty of Rs.16,88,670/- u/s.
Having taken note of the factual matrix as well as the submissions made by the parties, we find that the assessee has incurred certain expenditure as a guarantor in connection with the settlement of loan availed by its sister concern. Undoubtedly, the assessee has debited the amount to its profit and loss account towards expenditure. The assessee’s claim was disallowed by the A.O. and such disallowance was also sustained by ld. first appellate authority. Though the assessee had filed an appeal before the Tribunal, however, considering the fact that there was no tax implication arising out of such disallowance as the income was ultimately determined at Nil, the assessee took a conscious decision not to contest the disallowance.
Be that as it may, fact remains that the assessee had made certain payments to bank towards settlement of a debt incurred by its sister concern. Such payment was made by the assessee to fulfill its liability as guarantor and also to get back the land placed with the bank towards security. The assessee has claimed the payment as expenditure and all facts relating to such claim were disclosed to the Department. Therefore, we fail to understand in such a scenario how the A.O. can record a satisfaction of concealment of income while invoking the provision of section 271(1)(c) of the Act. Further, a reading of the order passed u/s. 271(1)(c) of the Act reveals that the A.O. has imposed the penalty alleging both concealment of income or furnishing of inaccurate particulars of income. Therefore, the A.O. himself was in doubt regarding the actual limb of section 271(1)(c) of the Act which is applicable to assessee’s case. It is fairly well settled through various judicial precedents that there cannot be a situation for imposition of penalty where there is mismatch between (A.Y.2016-17) Khanna Rayon Industries Pvt. Ltd. vs. Dy. CIT the satisfaction recorded for initiation of proceedings u/s. 271(1)(c) of the Act and the ultimate charge for which penalty is imposed.
In the facts of the present case, in the assessment order, the A.O. has recorded satisfaction for initiation of proceeding u/s. 271(1)(c) of the Act for concealment of income, whereas, in the penalty order, the A.O. has alleged that the provisions of section 271(1)(c) of the Act are attracted for concealment of income or furnishing of inaccurate particulars of income. Therefore, in our considered opinion, penalty-imposed u/s. 271(1)(c) of the Act is unsustainable. In any case of the matter, the assessee has merely claimed an item of expenditure which according to the departmental authorities is not allowable. This will not lead to concealment of income. For this reason also, penalty imposed is unsustainable. Accordingly, we delete the penalty imposed u/s. 271(1)(c) of the Act.
In the result, the appeal filed is allowed. Order pronounced in the open court on 03.12.2025 Sd/- Sd/- (Padmavathy S.) (Saktijit Dey) Accountant Member Vice President Mumbai; Dated : 03/12/2025 Roshani, Sr. PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT - concerned 5. DR, ITAT, Mumbai 6. Guard File BY ORDER,