LALITPUR POWER GENERATION COMPANY LIMITED,NARIMAN POINT vs. ASSISTANT COMMISSIONER OF INCOME TAX 3(2)(1), MAHARISHI KARVE ROAD

This appeal by the assessee is directed against the order dated 30.01.2026 passed by the Commissioner of Income-tax (Appeals), National Faceless Appeal Centre [hereinafter referred to as “the learned CIT(A)”], for the assessment year 2014-15, arising from the penalty order dated 08.09.2023 passed under section 271(1)(c) of the Income- tax Act, 1961 (“the Act”).

The assessee has raised the following grounds of appeal:

Brief facts of the case are that the assessee is engaged in the business of generation of power and is a subsidiary of the Bajaj Group. It filed its return of income on 26.09.2014 declaring nil income under the normal provisions and book loss of Rs.98,96,751 under section 115JB of the Act. The assessment was originally completed under section 143(3) on 21.12.2016 at a total income of Rs.1,98,53,000/-, inter alia, by treating interest of Rs.1,97,07,000/- earned on non- earmarked funds as income from other sources and by making an addition of rental income of Rs.1,46,000/-.

In the first appellate proceedings in the quantum matter, the learned CIT(A), following the decision of the Tribunal in the case of the assessee's sister concern, held that interest of Rs.10,33,564/-, which was not incidental to acquisition of plant and machinery, was taxable as income from other sources, while the balance interest receipt was capital in nature. The rental-income addition was also deleted. In the Revenue's appeal, the Tribunal restored the question of taxability of interest to the Assessing Officer with a direction to ascertain whether the interest had arisen from borrowed funds directly linked with the purchase of plant and machinery or from surplus funds comprising share capital and reserves.

In the consequential assessment made under section 143(3) read with sections 254 and 144B on 31.03.2023, the Assessing Officer assessed interest income of Rs.62,75,478/- under the head income from other sources. Penalty proceedings under section 271(1)(c) were initiated and, by order dated 08.09.2023, the Assessing Officer levied a penalty of Rs.19,39,123/-, being 100 per cent of the tax stated to have been sought to be evaded. The Assessing Officer held that the assessee had wilfully and deliberately concealed particulars of income to the extent of Rs.62,75,480/-.

The learned CIT(A) declined to admit the additional grounds relating to non-specification of the charge in the notice. On merits, he held that proof of mens rea was unnecessary and that the plea that the addition had been accepted to buy peace did not bar penalty proceedings. Relying upon Union of India v. Dharmendra Textile Processors (166 Taxman 65) and MAK Data (P.) Ltd. v. CIT (358 ITR 593), he confirmed the penalty. The assessee is in appeal before us.

The learned Authorised Representative submitted that the assessee had neither concealed any income nor furnished inaccurate particulars. The entire interest receipt, the nature and source of funds and the assessee's treatment thereof were disclosed in the accounts and during the assessment proceedings. The issue was confined to the legal character of the disclosed interest - whether it was a capital receipt inextricably linked with setting up the power project or taxable income from other sources. The fact that the Tribunal had earlier restored this very issue for factual examination itself demonstrated that the claim was arguable and bona fide. It was further submitted that acceptance of the addition to avoid prolonged litigation did not convert a disclosed claim into concealment or inaccurate particulars. Reliance was placed on the judgment of the Hon'ble Supreme Court in CIT v. Reliance Petroproducts (P.) Ltd. (2010) 322 ITR 158 (SC).

The learned Departmental Representative supported the orders of the authorities below. He submitted that, after verification in the set- aside proceedings, the interest was found taxable as income from other sources and the assessee accepted the addition. According to him, the assessee would have escaped taxation but for scrutiny; therefore, the 4 penalty was rightly imposed. He relied on the reasoning of the Assessing Officer and the learned CIT(A).

We have heard the rival submissions and perused the material available on record. The short question is whether assessment of the disclosed interest receipt as income from other sources, contrary to the assessee's claim that it was a capital receipt reducing the project cost, by itself attracts penalty under section 271(1)(c) of the Act.

The assessment history is material. In the first round, the learned CIT(A) had accepted the assessee's treatment in substantial part. Thereafter, the Tribunal did not decide that the claim was false; it restored the matter for examining the source of the funds and their nexus with the acquisition of plant and machinery. In the consequential proceedings, the receipt was assessed as income from other sources. Thus, the addition arose from the conclusion drawn on the character of an admitted and disclosed receipt after examination of the nexus of funds. There is no finding that the assessee suppressed the receipt, misstated its amount, fabricated any supporting record or furnished a fact which was found to be false.

The Hon'ble Supreme Court in CIT v. Reliance Petroproducts (P.) Ltd. (supra), while explaining the scope of the expression “furnishing inaccurate particulars of income”, held as under:

The Court further held that merely because the claim of expenditure was not accepted or was not acceptable to the Revenue, 5 that circumstance by itself would not attract penalty under section 271(1)(c), for otherwise every rejected claim would invite penalty, which was not the intendment of the Legislature.

Applying the above ratio, the assessee's claim cannot be equated with furnishing inaccurate particulars. All primary facts concerning the receipt and the source of the funds were placed before the Department. What was rejected was the assessee's legal and factual inference that the interest was inextricably linked with the setting up of the project and, consequently, was capital in nature. An addition sustained upon rejection of such a disclosed claim does not, without anything further, establish concealment or furnishing of inaccurate particulars.

The reliance placed by the learned CIT(A) on Dharmendra Textile Processors (supra) does not advance the Revenue's case. Absence of a requirement to prove mens rea does not dispense with the statutory requirement that there must be concealment of particulars of income or furnishing of inaccurate particulars. Similarly, MAK Data (supra) concerned a surrender made when specific material indicating undisclosed income was confronted to the assessee. In the present case, there is no discovery of any undisclosed receipt or false entry; the receipt stood disclosed and only its tax character was in dispute. The said decision is, therefore, distinguishable on facts.

In view of the foregoing, we hold that the penalty of Rs.19,39,123 levied under section 271(1)(c) is not sustainable. We accordingly set aside the order of the learned CIT(A) and direct the Assessing Officer to delete the penalty. Ground Nos. 2.1 to 2.3 are allowed on merits. In view of our decision on merits, Ground Nos. 1.1 and 1.2 relating to admission of additional grounds and the technical challenge concerning specification of the limb in the notice are rendered academic and are left open.

In the result, the appeal filed by the assessee is allowed.