RELIABLE CONSTRUCTION CO. vs. ASSTT. C I T

Facts

The assessee, Reliable Construction Co., filed its return of income for assessment year 1985-86 declaring a total income of Rs. 23,700/-. The Assessing Officer (AO) made a major addition of Rs. 2,93,053/- on account of furnishing inaccurate particulars of interest paid to proprietary concerns of a partner. The AO held that the assessee attempted to conceal income. The Commissioner (Appeals) and the Income-Tax Appellate Tribunal (ITAT) confirmed these additions. Consequently, penalty proceedings under Section 271(1)(c) were initiated. The assessee appealed to the High Court against the ITAT's order dated 31.08.1992.

Held

The High Court allowed the appeal in favour of the assessee. The Court noted that an identical issue had been decided by it in Income Tax Reference No. 67 of 1993, vide judgment and order dated 18.11.2014. In that case, the Court had held that Section 40(b) of the Act pertains to commission or interest paid to a partner, not to an individual who advanced amounts from his personal funds. The Court observed that the payments made by the assessee to Shri. Doshi, who was the sole proprietor of the concerns providing financial assistance, were in his individual capacity and not as a partner. Therefore, these payments were not liable to be disallowed under Section 40(b). The High Court found the facts in the present case to be akin to the facts in the aforementioned reference. Consequently, the penalty proceedings under Section 271(1)(c) were quashed and set aside. The substantial question of law was answered in favour of the assessee and against the revenue.

Key Issues

1. Whether, in the facts and circumstances of the case, the ITAT was right in law in confirming the penalty of Rs. 2,57,406/- levied under Section 271(1)(c) of the Income-tax Act, 1961. Assessee's Contention: The assessee argued that the additions made by the AO, which were confirmed by the CIT(A) and ITAT, were incorrect. The assessee relied on the High Court's decision in Income Tax Reference No. 67 of 1993, which dealt with similar facts and provisions of Section 40(b) of the Act, holding that payments made to a partner in his individual capacity for advances from his personal funds were not disallowable. Revenue's Contention: The judgment does not record specific arguments made by the revenue. However, the revenue would have contended that the penalty was rightly levied due to the furnishing of inaccurate particulars of income, as confirmed by the lower appellate authorities.