DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-6(1)(1), BANGALORE vs. SANTOSH SHIVAJI LAD, BANGALORE

5.1 Similarly, the AO observed that the assessee had declared interest income of ₹22,07,803/- under the head "Other Sources" and claimed an interest expenditure of ₹40,66,274/- under section 57 of the Act. When asked to provide details of the expenditure incurred to earn the interest income, the assessee failed to substantiate the claim. Consequently, the AO restricted the allowable expenditure under section 57 of the Act to ₹22,07,803/- and added the excess claim to the total taxable income of the assessee. Hence, the AO completed the assessment order after making disallowance of claim of "investment in companies written off” and claim of expenditure under section 57 of the Act. The AO in the assessment order also initiated penalty proceeding for furnishing inaccurate particulars of income.

7.1 As per the AO, it was the assessee’s duty to explain why the penalty should not be levied. Since the assessee did not provide any reply or documents, it was clear to the AO that the assessee had no valid explanation. Therefore, the AO concluded that the assessee furnished inaccurate particulars of income and proceeded to levy penalty under section 271(1)(c) of the Act. According to the AO, the assessee wrongly claimed to have written off advances given to two companies, M/s Lad Technologies Pvt. Ltd. and M/s Connect Films Media Pvt. Ltd., as business losses. According to the AO, these advances were not trade advances or loans from a money-lending business and did not qualify as business losses. Therefore, claiming them as business expenditure was wrong. The AO further held that even though those companies had declared the advances as income, it did not give the assessee a right to claim the same as an expense and reduce his taxable income by ₹5,55,20,973/- only.

7.2 Further, regarding interest income, the AO found that the assessee declared only ₹22,07,803/- as interest earned but claimed ₹40,66,247/- as interest expense. On being asked for clarification, the assessee only stated that the borrowed funds were used to earn interest . income through fixed deposits but did not give any clear details. Therefore, the AO restricted the allowable interest expense to ₹22,07,803 and added the remaining amount to the taxable income.

7.3 The AO also noted that the Income Tax Appellate Tribunal (ITAT) had confirmed the disallowances made during the assessment, stating that the advances written off were capital in nature and that no supporting evidence was provided for the interest expenditure claim.

7.4 Lastly, the AO held that the assessee did not submit any revised computation or voluntary disclosure of the mistakes during the assessment or penalty proceedings. Hence, the AO concluded that the assessee failed to discharge the legal burden of proving that he had not furnished inaccurate particulars of income. Hence, the penalty under section 271(1)(c) was justified for furnishing inaccurate particulars of income. Thus, the AO passed a penalty order on April 28, 2023, imposing a penalty for furnishing inaccurate particulars of income for Rs. 2,16,16,550 being hundred percent of the amount of tax sought to be evaded.

8. The aggrieved assessee preferred an appeal before the learned CIT(A).

9.1 Furthermore, the assessee submitted that any addition or disallowance made in the assessment order does not, per se, empower the AO to levy a penalty under section 271(1)(c) of the Act. The assessee contended that, in the present case, he had made advances to companies in which he was the majority shareholder. However, these advances became unrecoverable and were accordingly written off in both the assessee’s books and the companies’ books, which can be verified from the respective accounts. Therefore, the assessee claimed the amount as a loss, but the claim was disallowed by the revenue authorities.

9.2 Similarly, the assessee claimed that an expenditure against interest income under section 57 of the Act was accepted in part to the extent of interest income by the Revenue. Thus, this is not a case of furnishing inaccurate particulars of income but rather a situation where certain claims made in the return were not accepted by the revenue authorities. Therefore, given the facts and circumstances, no penalty under section 271(1)(c) of the Act can be levied. To support his argument, the assessee relied on several case laws, including the ratio laid down by the Hon’ble Supreme Court in CIT vs. Reliance Petroproducts Pvt. Ltd., reported in 322 ITR 158.

Page 8 of 16 wrong. In view of the above, I am of the opinion that the action of the assessee is bonafide as he has disclosed the transactions fully in his Profit and Loss account. The ratio of the decision held by the jurisdictional High Court in this case of CIT Vs Manjunatha Cotton and Ginning Factory(supra) is squarely applicable in the case of the assessee. 7.12.2. In CIT v. Madhushree Gupta [2013] 33 taxmann.com286/216 Taxman 65 (Delhi) (Mag.) it has been held that - Mere making of claim, which was not sustainable, in law, would not ipso facto, amount to furnishing inaccurate particulars regarding income. 7.12.3. In CIT v. Sambhav Media Ltd. [2013] 32 taxmann.com 371 (Guj.) for the assessment year 2000-01, the assessee claimed deduction under section 24 as well as also for depreciation. The Assessing Officer disallowed deduction on plea that assessee was disentitled to claim double deduction of depreciation as well as deduction under section 24 and made addition to its income. The AO also imposed penalty under section 271(1)(c) upon it. The Hon’ble Gujarat High Court held that this being a matter of bona fide difference of opinion between assessee and department regarding allowability of claim, imposition of penalty was not justified in the case. 7.12.4. In the case of CIT Vs Zoom Communication Private Limited [2010] 191 Taxman 179 (Delhi), it has been held- “11. Thus, in case of failure of the assessee to offer any explanation or the explanation furnished by him being found false, penalty may be imposed on him. However, if an explanation is offered by the assessee, mere failure on his part to substantiate it will not be enough to warrant penalty, if the explanation is bonafide and all the facts relating to the same were disclosed by him in the Return. Explanation 1 to Section 271(1) would be inapplicable in respect of any amount added or disallowed as a result of rejection of the explanation furnished by the assessee, provided that his explanation is shown to be bonafide and all the facts relating to the same and material to the computation of his total income were disclosed by him. Xxxxxxxxxxxxx 16. The proposition of law which emerges from this case, when considered in the backdrop of the facts of the case before the Court, is that so long as the assessee has not concealed any material fact or the factual information given by him has not been found to be incorrect, he will not be liable to imposition of penalty under section 271(1)(c) of the Act, even if the claim made by him is unsustainable in law, provided that he either substantiates the explanation offered by him or the explanation, even if not substantiated, is found to be bona fide. If the explanation is neither substantiated nor shown to be bona fide,Explanation 1 to section 271(1)(c) would come in to play and the assessee will be liable to for the prescribed penalty.”

Seen in the background of the judgment delivered in the case of CIT Vs Zoom Communication Private Limited (supra), in the present case of the assessee, the claim of the assessee has nowhere been proved as false during the assessment proceedings as well as appellate proceedings. The amounts disclosed were not found to be false and the assessee has on its part claimed it as allowable which were held as not allowable by the appellate authorities. In .

Page 9 of 16 the light of this observation, I am of the view that the explanation of the assessee is bonafide and in the absence of any findings that will show that the assessee has acted with malafide intention, the ratio delivered in the case of CIT Vs Zoom Communication Private Limited (supra) will be squarely applicable in the case of the assessee. 7.12.5. In CIT Vs Reliance Petroproducts (P) Ltd. [2010] 189 Taxman 322 (SC), the Hon’ble SC has held that penalty under section 271(1)(c) would by itself not be attracted merely because assessee had claimed expenditure, which claim was not accepted or was not acceptable to revenue. The relevant extracts of relevant paras of the order are reproduced here as under:- “A glance of provision of section 271(1)(c ) would suggest that in order to be covered, there has to be concealment of the particulars of the income of the assessee. Secondly, the assessee must have furnished inaccurate particulars of his income. The instant case was not the case of concealment of the income. That was not the case of the revenue either. It was an admitted position in the instant case that no information given in the return was found to be incorrect or inaccurate. It was not as if any statement made or any detail supplied was found to be factually incorrect. Hence, at least, prima facie, the assessee could not be held guilty of furnishing inaccurate particulars. The revenue argued that submitting an incorrect claim in law for the expenditure on interest would amount to giving inaccurate particulars of such income. Such cannot be the interpretation of the concerned words. The words are plain and simple. In order to expose the assessee to the penalty unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing of inaccurate particulars. [Para 7] Therefore, it must be shown that the conditions under section 271(1)(c ) exist before the penalty is imposed. There can be no dispute that everything would depend upon the return filed, because that is the only document, where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. [Para 8] The word 'particulars' must mean the details supplied in the return, which are not accurate, not exact or correct, not according to truth or erroneous. In the instant case, there was no finding that any details supplied by the assessee in its return were found to be incorrect or erroneous or false. Such not being the case, there would be no question of inviting the penalty under section 271(1)(c). A mere making of the claim, which is not sustainable in law by itself will not amount to furnishing of inaccurate particulars regarding the income of the assessee. Such claim made in the return cannot amount to the inaccurate particulars. [Para 9] The revenue contended that since the assessee had claimed excessive deductions knowing that they were incorrect, it amounted to concealment of income. It was argued that the falsehood in accounts can take either of the two forms: (i) an item of receipt may be suppressed fraudulently; (ii) an item of expenditure may be falsely (or in an exaggerated amount) claimed, and both types attempt to reduce .

Page 10 of 16 the taxable income and, therefore, both types amount to concealment of particulars of one's income as well as furnishing of inaccurate particulars of income. Such contention could not be accepted as the assessee had furnished all the details of its expenditure as well as income in its return, which details, in themselves, were not found to be inaccurate nor could be viewed as the concealment of income on its part. It was up to the authorities to accept its claim in the return or not. Merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the revenue, that, by itself, would not attract the penalty under section 271(1)(c). If the contention of the revenue was accepted, then in case of every return where the claim made was not accepted by the Assessing Officer for any reason, the assessee would invite penalty under section 271(1)(c). That is clearly not the intendment of the Legislature. [Para 10]” 7.12.6. In the landmark judgment delivered here in the case of CIT Vs Reliance Petroproducts (P) Ltd. [2010] 189 Taxman 322 (supra), the Hon’ble Apex Court has held – “merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the revenue, that, by itself, would not attract the penalty under section 271(1)(c)”. I am of the view that the case of the present assessee is covered by the decision of the Apex Court. The assessee has claimed expenditure which was considered by the authorities as not allowable. Thus, this case falls in the category where two views are possible. Further no information given in the return was found to be incorrect or inaccurate. The statements made or any details supplied were not found to be factually incorrect. Thus, prima facie, the assessee could not be held guilty of furnishing inaccurate particulars as held in the judgment of the Apex Court as above. 7.13. On the second issue of disallowance, the AO in his penalty order has held the view that the assessee has furnished inaccurate particulars in respect of income from other sources by reflecting/ offering to tax only Rs.22,07,803/- under interest income whereas he has claimed expenses in the nature of interest from borrowings amounting to Rs.40,66,247/-. On calling for details as to why the expenses should be allowed u/s 57 of the Act, the assessee only stated that the borrowed funds were mostly utilized to put money in savings in the form of Fixed Deposits on which interest is earned and offered to tax. Thus AO concluded that the assessee has failed to substantiate as to how much of borrowed funds were put into savings and how much is the proportionate interest on the borrowed funds. Here, the interest expenditure claimed was restricted to an amount of Rs.5,82,772/- was brought to tax. It seen from the facts as discussed above that the assessee has kept certain borrowed funds in FDs and earned interest on it. The assessee was asked to indicate how much of borrowed funds were put into FDs and the proportionate interest earned on those borrowed funds. The AO thus disallowed certain interest expenses and brought to tax an amount of Rs.5,82,772/-. In this particular instance too, it is seen that the assessee has given an explanation which the AO considered it not satisfactory and thus an amount of Rs.5,82,772/- was brought to tax. The AO has not given in his assessment order how this amount has been arrived at. This amount thus seems to be an estimated figure calculated by the AO. In the light of the above, I am of the opinion that there has not been any furnishing of inaccurate particulars of .

Page 11 of 16 income. The assessee has disclosed his expenses as well as income under interest head. The amounts disclosed have not been proved as false or bogus. Further, the AO has not brought out anything on record that would prove that the intention of the assessee was malafide. Furthermore, in many judicial pronouncements of various courts, it had been held that penalty is not leviable when addition/disallowance is made on estimation basis. 7.14. In the below mentioned judgments it has been held that Penalty u/s 271(1)(c) cannot be imposed on additions made on estimate basis. • CIT vs Smt K Meenakshi Kutty in 258 ITR 494 (Mad.) • CIT(A) vs Valmik bhai H Patel in 280 ITR 487 (Guj.) • CIT(A) vs Rajbans Singh in 276 ITR 351 (All.) • CIT vs Lallubhai Jogibhai Patel in 261 ITR 216 (Guj.) • CIT vs Shivnarayan Jamnalal &Co. in 232 ITR 311 (HP) • Navjivan Oil Mills vs CIT in 252 ITR 417 (Guj.) • CIT vs Ravail singh &Co. in 254 ITR 191 (P&H) • CIT vs Sangrur Vanaspati Mills Ltd in 216 ITR 92 (P&H) .CIT Vs Ample Properties Ltd [2012] 20 taxmann.com 422 (Mad) 7.15. The AO in his penalty order has held that assessee has not attempted to establish his bonafides nor submitted any explanation before the AO during the penalty proceedings and thus has failed to discharge the onus laid down upon him in terms of explanation 1 to section 271(1)(c) of the Act. The observation of the AO here is considered entirely not reasonable or maintainable. The assessee has submitted his reply requesting for time till 15.05.2023. The AO has noted that penalty was getting barred by limitation on 30-04-2023 and the assessee inspite of having the knowledge did not comply with furnishing explanation within the due time. Thus, in the present case it cannot be assumed that the assessee has “failed” in furnishing his reply. Be that it may, the assessee has come up with his explanation during the present appellate proceedings and is adjudicated on the facts and circumstances of the case.

Page 12 of 16 following the judgments of the Hon’ble SC and Hon’ble High Courts, I am of the considered view that the explanation furnished by the assessee is bonafide and in the absence of any findings that will show that the assessee has acted with malafide intention, the explanation offered by the assessee does not suffer from any infirmities. Further, I am of the view that the assessee has claimed expenditures which were considered by the authorities as not allowable. Thus, this case falls in the category where two views are possible. Furthermore no information given in the return was found to be incorrect or inaccurate. Thus, prima facie, the assessee could not be held guilty of furnishing inaccurate particulars as held in the judgment of the Apex Court in CIT Vs Reliance Petroproducts (P) Ltd. [2010] 189 Taxman 322(supra). Thus, penalty levied u/s 271(1)(c) is held not sustainable and liable to be deleted. Accordingly, the AO is hereby directed to delete the penalty levied u/s 271(1)(c). Grounds of appeal 3,4, and 5 are hereby allowed.

14.1 Similarly, in respect of the interest income and expenditure under section 57 of the Act, the assessee disclosed the interest earned and claimed the related expenditure. While the AO disallowed part of the interest expenditure for want of proper linkage, it is evident that the assessee made a full disclosure of both income and expenditure. There is no finding of concealment or deliberate misstatement of facts by the assessee. Further, the Hon'ble Karnataka High Court in the case of CIT v. Manjunatha Cotton and Ginning Factory [2013] 359 ITR 565 (Karn.) has held that mere disallowance of a claim, without establishing a deliberate act of concealment or furnishing of false particulars, does not automatically lead to penalty under section 271(1)(c) of the Act. Additionally, the Hon’ble Delhi High Court in CIT v. Madhushree Gupta [2013] 33 taxmann.com 286 has observed that mere making of a claim, which is not sustainable in law, would not amount to furnishing inaccurate particulars of income.

14.2 In the present case, the assessee’s claims, though ultimately disallowed, were based on a bona fide understanding of the facts and applicable law. The explanations offered by the assessee have neither been proved to be false nor any mala-fide intentions has been established by the Assessing Officer. The Revenue has not demonstrated that the assessee intended to mislead or suppress material facts.

14.3 It is also relevant to mention that the penalty provisions are distinct from the assessment proceedings. While the assessment involves . determining the correct income, penalty proceedings require establishing the assessee's intent to conceal or furnish inaccurate particulars, which is absent in this case. Therefore, applying the legal principles laid down by the Hon’ble Supreme Court in Reliance Petroproducts Pvt. Ltd. (supra) and other Hon’ble High Court decisions, we hold that this is a case where two views are possible on the allowability of the claims made by the assessee. The mere rejection of the assessee's claim does not mean that the assessee furnished inaccurate particulars of income. Accordingly, we hold that the learned CIT(A) rightly deleted the penalty imposed under section 271(1)(c) of the Act. The findings of the CIT(A) are well-reasoned, logical, and in line with the settled position of law. Therefore, in the facts and circumstances of the case, the penalty levied under section 271(1)(c) of the Income Tax Act is unsustainable and deserves to be deleted. We decide the issue in favour of the assessee. Hence the ground of appeal raised by the revenue is hereby dismissed.

Order pronounced in court on 10th day of July, 2025