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Income Tax Appellate Tribunal, MUMBAI BENCHES “G”, MUMBAI
Before: Shri Mahavir Singh & Shri G Manjunatha
O R D E R Per G Manjunatha, Accountant Member
This appeal filed by the Revenue is directed against order of the CIT(A)-10, Mumbai, dated 18.11.2015, and it pertains to assessment year 2009-10. The Revenue has raised following grounds of appeal:-
“1(a) On the facts and in the circumstances of the case, the Ld. CIT(A) erred in holding that although the interest expenditure incurred on the amount borrowed for investment in foreign subsidiary company has been held to be capital in nature by the both the CIT(A) and the ITAT, the disallowance of the said interest expenditure as capital expenditure will not attract concealment penalty u/s. 271(1)(c).
1(b) On the facts and in the circumstances of the case, Ld. CIT(A) erred in deleting the penalty levied u/s. 271(1)(c) without appreciating that the interest expenditure on the amount borrowed for investment in foreign subsidiary company was prima facie a capital expenditure and the assessee had furnished inaccurate particulars of its income by claiming the said expenditure as a revenue expenditure.
2. The appellant prays that the order of the Ld. CIT(A) be set aside and the order of the AO be restored.
The appellant craves leave to amend or alter any ground or add any other ground which may be necessary.”
The brief facts of the case are that in this case assessment has been completed u/s. 143(3) of the Income Tax Act, 1961 on 28.12.2011, determining total income at ` 6,10,90,560/- after making the additions on account of disallowance of interest paid amounting to ` 3,40,59,571/- on borrowed money for investments in foreign subsidiary company. Thereafter, the Assessing Officer initiated penalty proceedings u/s. 271(1)(c) of the Act for furnishing inaccurate particulars of income and called upon the assessee to explain as to why penalty shall not be levied in respect of additions made towards disallowance of interest. In response to show cause notice, the assessee submitted that it had neither concealed particulars of income nor furnished inaccurate particulars of income in respect of interest claimed against ‘Income from house property’ as the fact that whether interest paid on borrowed capital is a capital expenditure or revenue expenditure is a debatable issue, which always has two views. Therefore, the question of levying penalty for furnishing inaccurate particulars of income does not arise. The Assessing Officer after considering the submissions of the assessee and also relied upon judicial precedence including the decision of Hon’ble Supreme Court in the case of CIT vs. Dharmendra Textile Processors [306 ITR 277 (SC)], observed that the assessee company has consciously and deliberately concealed particulars of income or has furnished inaccurate particulars of income in respect of interest paid on borrowed capital. He therefore, opined that it is a fit case for levy of penalty for furnishing of inaccurate particulars of income and, accordingly, levied penalty of ` 1,15,76,857/- which is 100% of the tax sought to be evaded.
3. Aggrieved by the penalty order, assessee preferred appeal before the CIT(A). Before the CIT(A) the assessee has submitted that it has disclosed necessary facts in respect of interest expenditure on amount borrowed for investment in foreign subsidiary in the computation of total income as well as return of income, hence, the question of concealment of income does not arise. The assessee further submitted that whether interest paid on money borrowed for investment in foreign subsidiary is a capital or revenue expenditure is highly debatable issue and always two views are possible. Therefore, when the issue is highly debatable, penalty u/s. 271(1)(c) cannot be levied, more particularly when the assessee has disclosed necessary facts in computation of income. In this regard, he has relied upon plethora of judgments including that of Hon’ble Supreme Court in the case of CIT vs. Reliance Petroproducts (P.) Ltd. [322 ITR 158 (SC)]
4. The CIT(A) after considering relevant submissions of the assessee also relied upon the decision of Hon’ble Supreme Court in the case of Reliance Petroproducts (P.) Ltd. (supra) and observed that although the CIT(A) and the Tribunal have agreed to the view taken by the Assessing Officer in disallowing interest expenditure as capital in nature, in my considered opinion, it will not attract concealment penalty u/s. 271(1)(c) since the issue of whether interest paid on money borrowed for investment in foreign subsidiary is a capital or revenue expenditure is highly debatable issue and always two views are possible. The relevant portion of the order of CIT(A) is extracted below:
I have carefully considered the facts of the case and the submissions of the Id.AR. I have also gone through the decisions relied on by the AO and the Id.AR. As seen from the facts of the case the AO has disallowed interest paid amounting to Rs.3,40,59,5717- on borrowed money for investment in foreign subsidiary company holding it as capital in nature vide his order dt. 28.12.2011 para-7(iv). The CIT(A) has also confirmed the addition vide his order dt. 23.01.2012 as under-
"9.2. Decision on merit of additional around of appeal:-
I have carefully and dispassionately considered the facts and circumstances of the case. It is not disputed that the appellant had disclosed the investment in foreign company under the head capital account and the LAO has also treated the interest expenditure as capital expenditure for acquiring the previously mentioned foreign company namely M/s Great Catch Group Ltd. Under the circumstances, the appellant will be free to capitalize the interest cost and include the same in the cost of acquisition of the previously mentioned foreign company. This is also in accordance with the provisions of proviso to sec.36(1)(iii) and explanation 8 to sec.143(i) of the Act....."
While confirming the decision of the CIT(A) the ITAT vide its order dt.20.08.2014 has stated that-....
"......Since the money was borrowed for capital investment, the interest on the borrowing need to be capitalized as rightly held by the Ld.CIT(A)...."
As both the CIT(A) and ITAT have confirmed the disallowance of the AO holding it as capital in nature, the AO has proceeded to levy of penalty u/s.271(1)(c) of the Act.
4.1. As seen from the above, the issue in dispute is to see whether the interest expenditure incurred on the amount of advance to the foreign subsidiary is revenue or capital in nature. Even though the CIT(A) and ITAT have agreed with a view of the AO that the said expenditure is capital in nature, in my considered opinion it will not attract concealment penalty u/s.271(1)(c) since it is a matter of dispute. Further, I do not find any concealment of income or furnishing of inaccurate particular in the return of income by the appellant. Reliance is placed on the decision of the Hon'ble Supreme Court in the case of Reliance Petro Products P.Ltd. reported 322 ITR 158. In view of this the penalty levied is dismissed. The ground is allowed.
The learned DR submitted that the learned CIT(A) erred in holding that although the interest expenditure incurred on amount borrowed for investment in foreign subsidiary has been held to be capital in nature by CIT(A) and ITAT, the disallowance of said interest expenditure as capital expenditure will not attract concealment penalty u/s. 271(1)(c) of the Act. The learned DR further submitted that the assessee consciously and deliberately claimed interest paid on borrowed capital, which is otherwise not allowable as revenue expenditure against its ‘Income from house property’, which clearly attracts concealment penalty u/s. 271(1)(c) of the Act. The CIT(A) without appreciating the facts has deleted the penalty levied by the Assessing Officer. Hence, the order of CIT(A) should be set aside and penalty levied by the Assessing Officer should be upheld.
On the other hand, the learned AR for the assessee strongly supporting the order of the CIT(A) submitted that he has rightly appreciated facts in the light of disclosure made by the assessee in return of income about interest paid on borrowed capital for investment in foreign subsidiary and held that it is not a case of furnishing inaccurate particulars of income. Therefore, the order of the CIT(A) should be upheld.
We have heard both the parties, perused all available material on record and have gone through the orders of the authorities below. The Assessing Officer levied concealment penalty u/s. 271(1)(c) in respect of disallowance of interest paid on borrowed capital for investment in foreign subsidiary on the ground that interest paid on borrowed capital for investment in foreign subsidiary is capital in nature and cannot be allowed as deduction against ‘Income from house property’. According to the Assessing Officer the assessee consciously and deliberately furnished inaccurate particulars of income even though such interest is not deductible against ‘Income from house property’. Thus, the contention of the assessee that the issue of deductibility of interest paid on borrowed capital is highly debatable in nature and always two views are possible. The assessee further submitted that when two views are possible on deductibility of any expenditure, whether it is capital or revenue in nature, penalty cannot be levied u/s. 271(1)(c) more particularly when the assessee has disclosed all primary facts in the return of income.
Having heard both the sides, we find merits in the arguments of the assessee for the reason that the assessee has disclosed necessary facts in respect of interest paid on borrowed capital for investment in foreign subsidiary in its return of income. We further observed that the issue of deductibility of interest paid on borrowed capital is highly debatable in nature. There are divergent views on the issue. Some courts have held that interest is allowable u/s. 57(iii) even when the assessee has not earned any interest income. The Hon’ble Supreme Court in the case of Reliance Petroproducts (P.) Ltd (supra), has held that 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”. Therefore, we are of the considered view that the Assessing Officer has erred in levying penalty u/s. 271(1)(c) of the Act in respect of disallowance of interest expenditure by holding that assessee has deliberately furnished inaccurate particulars of income. The CIT(A) after considering relevant facts has rightly deleted the penalty levied by the Assessing Officer. We, therefore, do not find any error in the order of the CIT(A). We are inclined to uphold the finding of the CIT(A) and dismiss the appeal filed by the Revenue.
In the result, the appeal filed by the Revenue is dismissed. Order pronounced in the open court on this day of 18th May 2018.