INDIAN TOOL TECHNOLOGY CENTRE,JALANDHAR vs. ITO, WARD 1(1) , JALANDHAR

Brief facts emerging from records are that the assessee company was incorporated on 28th June, 2010 under the Companies Act 1956, with the main object to establish a common facility center (CPC ) for use of hand tool manufacturers, with the intention to provide manufacturing facilities like forging , heat treatment, packaging, finishing, testing, and other allied facilities all under one roof and the proposed project was also approved by the Department of Industrial Policy and promotion ( DIPP ), Ministry of Commerce, Government of India , on 1st of October, 2010 , and in pursuance to the same Central Government grant of Rs.58.25 crores were also approved ( by DIPP ) for the proposed project and the first instalment of the grant in aid , being Rs. 17.48 crores was released on 24th November, 2010, with a condition that the whole of the amount if not utilized within one year from the date of its receipt, was recoverable from the assessee along with interest @ 10% pa. never commenced and the aid received from the Government was refunded in subsequent years ( FY 2014-15 and 2015-16 ) along with interest @ 10%, as per, pre - condition stipulated by the Government on account of the failure on the part of the assessee, in utilizing the same for the specific purpose within the time period earmarked by the DIIP authorities , for which it was sanctioned .

Meanwhile , the said funds received by the assessee (which remained unutilized) was invested in bank fixed deposits (State bank of Patiala ) against which interest has been earned / received / receivable, and the assessee having disclosed the same in the audited financials and in the regular return of income under the head “income from other sources”, as per provisions of section 56 of the Act, has claimed the deduction of interest payable to the DIIP authorities calculated @ 10% as per stipulated pre conditions, as per provisions of section 57(iii) of the Act, and the issue that has arisen in the instant case is whether the said interest payable to the DIP authorities is allowable to be set off from the interest receivable or not, which has consequently given rise to the issue of furnishing of inaccurate particulars.

The AO disallowed the deduction claimed u/s 57 of the Act and the Ld. first appellate authority sustained the same and the matter travelled to the Hon’ble Tribunal and the tribunal vide order dated 21st February, 2022, has decided the issue against earn the interest income because the funds received as Government aid for specific purpose were invested in FD , and interest was actually earned by the assessee, whereas the assessee has not incurred any expenditure to earn the said income and the interest paid / payable to the government as per conditions , does not fall within the purview of section 57(iii) of the Act 61.

Now, in course of hearing the Ld. AR, of the assessee submitted that an appeal has been filed against the tribunal order dated 21st February, 2022, before the Hon’ble jurisdictional Punjab and Haryana High court (ITA-249-2022) (DN 7297542) and the matter is still sub-judice.

The Ld. AR submitted that in the instant case there is neither any concealment of income nor furnishing of any inaccurate particulars of income and the assessee has truly and fully disclosed all particulars of its income in the return as evident from the contents of the return of income and the assessment order and the claim of the assessee u/s 57(iii) of the Act , is a legal claim which should have been allowed because interest paid or payable to the DIIP authorities arises out of a pre - condition of refund back stipulation on account of unutilized Government aid within a specific timeframe and the same is not in the nature of capital expenditure, and the question of allowability or not, of the said deduction claimed by the assessee as per provisions of the Act 61, is a court has admitted the appeal u/s 260A of the Act 61, is proof enough that the matter or the issue is debatable and no penalty u/s 271(1) (c) of the Act is attracted in case of debatable issues.

He further submitted that in the instant case penalty has been imposed for furnishing of inaccurate particulars of income and he elaborated that no particulars contained in the return filed is factually or arithmetically inaccurate and it does not contain any incorrect figures and the interest received / receivable on account of FD has been correctly stated and the corresponding claim of interest payable has also been rightly claimed u/s 57(iii) of the Act.

He further submitted that all the primary facts were duly disclosed in the return and the claim was not without any basis , in other words it can be said that the claim is not a fanciful claim, because the Government aid itself has been received by the assessee with pre conditions attached, and the assessee was very much aware that interest @ 10% will be automatically imposed on the said amount if the time frame is breached, as per conditions governing such aid . In the instant case when the project failed to commence, the interest burden automatically devolved on the assessee and in order to counter the same the assessee took steps to invest the funds in bank FD to meet the interest payable out of the interest receivable on such FD from banks and the to the DIIP authorities and the same has been rightly claimed as expenditure u/s 57(iii) by the assessee (not being capital in nature).

The Ld. AR further relied on the Hon’ble Apex court in the case of Reliance Petroproducts Pvt Ltd 322 ITR 158 (SC), to submit that the assessee has made a claim under a particular head in the return, which is up to the department to accept and merely because the said claim is not accepted or not sustainable, by itself, will not amount to furnishing of inaccurate particulars.

He further submitted that in the instant case whether the claim for deduction u/s 57(iii) is legally allowable or not is very much an arguable matter and is very much debatable (and the matter is before the jurisdictional High Court ) the claim of the assessee is bonafide, and he relied on the case of [Urmila Rajendra Mundra vs ITO [ITA - 577 (JP) of 2025 ] to submit that when two views are possible , adoption of one such view cannot attract the penalty provisions , because in the instant case the disclosure is full, and the claim made by the assessee if any may be a wrong claim but the same is not a false claim by any stretch of imagination as such cases the question of filing inaccurate particulars by the assessee does not arise .

Thereafter, the Ld AR , argued on the additional ground regarding issue of notice u/s 274 of the Act , dated 15/12/2016 , which is on the issue of the notice not being a concealing the particulars of income or furnished inaccurate particulars of income, which is contended to be a fundamental error that goes to the root of the matter and has vitiated the impinged order of penalty. (The notice u/s 274 is as follows):

On this technical aspect of the matter the ld. AR of the assessee relied upon the following decisions:

The Ld DR relied on the order of the Ld CIT ( A ) and in respect of the issue of defective notice dated 15/12/2016 , issued u/s 274 of the Act 61, which is now challenged by the assessee, he argued that ground has been raised by the assessee for the first time before the tribunal and the AO has clearly stated in the assessment order ( last paragraph ) that penalty in this case has been initiated for furnishing of inaccurate particulars relating to deduction claimed u/s 57(iii) of the Act, and as such the assessee was fully aware of the charges made and no prejudice has been caused by not striking off the specific limb of the 274 notice, and on this issue he relied on the decision of the Bombay High Court in the case of “ Veena Estates Pvt Ltd v CIT, Mumbai, ITN 302 of 2002 order dated 11/01/2024, which relied on the decision of the Madras High Court in Sundaram finance ltd v ACIT dated 23/04/2018 IT 876 and 877 of 2008 , to hold that even if there is defect in the notice it has caused no prejudice to the assessee.

The Ld DR prayed for upholding the order of the Ld CIT ( A ).

We have considered the rival submissions and the materials on record and various judicial precedents cited before us. On the merits of this case we find that the assessee has made full and true disclosure of his interest income received and the claim in the return of income with full particulars, and the bonafide of the said claim cannot be doubted , and none of which has been found to be incorrect on facts and figures , though it may or may not be legally sustainable in the eye of law , but the issue is certainly debatable and two opinions are possible .

Presently we are concerned with the issue of penalty only , and we are of the opinion that filing of inaccurate particulars of income refers to a situation where the assessee has reported the income in the return but files incorrect or fabricated information about the nature of income knowing the same to be erroneous and furnishes false details ( including false entries in books of accounts ) about the amount , its description or source of that income which also includes claiming deductions for expenses that cannot be substantiated by evidence or are not legally allowable.

However, bona-fide difference in legal interpretation says, making a claim that is not sustainable in law, by itself does not automatically amount to furnishing inaccurate particulars, provided all the primary facts were duly disclosed in the return and the claim was not without any basis, in other words the claim should be bonafide and in the instant case we consider it so, irrespective of difference in legal opinion by higher courts, regarding its allowability u/s 57(iii) of the Act, 61. case of CIT v. Reliance Petro Products Pvt. Ltd. (supra) we are of the opinion that no inaccurate particulars of income has been filed by the assessee in the return and as such we have no hesitation in deleting the penalty on merits.

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