M/S. GUPTA INTERNATIONAL,PANIPAT vs. ACIT, PANIPAT

The only ground raised by the assessee is against the levy of penalty of `3,76,390/- imposed u/s 271(1)(c) of the Income-tax Act, 1961.

The Assessing Officer has levied the penalty in respect of the following three additions :-

2 ITA-2247/Del/2014 (ii) Disallowance of interest of `1,50,980/- which is also capitalized by the Assessing Officer.

With regard to the first two items i.e., capitalization of interest, it is stated by the learned counsel that there is no dispute that the plot was purchased for the purpose of business and the construction started thereon was also for the purpose of business. As per Assessing Officer, since the building was not put to use, the interest attributable to investment in the plot and construction of building is capitalized. It is stated by the learned counsel that no money was borrowed for the purpose of either investment in the plot or for construction of the building. The total investment in the plot was `1.40 crores and the investment in the building was `15.98 lakhs and `3.78 lakhs. Thus, the total investment in the plot and building taken together was less than `1.25 crores. He stated that the own fund in the form of partner’s capital on which no interest was paid was more than `6.73 crores. Thus, the own fund was much more than the investment in the plot/building. That no money was borrowed for the purpose of purchase of plot or the construction and no nexus has been proved by the Assessing Officer. That Hon'ble Jurisdictional High Court in the recent case of Bright Enterprises Pvt.Ltd. Vs. CIT vide of 2013 held that if the interest free funds are available, the presumption would arise that the investment would be out of interest free funds generated or available with the company if interest free funds were sufficient to meet the investment. That in the case of the assessee, interest free funds are more than five times of the investment in plot/building. In view of the above decision of Hon'ble Jurisdictional

Learned DR, on the other hand, argued at length. He also furnished the written submission. His arguments as well as written submission both have been carefully considered. It is stated by the learned DR that as per proviso to Section 36(1)(iii), the amount of interest paid by the assessee is not allowable. He stated that this proviso was inserted by the Finance Act, 2003 with effect from 01.04.2004. Thus, the proviso had come into existence since last five years and therefore, the assessee ought to have capitalized the interest in respect of investment in plot and building which has admittedly not been utilized for the purpose of business during the year under consideration. Since the assessee has claimed the deduction which is contrary to the provisions of law, the act of the 4 ITA-2247/Del/2014 assessee falls within the ambit of furnishing of inaccurate particulars of income. In support of this contention, he relied upon the following decisions:-

We have considered the rival submissions and have perused the order of the Assessing Officer and learned CIT(A). Though it is a case of a penalty but both the sides have argued with regard to the correctness of allowability of interest. Therefore, we would like to deal with the same briefly because penalty proceedings are separate and independent proceedings. Section 36(1)(iii) reads as under:-

As per proviso, the interest paid in respect of capital borrowed for acquisition of an asset whether capitalized in the books of account

From the above, it is evident that as per Hon'ble Jurisdictional High Court, if there are interest free funds available, a presumption would arise that the investment was out of interest free funds. Therefore, in view of the above decision of Hon'ble Jurisdictional High Court, the disallowance of interest by the Assessing Officer is not justified. However, the appeal before us is only in respect of penalty and not in respect of addition made by the Assessing Officer. It was 6 ITA-2247/Del/2014 clarified by the learned counsel that the assessee has accepted the assessment order and has not filed any appeal. He stated that once the interest is capitalized, the assessee will ultimately get the deduction in the subsequent year in the form of more depreciation and therefore, there was only the timing difference in respect of allowability of interest. Hence, the assessee did not file any appeal against the addition made by the Assessing Officer. Now, the limited question before us is whether it is a fit case for levy of penalty u/s 271(1)(c). As we have already stated that it is not even a fit case for disallowance of interest, therefore, it cannot be said that it is a fit case for levy of penalty u/s 271(1)(c). Moreover, the issue is squarely covered in favour of the assessee by the decision of Hon’ble Apex Court in the case of Reliance Petroproducts Pvt.Ltd. (supra), wherein Hon’ble Apex Court held as under:-

The ratio of above decision of Hon’ble Apex Court would be squarely applicable to the facts of the assessee’s case. The assessee has disclosed all material facts and, admittedly, the details supplied by the assessee in its return of income are not found to be incorrect or erroneous or false. Accordingly, we, respectfully following the above decision of Hon’ble Apex Court, hold that no penalty u/s 271(1)(c) of the Act is leviable in respect of disallowance of interest of `9,42,000/- and `1,50,980/-.

So far as the difference in the disclosure of receipt as per TDS certificate and books of account is concerned, no satisfactory explanation is given by the assessee’s counsel. The only explanation was that the difference is meager and that the same is a clerical error. We are unable to accept such explanation and therefore sustain the penalty levied in respect of difference in the receipt. We, therefore, direct the Assessing Officer to calculate the penalty at the rate of 100% of the tax sought to be evaded on the difference in the receipt shown in the TDS certificate and as shown in the books of account.

In the result, the appeal of the assessee is partly allowed. Decision pronounced in the open Court on 13.07.2016.