In the case of CIT Versus Reliance Petroproducts Pvt. Ltd. the issue before the SC was in respect of levy of concealment penalty under the Indian Tax Law (ITL) for dis allowance of interest expense on borrowed funds. The borrowed funds were used for investment in shares which yielded exempt dividend income.
The SC held that merely making a claim in the return of income which is not accepted by the Tax Authority or which is not sustainable under the ITL, in itself, does not amount to furnishing inaccurate particulars by the Taxpayer and, hence, is not liable to penalty.
Background and facts of the case
- Under the ITL, a taxpayer is liable to penalty if it furnishes inaccurate particulars of income or conceals income.
- The Taxpayer, an investment company, filed its return of income for tax year 2000- 01, declaring loss. The Taxpayer paid interest on funds borrowed for investing in shares. For the relevant tax year, dividend income was not taxable in the hands of the Taxpayer. The Taxpayer claimed the amount of interest paid as an expense in its return of income.
- During the assessment proceedings, the Tax Authority disallowed interest expense on the ground that this expense was incurred in relation to dividend income which was exempt from tax.
- The Tax Authority levied penalty by holding that the Taxpayer furnished inaccurate particulars by wrongly claiming interest paid as an expense.
- The appellate authorities and the High Court deleted the penalty levied by the Tax Authority. Aggrieved by this, the Tax Authority preferred an appeal before the SC.
Contentions of the Tax Authority
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