DELETION OF PENALTY IN CASE OF BONAFIDE BELIEF OF AN ASSESSEE: ESPECIALLY WHEN THE ACTION OF ASSESSEE IS SUPPORTED BY FACTUAL CIRCUMSTANCES AND A DECISION
Section 271 (1)( c) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) deals with the penalty in respect of failure to furnish returns, comply with notices, concealment of income, etc.
Recently, in DCIT vs. American Express India Pvt. [ITA No. 4422/Del./2014, decided on 06.10.2017], one of the ground in appeal was whether on the facts and in the circumstances of the case, the CIT (A) had erred in deleting the penalty of Rs.54,37,000 imposed under section 271 (1 )(c) of the Act, ignoring the fact that patently a wrong claim had been made by the assessee of treating the interest on income tax refund as income derived from the export of articles or things or computer software by 100% Export Oriented Undertaking(EOU) and thereby it amounted to filing inaccurate particulars of income.
The brief facts qua the issue relating to levy of penalty were that the assessee company was 100% EOU which was engaged in the business of financial accounting data processing for its various customers including American Express World Wide. The assessee’s unit was entitled for tax deduction under section 10B, since A.Y. 1996-97 to 2005-06. The assessee in its computation of income while claiming of deduction under section 10B had netted the interest earned on income tax refund of Rs. 1,52,92,404 against the interest paid. In response to show cause notice issued during the course of assessment proceedings, the assessee had given detailed explanation and reply which is summarized as follows:-
(i) Netting of interest income against interest expenditure is to be allowed in view of decisions of Tribunals which was quoted by the assessee.
(ii) Since the income tax demand was created which was on account of interest also for which assessee had to pay interest on overdraft facility. Therefore, the interest earned on Income Tax Refund is linked to the business of the assessee company.
(iii) It was further argued that for exemption under section 10B of the Act it is not required that the profit is to be derived from the business.
(iv) Various decisions relating to Section 80HHC of the Act on this issue were referred and it was argued that sections 80HHC and 10B are pari- material and it was further submitted that sec 80HH/80I are different from sections 80HHC and 10B.
The Assessing Officer(AO) held that the demand of income tax is required to be paid by the assessee, whether from its own fund or from OD facility, is not material and it cannot be netted with the interest paid by the assessee company for the purpose of its business activities, because the interest on income tax refund has not been earned in the course of business activities of the assessee company and same cannot be reckoned to have been derived from the business of the undertaking. The AO held that interest income falls under the head, ‘income from other sources’ and therefore, cannot be netted. The total interest accrued to the assessee during the year was Rs. 1,64,62,391 and the assessee had netted interest income of Rs. 1,52,29,404 against the interest paid. Thus, the AO held that the whole interest income of Rs. 1,64,62,391 is to be treated as income under the head of income from business. He added the netted interest income of Rs. 1,52,29,404.
In the quantum appeal the Learned CIT (Appeals) had deleted the said addition.
Before Delhi ITAT, DR submitted following case laws in support of his contention:-
1. CIT vs. Moser Baer India Ltd. (184 Taxman 8 (SC)/2009 315 ITR 460 (SC)/(2009) 222 CTR 213)
2. CIT vs. Gold Coin Health Food (P.) Ltd (172 Taxman 386 (SC)/(2008) 304 ITR 308 (SC).
3. Union of India vs. Dharamendra Textile Processors (2007) 295 ITR 2441 (SC).
4. MAK Data P. Ltd vs. CIT (SC)2013 263 CTR 1.
5. B.A. Balasubramaniam & Bros. Co vs. CIT [116 Taxman 842, 236 ITR 977, 157 CTR 556].
6. CIT vs. Gates Foam & Rubber Co [91 ITR 467] CIT vs India Seafood [105 ITR 708]
7. Steel Ingots Ltd vs. CIT [(2008)296 ITR 228 (MP)]
8. CIT vs. Escorts Finance Ltd [183 Taxman 453 (Del)/ 328 ITR 44 (Del)/ 226 CTR 105]
9. CIT vs. R.M.P. Plasto (P.) Ltd [184 Taxman 372 (SC)/ 313 ITR 397 (SC)/ 227 CTR 635]
10. CIT vs. Zoom Communication (P.) Ltd. [191 Taxman 179 (Del)/ 327 ITR 510 (Del)/ 233 CTR 465]
11. K.P. Madhusudhanan vs. CIT 2001 118 Taxman 324 (SC)/ 251 ITR 99 (SC)/ 169 CTR 489 (SC)].
He further submitted that penalty has rightly been levied by the AO, because interest on income tax refund can never be treated or can be held as income from business activities or profits derived from the undertaking. Accordingly, the penalty levied by the AO should be confirmed.
On the other hand, the Counsel for the assessee submitted that in the annual report itself, the assessee had given the justification for such netting of interest which was based on certain decisions. Therefore, at the time of making the claim in the return, assessee had bona fide belief based on judicial precedents. Such bona fide belief was accentuated by the fact that the first appellate authority in the quantum proceedings had accepted the assessee’s contention and deleted the addition made by the AO. Thus in such a situation it cannot be held that the assessee can be liable for penalty under section 271(1)(c) for ‘furnishing of inaccurate particulars’. Lastly, he submitted that exactly on same issue and on similar set of facts, this Tribunal in the case of Millennium International vs. ACIT in ITA no. 4956/Del/2010 vide order dated 8.8.2013 had deleted the penalty.
The learned Members of ITAT, after considering the facts & circumstances of the case, rival submissions, case laws, briefly, observed that the assessee had furnished and disclosed the entire particulars of the claim for netting of the interest. Bona fide belief of the assessee has been accentuated by the fact that the CIT (A) had allowed netting off and decided the issue in favour of the assessee. Under the facts it cannot be held that the assessee had furnished any inaccurate particulars of income so as to warrant levy of penalty under section 271(1)(c) read with Explanation 1. If a claim made by the assessee has been allowed at one stage and later on has been disallowed, ostensibly, the assessee can said to have some bona fide belief for making such a claim. More so when the assessee had paid huge income tax demand in the earlier years for disallowance of claim of deduction under section 10B, out of borrowed funds for which it has paid huge interest and when the interest on such refund was made the assessee had netted-off on the ground that it is relatable to its activities of EOU. Finally, ITAT held that the deletion of penalty by the CIT(A) was justified in the case.