Case Law Details
Ideal Energy Projects Limited. Vs DCIT (ITAT Mumbai)
Mumbai ITAT has deleted penalty levied u/s 271(1)(c) holding that mere making of a claim which is ultimately disallowed does not amount to furnishing of inaccurate particulars or concealment of income.
Assessee, engaged in generation of power through a thermal project, had filed return for AY 2012-13 declaring income of ₹6.10 lakh. During reassessment proceedings u/s 147, AO disallowed interest expenditure of ₹18.32 lakh claimed u/s 57 against interest income earned on short-term parking of borrowed funds. AO held that the expenditure was related to business activity, should have been capitalised to WIP & therefore not allowable u/s 57. Consequently, penalty proceedings u/s 271(1)(c) were initiated & AO levied penalty of ₹5.66 lakh for furnishing inaccurate particulars. CIT(A) upheld the penalty ex parte.
Before Tribunal, it was pointed out that in the quantum proceedings, CIT(A) while upholding disallowance u/s 57 had simultaneously allowed the same interest as deduction u/s 36(1)(iii) & directed balance to be capitalised as part of project cost. Thus, the very disallowance forming basis for penalty did not survive in the form alleged by AO.
Tribunal observed that the addition was based purely on a difference of opinion as to the correct section under which deduction was allowable. Relying on the judgment of the Supreme Court in CIT v. Reliance Petroproducts Pvt. Ltd. (322 ITR 158), Tribunal held that mere making of an unsustainable claim does not ipso facto amount to furnishing inaccurate particulars. Since there was no allegation that Assessee had furnished false details, penalty u/s 271(1)(c) was not justified. Accordingly, Tribunal set aside the order of CIT(A) & quashed the penalty.
This decision reaffirms the principle that penalty u/s 271(1)(c) cannot be levied for a claim that is rejected in assessment, unless there is clear evidence of concealment or furnishing of inaccurate particulars
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The present appeal has been filed by the assessee challenging the impugned order dated 15/03/2025, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by the learned Commissioner of Income Tax (Appeals)-53, Mumbai, [“learned CIT(A)”], which in turn arose from the penalty order passed under section 271(1)(c) of the Act, for the assessment year 2012-13.
2. The only grievance of the assessee is against the levy of penalty under section 271(1)(c) of the Act.
3. The brief facts of the case are that the assessee is a company and is engaged in the business of energy generation through a thermal power plant. For the year under consideration, the assessee filed its return of income on 28/09/2012, declaring a total income of INR 6,10,772. The return filed by the assessee was selected for scrutiny, and an order under section 143(3) of the Act was passed on 18/03/2015, accepting the returned income. Subsequently, proceedings under section 147 of the Act were initiated, inter alia, on the basis that the assessee had claimed a deduction of INR 18,32,316 under section 57 of the Act on account of interest expenses claimed to be attributable to earning the interest income. However, the said interest expenditure was incurred towards its business activities and was liable to be capitalised in its WIP as the project of the assessee was not commenced. Thus, instead of capitalising the said interest expenditure, the assessee has claimed the interest expenses as a deduction under section 57 of the Act against the interest income earned by way of short-term parking borrowed funds during the construction period of the project. Since the interest expenditure was not incurred wholly and exclusively for the purpose of earning the said interest income, and nothing was brought on record to substantiate the direct nexus between the interest income and the interest expenditure incurred, notice under section 148 of the Act was issued on 26/03/2019. In response to the notice, the assessee filed its return of income on 08/04/2019. Thereafter, statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. On the basis that the interest expenditure of INR 18,32,316 was not incurred wholly and exclusively for the purpose of earning the interest income and the assessee failed to bring any material on record establishing a direct nexus between the said interest income and interest expenditure, the Assessing Officer (“AO”), vide order dated 30/12/2019 passed under section 143(3) read with section 147 of the Act, disallowed the said interest expenditure under section 57(iii) of the Act and added the same to the total income of the assessee.
4. In the meanwhile, the penalty proceedings under section 271(1)(c) of the Act were initiated only on the addition made under section 57 of the Act, and vide order dated 21/03/2023 passed under section 271(1)(c) of the Act a penalty of INR 5,66,184 was levied on the assessee on the basis that the assessee has wilfully evaded tax by furnishing inaccurate particulars/concealing its income.
5. In further proceedings before the learned CIT(A), despite multiple opportunities being granted to the assessee, no one appeared on behalf of the assessee. Accordingly, vide impugned order, the learned CIT(A) upheld the levy of penalty on the assessee under section 271(1)(c) of the Act.
6. We have considered the submissions of both sides and perused the material available on record. It is evident from the record that the only basis for initiating the penalty proceedings is the addition made under section 57 of the Act on the basis that the assessee has failed to establish the direct nexus between the interest expenditure of INR 18,32,316 and interest income of INR 26,81,718 declared under the head “income from other sources”. We find that against the aforesaid addition made vide order passed under section 143(3) read with section 147 of the Act, the assessee filed an appeal before the learned CIT(A). The learned CIT(A), vide its order passed in quantum appeal, even though upheld the disallowance of interest expenditure made under section 57 of the Act by the AO, however, allowed the interest paid under section 36(1)(iii) of the Act. Further, part of the interest was also added to the cost of the WIP. We find that the findings of the learned CIT(A) in quantum appeal have duly been taken note of in the impugned order in para-5.1 as follows: –
“5.1 During the course of appellate proceedings, even after giving multiple opportunities, the assessee has not filed any submission in respect of the grounds of The appeal filed against the penalty order. From the penalty order, it is seen that the AO has disallowed interest expenses of Rs. 18,32,316/-claimed by the assessee u/s 57(1) of the IT Act. Further, the CIT(A) has dismissed the quantum appeal filed by the appeal. Relevant portion of order of the CIT(A) is reproduced as under:
“On going through the decisions relied upon by the appellant, it is seen the facts of the case of the appellant are different. In the case of the appellant, the appellant has offered the interest income as income from other sources. The interest paid on borrowed fund to the extent of 75% of the interest income has been taken as deduction u/s 57 of the Act. The appellant itself has treated interest income from FD as income other sources, its character cannot be changed now. The issue which is under consideration is that whether interest paid on loan can be adjusted against the interest income u/s 57 or not. It is a fact, the interest has been paid for the purpose of the business of power plant construction and it is allowable as deduction u/s 36(1) (iii) of the IT Act. The appellant company has tried to allocate the interest expenses to be allowed u/s 36(1)(iii) and u/s 57 of the Act. The only basis for such allocation of interest expenses is that the project is to be funded by debt-equity ratio of 75:25. Such allocation cannot be accepted to allow deduction of interest u/s 57 of the Act. Therefore, the disallowance of interest of Rs. 18,32,316/- made u/s 57 by the AO is upheld. However, the interest paid has been held allowable u/s 36(1)(ii) of the Act, the interest paid of Rs. 18,32,316/- is also to be added to the cost of WIP. The AO is directed accordingly…”
7. Therefore, it is at the outset evident that the addition on the basis of which the impugned penalty under section 271(1)(c) of the Act was levied was subsequently deleted by the learned CIT(A) as the interest expenditure was partly allowed under section 36(1)(iii) of the Act and party was added to the total cost of WIP. Thus, the only disallowance on the basis of which the impugned penalty was levied was subsequently deleted under other provisions of the Act, and therefore, there remains no basis now for upholding the penalty levied under section 271(1)(c) of the Act.
8. Apart from the above, it is evident from the record that the AO merely, on the basis of material available on record, denied the claim of interest expenditure made by the assessee under section 57 of the Act, rejecting the submission of the assessee that the interest expenditure incurred on borrowed funds have direct nexus with the interest income earned by the assessee. Thus, it is evident from the record that there was no allegation of concealment of particulars of income or furnishing inaccurate particulars of income, and instead, the entire addition itself is based on disagreement with the submissions of the assessee. We find that while examining the meaning of the term “particulars” in section 271(1)(c) of the Act, the Hon’ble Supreme Court in CIT v/s Reliance Petroproducts (P) Ltd., reported in [2010] 322 ITR 158 (SC), held that mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. The relevant findings of the Hon’ble Supreme Court, in the case cited supra, are reproduced as follows: –
“9. We are not concerned in the present case with the mens rea. However, we have to only see as to whether in this case, as a matter of fact, the assessee has given inaccurate particulars. In Webster’s Dictionary, the word “inaccurate” has been defined as :—
“not accurate, not exact or correct; not according to truth; erroneous; as an inaccurate statement, copy or transcript.”
We have already seen the meaning of the word “particulars” in the earlier part of this judgment. Reading the words in conjunction, they must mean the details supplied in the Return, which are not accurate, not exact or correct, not according to truth or erroneous. We must hasten to add here that in this case, there is no finding that any details supplied by the assessee in its Return were found to be incorrect or erroneous or false. Such not being the case, there would be no question of inviting the penalty under section 271(1)(c) of the Act. A mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such claim made in the Return cannot amount to the inaccurate particulars.”
9. Therefore, in view of the facts and circumstances as noted above, we are of the considered view that the levy of penalty under section 271(1)(c) of the Act in the facts of the present case is not justifiable, and accordingly, the same is quashed. As a result, the impugned order is set aside, and the grounds raised by the assessee are allowed.
10. In the result, the appeal by the assessee is allowed.
Order pronounced in the open Court on 21/08/2025
Author Bio
