A division bench of the delhi Tribunal in DCIT v. American Express India Pvt. Ltd, held that penalty under Section 271(1)(c) of the Income Tax Act, 1961 is not leviable when Assessee made a claim under bona fide belief based on judicial precedence.
In the instant case, assessee company is 100% Export Oriented Unit which is eligible for tax deduction u/s 10B. While filing returns for the year under consideration, assessee claimed deduction u/s 10B and has netted the interest earned on income tax refund of Rs. 1,52,92,404/- against the interest paid. Assessing Officer, however, rejected the claim on ground that interest on income tax refund can never be treated or can be held as income from business activities or profits derived from the undertaking. He, therefore, 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/-.
On appeal, the first appellate authority reversed the said order and concluded the matter in favour of the assessee. On further appeal, the Tribunal quashed the relief and held that interest on income tax refund can never be treated or can be held as income from business activities or profits derived from the undertaking.
However in the second appeal filed by the department before the Tribunal, the said relief granted by the Ld. CIT(Appeals) was reversed and the addition was sustained, after holding that the interest earned on income tax refund is to be taxed under the head ‘income from other sources’ and hence was not eligible for deduction u/s 10B.
Subsequently, penalty proceedings were initiated against the assessee u/s 271(1)(c) for ‘furnishing of inaccurate particulars’, which were later quashed by the first appellate authority.
After hearing both sides, the Tribunal held that penalty is not leviable in the present case.
The bench noted the fact that in the first appeal, first appellate authority had allowed the netting-off of the interest, while computing the profits of business eligible for deduction u/s 10B. This order of the first appellate authority has been reversed by the Tribunal by holding that interest receipt from the department on the income tax refund, does not have any direct nexus with the business of the assessee and it cannot be linked with the business of the assessee. Therefore, it cannot be netted off with the other interest payment.
“Though this issue has been decided against the Tribunal in the quantum proceedings, however, in the penalty proceedings, one has to see, whether at the time of making the claim at the time of filing of return of income the assessee had any bona fide belief based on certain judicial precedence or not. Here in this case, such a bona fide belief has been accentuated by the fact that the Ld. CIT (Appeals) had allowed such netting off and decided the issue in favour of the assessee. Under these facts it cannot be held that the assessee had furnished any inaccurate particulars of income so as to warrant levy of penalty u/s 271(1)(c) read with Explanation 1,” the bench said.
Dismissing the departmental appeal, the bench added that “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 u/s 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.”
Read the full text of the Order below.
