No Penalty on the basis of Addition of Notional Income from House Property: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Mumbai bench has held that the penalty under section 271(1)(c) of the Income Tax Act cannot be levied on the basis of the addition made in respect of notional income from house property.

The Assessing Officer imposed a penalty under section 271(1)(c) of the Income Tax Act on the basis of the additions on account of disallowance of interest expenditure and notional house property income.

The assessee submitted that he has availed of overdraft facility from Dena Bank and out of the funds borrowed from overdraft account investment was made in taxable bonds of RBI as well as fixed deposit.

The Tribunal observed that against the interest income earned from taxable bonds and fixed deposits, which was offered as income, the assessee has set off the interest expenditure incurred on account of funds borrowed from the overdraft account. This claim of set off of interest expenditure against interest income has been rejected by the Assessing Officer in course of assessment proceedings.

Deleting the penalty order, the Tribunal held that “Thus, as could be seen from the facts on record, under a bona fide belief that interest expenditure incurred on the overdraft facility is allowable against the interest income earned by investing the funds borrowed from the overdraft account assessee has claimed the expenditure. This, in our view, neither leads to the furnishing of inaccurate particulars of income nor concealment of income. Hence, assessee’s explanation that the conditions of section 271(1)(c) of the Act are not satisfied appears to be plausible. That being the case, no penalty u/s. 271(1)(c) of the Act can be imposed on account of disallowance of interest expenditure. As regards imposition of penalty on the addition made on account of notional house property income, it goes without saying that in reality, the assessee has not earned any income from house property. The Assessing Officer himself has observed that the addition made on account of income from house property is notional. In that view of the matter, penalty u/s. 271(1)(c) of the Act cannot be imposed in respect of addition made on account of notional income from house property. Thus, on overall consideration of facts and circumstances, we are of the opinion that imposition of penalty u/s. 271(1)(c) of the Act, in the facts of the present appeals is not justified.”