Recently, Ahmedabad Bench of the Income Tax Appellate Tribunal ( ITAT ) set aside a penalty of Rs. 58.97 lakh imposed by the Assessing Officer ( AO ), noting that the issue of disallowance of a claim of Rs. 1,73,51,790 was debatable and not a clear case of furnishing inaccurate particulars.
Gujarat Insecticides Ltd., the assessee has filed an appeal against the order of the CIT(A), dated 26.03.2024, which upheld the penalty of Rs. 58,97,870 levied by the Assessing Officer ( AO ) under Section 271(1)(c) of the Income Tax Act, 1961, related to the disallowance of a claim of Rs. 1,73,51,790 as a business loss or bad debt.
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The assessee is a company that manufactures and sells insecticides. For the Assessment Year (AY) 2007-08, the company filed its income tax return on 31.10.2007, declaring a loss. Later, on 07.04.2008, the company filed a revised return, claiming a deduction of Rs. 1,73,51,790 as bad debt or business loss. This amount was related to “notional interest” that the Assessing Officer ( AO ) had added to its income in previous years but had not been paid by the debtor.
In earlier assessment years (AY 2000-01 to AY 2005-06), the AO had added a total of Rs. 1,73,51,790 as notional interest on an inter-corporate deposit ( ICD ) given by the assessee to Nipun Investment Pvt. Ltd. The deposit was supposed to earn interest, but the debtor did not pay the interest. The AO had added the notional interest to the assessee’s taxable income each year, based on the mercantile system of accounting.
The assessee claimed the deduction based on two arguments,The unpaid notional interest had already been included in taxable income in earlier years, so it should qualify for a deduction as a bad debt under Section 36(1)(vii) and Section 36(2), since it became irrecoverable. And Alternatively, the assessee argued that if it wasn’t a bad debt, the amount should be treated as a business loss under Section 28, as the income was expected but not realized, and the irrecoverability represented a business loss for the year when only the principal was recovered.
Sanjay R Shah,counsel representing appellant referred to several court rulings where it was decided that a penalty under Section 271(1)(c) should not be imposed when a High Court admits a substantial question of law, indicating that the issue is debatable and not a clear case of providing inaccurate details.
Surendra Kumar,the respondent counsel argued that the assessee knowingly claimed this expenditure in the revised return, even though it would not be allowed, which amounted to furnishing inaccurate details.
After considering the arguments, the Tribunal found that the assessee made a genuine claim based on the previous treatment of notional interest as business income. The admission of a substantial question of law by the Gujarat High Court showed that the matter was debatable and involved legal interpretation. Since quantum and penalty proceedings are separate, the mere confirmation of the disallowance in the quantum proceedings was not enough to justify the penalty without evidence of intentional concealment or misrepresentation.
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The Two member bench composed of Suchitra Kamble ( Judicial Member ) and Makarand V Mahadeokar ( Accountant Member ) considered the case of CIT vs. Nayan Builders ( Bombay High Court ), the court ruled in favor of the assessee. The judgment stated that penalty imposition was not justified and the appeal was allowed. The court found that the penalty was a debatable issue and referred to the Tribunal’s decision in the quantum proceedings, where substantial questions of law were raised. As a result, the penalty was rightly set aside.
The Bench also noted that , a similar view was expressed by the Karnataka High Court in the CIT vs. Ankita Electronics case. The Co-ordinate Bench in Shaileshkumar Shivrambhai Patel also followed this principle. The bench ruled that since the assessee’s case was admitted by the jurisdictional High Court, the issue was debatable, and therefore, penalty should not be imposed on debatable issues.
Based on these court rulings, the bench concluded that penalty should not be imposed when a substantial question of law exists, indicating that the matter is not clear-cut. Therefore, the penalty under Section 271(1)(c) was cancelled.
In Conclusion,appeal was allowed.
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