As a relief to Nagarjuna Oil corporation, the Chennai bench of the Income Tax Appellate Tribunal ( ITAT ) has held that Section 271(1)(c) of the Income Tax Act,1961 penalty cannot be imposed on a debatable issue.
The assessee is engaged in the business of refining petroleum oil, etc. The assessee company started its construction and related project works, which were carried out during the previous year. During the previous year, the assessee earned interest income of Rs.25.92 crores as a result of investments made including investment in FDR’s in banks.
The assessee has claimed exemption of this interest income to the tune of Rs.21.79 crores out of the total interest earned at Rs.23.86 crores. The AO treated the interest income earned on margin money kept in deposits against the letter of credit for the supply of equipmentas revenue receipt.The CIT(A) restricted the penalty to a minimum and restricted the penalty of Rs.7.25 crores for the assessment year 201112 and Rs.5.50 crores for the assessment year 2012-13.
The AO in his penalty order also admitted that during the year, a fresh allotment of shares to the extent of Rs.76.5 crores was made in September 2010 and the said amount was invested in a fixed deposit on 24.09.2010 and earned interest on a short-term deposit of Rs.2,06,57,532/- and offered the same as ‘income from other sources’.
The balance deposit was converted into short-term deposits as and when the bankers released the loan funds and kept them in separate earmarked accounts. These amounts were not available to the assessee company as unencumbered funds.
The assessee earned total interest income on FDR’s at Rs.23.86 crores, as a result of the investment made in FDR’s in the bank. The assessee claimed exemption of interest income for an amount of Rs.21.79 crores out of the total interest income earned for the reason that whenever loan funds were kept in the separate earmarked account were capital in nature.
It was evident that there is a debate involved, whether the loan obtained from the bank and kept in earmarked accounts temporarily, whether it is a capital receipt or revenue receipt. The assessee treated this as capital receipt and claimed exemption from tax on these amounts because the assessee was in the process of setting up the business.
The assessee has disclosed all the facts relating to the transaction of loans obtained from banks and the details of the bank account and the details of interest earned but treated the same as capital in nature which means that there is a debate available whether idle funds kept temporarily during the intermittent period between the set-up of business and the actual start of the business, the interest income earned is capital or revenue.
A Coram comprising of Shri Mahavir Singh, Vice President and Shri Manoj Kumar Aggarwal, Accountant Member observed that the assessee has made complete disclosure of facts and the only issue is whether the interest received on idle funds lying with banks in the shape of fixed deposits is a capital receipt or revenue receipt which is a highly debatable issue.
The Tribunal held that once there is a debatable issue then the assessee is not liable for penalty u/s.271(1)(c) of the Act. While allowing the appeal, the impinged penalty was deleted.
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