Appeals Dismissed: Interest Disallowance & Penalty Upheld under Income Tax Act

The Tribunal dismissed both appeals filed by the assessee, upholding the disallowance of interest amounting to ? 53,76,200 and the penalty imposed under section 271(1)(c) of the Income Tax Act. The Tribunal found that the interest claimed was not paid to the creditors as per the Memorandum of Understanding and that inaccurate particulars were furnished to evade tax liability. The order was pronounced on 5th August 2016.

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Issues Involved:

1. Disallowance of Interest - Rs. 53,76,200/-
2. Levy of Penal Interests

Issue-wise Detailed Analysis:

1. Disallowance of Interest - Rs. 53,76,200/-

The assessee filed its return of income declaring a total loss of Rs. 58,15,725/-. The Assessing Officer (AO) disallowed the interest claimed amounting to Rs. 53,76,200/- on the grounds that it was not paid to the creditors, particularly M/s. Sangam India Ltd. The assessee argued that the liability to pay interest was crystallized by virtue of a Memorandum of Understanding (MOU) dated 29.07.2003 due to mounting business losses and legal actions initiated by creditors. The assessee made a provision in the account books following the mercantile system of accounting. However, the AO noted that M/s. Sangam India Ltd. confirmed they did not receive any interest from the assessee, and the entry was not recorded in their account books. The AO concluded that the interest expense was not incurred for business purposes and added the amount to the assessee's income.

The salient features of the MOU included an agreement to sell property for Rs. 2.5 crores, adjustment of Rs. 57,00,000/- from the sale proceeds, and payment of the balance amount in 30 monthly installments with interest. The CIT(A) pointed out discrepancies in the interest calculations and noted that the MOU was not acted upon, as no actual interest payment was made. The Tribunal restored the matter to the AO to verify the correctness of the interest claimed and whether the interest was paid in subsequent years. The AO was directed to disallow the interest if it was found that no payment was made even after the provision in the MOU.

2. Levy of Penal Interests

The assessee challenged the penalty levied under section 271(1)(c) of the Income Tax Act on the grounds that the interest claim was bona fide but not accepted. The assessee cited several legal precedents to argue that no penalty should be levied where two views are possible. The representative of the department relied on the CIT(A)'s order, which upheld the penalty. The Tribunal noted that the interest claim was disallowed because no provision for interest was made in earlier years, and the interest included amounts payable for earlier years. The MOU was not acted upon, and the cheques issued by the assessee were dishonored. The Tribunal concluded that the assessee furnished inaccurate particulars to evade tax liability, and thus, the penalty was justified.

Conclusion:

Both appeals filed by the assessee were dismissed. The Tribunal upheld the disallowance of interest and the penalty levied under section 271(1)(c) of the Income Tax Act. The order was pronounced in the open court on 5th August 2016.

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