2022 (12) TMI 25 - AT - Income Tax

ITAT removes penalties for debatable interest income classification

The ITAT allowed the appeals, deleting the penalty under Section 271(1)(c) for both assessment years. The Tribunal found the classification of interest ... Penalty u/s.271(1)(c) - Nature of interest income - capital receipt or revenue receipt - interest income claimed by assessee, on the pre-commencement of business period, as capital receipt as against assessed by AO as revenue receipt - AO levied penalty @ 200% - CIT-A restricted it to 100% - HELD THAT:- It is an admitted fact that the assessee has filed complete particulars of income before the AO and nothing was concealed. As in the present case, the assessee has disclosed all the facts relating to the transaction of loans obtained from banks and the details of bank account and the details of interest earned but treated the same as capital in nature, in view of the decisions of Bokaro Steels Ltd.[1998 (12) TMI 4 - SUPREME COURT] and Karnal Cooperative Sugar Mills Ltd.[1999 (4) TMI 7 - SC ORDER] - It means that there is a debate available whether idle funds kept temporarily during the intermittent period between the set-up of business and actual start of the business, the interest income earned is capital or revenue. The assessee only claimed the same as capital in nature and not disclosed as revenue income on which taxes to be paid. The assessee has made complete disclosure of facts and 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. This, being a highly debatable issue, the assessee is exigible to penalty u/s.271(1)(c) of the Act, for furnishing of inaccurate particulars of income. This being a highly debatable issue and once there is a debate as assessee’s present case, Hon’ble Madras High Court has admitted the substantial question of law against the order of Tribunal in quantum, we are of the view that assessee is not liable for penalty u/s.271(1)(c) - Hence, we delete the penalty levied by AO completely in both the assessment years and allow both the appeals of assessee. Issues Involved:1. Levy of penalty under Section 271(1)(c) of the Income Tax Act, 1961.2. Classification of interest income earned during the pre-commencement period as capital receipt or revenue receipt.3. Applicability of judicial precedents in determining the nature of interest income.4. Consideration of the assessee's belief and reliance on previous judicial decisions.5. The quantum of penalty imposed and its subsequent reduction.Detailed Analysis:1. Levy of Penalty under Section 271(1)(c) of the Income Tax Act, 1961:The primary issue in these appeals is the levy of penalty under Section 271(1)(c) for allegedly furnishing inaccurate particulars of income. The Assessing Officer (AO) contended that the assessee concealed particulars of income by claiming interest income as capital receipt, which was assessed as revenue receipt. The AO initiated penalty proceedings and imposed a penalty of Rs. 15 crores, which was later reduced by the Commissioner of Income Tax (Appeals) [CIT(A)] to Rs. 7.25 crores for AY 2011-12 and Rs. 5.50 crores for AY 2012-13.2. Classification of Interest Income Earned During the Pre-Commencement Period:The assessee, engaged in the business of refining petroleum oil, had not started its business activities and was in the construction phase. During this period, it earned interest income from investments in fixed deposits. The assessee claimed that the interest income should be treated as capital receipt, relying on the Supreme Court decisions in Karnal Cooperative Sugar Mills Ltd. and Bokaro Steels Ltd., arguing that the deposits were linked to the purchase of plant and machinery.3. Applicability of Judicial Precedents:The AO, however, relied on the Supreme Court decisions in Autokast Ltd. and Tuticorin Alkali Chemicals and Fertilizers Ltd., which held that interest income earned on margin money kept in deposits is taxable as revenue receipt. The AO's stance was that interest income is of a revenue nature unless received as damages or compensation. The CIT(A) and ITAT upheld this view, rejecting the assessee's claim.4. Consideration of the Assessee's Belief and Reliance on Previous Judicial Decisions:The CIT(A) acknowledged the assessee's reliance on the ITAT's decision for AY 2005-06 but noted a crucial difference in the nature of interest income for the years under consideration. The CIT(A) observed that the assessee, assisted by professionals, should have been aware of the prevailing legal position and that its claim of the interest being non-taxable was not bona fide. Despite this, the CIT(A) reduced the penalty to the minimum prescribed under the law.5. The Quantum of Penalty Imposed and Its Subsequent Reduction:The AO initially imposed a penalty at 200% of the tax sought to be evaded, amounting to Rs. 15 crores. The CIT(A) reduced this penalty to Rs. 7.25 crores for AY 2011-12 and Rs. 5.50 crores for AY 2012-13, considering the facts and circumstances of the case. The ITAT, however, noted that the issue of whether the interest income is a capital receipt or revenue receipt is debatable and has been admitted as a substantial question of law by the Madras High Court. The ITAT concluded that the assessee had disclosed all relevant facts and that the issue was highly debatable. Consequently, the ITAT deleted the penalty imposed by the AO in both assessment years.Conclusion:The ITAT allowed the appeals filed by the assessee, deleting the penalty levied under Section 271(1)(c) for both assessment years, and dismissed the appeals filed by the Revenue. The Tribunal emphasized that the classification of interest income as capital or revenue was a debatable issue, and the assessee had made full disclosure of facts, thus not warranting the imposition of penalty.