Capitalisation of interest on loan for plant and machinery: penalty for concealment not sustained where disclosure was accurate and depreciation allowed

Penalty under tax law was contested for disallowance of interest claimed as revenue and not capitalised as part of plant and machinery. The tribunal found the assessee raised a term loan to purchase machinery installed and used from 25.9.2006; the assessing officer disallowed the interest as revenue but thereafter capitalised the amount and allowed depreciation. The tribunal held the assessee had disclosed facts accurately and acted under a bona fide belief, so there was no concealment of income or furnishing of inaccurate particulars; consequently levy of penalty under the relevant tax provision was not sustained and the appeal was allowed.

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Issues: Whether penalty under Section 271(1)(c) of the Income-tax Act, 1961 can be levied where interest on loan for acquisition of plant and machinery is treated as capital expenditure under Section 36(1)(iii) and the assessee had made full disclosure and acted under a bona fide belief, giving rise only to a difference of opinion with the Assessing Officer.

Analysis: The facts show a term loan raised for purchase of machinery and interest treated as capital expenditure under the proviso to Section 36(1)(iii); the asset was put to use and depreciation was allowed on the capitalised amount. The assessment differences arose from application of Section 36(1)(iii) regarding pre-use interest. Penalty under Section 271(1)(c) requires concealment of income or furnishing of inaccurate particulars; where the assessee disclosed relevant facts and figures in the return and acted under a bona fide belief leading to a difference of opinion, the requisites for imposing penalty under Section 271(1)(c) are not satisfied.

Conclusion: Penalty under Section 271(1)(c) cannot be sustained; the penalty imposed is deleted and the appeal is allowed in favour of the assessee.

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