1994 (10) TMI 102 - AT - Income Tax

Interest deduction denied for non-business property purchase; penalties canceled for no concealment or inaccuracies.

Shobha Trading Company Private Limited. Versus Income-Tax Officer.

The Tribunal dismissed the quantum appeals, confirming the disallowance of interest deduction for the purchase of a property not used for business ... Business Expenditure, House Property, Penalty For Concealment Issues Involved:1. Allowance of interest as a deduction in computing the income from business.2. Imposition of penalties under section 271(1)(c) for assessment years 1985-86 and 1986-87.Detailed Analysis:1. Allowance of Interest as a Deduction:The primary issue in these appeals is whether the interest paid on loans borrowed from the Directors for the purchase of a house property can be allowed as a deduction in computing the income from business. The appellant, a company, purchased a house property partly let out to tenants and partly used by the Directors for their residence. The interest on loans from the Directors for this purchase was claimed as a deduction, which was allowed up to the assessment year 1984-85. However, for the assessment years 1985-86 and 1986-87, the Assessing Officer disallowed the deduction, arguing that the property was not purchased for business purposes but to circumvent tax laws. This view was upheld by the CIT (Appeals), who noted that the company had no independent business and was essentially a conduit for the income of the Directors.The Tribunal considered whether the expenditure on interest was for business purposes. The CIT (Appeals) found that the company's only income was commission from a firm run by one of the Directors, and there was no necessity for purchasing the property for business purposes. The property was primarily used for the Directors' residence, and the company did not require its own premises for its commission business. The Tribunal concluded that the interest expenditure was not for business purposes and upheld the disallowance.2. Imposition of Penalties under Section 271(1)(c):The second issue pertains to the penalties imposed under section 271(1)(c) for the assessment years 1985-86 and 1986-87. The Assessing Officer had initiated penalty proceedings and imposed penalties of Rs. 99,839 and Rs. 95,458, respectively, for disallowing the interest deduction. The Tribunal noted that the assessee had claimed the deduction in earlier years, which had been allowed. The Tribunal emphasized that penalties for concealment cannot be levied merely because a deduction has been denied. The facts must show that the assessee concealed income or furnished inaccurate particulars. The Tribunal found that the Directors had declared the interest received in their individual returns, contrary to the CIT (Appeals)'s finding. Consequently, the Tribunal held that penalties were not warranted and canceled them for both assessment years.Conclusion:The Tribunal dismissed the quantum appeals (ITA Nos. 4237 and 6772) of the assessee, confirming the disallowance of the interest deduction. However, it allowed the penalty appeals (ITA Nos. 5658 and 5659), canceling the penalties imposed under section 271(1)(c) for the assessment years 1985-86 and 1986-87.