2025 (3) TMI 30 - AT - Income Tax

ITAT dismisses penalty under Section 271(1)(c) for transfer pricing adjustment on interest-free loans to associated enterprises

ITAT Mumbai held that penalty u/s 271(1)(c) cannot be levied on TP adjustment for interest-free loans to associated enterprises when the issue is ... Penalty u/s. 271(1)(c) - TP Adjustment on interest-free loans given to associated enterprises - According to the assessee, issue of notional interest on interest free loans given to associated enterprise is highly debatable issue, more particularly when appeal by the assessee against the aforesaid order of Coordinate Bench has been admitted by the Hon’ble High Court of Bombay on substantial question of law and is pending for disposal - HELD THAT:- In this case, upward adjustment was made by TPO at SBI PLR which was confirmed by the ld. DRP but was restricted to LIBOR + 200 bps by the Coordinate Bench on appeal by the assessee. Facts of the case are undisputed. We note that although AO has levied penalty for furnishing of inaccurate particulars of income, fact of the matter is that assessee had disclosed necessary facts required for computation of total income in the return of income filed for the year. It is also a fact on record that appeal by the assessee before the Hon’ble High Court of Bombay on the quantum assessment has been admitted on substantial question of law and is pending for disposal. Admission of appeal by the Hon'ble High Court indicates that the question is an arguable point in law on which two views are possible. Therefore, we are of the considered view that it is not a case for penalty under section 271(1)(c). When the issue is debatable and two views are possible, then on such issue, penalty under section 271(1)(c) cannot be levied by charging the assessee with the charge of furnishing inaccurate particulars of income. Accordingly, considering the facts on record, pendency of appeal by the assessee before the Hon’ble High Court on quantum addition which forms the basis for levy of penalty by admitting substantial question of law as well as judicial precedents referred above, we hold that penalty under section 271(1)(c) is not leviable. Grounds raised by the Revenue are dismissed. The issues presented and considered in the judgment are as follows:1. Whether the penalty levied under section 271(1)(c) of the Income-tax Act for furnishing inaccurate particulars of income should be upheld.2. Whether the transfer pricing adjustment made on interest-free loans given to associated enterprises by the assessee was justified.3. Whether the delay in filing the appeals by the Revenue before the Tribunal should be condoned.Detailed analysis of the identified issues:Issue 1: Penalty under section 271(1)(c)- The Court considered the fact that the assessee had disclosed all necessary facts for the computation of total income in the return filed.- The Court noted that the appeal by the assessee on the quantum assessment had been admitted by the Hon'ble High Court of Bombay, indicating that the issue was debatable.- Citing judicial precedents, the Court held that when an issue is debatable and two views are possible, penalty under section 271(1)(c) cannot be levied.- The Court drew force from the decision in the case of Nayan Builders & Developers and the case of DCIT LTU v. Reliance Industries Ltd to support its conclusion that the penalty was not justified.Issue 2: Transfer pricing adjustment on interest-free loans- The transfer pricing adjustment was made by the Transfer Pricing Officer at SBI PLR but was restricted to LIBOR + 200 bps by the Coordinate Bench on appeal by the assessee.- The Court considered the fact that the matter was pending before the Hon'ble High Court on substantial question of law, indicating that the issue was arguable.- The Court held that since the matter was debatable and two views were possible, penalty under section 271(1)(c) could not be levied.- The Court referred to the decision in the case of Kamal Kumar Saharia v. ITO to distinguish the present case from the case cited by the Senior DR.Issue 3: Condonation of delay- The Court noted a delay of 7 days in filing the appeals before the Tribunal and considered a petition for condonation of the delay.- After perusing the petition and hearing both sides, the Court condoned the delay on the ground of sufficient cause.Significant holdings:- The Court held that when an issue is debatable and two views are possible, penalty under section 271(1)(c) cannot be levied.- The Court emphasized the importance of judicial precedents in determining the applicability of penalties under tax laws.- The Court dismissed all four appeals by the Revenue, upholding the decision to delete the penalty imposed on the assessee.In conclusion, the judgment focused on the application of tax laws regarding penalties for furnishing inaccurate particulars of income and transfer pricing adjustments, emphasizing the importance of debatable issues and judicial precedents in determining the liability of penalties under the Income-tax Act.