Under-reporting penalty for unsupported interest deduction upheld; failure to prove nexus therefore led to penalty.

Penalty under section 270A was sustained where an assessee claimed interest under section 57 against interest income but failed to establish a direct nexus between borrowed funds and loans advanced; the assessment recorded higher income and the assessee did not appeal. The tribunal applied the statutory scheme governing under reporting and concluded that a substantive deduction unsupported by evidence, coupled with non disclosure of material facts and no estimate of disallowance, meets the statutory definition of under reporting, permitting levy of penalty. Outcome: penalty for under reporting upheld in favour of revenue.

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Issues: Whether penalty under section 270A of the Income-tax Act, 1961 can be sustained for under-reporting of income arising from disallowance of interest expenditure claimed under section 57 when the assessee failed to establish nexus between borrowed funds and loans advanced.

Analysis: The assessee claimed interest expenditure under section 57 against interest income and, on scrutiny under sections 143(2)/142(1) and assessment under section 143(3) r.w.s. 144B, failed to demonstrate a direct link between the borrowed funds (on which interest was paid) and the interest earning advances. The assessment recorded higher income than returned, and the assessee accepted the disallowance by not appealing against the assessment order. In penalty proceedings under section 270A(2)(a), the authorities found the requirements of clauses (6)(a) and (6)(c) of section 270A inapplicable because the assessee did not disclose all material facts or make an estimate of the disallowance; the claim was a substantive deduction unsupported by evidence. The tribunal applied the statutory scheme of section 270A and related provisions to conclude that the factual failure to substantiate nexus and the resulting shortfall in declared income fall within the statutory definition of under reporting.

Conclusion: Penalty under section 270A is sustained against the assessee; the levy of penalty for under reporting of income is upheld in favour of the revenue.

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