[ITAT – Mumbai] Penalty Under S. 271(1)(c) of ITA for Income Concealment Deleted as the Assessee Had Explained Reasons for Advancing Interest-Free Loan to Its Associated Enterprises

Introduction

In the recent case of Air Works India (Engineering) (P) Ltd. v. Income Tax Officer[i] The Income Tax Appellate Tribunal, Mumbai (‘ITAT’) allowed the appeal of the Air Works India (Engineering) (P) Ltd. (‘Assessee’) and deleted the penalty imposed by the Commissioner of Income Tax (Appeals) [‘CIT(A)’] as the Assessee had provided comprehensive reasons for not charging interest on the loans advanced in an international transaction.

Brief Facts

• The Assessee engages in providing aviation-related services. The Assessee had extended a loan to M/s. Mac Air Sales Ltd., a Mauritius-based Associated Enterprises (‘AE’) of the Assessee for meeting its working capital requirement, subsequently, the AE had repaid part amount to the Assessee.

• Subsequently, the transfer pricing officer (‘TPO’) contended that as per Form-3CEB, the AE was partly owned by the Assessee and the working capital loan was extended by the Assessee without charging any interest. Consequently, the TPO made an upward adjustment by adding interest at 11.96%.

• The Assessee clarified that being a holding company it had funded the working capital loan from its own funds and that the transaction was an equity/quasi-equity investment made in the AE as a startup support for business promotion in Asia, which did not impact profits as they were interest-free aligning with the Reserve Bank of India (‘RBI’) approvals. Thus, no interest was required on such transactions.

• ·The Assessee argued that it had disclosed all the particulars of income, therefore, there was no requirement to charge interest. However, the TPO did not accept the same.

• However, in the quantum proceedings addition was reduced as per LIBOR +300 bps and penalty under s. 271(1)(c) of the Income-tax Act, 1961 (‘ITA’) was imposed for inaccurate income leading to concealment of income in the A.Y. 2009-10 and for the A.Y. 2010-11 which was confirmed by the CIT(A).

• Being Aggrieved by the same, the Assessee had appealed before the ITAT.

Held

The Hon’ble ITAT allowed the appeal filed by the Appellant and observed as under:

• The ITAT observed that the Assessee had clarified that the working capital loan was extended from its own funds which was an equity/quasi-equity investment and the Assessee had also disclosed all particulars of income including arm’s length price of interest in the transfer pricing (‘TP’) report by explaining that interest was not chargeable on such transaction.

• Most importantly, the ITAT observed the bona fide explanations/ reasons provided by the Assessee for not charging interest and that the funds were extended in the form of investments, thus, there was no requirement to impute interest under a TP transaction.

• Consequently, the ITAT deleted the penalty levied by CIT(A) for the A.Y. 2009-10 and the A.Y. 2010-11.

Conclusion

This judgment clarifies that when an Assessee advances an interest-free loan from its own funds and provides comprehensive reasons/ explanations for not charging any interest it is deemed to be a bona fide transaction and consequently, the penalty imposed under s. 271(1)(c) of the ITA for inaccurate particulars of income leading to concealment of income was deleted.

Thus, the judgement clarifies that when proper reasons are provided in respect of the international transaction undertaken then the penalty cannot be imposed.

End Note

[i] [2024] 162 taxmann.com 464 (Mumbai - Trib.); (30.04.2024).

Authored by Purvi Garg, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.