Penalty u/s 271 (1) ( c )

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Rupesh Gunjal (Querist)
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20 June 2011 Firm is not charging interest on Partners capital account having debit balance. But A.O.has decided to charge the interest and add the interest income to the Firm and levy the penalty u/s 271 (1)(c). Is it tenable.Pls provide the case law.

CA MANOJ GUPTA

CA MANOJ GUPTA (Expert)
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21 June 2011 THE AO IS TRYING TO TAX NOTIONAL INCOME IN THE HANDS OF THE FIRM
U CAN TAKE HELP FROM THE FOLLWING
In Asstt. CIT v. Kamal Kumar (2003) 80 TTJ (Jod-Trib) 356 the assessing officer has estimated the interest income and made addition. The assessee contended that his wife Smt. Lata and HUF have been the existing income-tax assessees and filing their returns of income. Accordingly, there was no justification of addition of estimated interest income in the hands of the assessee. He also contended that the addition has been made merely on the basis of estimate without there being a specific finding as to actual accrual/receipt of income. It was held that the assessee's HUF and wife was existing income-tax assessee. Besides, the assessing officer has made the addition merely on the basis of estimate without giving a specific finding to actual accrual/earning of income. Therefore, there was no justification for addition on this count.
Similarly in Ravindra Kumar Sharma v. ITO ITAT Jaipur Bench, SMC ITA No. 905/Jp/2005 for the relevant assessment year, the Assessing Officer made an addition of Rs.78,100 towards deemed interest on interest-free loans given by the assessee to his father and sister. The AO held that on the one hand the assessee had taken loans on which he was paying interest @ 12% p.a. and on the other hand he had given interest-free loan to two persons. He, therefore, calculated interest @ 12% on the closing balances of the loans given and added the said amount as deemed income of the assessee. The CIT (A) upheld the AO’s order stating that the interest-free capital was consumed in the fixed assets and the security deposits. The Tribunal Jaipur Bench held that taxation of notional interest is not permissible and it is always for the AO to establish nexus between the interest-bearing funds and the interest-free advances to justify the disallowance on the claimed interest payment.
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