Penalty – Concealment of income – Suit for recovery by bank settled at Rs.42,45,477 as against Rs.52,07,873 outstanding in the assessee’s books of account – Not a case to which section 271(1)(c) would apply.

The assessee took loan from Citi Bank N.A. to buy a hotel (capital asset). Default was committed in repayment of loan. Suit was filed for recovery, which was settled by signing consent decree on 30th April, 1982. The consent decree recited that the borrowers acknowledged their liability to the plaintiff-bank in the sum of Rs.42,45,477, being the outstanding amount in the loan account of the bank as on 30th April, 1982. However, in the books of account of the assessee, the outstanding amount repayable to the bank was Rs.52,07,873 as on 30th April, 1982. Consequently, the Department came to the conclusion that there was a waiver by the bank to the extent of approximately rupees ten lakhs. This amount was sought to be taxed by the Department. The Department also initiated proceedings u/s. 271(1)(c) of the Incometax Act, 1961, against the assessee. The Supreme Court observed that, in the books of account of the assessee, the outstanding amount, as on 30th April, 1982, was Rs.52,07,873, including interest. However, the decree in favour of the bank was for Rs.42,45,477, because that was the amount indicated as the outstanding amount due and payable by the assessee to the bank in its books of account.

According to the Supreme Court it appeared that the bank had not calculated the interest over the years possibly for the reason that, in its accounts, this amount was classified as “NPA”. The Supreme Court held that in the peculiar facts and circumstances of this case, section 271(1)(c) of the Income-tax Act, 1961, was not applicable.