• Nov
  • 24
  • 2009

Penalty u/s 271(1)(c) can not be levied on ground of disallowance of deduction u/s 80HHC of IT Act, 1961

CASE LAW DETAILS

Decided by: ITAT, DELHI BENCH `A’: NEW DELHI,  In The case of: Model Footwear Pvt.Ltd. v. ITO,  Appeal No.: ITA No. 4110/Del/2003,Decided on: May 22, 2009

RELEVANT PARAGRAPH

12. Section 271(1)(c) provides that if the AO or the Commissioner (Appeals) or the Commissioner, in the course of proceedings in this Act is satisfied that any person has concealed the particulars of his income or furnish inaccurate particulars of income, he may direct that such person shall pay by way of penalty a sum which shall not be less than but which shall not exceed three times the amount of tax sought to be evaded by a reason of the concealment of particulars of his income. Explanation 1 to section 271(1)(c) provides that where in respect of any facts material to the computation of the total income of any person under the Act, such person fails to offer an explanation or offers an explanation which is found by the AO or the Commissioner (Appeals) or the Commissioner to be false, or such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bonafide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then the amount added or disallowed in computing the total income of such person as a result thereof shall for the purpose of clause (c) of sub section 271, be deemed to represent the income in respect of which particulars have been concealed. In other words/ the necessary elements for attracting Explanation 1 to sec. 271(1 )(c) may be stated as under

(i) The person fails to offer the explanation, or

(ii) He offers the explanation which is found by the AO or the

Commissioner (Appeals) or the Commissioner to be false, or (Hi) The person offers explanation which he is not able to substantiate and fails to prove that such explanation is bonafide and that all the facts relating to the same have been disclosed by him.

13. If the case of any assessee falls in any of these three categories, then the deeming provision provided in Explanation 1 to sec. 271(1)(c) comes into play, and the amount added or disallowed in computing the total income shall be considered as the income in respect of which particulars have been concealed, for the purposes of clause (c) of sec. 271(1), and the penalty follows. On the other hand, if the assessee is successfully able to come out of the above three conditions, then he cannot be deemed to have concealed the particulars of his income with reference to the amount added or disallowed in the computation of total income. We may put It differently that if assessee has been able to offer an explanation, which is not found by the authorities to be false, and assessee has been able to prove that such explanation is bonafide and that all the facts relating to the same have been disclosed by him, the assessee shall be out of the clutches of Explanation 1 to sec. 271(1)(c) of the Act, and fn that case the penalty shall not be imposed.

15. First, we shall take up the issue as to whether penalty u/s 271(1)(c) is leviable in respect of disallowance of deduction made u/s 80HHC of the Act. The deduction u/s 80HHC was claimed by the assessee at Rs. 1,52,63,904/ -, which has been reduced to Rs. 1,49,12,573/ -. Thus, the deduction amounting to Rs. 3,51,331/- has been disallowed by the AO. The deduction has been reduced by the AO for the reason that 90% of the interest income and miscellaneous income of Rs. 4,20,9457- was included in the business profit by the assessee while computing the deduction u/s 80HHC though the 90% thereof should have been reduced from the profit as per Explanation (baa) to sec. 80HHC of the Act The 90% thereof was worked out by the AO at Rs. 3,78,850/-. The details of the interest as well as as miscellaneous income were duly furnished by the assessee in the return of income. The assessee has claimed deduction u/s 80HHC also with reference to the aforesaid income by way of interest and miscellaneous income. The answer to question as to whether the interest income and miscellaneous income are to be excluded from the business profit for the purpose of computing deduction u/s 80HHC is dependent upon the nature of the interest income and miscellaneous income after ascertaining whether they are directly connected to the operational activities of the assessee’s business, and on the issue as to whether certain income from business is of operational in nature or not there could be a difference of opinion between the assessee and the AO. Simply because the assessee has claimed deduction u/s 80HHC with reference to the interest income and miscellaneous income without reducing 90% thereof from the net profit is by itself cannot be a basis to hold that the assessee has concealed income or has made incorrect claim with a view to evade the payment of taxes. It is not the case of the AO that the interest income and miscellaneous income were not at all earned by the assessee in the course of carrying on its business activities or were patently assessable under the head “other sources”. The deduction has been disallowed by applying the provisions of Explanation (baa) to sec. 80HHC without giving any finding that the assessee has failed to disclose all material facts relating to the computation of deduction u/s 80HHC or that the assessee’s claim was false. In the light of the discussion made above, we are, therefore, of the considered view that the assessee’s claim was bonafide and assessee has disclosed all material facts relating to the computation of deduction u/s 80HHC and, thus, the assessee has been able to discharge his burden that lay upon him under explanation 1 to section 271(1)(c) of the Act. We, therefore, hold that no penalty u/s 271(1)(c) is to be levied in so far as the disallowance of claim of deduction u/s 80HHC is concerned.

Sandeep Kanoi

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