CIT Vs Nirma Limited (Gujarat High Court)
Summary: The Gujarat High Court dismissed Revenue’s Tax Appeal Nos. 2089 of 2009 and 169 of 2010, answering both substantial questions of law in favour of Nirma Limited and against the Revenue. The appeals concerned deletion of penalties imposed under Section 271(1)(c) of the Income-tax Act, 1961.
Tax Appeal No. 2089 of 2009 related to AY 2000-01, while connected Tax Appeal No. 169 of 2010 related to AY 1998-99. The substantial question in the first appeal concerned deletion of penalty stated in the question as Rs.33,66,07,201, while the second concerned penalty of Rs.9.25 crores.
For AY 2000-01, Nirma Limited had originally returned income of Rs.4,28,09,945. Assessment under Section 143(3) was completed on 31.03.2003 at Rs.157.65.29.680 and, following the CIT(A)’s order dated 29.11.2004, total income was redetermined at Rs.157,04,10,400. The principal additions included Rs.92,62,52,470 relating to interest on SPNs (Secured Premium Notes), pre-operative expenses resulting in a net disallowance of Rs.62,15,39,797, and excess depreciation of Rs.27,77,824.
The Assessing Officer initiated penalty proceedings under Section 271(1)(c) and imposed penalty of Rs.59,69,70,000. The CIT(A) deleted penalty concerning the two other principal additions because the Tribunal had restored those issues to the Assessing Officer for re-adjudication, while observing that penalty could be considered later if additions were ultimately sustained. However, the CIT(A) upheld penalty concerning the Rs.92.62 crore SPN-interest disallowance and reduced the overall penalty to Rs.35,66,07,201.
The Tribunal deleted the penalty. It observed that the allowability of interest on SPNs itself was not being decided in the penalty appeal, but that the underlying issue was debatable because the quantum dispute had been admitted by the Gujarat High Court in Tax Appeal No.1219 of 2006 on the question whether interest on Special Purpose Notes borrowed for business purposes was allowable. The Tribunal followed its earlier decision in Bill Metal Industries Ltd. Vs. ACIT, ITA No.1204/Ahd/2007, dated 13.05.2008, where penalty under Section 271(1)(c) was deleted in circumstances involving a debatable issue.
The Tribunal also independently held that penalty proceedings were separate from assessment proceedings and that an addition did not automatically justify penalty. It relied on several precedents concerning debatable claims and Explanation 1 to Section 271(1)(c). The Tribunal noted that the interest payment had suffered tax deduction at source under Section 194A, the books had been audited under the Companies Act, 1956 and Section 44AB, and there was no allegation that the interest expenditure was not actually incurred. It further noted that interest on NCDs had been allowed under Section 36(1)(iii).
The High Court recorded that the quantum appeals, Tax Appeal Nos.277 of 2007 and 328 of 2007, had been decided in favour of the assessee by orders dated 11.10.2017, following the Court’s judgment in Tax Appeal No.1219 of 2006 dated 10.10.2017. In that judgment, the Court had held that interest concerning the secured promissory notes was not required to be disallowed and that the interest was for business purposes.
Consequently, the High Court held that the very basis of the penalty did not survive. It observed that the Tribunal had rightly deleted the penalty after considering the issue as debatable and that the issue had subsequently achieved finality in favour of the assessee. Both questions of law were therefore answered in favour of the assessee and against the Revenue, and both appeals were dismissed.
Cases Discussed
- Bill Metal Industries Ltd. Vs. ACIT, ITA No.1204/Ahd/2007, dated 13.05.2008
- Sarabhai Chemicals Pvt. Ltd. Vs. CIT, 257 ITR 355 (Guj.)
- Badridas Keshavprasad Vs. DCIT, 79 ITD 26
- Rupam Mercantile Ltd. (In Liqui.) & Ors. Vs. DCIT, 91 ITD 237
- CIT Vs. Dharmachand L. Shah, 204 ITR 462 (Bom.)
- Gujarat Credit Corpn. Ltd. Vs. ACIT, 113 ITD 113 (Ahd.)(SB)
- CIT Vs. Harshvardhan Chemicals & Minerals Ltd., 133 Taxman 320 (Raj.)
- Durga Kamal Rice Mills Vs. CIT, 265 ITR 25 (Cal.)
- CIT Vs. Bacardi Martini Ltd., 288 ITR 585 (Delhi)
- Burmah Sell Oil Storage & Distributing Co. of India Ltd. Vs. ITO, 112 ITR 592 (Cal.)
- CIT Vs. Amar Nath, 230 ITR 619 (All.)
- CIT Vs. Calcutta Credit Corpon., 166 ITR 29 (Cal.)
FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT
1. Heard learned Senior Standing Counsel Mr. Utkarsh Sharma appearing for the appellant – Revenue and learned advocate Mr.B.S.Soparkar appearing for the respondent. These appeals are admitted for consideration of the following substantial questions of law by order dated 19.07.2011 and 04.05.2011 respectively:
SUBSTANTIAL QUESTION OF LAW IN TAX APPEAL No. 2089 of 2009:
“Whether the Appellate Tribunal is right in law and on facts in reversing the order passed by the CIT(A) and thereby deleting the penalty of Rs.33,66,07,201/- levied u/s. 271(1)(c) of the Act?”
SUBSTANTIAL QUESTION OF LAW IN TAX APPEAL No. 169 of 2010:
“Whether the Appellate Tribunal is right in law and on facts in reversing the order passed by CIT(A) and thereby deleting the penalty of Rs.9.25 crores levied u/s. 271(1)(c) of the I.T.Act?”
2 Both these appeals are filed by the appellant – revenue being aggrieved by the orders passed by the Income Tax Appellate Tribunal, Ahmedabad ‘A’ Bench, (for short ‘the Tribunal’) in ITA No. 1972/Ahd/2007 for the Assessment Year 2000-01 and ITA No. 1971/Ahd/2007 for the Assessment Year 1998-99, filed by the assessee challenging the confirmation of penalty levied under Section 271(1)(c) of the Income Tax Act, 1961 (for short ‘the Act’) for the respective assessment years. The relevant paragraphs of the impugned order reads as under:
“2 For the year under consideration, the assessee filed its return of incothe on 30.11.2000 declaring income of Rs. 4,28,09,945.
Assessment u/s. 143(3) was completed on 31.3.2003 on a total income of Rs. 157.65.29.680 and in pursuance of appellate order passed by the CIT (A) on 29.11.2004 the total income was re-determined at Rs. 157,04,10,400. In the assessment, the main disallowances/additions comprised of the following three items.
i. “Rs.92,62,52.470 on account of interest etc. pertaining to SPNs (Secured Premium Notes);
ii. Pre-operative expenses of Rs. 53,73,39,718 and Rs.16,55,02,104 which have resulted in net disallowance of Rs. 62,15,39,797 after netting of depreciation of Rs. 8,12,97,000, and
iii. Rs. 27,77,824 for excess claim of depreciation
Vide order dt. 29.11.2004 the above disallowance/additions were confirmed by the learned CIT (A) and also by the Tribunal, as observed by the learned CIT (A) in his order.
2.1 The Assessing Officer initiated penalty proceedings u/s. 271(1) (c) of the Act in respect of all the additions including the addition of Rs.92,62,52,740 and ITA No. 1972/Ahd/2007 after considering the explanation of the assessee levied the penalty of Rs.59,69,70,000.
2.2 Aggrieved, assessee carried the matter in appeal before the CIT (A) and the learned CIT(A) vide paragraph 21 and 22 of his order, subject to certain observation, has deleted the penalty u/s. 271 (1) (c) in respect of the additions mentioned in Sl. (11) and (m) of paragraph 2 above of this order Paragraph 21 and 22 of the CIT(A)’s order reads as under:
“21 In regard to the penalty referable to the other two main addition the position is that the Tribunal has followed its earlier order(s) and on that basis vide paras marked 12 & 14 one pages. 26 and 27 respectively of its order dated 30.8.2006 for this year the Tribunal has restored the matters to the file of the Assessing officer for re-adjudication. Obviously, at this point of time penalty u/s 271(1)(c) with reference to the aforesaid two sums cannot be upheld.
22 Out of abundant caution, it may be mentioned that if and when on re-adjudication addition/disallowance is made for the whole or a part of the said two sums of Department would be free to consider the question of exigibility of penalty u/s 271(1)(c) in respect of that sum added or disallowed and take appropriate action in that regard as may be permissible in law then.”
However, the learned CIT(A) upheld the imposition of penalty u/s. 271(1)(c) in respect of the addition in SL.(i) of paragraph 2 of this order i.e. Rs.92,62,52,470 on account of interest etc, pertaining to SPNS (Secured Premium Notes) and this reduced the penalty from Rs.59,69,70,000 to Rs.35,66,07,201.”
2.1 Being aggrieved by the order passed by the CIT(Appeals), the assessee carried the appeals before the Tribunal. The Tribunal, considering the submissions made by both the sides, deleted the penalty by observing as under:
“6.4 We find that before us, the learned AR of the assessee argued at length that the interest on SPN was an allowable expenditure. But this is not a question to be decided in the present appeal. The only question that requires our decision in the present appeal is “Whether on the facts and circumstance, for such disallowance/addition penalty u/s. 271(1)(c) can be levied ?. We find that undisputedly the interest on SPNs was not allowed by the assesseing officer by not accepting various explanations of the assessee and such action of the assessing officer was confirmed by the learned CIT(A) as well as the Tribunal. On further appeal filed by the assesee against the said order of the Tribunal, the same has been admitted by the Hon’ble Gujarat High Court, vide order dt. 20.11.2006 in Tax Appeal No. 1219 of 2006 and others, in terms of the following substantial question of law:
“Whether in the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that interest on Special Purpose Notes was required to be disallowed when the said interest was in respect of the capital borrowed for the purposes of the business of the appellant.”
Thus, we find that the dispute as to whether or not the interest on Special Purse Notes was required to be disallowed in the present case is a debatable e and as such, in our considered view, the penalty u/s. 271(1)(c) levied with refence to that disallowance cannot be sustained. While dealing with a similar the ITAT. Bench-C. Ahmedabad in the case of Bill Metal Industries Ltd. ACIT in ITA No. 1204/Ahd/2007 dt. 13.05.2008 has deleted the penalty Jevied u/s. 271(1)(c) of the Act. The relevant portion of the said order is quoted here under for ready reference:
“10. It is true that disallowance made by the AO was upheld by the Tribunal, but in view of the fact that some substantial question of law has been admitted by the High Court on such disallowance, it would be difficult to hold that it was a case of concealment of inome, because this disallowance stands as debatable in view of three decisions Rupam Mercantile Ltd. (In Liqui.) & Ors., Emtici Engg and K.G. Nariman Alias N.K. Gajwani referred to above. Further, the assessee’s case is also covered by the Explanation-1 to section 271(1)(c) which provides for deeming concealment only in a case where such person fails to offer explanations or offers explanations which is found to be false or offers an explanation which he is not able to substantiate and fails to prove that such explanations are bonafide and that all the materials relating to the same and material to the computation of income of his income has been disclosed by him. It is not a case of revenue that assessee has not offered an explanation. It is also not a case of the revenue that explanation furnished by the assessee was false. The assessee’s case falls in the last category ie where the assessee offers explanations, which he is not able to substantiate and fails to prove such explanation was bonafide. Here necessary facts relating to the claim of interest were made before the AO and therefore, in view of the decision of Gujarat High Court in the case of Sarabhai Chemicals Pvt. Ltd. Vs. CIT, 257 ITR 355 (Guj) and the decision of the Third Member Badridas Keshavprasad Vs. DCIT 79 ITD 26 and Rupam Mercantile Ltd. (in Liqui.) & Ors. Vs. DCIT 91 ITD 237 it would not be case of deemed concealment, and consequently, penalty may not be justifiable. Accordingly, we delete the penalty”
Following the decision of the ITAT, C-Bench, Ahmedabad in the case of Bill Metal Industries Ltd. vs. ACIT in ITA No. 1204/Ahd/2007 dt. 13.05.2008 the impugned penalty levied u/s. 271(1)(c) is not leviable and as such liable to be deleted and it is deleted.
6.5 Even otherwise on merit also, the impugned penalty cannot be sustained because of the following reasons. It is well settled law that penalty proceedings u/s. 271(1)(c) of the Income tax Act, 1961 are separate and distinct, therefore, addition in the assessment would not automatically authorise the Revenue to impose penalty. In support of this, reliance can be placed on the decisions in case of CIT vs. Dharmachand L. Shah (1993) 204 ITR 462 (Bom.) and Gujarat Credit Corpn. Ltd. Vs. ACIT (2008) 113 ITD 113 (Ahd)(SB). Hon’ble Rajasthan High Court in the case of CIT vs. Harshvardhan Chemicals & Minerals Ltd (2003) 133 Taxman 320 took the view that where the issue relating to a duction is debatable, which has not been allowed as deduction is not sufficient impose penalty u/s. 271(1)(c) of the Income-tax Act, 1961. In support of this proposition reliance can also be placed on the following decisions:
(1) Durga Kamal Rice Mills Vs. CIT (2004) 265 ITR 25 (Cal)
(2) CIT v. Bacardi Martini Ltd. (2007) 288 ITR 585 (Delhi)
(3) Burmah Sell Oil Storage & Distributing Co. of India Ltd. v. ITO (1978) 112 ITR 592 (Cal)
(4) CIT v. Amar Nath (1998) 230 ITR 619(AII)
(5) CIT v. Calcutta Credit Corpon. (1987) 166 ITR 29(Cal)
“Explanation 1 to Section 271(1)(c) of the Income-tax Act, 1961 as stood in the Assessment Year 2000-01, under appeal reads as under “Explanation 1 — Where in respect of any facts material to the computation of the total income of any person under this Act
(A) such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the Commissioner to be false, or
(B) such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide 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 purposes of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed.”
On perusal of the above and the in the light of precedents, it reveals that Explanation to Section 271(1)(c) was substituted by the Taxation Laws (Amendment) Act, 1975 w.e.f. 1.4.1976. By this Explanation a fiction has been created for deeming concealment of particulars of income that where in respect of any facts material to the computation of the total income of any person fails to or offers an explanation which he is not able to substantiate and fails to prove penalty is leviable. But if an assessee establishes that the explanation furnished was bonafide and all the facts relating to the same and material for computation of the total income has been disclosed by him. Explanation 1B will be account. On this interest payment, tax has been deducted at source, as required u/s. 194A of the Income-tax Act, 1961. The books of accounts were statutorily audited as required under the Companied Act, 1956 as well as 44AB of the Income-tax Act, 1961. It is nobody’s case that the interest expense was not incurred. The interest on NCDs has been allowed u/s. 36(1)(iii) of the Income-tax Act, 1961. In this view of the matter, we are convinced that in the facts and circumstances of the case, the penalty levied u/s 271(1)(c) of the Income-tax Act. 1961 in respect of disallowance of interest/addition of Rs. 92.62.52.470/-is hereby cancelled.
7 In ground No.3, the assessee has challenged the observation of the learned CIT(A) given in paragraph 22 of his order, which is quoted earlier While deleting the penalty levied u/s. 271()(c) of the Act in respect of additions mentioned in Sl. (ii) and (ii) of paragraph 2 of this order, the learned CIT(A) has observed that the Department would be free to consider the question of exigibility of penalty u/s. 271(1)(c) in respect of that sum added or disallowed and take appropriate action in that regard as may be permissible in law then. We find that the CIT(A) has deleted the penalty u/s. 271(1)(c) of the Act in respect of the above additions. In view of this, the above observation made by the learned CIT(A), which is general in nature, does not rise any cause of action for filing of the appeal. Therefore, we dismiss ground No. 3 of the assessee.”
2.2 It was submitted by learned advocates for the respective parties that Tax Appeal No.277 of 2007 and Tax Appeal No.328 of 2007 were preferred by the assessee against the order of the Tribunal confirming the quantum and this Court, following the judgement and order of this Court passed in Tax Appeal No.1219 of 2006 decided both the appeals by separate orders dated 11.10.2017 in favour of the assessee.
2.3 It was, therefore, submitted that in view of the reversal of the order of the Tribunal by this Court on quantum, the very basis of the penalty would not survive, and therefore, these appeals are liable to be dismissed.
3 Considering the above submissions and in view of the orders dated 11.10.2017 passed in Tax Appeal No. 277 of 2007 and Tax Appeal No. 328 of 2007, wherein, this Court by following its judgement and order in Tax Appeal No.1219 of 2006 dated 10.10.2017, answered the question with regard to interest on secured promissory note that the interest was not required to be disallowed and admittedly, the said interest was for the purpose of business. The Tribunal has, therefore, rightly deleted the penalty levied upon considering the debatable issue which has now achieved finality.
4 Both the questions of law are, therefore, answered in favour of the assessee and against the revenue. The appeals are, accordingly dismissed.
