Brief Facts of the Case
The assessee is an investment company registered as non-banking financial company (NBFC) with Reserve Bank of India. For the relevant financial year under consideration, return of income was filed showing taxable income of Rs.5,29,14,607/- on 28.10.2005 and the AO completed the assessment u/s 143(3) of the Act at an income of Rs.5,93,93,381/- after making several disallowances including disallowance of Rs.52,30,121/- u/s 35D of the Act.
The aggrieved assessee filed an appeal before the CIT(A) wherein the assessee did not press disallowance made by the AO u/s 35D of the Act. Subsequently, the AO issued notice requiring the assessee to show cause as to why penalty u/s 271(1)(c) of the Act be not imposed with reference to additions sustained on further appeal before the CIT(A) viz. disallowance of Rs.52,30,127 u/s 35D of the Act and disallowance of Rs.97,381 u/s 14A of the Act.
After considering detailed reply of the assessee, the AO did not find himself satisfied with the explanation furnished by the assessee and imposed penalty u/s 271(1)(c) of the Act in respect of aforesaid both disallowances.
Question of Law
- Whether penalty can be imposed merely on the ground that the assessee submitted the claim under a bona fide belief and due to inadvertent mistake which was not found to be acceptable or was not accepted by the revenue?
- Whether penalty can be imposed because assesse didn’t objected the addition / disallowance?
Contention of the Assessee
The assesse submitted that the unamortized amount of public issue expense lying in the books of account was not described with assets of demerged unit at Dadra by the accountants while preparing the scheme of demerger and due to this inadvertent and bona fide mistake, the assessee company claimed deduction u/s 35D of the Act in the return of income for the relevant assessment year. The assessee further submitted that even in the case of disallowance in the hands of assessee company, the same amount would be eligible for deduction in accordance with the provisions of sub-section (5A) of section 35D of the Act for the unexpired period in the hands of resulting company i.e. Consolidated Photo Products Ltd. which did not claim any deduction in this regard in the return of income for the year under consideration.
He also submitted that the assessee company was not at any advantageous position to claim deduction u/s 35D of the Act as both the companies i.e. appellant company and the transferee company belong to the same group, therefore, the mistake was bona fide and inadvertent and hence penalty was not leviable. The assessee has further submitted that no deduction for the aforesaid expenditure was claimed in the return of income of Consolidated Photo Products Ltd. for AY 2005-06 which again shows the bona fide of the assessee in this regard.
Contention of the Revenue
The Department Representative submitted that in the relevant assessment year, the assessee claimed deduction u/s 35D of the Act in respect of unit at Dadra, UP for a period of 10 years w.e.f. AY 1996-97 in accordance with the provisions of section 35D of the Act. The DR further submitted that the relevant assessment year was the last year for this claim. He further submitted that Dadra Unit was demerged under the scheme of demerger into transferee company viz. Consolidated Photo Products Ltd. (now known as Jindal Photo Limited). He further submitted that the assessee claimed deduction u/s 35D of the Act by furnishing inaccurate particulars of its income, therefore, the AO was justified in imposing the penalty.
He further submitted that the onus was on the assessee to prove that there was no concealment of income and assessee has not furnished inaccurate particulars of its income and the assessee has failed to discharge its onus and the explanation offered by the assessee was not found to be satisfactory and acceptable by the AO, therefore, the penalty was rightly imposed u/s 271(1)(c) of the Act.
He further submitted that the Dadra unit was showing loss which was subsequently merged with the assessee and in this situation, the assessee placed claim u/s 35D of the Act with the intention to reduce tax liability of the assessee and therefore, the AO was right in imposing penalty for concealment and furnishing of inaccurate particulars of income of the assessee.
Held by the ITAT
We note that although the assessee claimed deduction u/s 35D of the Act, the unamortized amount of public issue expense lying in the books of account was disallowed by the AO and addition was made. We further note that this disallowance attained finality when the assessee accepted the conclusion of the AO by not pressing the ground before the CIT(A) pertaining to this issue.
However, it is a well-settled proposition that the quantum of penalty proceedings are separate proceedings and penalty cannot be imposed merely on the ground that the assessee did not challenge or agitate the issue before higher forum and accepted the disallowance made by the AO.
On careful consideration of above submissions of both the sides, we note that in accordance with the provisions of section (5A) of section 35D of the Act, the resulting company was eligible for deduction but no deduction was claimed by the resulting company i.e. Consolidated Photo Products Ltd. as per computation of income for the year under consideration.
In view of above noted facts, we are inclined to agree that the impugned claim of deduction u/s 35D of the Act in the hands of Consolidated Photo Products Ltd. would have reduced the aforesaid income and consequential payment of taxes and hence, the assessee company was not at all in any advantageous position to make a false claim of deduction u/s 35D of the Act as the assessee company and the transferee company belong to the same group of companies.
In the result, the appeal of the revenue is dismissed.