CIT Vs. Zoom Communications Private Limited (Delhi High Court)
ITA 07/2010,(2010) 191 Taxman 179,  327 ITR 510
Judgement Delivered on: 24.05.2010,
Delhi High Court Ruling: If the assessee makes a claim which is not only incorrect in law but is also wholly without any basis and the explanation furnished by him for making such a claim is not found to be bonafide, it would be difficult to say that he would still not be liable to penalty under section 271(1)(c) of the Act
Zoom Communications Private Limited (the assessee / company) was engaged in the business of hiring of audio and video equipment. The assessee had declared a positive income in its return of income, which was selected for the scrutiny. The Assessing Officer (AO) noticed that the assessee had not made any adjustments to the taxable income on account of expenditure, like, equipment written off and income tax paid, which were debited to Profit & Loss account. The assessee contended that these amounts had not been added back in the computation of income due to oversight. The AO added both the amount pertaining to the equipment written off and income tax paid to the income of the assessee and initiated penalty proceedings under section 271(1 )(c) of the Income Tax Act (Act) against the assessee.
During penalty proceedings, the assessee claimed that it had committed a bona fide mistake and all the facts material to the computation were disclosed. The AO took the view that there was no difference of opinion as regards disallowance of these expenses and the incorrect computation given by the assessee was an act of paying less tax than what was due from it. He was of the view that the asses see was a big company, assisted by a team of Tax Auditors and, therefore, it was a case of concealment of income as well as of furnishing wrong particulars of income.
On appeal, the Commissioner of Income Tax Appeals [CIT(A)] upheld the penalty by holding that the assessee had committed serious laxity, while filing computation of income and the mistake committed by it could not be said to be bona fide.
Aggrieved by the order of the CIT(A), assessee preferred an appeal before the Income Tax Appellate Tribunal (Tribunal). The Tribunal accepted the contention of the assessee that due to oversight and bona fide mistake, the amount of income tax was not added back while filing Return of income and that no person would claim the amount of income tax as deduction, to evade payment of taxes. As regards the amount debited to Profit & Loss Account on account of equipment that had been written off, having become unusable and discarded, the Tribunal held that as per the provisions of section 32(1)(iii) of Income Tax Act, the assessee could have claimed this amount as a deduction and merely because it had claimed the same as revenue deduction, which had been treated to be capital in nature by the AO, could not be a basis to levy penalty under Section 271(1)(c) of Act, when all the relevant materials relating to that issue were duly disclosed by the assessee in the course of the assessment proceedings. The Tribunal accordingly deleted both the penalties.
Aggrieved by the order of the Tribunal , the department filed the appeal in the Delhi High Court. Delhi High Court’s observation and Ruling:
- The Tribunal was incorrect in holding that the deduction claimed by the assessee was admissible under section 32(1 )(iii) of the Act.
- The assessee is the company and the accounts of the company are mandatorily required to be audited. No advice has been claimed by the assessee in respect to the amount claimed as deduction on account of certain equipment having become useless and having been written off. Further, it is not contended by the assessee that claiming of such deduction under Section 32(1)(iii) was a debatable issue on which there were two opinions prevailing at the relevant time. In fact, the assessee did not claim, either before the AO or before the CIT(A) that such a deduction was permissible under Section 32(1 )(iii) of the Act. No such contention on behalf of the assessee finds noted in the order of the Tribunal. Thus it was the Tribunal which took the view that Section 32(1)(iii) could be attracted to the deduction claimed by the assessee. Therefore, it cannot be disputed that the assessee had no justification to claim this amount as revenue expenditure.
- In view of the provisions of Section 40(ii) of the Act, the amount of income tax could not have been claimed as a deduction while computing income of the assessee. It is not the case of the assessee that it was advised that the amount of income tax paid by it could be claimed as revenue expenditure. Further, it is not the case of the assessee that deduction of income tax paid by it was a debatable issue. In fact, in view of the specific provisions contained in Section 40(ii) of the Act, no such advice could be given by an Auditor or other Tax Expert.
- It is also not the case of the assessee that it was under a bonafide belief that these two amounts could be claimed as revenue expenditure. The assessee, in fact, out rightly contended before the AO that these amounts could not have been claimed as revenue deductions. The only plea taken by the assessee before the AO was that it was due to oversight that the amount of income tax paid and equipment written off could not be added back in the computation of income.
- Section 271(1 )(c) of the Act provides for the levy of penalty in cases where the AO is satisfied that any person had concealed particulars of his income or had furnished inaccurate particulars of such income. Also, Explanation 1 to Section 271(1) provides that where in respect of any facts material to the computation of the total income of any person, such person fails to offer an explanation or offers an explanation which is found to be false or he 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 are material to the computation of the total income of the person, have been disclosed by him, then the amount added or disallowed in computing total income of such person, as a result thereof, shall for the purpose of clause (c) be deemed to represent the income in respect of which particulars have been concealed. Thus, in case of failure of the asses see to offer any explanation furnished by him being found false, penalty can be imposed.
- However, if an explanation offered by the assessee is bonafide and all the facts relating to the same were disclosed in the return of income, mere failure on his part to substantiate it will not be enough to warrant penalty. Explanation 1 to section 271(1) would be inapplicable in respect of any amount added or disallowed as a result of rejection of the explanation furnished by the assessee, provided that his explanation is shown to be bonafide and all the facts relating to the same and material to the computation of his total income were disclosed by him.
- Relying on the judgement of the Supreme Court in the case of CIT v Reliance Petro Products Pvt. Ltd. (322 ITR 158) it was contended by the assessee, that since the factual information in respect of the amounts wrongly included in Schedule 9 of Profit & Loss Account was disclosed by the assessee, this was not a case where penalty could be imposed under section 271(1)(c) of the Act. As per the Supreme Court judgement, so long as the assessee has not concealed any material fact or the factual information given by him has not been found to be incorrect, he will not be liable to imposition of penalty under section 271(1 )(c) of the Act, even if the claim made by him is unsustainable in law, provided that he either substantiates the explanation offered by him or the explanation, even if not substantiated, is found to be bonafide. If the explanation is neither substantiated nor shown to be bonafide, Explanation 1 to section 271 (1) (c) would come into play and the assessee will be liable to for the prescribed penalty.
- In the case of Reliance Petro Products Private Limited, the addition made by the AO in respect of the interest claimed as a deduction under section 36(1 )(iii) of the Act was deleted by the CIT(A) though it was later restored, by the Tribunal, to the AO. The appeal filed by the assessee against the order of the Tribunal was also admitted by the High Court. It was, in these circumstances, that the Tribunal came to the conclusion that the assessee had neither concealed the income nor filed inaccurate particulars thereof. In recording this finding, the Tribunal felt that if two views of the claim of the asses see were possible, the explanation offered by it could not be said to be false. This, however, is not the factual position in the present case. The facts of the present case are clearly distinguishable.
- It is true that mere submitting a claim which is incorrect in law would not amount to giving inaccurate particulars of the income of the assessee, but it cannot be disputed that the claim made by the assessee needs to be bonafide. If the claim besides being incorrect in law is malafide, Explanation 1 to section 271(1) would come into play and work to the disadvantage of the assessee.
- If the assessee makes a claim which is not only incorrect in law but is also wholly without any basis and the explanation furnished by him for making such a claim is not found to be bonafide, it would be difficult to say that he would still not be liable to penalty under section 271 (1)(c) of the Act.
- We cannot lose sight of the fact that the assessee is a company which must be having professional assistance in computation of its income, and its accounts are compulsorily subjected to audit. In the absence of any details from the assessee, we fail to appreciate how such deductions could have been left out while computing the income of the assessee company and how it could also have escaped the attention of the auditors of the company.
- A general proposition as enunciated by the Tribunal, that no person would ever claim the amount of income tax as a deduction with a view to avoid payment of tax. One cannot lay down a hard and fast rule in this regard and every case must be decided considering the facts and circumstances in which such a deduction is claimed, coupled with as to whether the explanation offered by the assessee for making the claim, is shown to be bonafide or not.
- Accordingly, it has been held that the AO has correctly levied penalty under section 271(1)(c).
In order to attract penalty under section 271(1 )(c), there has to be either concealment of income or furnishing of inaccurate particulars of such income. The Supreme Court in the case of CIT Vs Reliance Petro Products Pvt. Ltd. (supra) examined the applicability of penalty under section 271(1)(c) only with reference to second condition, that is, furnishing of inaccurate particulars of income and not on the issue of concealment of particulars of income. In that limited context, the Supreme Court held that a mere making of a claim, which is not sustainable in law, by itself, will not amount to furnishing of inaccurate particulars of income.
However, Delhi High Court in this case has examined the penalty issue under section 271(1 )(c) with reference to first condition, that is, concealment of particulars of income and therefore, it has invoked the Explanation 1 to section 271(1) to hold that if the assessee makes a claim which is not only incorrect in law but is also wholly without any basis and the explanation furnished by him for making such a claim is not found to be bonafide, it would be difficult to say that he would still not be liable to penalty under section 271(1 )(c) of the Act.
This judgement seems to have interpreted the penalty provisions very strictly, and levied penalty even for an inadvertent mistake. Probably, this may not be the intention of the legislature while legislating on penalty provisions, and it remains to be seen how the Supreme Court will interpret such situations where inadvertent mistakes are committed by the taxpayer which are not malafide in nature
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