DCIT Vs M/s. National Textile Corporation. Ltd. (ITAT Delhi)
We have carefully gone through the orders of the authorities below and the material placed before us. We have also deliberated on the judicial pronouncements referred to by the lower authorities in their respective orders as well as cited by the learned DR and AR during the course of hearing. The learned CIT(A) while deleting the penalty has passed a well reasoned order which does not require any interference. The findings of the learned CIT(A) are as under:
“ Ground No. 1, 3 &5 related to imposition of penalty u/s 271(1 )(c) which are dealt with as under
On the factual front, there is loss in foreign exchange fluctuation. Whether it is capital in nature or revenue in nature is the issue of contention.
During the year under consideration the assessee suffered loss due to foreign exchange rate fluctuations. This was in relation to import of machinery from other countries.
As per section 43A, when the assessee was supposed to add this amount to the cost of plant and machinery and claim depreciation against it, instead it claimed it wrongly as revenue expenditure.
It is a fact that the assessee accepted the addition at CIT(A)’s level and did not further carry the matter to higher appellate forum. Once on the factual front the issue is decided, now comes the issue of penalty.
After the amendment to Sec.271 (l) (c) w.e.f 1.4.1964, mens rea need not be established. Hence on this ground assessee’s contention fails. Support for this rational is taken from the following judgments .
Hon’ble Apex Court in Union of India vs. Dharmendra Textile processors (SC) 306 ITR 277, Guljag Industries Ltd. vs. CTO (SC) 293 ITR 584 and CIT vs. Atul Mohan Bindal (SC) 317 ITR 1 have held that ‘mens rea’ not essential for civil liability of penalty – Penalties under fiscal statutes are for breach of civil liabilities – Willful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution u/s 276C.
Assessment and penalty proceedings are two separate and distinct proceedings.
Every addition in assessment order does not automatically qualify for levy of penalty.
It is settled position that assessment proceedings and penalty proceedings are separate, and distinct and as held by Hon’ble Supreme Court in the case of Anantharaman Veerasinghaiah & Co. v. CIT {1980] 123 ITR 457, the findings in the assessment proceedings cannot be regarded as conclusive for the penalty proceedings. It is also well settled that the criterion and yardsticks for the purpose of imposing penalty u/s 271 (l)(c) of the act are different than those applied for making or confirming the additions. It has been held by Hon’ble Courts, including Hon’ble Mumbai Tribunal in the case of Yogesh R.Desai Vs. ACIT (8DTR 101), each and every addition made during assessment proceedings does not automatically lead to levy of penalty for concealment of income. If the revenue is not able to establish either concealment of income or furnishing of inaccurate particulars of income, penalty u/s 271(1 )(c) is not leviable. In such circumstances, Hon’ble Delhi High Court in the case of CIT v. Bacardi Martini India Ltd. [2007] 288 ITR 585/158 TAXMAN 348 held that no penalty is imposable.
In the present case, in the penalty proceedings no concealment of income or inaccurate particulars of its income has been established by the department. They simply relied on the findings in the assessment order, which will not suffice for levy of penalty.
Making a wrong claim of deduction-will it qualify for levy of penalty u/s 271(l)(c) ?
The Hon’ble Apex Court in its judgment in the case of Reliance Petro Products Ltd. 189 Taxman 322 (SC) said no to this proposition.
“Merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the Revenue, that by itself would not, in our opinion, attract the penalty under Section 271 (l)(c).
If we accept the contention of the Revenue then in case of every Return where the claim made is not accepted by Assessing Officer for any reason, the assessee will invite penalty under Section 271 (l) (c). That is clearly not the intendment of the Legislature”.
Non pointing of the wrong claim by tax audit
Sec.43A in its amended form came into effect from 01.04.2003. In the present case, the tax audit was done on 25.09.2009. The foreign exchange fluctuation with reference to import of plant & machinery, in what way they would affect the taxability of the assessee should have been pointed out by the tax auditors of the company. But it missed their attention. For the omissions and commissions on the part of the tax audit personnel, the assessee should not be found fault with. This rational is supported by Delhi ITAT’s decision in the case of Nalwa Investments (this decision relates to 14A deduction but can be applied to the facts of the case. The operational part of this judgment is reproduced as under:
“However, the accounts have been audited and the return was accompanied by the tax audit report. The latter did not suggest any disallowance u/s 14A. Therefore, it can be inferred that all expenses were claimed in full as the auditors did not suggest disallowance of any part of the expenditure relating it to the dividend income. Thus, it can be concluded that the claim was made on the basis of tax audit report. There is no allegation by the AO that there was any collusion between the auditor and the assessee to enhance the loss in the return of income by ignoring the provision contained in section 14A. Therefore, it can be said that the assessee has furnished an explanation which is bona fide.”
AO’s reliance on the decision of Delhi High Court in Zoom Communication (P)Ltd. 327 ITR 510.
In this case, the Hon’ble Delhi High Court took the view that, as the Income Tax Department is resorting to scrutiny in limited number of cases, the penalty should be treated as a deterrent effect and no lenient view may be taken.
There is merit in the AO’s contention. But it won’t apply in all the cases on a blanket level. The operational part of this judgment is reproduced as under:
” 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 bona fide. If the claim besides being incorrect, in law, is mala fide the Explanation 1 to section 271(1) would come into play and work to the disadvantage of the assessee. [Para 19] The Court cannot overlook the fact that only a small percentage of the income- tax returns are picked up for scrutiny. 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 bona fide, it would be difficult to say that he would still not be liable to penalty under section 271(l)(c ). If one takes the view that a claim which is wholly untenable in law and has absolutely no foundation on which it could be made, the assessee would not be liable to imposition of penalty, even if he was not acting bona fide while making a claim of this nature, that would give a licence to the unscrupulous assessees to make wholly untenable and unsustainable claims without there being any basis for making them, in the hope that their return would not be picked up for scrutiny and they would be assessed on the basis of self-assessment under section 143(1) and even if their case is selected for scrutiny, they can get away merely by paying the tax, which, in any case, was payable by them. The consequence would be that the persons, who make claims of this nature, actuated by a mala fide intention to evade tax otherwise payable by them, would get away without paying the tax legally payable by them, if their cases are not picked up for scrutiny. This would take away the deterrent effect, which these penalty provisions in the Act have. ” [Para 20]”
So to apply the judgment AO has to prove that
1. The claim of assessee is wrong but also that
2. It was made with malafide intention. .
The facts in the present case, show that
– Assessee is a public sector undertaking owned by the Govt. of India
– Assessee is incurring heavy losses
– No personal benefit accrues to anybody because of wrong claim of deduction
– Assessee has also not concealed any income or furnished any inaccurate particulars
– It is only an issue of wrong claim of deduction
Hence as AO failed to prove that the claim was made with malafide intention, the above cited judgment won’t apply.
Based on the above fact and circumstances, the penalty u/s 271(1)(c) levied for AY 2009-10 is hereby cancelled.”
From the perusal of above, it is clear that the assessee’s intention was not to conceal the income. The assessee had rightly disclosed it in the Profit and Loss account and not included while computing the taxable income. The revised return of income filed by the assessee has also been accepted by the AO. In view of the judgment of Hon’ble Supreme in the case of CIT vs. Reliance Petro products P. Ltd. (2010) 322 ITR 158, we are of the view that it is not a fit case for levy of penalty as AO had not given any finding separately as to whether there was concealment of income or whether assessee had furnished inaccurate particulars of income. The AO has imposed the penalty on the ground of disallowance of foreign exchange fluctuation. The assessee cannot be fastened with the law of penalty without there being a clear specific charge. Fixing a charge should not be in a casual manner and it has not been permitted under the law. After considering the judgments relied on by both the sides and orders of the lower authorities, we, while upholding the order of CIT(A), are of the considered opinion that learned CIT(A) is justified in deleting the penalty.
FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-
This is an appeal filed by the Revenue u/s 271(1)(c) of the Income-tax Act, 1961 (hereinafter referred to as “the Act) against an order dated 17.7.2015 passed by the Commissioner of Income-tax (A)-6, New Delhi (hereinafter referred to as the “CIT(A)} in Appeal No.94/14-15 for the Assessment Year 2009-10. Following grounds of appeal were raised:
“1. Whether on the facts and circumstances of the case and in law, the ld. CIT(A) is justified in deleting the penalty of Rs.4,40,47,933/- imposed by the Assessing Officer u/s 271(1)(c) of the Act without considering the provisions of Explanation 1 to Section 271(1)(c) of the Act?
2. Whether on the facts and circumstances of the case and in law, the CIT(A) is justified in deleting the penalty imposed by the AO u/s 271(1)(c) of the Act without considering that the assessee has made a claim which is incorrect in law and the explanation of the assessee is neither substantiated nor shown to be bonafide?
3. Whether on the facts and circumstances of the case and in law, the CIT(A) is justified in deleting the penalty ignoring ratio decidendi as laid down by Hon’ble Delhi High Court in the case of CIT vs. Zoom Communications P. Ltd. (327 ITR 510)?”
2. The brief facts of this case are that the assessee, a public limited company engaged in the business of manufacturing of textile, filed its return of income on 28.7.2009 declaring an income of Rs.1,16,540/-. Subsequently, on 31.3.2010, assessee revised its return declaring ‘nil’ income. The return was processed u/s 143(1) of the Act on 22.3.2011. Later on the case was selected for scrutiny. During the course of scrutiny proceedings, AO made the following additions:
