Case Law Details

Case Name : DCIT Vs M/s. National Textile Corporation.Ltd (ITAT Delhi)
Appeal Number : I.T.A..No.5757/Del/2015
Date of Judgement/Order : 22/02/2018
Related Assessment Year : 2009-10.
Courts : All ITAT (4867) ITAT Delhi (1069)

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:

i) Disallowance.of.expenses.u/s.14A.of.the.Act.. Rs.1,17,24,660/-
ii) Disallowance.of.prior.period.expenses. Rs.16,61,43,509/-
iii) Disallowance.on.account.of.foreign.exchange. Fluctuation loss. Rs.14,25,49,948/-

3. Aggrieved by the above three additions, assessee appealed before the CIT(A). The learned CIT(A) while allowing depreciation @ 15% plus additional depreciation @ 20% on the increase in the value of plant and machinery on account of foreign exchange fluctuation, partly allowed its appeal. The leaned AO initiated penalty proceedings u/s 271(1)(c) on the total foreign exchange fluctuation loss debited to the P&L account by holding that the assessee has concealed as also furnished inaccurate particulars of its income and levied a penalty of Rs.4,40,47,993/- . Assessee appealed against the penalty order and the learned CIT(A) cancelled the penalty holding that AO failed to prove that the claim was made with malafide intention.

4. The learned DR relied on the order of AO. In support of his arguments, he submitted that the following decisions may be considered with regard to levy of penalty u/s 271 (1 )(c) of the Act:

1. Union of India v. Dharamendra Textile Processors ff2007) 295 ITR 244]

Where Hon’ble Supreme Court held that penalty u/s 271(1)(c) is a civil liability for which willful concealment is not an essential ingredient for attracting the civil liability as is the case in the matter of proceedings under section 276C;

2. CIT Vs Zoom Communication (P.) Ltd. [191 Taxman 179 (Delhi)/[2010] 327 ITR 510 (Delhi)/[2010] 233 CTR 465]

Where Hon’ble Delhi High Court held that If assessee makes a claim which is not only incorrect in law, but is also wholly without any basis and explanation furnished by him for making such a claim is not found to be bona fide, Explanation 1 to section 271(1 )(c) would come into play and assessee will be liable to penalty;

3. CIT Vs Moser Baer India Ltd. (184 Taxman 8 (SC)/r20091 315 ITR 460 (SC)/r20091 222 CTR 213)

Where Hon’ble Supreme Court confirmed Penalty under section 271(1)(c) for wrong adjustment of unabsorbed depreciation.

4. C1T Vs Gold Coin Health Food (P.) Ltd (172 Taxman 386 (SC)/r20081 304 ITR 308 (SCVr20081 218 CTR 359) :

Where Hon’ble Delhi Supreme Court held that amendment made in Explanation 4 to section 271 (1 )(c)(iii) with effect from 1-4-2003 is clarificatory and, therefore, will have retrospective effect. Penalty u/s 271(1)(c) could be levied in case of loss return

5. MAK Data P. Ltd vs. CIT T38 taxmann.com448 (SC)/r20131 358 ITR 593

Where Hon’ble Supreme Court held that Under Explanation 1 to Section 271(1 )(c), voluntary disclosure of concealed income does not absolve assessee of s. 271(1)(c) penalty if the assessee fails to offer an explanation which is bona fide and proves that all the material facts have been disclosed”

“9. We are of the view that the surrender of income in this case is not voluntary in the sense that the offer of surrender was made in view of detection made by the AO in the search conducted in the sister concern of  the assessee. In that situation, it cannot be said that the surrender of income was voluntary. AO during the course of assessment proceedings has noticed that certain documents comprising of share application forms, bank statements, memorandum of association of companies, affidavits, copies of Income Tax Returns and assessment orders and blank share transfer deeds duly signed, have been impounded in the course of survey proceedings under Section 133A conducted on 16.12.2003, in the case of a sister concern of the assessee. The survey was conducted more than 10 months before the assessee filed its return of income. Had it been the intention of the assessee to make full and true disclosure of its income, it would have filed the return declaring an income inclusive of the amount which was surrendered later during the course of the assessment proceedings. Consequently, it is clear that the assessee had no intention to declare its true income. It is the statutory duty of the assessee to record all its transactions in the books of account, to explain the source of payments made by it and to declare its true income in the return of income filed by it from year to year. The AO, in our view, has recorded a categorical finding that he was satisfied that the assessee had concealed true particulars of income and is liable for penalty proceedings under Section 271 read with Section 274 of the Income Tax Act, 1961.”

6. B.A. Balasubramaniam & Bros. Co Vs CIT [116 Taxman 842,236 ITR 977, 157 CTR 556]

Where Hon’ble Supreme Court held that difference between income assessed and income returned being more than 20 per cent, Explanation to section 271(1)(c) became applicable and assessee having failed to discharge onus being cast on assessee by virtue of said Explanation, Assessing Officer was justified in imposing penalty.

7. CIT vs Gates Foam & Rubber Co T91 ITR 467] CIT vs India Seafood [105 ITR 708]

Where Hon’ble Kerala High Court held that claiming excessive deduction also amounts to  concealment of income

8. Steel Ingots Ltd vs. CIT [296 ITR 228]

where Hon’ble Madhya Pradesh High Court held that in case of concealment of true income chargeable to tax by making bogus claim, levy of penalty u/s 271 (1 )(c) read with Explanation 1 is justified.

9. CIT Vs Escorts Finance Ltd [183 Taxman 453 (Delhi)/[2010] 328 ITR 44 (Delhi)/[2009] 226 CTR 105]

Where Hon’ble Delhi High Court held that if claim made in return of income appears to be ex facie bogus, it would be treated as a case of concealment or furnishing of inaccurate particulars and penalty proceeding would be justified.

5. He further submitted that the entire facts and circumstances leading to the levy of penalty has to be seen and simply because inappropriate word had not been deleted in the notice u/s 271(1)(c) does not mean that penalty proceedings get vitiated. Section 271(1)(c) provides for levy of penalty if the AO is satisfied that assessee has concealed the particulars of his income or furnished inaccurate particulars of income. In other words, Income tax authority may levy penalty, if any one of the conditions is satisfied i.e. (i) Assessee has concealed the particulars of his Income; (ii) Assessee has furnished inaccurate particulars of income. If the AO levied the penalty on anyone of the charge, it cannot be held that penalty order is bad in law. He further submitted that the learned AO has properly recorded his satisfaction while passing assessment order as well as penalty order. Therefore, it clearly indicates proper application of mind by the AO

6. On the other hand, learned authorized representative relied on the order of CIT(A) and reiterated the submissions made before the authorities below. It is to be noted that the AO while imposing penalty, has gone on a wrong premises that the CIT(A) has confirmed the disallowance of Rs. 14,25,49,948/- in an appeal filed by the assessee against the order of the AO u/s 143(3). It is to be appreciated that the submission of the assessee has all along been that it had made the claim of this amount on account of a bona fide mistake and therefore it preferred not to file an appeal on this account before the CIT(A). The assessee had asked for the relief of depreciation on increase in value of asset on account of foreign exchange fluctuation only which is in any case has to be allowed as it amounts to addition in the value of asset.

7. No penalty u/s 271 (1)(c) is leviable if the claim has been made by assessee out of a bona fide error. The assessee claimed the foreign exchange fluctuation amount on account of an inadvertent error and this fact has all along been contended by the assessee right from the assessment proceedings u/s 143(3). This fact is also strengthened by the action of the assessee in not filing any appeal before the CIT(A) on this issue. In such a scenario no penalty u/s 271 (1)(c) can be levied. Reliance is placed on the following judgments:

(i) Price Waterhouse Coopers Pvt. Ltd. vs CIT 348 ITR 306 (SC)

“19. The contents of the Tax Audit Report suggest that there is no question of the assessee concealing its income. There is also no question of the assessee furnishing any inaccurate particulars. It appears to us that all that has happened in the present case is that through a bona fide and inadvertent error, the assessee while submitting its return, failed to add the provision for gratuity to its total income. This can only be described as a human error which we are all prone to make. The caliber and expertise of the assessee has little or nothing to do with the inadvertent error. That the assessee should have been careful cannot be doubted, but the absence of due care, in a case such as the present, does not mean that the assessee is guilty of either furnishing inaccurate particulars or attempting to conceal its income.

20. We are of the opinion, given the peculiar facts of this case, that the imposition of penalty on the assessee is not justified. We are satisfied that the assessee had committed an inadvertent and bona fide error and had not intended to or attempted to either conceal its income or furnish inaccurate particulars. ”

(ii) CIT vs. M/s Bennett Coleman and Co. Ltd2013 (3) TMI 373

“2. So far as question (i) is concerned, the respondent- assessee has claimed deduction of interest on tax free bonds of Rs. 5,60,11,644/-. During the course of the assessment proceedings, the assessee was asked to give details of interest on tax free bonds. While preparing the said details, it was noticed that 6 percent Government of India Capital Index Bonds purchased during the year had inadvertently been categorized as tax free bonds and, therefore, interest of Rs. 75,00,000/- earned on such bonds had also inadvertently escaped tax. The assessing officer levied penalty under Section 271(1)(c) of the Income Tax Act, 1961 (the Act). The CIT(A) upheld the order of the Assessing Officer. On further appeal, the Tribunal in the impugned order records a finding of fact that by inadvertent mistake interest at 6 percent on the Government of India Capital Index Bonds was shown as tax free bonds. The Tribunal concluded that there was no desire on the part of the respondent-assessee to hide or conceal the income so as to avoid payment of tax on interest from the bonds. In that view of the matter, the Tribunal deleted the penalty imposed upon the respondent- assessee under Section 271(1)(c) of the Act. In view of the fact that the decision of the Tribunal is based on finding of fact that there was an inadvertent mistake on the part of the assessee in including the interest received of 6 percent on the Government of India Capital Index Bonds as interest received on tax free bonds. It is not contended by the Revenue that above finding of fact by the Tribunal is perverse. In these circumstances, we see no reason to entertain the proposed question (i). ”

(iii) CIT vs. Escorts finance Ltd. [2010] 328 ITR 44 (Delhi)

“10 It is repeatedly held by the Courts that the penalty on the ground of concealment of particulars or non-disclosure of full particulars can be levied only when in the accounts/return an item has been suppressed dishonestly or the item has been claimed fraudulently or a bogus claim has been made. When the facts are clearly disclosed in the return of income, penalty cannot be levied and merely because an amount is not allowed or taxed as income, it cannot be said that the assessee had filed inaccurate particulars or concealed any income chargeable to tax. Further, conscious concealment is necessary. Even if some deduction or benefit is claimed by the assessee wrongly but bona fide and no mala fide can be attributed, the penalty would not be levied. A fortiorari, if there is a deliberate concealment and false/inaccurate return was filed, which was revised after the assessee was exposed of the falsehood, it would be treated as concealment of Income in the original return and would attract penalty even if revised return was filed before the assessment is completed. Likewise, where claim made in the return appears to be ex facie bogus, it would be treated as case of concealment or inaccurate particulars and penalty proceedings would be justified. ”

(iv) CIT vs. Mahanagar Telephone Nigam Ltd. (2011) 63 ITR 87

“There is no finding of the AO as regards assessee having furnished inaccurate particulars—Also, there is no discussion that the explanation given by the assessee was not bona fide—Thus, the imposition of penalty under s. 271(1)(c) was a complete non-starter—This finding of fact stands affirmed by the Tribunal—A mere erroneous claim made by an assessee under a bona fide belief that it is maintainable in law, cannot by itself, lead to imposition of penalty—In the instant case, both the claims were made under the belief that they are maintainable in law—As regards the contributions made to the Staff Welfare Fund, assessee had made the claim for deduction as it genuinely differed with the opinion of its auditor that the claim was disallowable— Similarly, the claim of higher rate of depreciation on vehicles was based on the premise that the vehicles used by the assessee were in the nature of plant and machinery as these vehicles were used to correct faults and to provide other services to its customers—Denial of these claims by the AO does not lead to the conclusion that the assessee had furnished inaccurate particulars— Admittedly, the information pertaining to both the claims was provided in the return filed by the assessee and the documents appended thereto—Findings of the Tribunal upholding the order of the CIT(A) deleting the penalty are pure findings of fact and no substantial question of law arises for consideration. ”

8. It is also to be appreciated that there is a full disclosure made by the assessee in its return of income and in fact, all facts and figures are being taken by the AO from the return of income of the assessee only. The amount of foreign exchange fluctuation is being duly reflected in the Balance Sheet of the assessee as noted by the AO at page 5 para 5.1 of the assessment order as well as by CIT(A) at page 13 para 6.3. It is not a case of concealment of particulars of income or furnishing of inaccurate particulars. In these circumstances, no penalty u/s 271 (1)(c) can be levied. Reliance is placed on the following judgments:

(i) CIT Vs. Reliance Petro Products Ltd. 322 ITR 158 (SC)

“10. It was tried to be suggested that s. 14A of the Act specifically excluded the deductions in respect of the expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. It was further pointed out that the dividends from the shares did not form the part of the total income. It was, therefore, reiterated before us that the AO had correctly reached the conclusion that since the assessee had claimed excessive deductions knowing that they are incorrect; it amounted to concealment of income. It was tried to be argued that the falsehood in accounts can take either of the two forms; (i) an item of receipt may be suppressed fraudulently; (ii) an item of expenditure may be falsely (or In an exaggerated amount) claimed, and both types attempt to reduce the taxable income and, therefore, both types amount to concealment of particulars of one’s income as well as furnishing of inaccurate particulars of income. We do not agree, as the assessee had furnished all the details of Its expenditure as well as income in its return, which details, in themselves, were not found to be inaccurate nor could be viewed as the concealment of income on its part. It was up to the authorities to accept its claim in the return or not. 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 s. 271(1)(c). If we accept the contention of the Revenue then in case of every return where the claim made is not accepted by AO for any reason, the assessee will invite penalty under s. 271(1)(c). That is clearly not the Intendment of the legislature. ”

(ii) Commissioner Of Income Tax Large Taxpayer Unit V Indian Renewable Energy (ITA No. 294/2016 Delhi High Court):

“7. On the other hand, learned counsel for the Assessee placed before us a copy of the P&L Account of the Assessee for the AY in question where the fact of the said amount being claimed as Administrative Expenses’ is clearly mentioned in the notes to the accounts. He points out that the Commissioner of Income Tax (Appeals) [‘CIT(A)’] noticed this and then proceeded to revise the assessment order under Section 263 of the Act.

8. Having considered the submissions of the learned counsel of the parties, the Court is of the view that the decision of the IT AT was a plausible one in the facts and circumstances of the case. The Court is unable to agree with the Revenue that there is a deliberate concealment by the Assessee warranting the levy of penalty”.

9. Otherwise also, the assessee being a Public Sector Undertaking, there cannot be any allegation of malafide in this case. No penalty under such situation can be levied u/s 271 (1 )(c) of the Act. Reliance is placed on the following judgments:

(i) Deputy Commissioner of Income-Tax Versus Rural Electrical Cooperative  Society Ltd. [2005] 279 ITR 319 (MP)

“So far as the applicability of the Explanation to section 271(1)(c) is concerned, the same is not attracted. The issue of explanation was considered on the facts and it was held that the same was properly explained on the facts. Every concealment does not attract the rigour of section 271(1)(c). It must be deliberate and intentional being in the knowledge of the assessee so as to evade payment of income-tax. The assessee being a non-profit organization managed and controlled by the Government of India for supply/distribution of electricity in the State, it cannot be held that they had any deliberate intention to evade payment of tax. If due to some accountancy system maintained, one entry could not be subjected to tax, the same was rightly not made the basis for imposing a penalty of Rs. 1,00,000 under section 271(1)(c) ibid.”

(ii) Commissioner of Income-Tax Versus Senior Accounts Officer, Madhya  Pradesh Electricity Board. [2005] 276 ITR 84 (MP)

“7. In our opinion, the Tribunal rightly accepted the explanation offered by the Board/assessee. It was not a case of deliberate attempt on the part of the assessee to avoid payment by way of deduction for being deposited. The assessee is not a private businessman but it is a Government statutory organization. Moreover there was some confusion as regards the extent of percentage to be deducted from the different class of customers. No sooner it was clarified, the Board made compliance from their own funds.”

(iii) Steel Authority Of India Ltd. Versus Income-Tax Officer. [ITD 100, 029/TTJ 107, 372, ITAT Nagpur]

In the facts of the present case it is seen that there is no evidence on record to show that there was any deliberate intention on the part of assessee while making deduction of tax at source by considering the exemption available to its employees at Rs. 2.50 lakhs. There could be no personal gain to assessee as it is a Government company and therefore, allegation in the orders of Lower Authorities as to mala fide intention are not justifiedJ. In the facts of the present case, the assessee-company has amply demonstrated that actions of assessee were bona fide by referring to various correspondences which are placed in the paper book. The company has made honest estimate of salary income of employees for deduction of tax at source. The ratio as laid down by various authorities referred to in the submissions of the counsel of the assessee fully supports the case of assessee that it was a bona fide estimate by the assessee for the purpose of deduction of tax at source in the case of assessee-company.

(iv) Dena Bank. Versus Inspecting Assistant Commissioner [ITD 025, 109, ITAT Bombay]

“6. We have carefully considered the rival submissions. We agree with the learned departmental representative, Shri Subramanian, that after the amendment of section 271(1)(c) of the Income-tax Act, 1961 by the Finance Act, 1964 the element of means are is not important and in any case the onus is not on the revenue to establish mensrea before penalty for concealment of income or furnishing of inaccurate particulars thereof can be imposed. We further agree that a fraudulent claim of deduction in working out the income as such amounts to concealment of income or furnishing inaccurate particulars thereof as suppression of any item of income. It is, however, necessary to bear in mind that we are dealing with the case of a nationalized bank, which is fully owned by the Government of India and administered by its nominees. It would not be an unreasonable presumption that it could not be the Intention of an organization owned and run by the Government of India to conceal Its income or furnish inaccurate particulars thereof with a view to evade payment of proper taxes due to the Government of India. We have the authority of the Hon’ble Supreme Court in the case of Brij Mohan v. CIT [1979] 120 ITR 1 that the concealment of income or furnishing of inaccurate particulars thereof takes place when the return of income is filed. We have, therefore, to consider the facts and circumstances at the time the return of income was filed for deciding whether the assessee- bank can be charged with the default of concealment of income or furnishing of inaccurate particulars thereof. Viewed in this context, it is found in the present case that the assessee-bank was fallowing the mercantile system of accounting and the liability for bonus relating to a particular year for which a provision was made in the account books of that year crystallized in the next year when a result of negotiations with the union of bank workers the exact amount to be paid as bonus was settled. In these circumstances, if the assessee-bank was in doubt whether the excess amount, i.e., over and above the provision for bonus, which the bank had to pay in the year in which the actual amount was settled after negotiations with the union of the bank workers, will be an admissible deduction in working out the business income of the year to which it related or the year In which the liability crystallized on finalization of negotiations with the union of bank workers, the doubt of the assessee- bank cannot be said to be frivolous particularly when this issue was a highly arguable contention, which required serious consideration. It is necessary here to point out that it is not disputed that on the dates on which the claim for deduction as a protective measure was made for the years under appeal the assessments for the immediately preceding years had not been completed and, therefore, the assessee-bank could not be sure of the year in which the claim of deduction will ultimately be held to be admissible. In these circumstances, if the assessee-bank made a claim of deduction of the excess in the year to which it related based on the mercantile system of accounting and as a protective measure in the years in which the liability crystallized, i.e., the assessment years under consideration in the present appeals, we fail to see how the assessee- bank can be said to have made a fraudulent claim of deduction. The Hon’ble Supreme Court in the case of Cement Marketing Co. of India Ltd. v. ACST [1980] 124 ITR 15 has laid down that where a claim was made based on a highly arguable contention, which required serious consideration, it cannot be said that the claim was frivolous and on account of such a claim it would not be right to condemn the return as a false return inviting imposition of penalty. It is true that the assessee- bank ought to have withdrawn the claim of deduction made as a protective measure for the assessment years under consideration before us when the assessments for the immediately preceding assessment years in which the claim was allowed were finalized. This, however, will not affect the default, which had already taken place earlier and which has to be judged, as already described, on the facts and circumstances prevailing on the dates on which the returns were filed. The Hon’ble Supreme Court in the case of Hindustan Steel Ltd. has laid down that penalty for failure to perform a statutory obligation should not be imposed merely because it is lawful to do so and whether penalty should be imposed was a matter of discretion to be exercised judicially and on a consideration of all the facts and circumstances. Their Lordships further laid down that if the default was merely a technical or venial breach of the provisions of the Act, the authority imposing penalty will be justified in refusing to impose a penalty. Considering all this and looking to the totality of the facts and circumstances, we have no hesitation in coming to the conclusion that the penalties under section 271(1)(c) under consideration here were not justified. These penalties are, therefore, hereby cancelled.”

10. lt is also to be noted that the AO in his order u/s 143(3) after making the impugned addition at page 5, Para 5.4 states that he is initiating penalty proceedings as ‘the assessee has furnished inaccurate particulars of its income and has concealed Its income on this issue’. Further, from the order levying penalty u/s 271 (1)(c) at page 4, para 8, also he states that I am satisfied that in respect of amount of Rs. 14,25,49,948/- the assessee has concealed the particulars of its income as also furnished inaccurate particulars thereof. In this background it becomes very clear that the penalty has been levied without specifying the specific reason as to whether it is for concealment of particulars of income or furnishing of inaccurate particulars. The AO himself is not sure even till the time of levying penalty whether he is levying the same for concealment or for furnishing inaccurate particulars. No penalty u/s 271 (1)(c) can be levied in such circumstances. Reliance is placed on the following judgments:

(i) Commissioner Of Income Tax &Anr. Versus M/S SSA’s Emerald Meadows wherein the Hon’ble Apex Court dismissed the SLP filed by the revenue against the judgment of Hon’ble Karnataka High Court wherein reliance was placed upon ratio laid down by Hon’ble Karnataka High Court In The Case Of Cit V. Manjunatha Cotton And Ginning Factory [2013] 359 ITR 565

(ii) In Commissioner Of Income Tax, Bangalore And The Income Tax Officer, Ward-6 (3), Bangalore Versus M/S Ssa’s Emerald Meadows, the Hon’ble Karnataka High Court held that:

11. The Tribunal has allowed the appeal filed by the assessee holding the notice issued by the Asses sing Officer under Section 274 read with Section 271 (1)( c) of the Income Tax Act, 1961 (for short ‘the Act’) to be bad in law as it did not specify which limb of Section 271(1)(c) of the Act, the penalty proceedings had been initiated i.e., whether for concealment of particulars of income or furnishing of inaccurate particulars of income. The Tribunal, while allowing the appeal of the assessee, has relied on the decision of the Division Bench of this Court rendered in the case of Commissioner of Income-tax vs Manjunatha Cotton and Ginning Factory (2013) 359 ITR 565.

(iii) In CIT V. Manjunatha Cotton And Ginning Factory [2013] 359  ITR 565 (Kar)

“9. Aggrieved by the said order, the Assessee preferred an appeal to the Tribunal. The Tribunal held that on perusal of the notice issued under Section 271(1)(c) of the Act, it is clear that it is a standard proforma used by the Assessing Authority. Before issuing the notice the inappropriate words and paragraphs were neither struck off nor deleted. The Assessing Authority was not sure as to whether she had proceeded on the basis that the assessee had either concealed its income or has furnished inaccurate details. The notice is not in compliance with the requirement of the particular section and therefore it is a vague notice, which is attributable to a patent non-application of mind on the part of the Assessing authority.

8. A reading of Section clearly indicates that the assessment order should contain a direction for initiation of penalty proceedings. The meaning of the word direction is of importance. Merely saying that penalty proceedings are being initiated will not satisfy the requirement. The direction to initiate proceedings should be clear and not be ambiguous. It is well settled law that fiscal statutes are to be construed strictly and more so the deeming provisions by way of legal fiction are to be construed more strictly. They have to be interpreted only for the said issue for which it has deemed and the manner in which the deeming has been contemplated to be restricted in the manner sought to be deemed. /As the words used in the legal fiction or the deeming provisions of Section 271 (1B) is Direction, it is imperative that the assessment order contains a direction. Use of the phrases like (a) penalty proceedings are being initiated separately and (b) penalty proceedings under Section 271(1)(c) are initiated separately, do not comply with the meaning of the word direction as contemplated even in the amended provisions of law. The direction should be clear and without any ambiguity. The word ‘direction’ has been interpreted by the decision of the Apex Court in the case of Rajendranath reported in 120 ITR pg.14, where it has been held that in any event whatever else it may amount to, on its very terms the observation that the ITO is free to take action, to assess the excess in the hand of the co owners cannot be described as a direction. A direction by a statutory authority is in the nature of an order requiring positive compliance. When it is left to the option and discretion of the ITO whether or not take action, it cannot be described as a direction.

12. Without prejudice to above, it is to be appreciated that total disallowance of Rs. 14,25,49,948/- was made by the AO on account of foreign exchange fluctuation while the CIT(A) had allowed him the depreciation on the said increase in the value of its assets amounting to Rs. 3,45,93,316/-. This has also been confirmed by the ITAT. Resultantly, even if the penalty is levied, the same has to be computed on the amount of difference between these two figures. The AO has erred in computing the penalty on the total amount of disallowance of Rs. 14,25,49,948/- made by him.

13. It is further submitted that the CIT(A) in appeal against penalty u/s 271 (1)(c) has correctly deleted the penalty levied by the AO. The finding of the CIT(A) are at page 8 onwards. The CIT(A) has given a detailed reasoning in this regard and also dealt with the judgment of the Delhi High Court in the case of Zoom Communication Pvt. Ltd. 327 ITR 510 which is referred in the ground taken by the Department in the present appeal.

14. In view of the above, learned AR prayed that the appeal filed by the Revenue may kindly be dismissed.

15. The learned AR also submitted a case law compilation comprising 80 pages. He further submitted that in the quantum proceedings, by an order dated 9th November 2014 in ITA No.2211/Del/2013, ITAT confirmed the order of CIT(A) and allowed additional depreciation on the increase in value of plant and machinery on account of foreign exchange fluctuations. He further submitted that the assessee although declared the amount in profit and loss account but omitted to add back as per Section 40A(3) read with Section 43(1) of the Act. There was no malafide intention but it was simple omission to apply intricate income-tax There was true and fair disclosure of expenses. The assessee neither suppressed any income nor claimed any bogus or false expenses. The disallowance has been made by the AO on technical and legal ground which does not tantamount to concealment. He further submitted that the AO has not clearly charged penalty proceedings under any limb of Section 271(1)(c) i.e whether for concealment of income or filing inaccurate particulars of income. As such, the AO is not justified in imposing penalty on the foreign exchange fluctuations debited to P&L account. He further submitted that the case laws relied by the learned Departmental Representative are not applicable in the present case.

16. 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.”

17. 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.

18. In the result, appeal of the revenue is dismissed.

Order pronounced in the Open Court on …22nd. February, 2018.

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Category : Income Tax (26971)
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Tags : ITAT Judgments (5049) section 271(1)(c) (354)

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