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Penalty not justified for disallowance under normal provisions when assessee was assessed under MAT provisions

No penalty initiated under  Section 271(1)(c) of I.T. Act 1961 was justified for disallowance made under normal provisions when assessee was assessed under MAT provisions.

We are sharing with you an important judgment of the Hon’ble Delhi High Court  in the case of M/s UNISON HOTELS LTD. vs. DEPUTY COMMISSIONER OF INCOME TAX [(2013) 86 CCH 094 Del HC] and detailed analysis on following issue:

ISSUE:

 Whether the order of the Income Tax Appellate Tribunal confirming penalty under Section 271(1)(c) of the Income Tax Act, 1961 is justified as the appellant-assessee was assessed and had paid tax under MAT provisions?”

Relevant extract of Section 271(1) (c) explanation 4 of I.T. Act:

271(1)(c)  If the [Assessing] Officer or the [Commissioner (Appeals)] [or the Commissioner] in the course of any proceedings under this Act, is satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of [such income, or]

(iii) in the cases referred to in clause (c) [or clause (d)],[in addition to tax, if any, payable] by him, a sum which shall not be less than, but which shall not exceed [three times], the amount of tax sought to be evaded by reason of the concealment of particulars of his income [or fringe benefits] or the furnishing of inaccurate particulars of such income [or fringe benefits].

Explanation 4.—For the purposes of clause (iii) of this sub-section, the expression “the amount of tax sought to be evaded”,—

          (a) in any case where the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished has the effect of reducing the loss declared in the return or converting that loss into income, means the tax that would have been chargeable on the income in respect of which particulars have been concealed or inaccurate particulars have been furnished had such income been the total income;]

(b) in any case to which Explanation 3 applies, means the tax on the total income assessed [as reduced by the amount of advance tax, tax deducted at source, tax collected at source and self-assessment tax paid before the issue of notice under section 148];

(c) in any other case, means the difference between the tax on the total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished.]

Facts of the case:

M/S Unison Hotels Ltd an assessee has been assessed under Section 115JB of the Act. As per the income tax return filed on 31stOctober, 2005, the appellant-assessee had suffered loss of Rs.12.28 crores under the normal provisions. The Assessing Officer while examining the profit and loss account and statement of income prepared under the normal provisions, disallowed donation of Rs.50,98,500/-, which had been claimed as expenditure in the profit and loss account. Under the heading “operating and general expenses” schedule (xviii) the appellant-assessee had specifically under “donation” mentioned this amount. However, the Assessing Officer computed the income on book profits under Section 115JB after noticing that the assessee had earned profit of Rs.14,47,91,067/-in the said assessment year. No adjustment towards book profits was made, except on account of provision for wealth tax and excess depreciation charged on electrical fittings. Accordingly, minimum alternative tax was computed.

Assessment Proceeding:

The Assessing Officer  initiated penalty proceedings under Section 271(1)(c) of the Act and imposed penalty of Rs.24,94,596/-. While calculating the penalty, the Assessing Officer records that the returned income was at loss of Rs.12,27,93,403/-and the assessed income was at the positive figure of Rs.14,47,91,067/-.The amount in respect of which inaccurate particulars were furnished was taken at Rs.50,98,500/-plus foreign commission of Rs.18,89,158/-(addition towards foreign commission was deleted by the tribunal and, therefore, is not subject matter of the present appeal and penalty has not been sustained by the tribunal on the said amount).

Proceeding before Commissioner (Appeal) & Tribunal:

In the first appeal filed before the Commissioner (Appeals), it was stated that donation of Rs.50,98,500/-was given to charitable organizations and deduction under Section 80G of the Act was assessable. This amount was shown as an expense under the head “administrative expenses” in the profit and loss account and the relevant schedule of the balance sheet. It was stated that by mistake, the appeallant- assessee inadvertently had failed to add back or disallow Rs.50,98,500/-while computing the taxable income in the statement of accounts. This was an inadvertent error as the amount paid was clearly disclosed under the entry “donation” in the heading “administrative expenses”. There was no concealment. The Commissioner (Appeals) confirmed the said penalty and by the impugned order penalty imposed has been sustained by the tribunal.

Finding & Decision of  Delhi High Court:

Learned counsel for the appellant has relied upon decision of the Supreme Court in Price Water House Coopers Private Limited versus Commissioner of Income Tax,(2012) 348 ITR 306(SC), but H.C. relied upon decision of the Delhi High Court in case of Commissioner of Income Tax versus Nalwa Sons Investments Limited,(2010) 327 ITR 543 (Delhi) wherein it has been held that when taxable income is computed on book profits under Section 115JB and not under the normal provisions, Explanation (4) has to be accordingly applied. In view of the said Explanation, the additions made by the Assessing Officer under the normal provisions are totally irrelevant. Thus, there cannot be imposition of penalty under Section 271(1)(c) of the Act for addition made under the normal provisions.

 Question of law is accordingly answered in favor of the appellant-assessee and against the respondent-Revenue.

Conclusion:

The assessing officer using the weapon of section 271(1)(C) for initiating penalty for every disallowance made without examining the facts that means rea is an essential ingredients before the penalty can be imposed on an assessee. Penalty can be initiated in two situation first, there was an concealment of income and second, there  was furnishing of inaccurate particulars of income.

In present case penalty was initiated for making incorrect claim, which does not amount to furnishing inaccurate particulars specially when asseesee assessed under MAT provision and penalty initiated on disallowance made while calculating Income under normal provision are totally incorrect as held by Hon’ble Delhi high court.

This decision certainly helpful for those assessee whose income computed in accordance with the normal procedure is less than the income determined u/s 115JB of act and the income of the assessee is assessed u/s 115JB and not under the normal provisions, the tax was paid on the income assessed u/s 115JB of the act, Concealment of income would have no role to play and would not lead to tax evasion. Therefore, penalty cannot be imposed on the basis of disallowances or additions made under the regular provisions.

(Shailendra Saxena, B.Com, CS, FCMA, FCA, DISA (ICAI) , OM P. Maheshwari & Associates, Chartered Accountants, Cell:09377410260, Email: omp20535@gmail.com)

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