Penalty proceedings- Mere submitting a claim which is incorrect in law would not amount to giving inaccurate particulars of income of assessee, but if claim besides being incorrect in law is malafide, Explanation 1 to section 271(1)(c) comes into play and work to disadvantage of 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).
ITAT, AHMEDABAD BENCH `B’,
Gujarat State Financial Services Ltd. Vs. ACIT
ITA Nos. 2078/Ahd/2006 & 2526/Ahd/2006,
Date- May 31, 2010
ORDER
A N Pahuja:
These cross appeals filed against an order dated 04-09-2006 of the ld. CIT(Appeals)-VIII, Ahmedabad ,raise the following grounds :
1 The learned Commissioner of Income-tax (Appeals) erred in holding that penalty u/s 271(1)(c) is leviable. It is submitted that in the facts and circumstances of the case there is neither concealment of income nor furnishing of any inaccurate particulars and hence provisions of section 271(1)(c) is not applicable. It is submitted that it be so held now.
1.1 The learned Commissioner of Income-tax (Appeals) erred in not appreciating the fact that there was no satisfaction as regards concealment of income or furnishing of any inaccurate particulars while passing the assessment order. It is submitted that in absence of such satisfaction penalty u/s 271(1)(c) can not be levied. It is submitted that it be so held now.
1.2 The learned Commissioner of Income-tax (Appeals) erred in confirming the penalty levied u/s 271(1)(c) of the Act on the dis allowance made for provision made for bad and doubtful debts for Rs.1,62,81,557/- and provision made for diminution in value of the investments for Rs.21,98,638/- as per the norms of Reserve Bank of India. It is submitted that in the facts and circumstances of the case penalty u/s 271(1)(c) is not leviable. It is submitted that it be so held now. Your appellant craves leave to add, alter and/or amend all or any of the grounds before final hearing of the appeal.
1 “The Ld. CIT(A) erred in law and on the facts of the case in canceling the part of the penalty levied u/s 271(1)(c) of the I.T. Act, 1961 which was attributable to the dis allowance of Rs.9.91 lacs u/s 14A of the I.T. Act on the ground that the addition sustained was made on estimate basis.
2 The Ld. CIT(A) has further erred in appreciating the fact that the said addition was confirmed by the Ld. CIT(A) in quantum appeal.
3 The Ld. CIT(A) has also erred in appreciating the fact that the concealment penalty is leviable even where the additions are made on the estimated basis as held in the cases of CIT vs. Warasat Hussian 171 ITR 405 (PAT), Dr. K.D. Arora vs. CIT, 162 ITR 481 (PAT), CIT vs. Swarup Cold Storage & General Mills 136 ITR 435 (ALL), CIT vs. Kedarnath Ramnath 106 ITR 172 (ALL), CIT vs. E V Rajan 151 ITR 189 (MAD) & Addl. CIT vs. Lakshmi Ind. & Cold Storage Co. Ltd. 146 ITR 492 (ALL).
4 On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer.
5 It is, therefore, prayed that the order of the Ld. CIT(A) may be cancelled and that of the Assessing Officer may be restored to the above effect. ”
2 Facts, in brief as per relevant orders are that return declaring income of s.16,17,56,630/- filed on 11-10-2001 by the assessee company, carrying on the business of providing loans/ finance & leasing/hi re purchase besides providing financial services, after being processed on 30.9.2002 u/s 143(1) of the Income-tax Act ,1961[hereinafter refer red to as the ‘Act ’] , was selected for ITA No.2078/Ahd/2006 & ITA No.2526/Ahd/2006 for AY 2001-02 Gujarat State Financial Services Ltd. scrutiny with the issue of not ice u/s 143(2) of the Act on 29.10.2002. The assessment was completed u/s 143(3) of the Act vide order dated 26-2-2004, determining total income of Rs.29,05,15,132/-.
Inter alia, following dis allowances were made:
(1) U/s 14A Rs.6,98,72,062/ –
(2) Bad Debts Rs.1,62,81,557/ –
(3) Provision for diminution Rs. 21,98,638/ – in value of investments
(4) Income reversal Rs. 38,211/-
and penalty proceedings under sect ion 271(1) (c) of the Act were also initiated . In response, neither anybody at tended nor any reply was furnished .On appeal, the ld. CIT(A) vide his order dated 29.11.2004 upheld the following dis allowances:
(1) U/s 14A Rs. 9,91,000/-
(2) Bad Debts Rs.1,62,81,557/ –
(3) Provision for diminution Rs. 21,98,638/ – in value of investments
Here it may be worth mentioning that the assessee’s appeal on the aforesaid dis allowances was also dismissed by the ITAT vide order dated 10.7.2009 in ITA no.229/Ahd. /2005.
2.1. After receipt of order of the ld. CIT(A), in response to a show cause not iced dated 8.2.2006 issued before levy of penalty, the assessee replied on 15.2.2006 that they have neither concealed any income nor furnished any inaccurate particulars thereof and therefore, the provisions of section 271(1)(c) would not be applicable . It was argued that out of additions of Rs.12.87 crores, additions / dis allowances of Rs.1.87 crores were confirmed in respect of provision for doubtful debts and provision for diminution in value of the investment besides dis allowance u/s 14A of the Act. It was pointed out that the provision for doubtful debts and diminution in investments having Gujarat State Financial Services Ltd. been made in view of the RBI directions and in compliance with the accounting standard and separately disclosed in the audited accounts, it was not a case of any concealment of income. While relying upon decisions in the case of CIT v. Calcutta Trading Corporation,166 ITR 29 (Cal.),J. K. Jaju v. CIT,181 ITR 410 (MP),CIT v. Inden Bislers,240 ITR 943(Mad), CIT v. Gujarat Machineries,67 TTJ 466 (Ahd), Shivam R. Processors Ltd. v. ACIT,69 TTJ 600 (Ahd),ITO v. Rajkot Rice and General Mill,110 Taxman 102 (Chgandigarh SMC) ,DCIT v. Smt. Pannaben C.Desai,112 Taxman 84) (Ahd), the assessee pleaded that mere addition itself would not attract penalty u/s. 271(1)(c) of the Act, particularly when there was a true and complete disclosure in the return of income filed. However, the AO did not accept the submissions of the assessee on the ground that i) during the year under consideration, the assessee company claimed exempted income on account of dividends of Rs.4,81,45,543/- u/s. 10(33) of the Act. The dis allowance on account of interest on funds invested in exempted assets and administrative & other expenses of Rs.6,98,72,062/- made by the AO was restricted by the ld. CIT(A) to Rs.9,91,000/-. ii) the assessee claimed deduction for provision for bad and doubtful debts of Rs.1,61,81,556/-,even when the explanation to the relevant provisions of sec. 36(1)(vii) of the Act clearly mentioned that for the purpose of the said clause any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee. Moreover, assessee’s claim was not maintainable even u/s.28 of the Act ; iii) the claim for deduction of a sum of Rs.21,98,638/- on account of diminution in the value of the investments was not admissible, these investments being not stock-in-trade ; and iv) the actions of the assessee in claiming the deductions were deliberate and with willful intention to evade tax.
2.2 Accordingly, relying upon decision of the Hon’ble Gujarat high Court in the case of Jamnadas & Co vs CIT (1994) 210 ITR 218 and explanation 1 to section 271(1)(c) of the Act, the AO imposed a penalty of Rs.77,00,857/- for furnishing inaccurate particulars of income leading to concealment of income of Rs.1,94,71,195/- .According to the AO, the assessee committed the default of concealment of its income due to furnishing inaccurate particulars thereof.
3. On appeal, it was contended on behalf of the assessee that no justification was given in the assessment order regarding concealment of income or furnishing of inaccurate particulars nor any satisfaction was recorded by the AO . The AO had not stated whether penalty proceedings were initiated for concealment of income or for furnishing inaccurate particulars. While relying upon the decisions of Hon’ble Delhi High Court in Diwan Enterprises v. CIT 246 ITR 571,CIT v. Ram Commercial Enterprises Ltd. 246 ITR 568, CIT v. Auto Lamps Ltd. 278 ITR 32 and CIT v. B.R. Sharma 275 ITR 303, the assessee contended that in the absence of any such satisfaction being recorded in the assessment proceedings, the jurisdiction to initiate the penalty proceedings could not have been exercised. Relying upon the decisions in the case of Dahod Sahkari Kharid Vechan Sangh Ltd. V. CIT 149 Taxman 456(Guj), DC1T v. Rural Electrical Cooperative Society Limited 279 ITR 319(MP) and Dena Bank Ltd. 25 ITD 104(Bombay), it was further contended that being a Government Company, there was no mala fide intention in claiming the deduction. Relying on the decisions in the case of ITO v. C. Chhotalal Textiles (P) Ltd. 95 TTJ 436 (Mumbai ITAT), CIT v. Raj Bans Singh 276 ITR 351 (Allahabad &ITO v Smt. Purnima Devi Gupta 3 SOT 753 (Jodhpur ITAT),the assessee further pleaded that penalty can not be levied for estimated dis allowance u/s 14A of the Act. It was submitted that provision made for bad and doubtful debts and provision for diminution in value of investments were in accordance with the prudential norms of the Reserve Bank of India and were shown on the face of profit and loss account ,the assessee being a Non-Banking Finance Company. It was argued that the RBI Act overrides the provisions of Income-tax Act and therefore, the provisions made in the profit and loss account were allowable as deduction u/s. 28/37(1) of the Act in view of decision of Delhi Tribunal in the case of Tedco Investment and financial Services Pvt. Ltd. reported at 82 TTJ 259. and decision of Chennai Tribunal in the case of Overseas Sanmar Ltd. reported at 86 ITD 602. Since the assessee was under a bonafide belief that these provisions were allowable deductions, penalty u/s. 271(l)(c) was not applicable. Without prejudice to these contentions, it was pleaded that the disallowance on account of provisions for bad debts was made in view of the amendment to section 36(1)(vi) retrospectively by the Finance Act, 2001 effective from 01-04-1989 and the assessee was not aware of this as it was not publicly known. Relying further upon decisions in the case of CIT v. Calcutta Trading Corporation 166 ITR 29, CIT v. Inden Bislers 249 ITR 942 (Mad), DCIT v. Gujarat Machineries, 47 TTJ 466 (Ahmedabad}and Shivram R Procesors Limited v. ACIT 69 TTJ 600 (Ahmedabad), the assessee added that mere addition sustained by CIT(A) cannot be the base for levy of concealment penalty. In the light of these submissions, the ld. CIT(A) upheld the levy of penalty in relation to disallowance on account of provision for bad and doubtful debts- Rs.1,62,81,557/- and provision for diminution in value of investments- Rs.21,98,638/- while cancelling the penalty attributable to disallowance of Rs.9.91 lacs sustained on estimated basis in the following terms:-
