Case Law Details
Vimal Oil & Foods Ltd Vs DCIT (ITAT Ahmedabad)
ITAT Ahmedabad held that no penalty can be imposed u/s. 271(1)(c) of the Act on account of disallowance of expenses incurred for increase of authorized share capital since no penalty can be imposed when there was no willful concealment.
Facts- During the course of assessment, AO observed that the assessee had increased the authorized share capital from Rs. 23 crores to Rs. 33 crores. The assessee had incurred expenditure of Rs. 5,01,000/- in connection with increase in authorized share capital. In the assessment proceedings, AO held that such expenditure of Rs. 5,01,000/- was capital in nature and accordingly, could not be allowed to the assessee as revenue expenditure.
Accordingly, AO, after recording necessary satisfaction, proceeded to initiate penalty proceedings u/s. 271(1)(c). In the penalty proceedings u/s. 271(1)(c) of the Act, AO proceeded to impose penalty amounting to Rs. 1,50,330/- on disallowance of expenditure incurred on raising authorized share capital. The assessee filed appeal against the aforesaid order passed by the Assessing Officer imposing penalty u/s. 271(1)(c) of the Act, which was dismissed by the ld. CIT(A).
Conclusion- ITAT Mumbai in the case of Jefferris India Pvt. Ltd held that no penalty can be imposed u/s. 271(1)(c) of the Act on account of disallowance of expenses incurred for increase of authorized share capital since no penalty can be imposed when there was no willful concealment and mistake involved only a human error.
In view of the above observations, we are of the considered view that considering the facts of the case and the judicial precedents on the subject as highlighted above, penalty imposed u/s. 271(1)(c) of the Act is liable to be set aside.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
These two appeals filed by the assessee are against the order of the ld. CIT(A)-8, Ahmedabad, in proceeding u/s. 250 vide order dated 06/10/2017 passed for the assessment year 2009-10 & 2010-11.
2. The assessee has taken the following grounds of appeal:-
“1. On the facts and circumstances of the case, the CIT (Appeals) has erred in confirming penalty u/s 271(1)(c) of the Act for furnishing inaccurate particulars of income. 1d. CIT(A) ought to have appreciated the fact that while levying penalty there was no clear finding as to whether penalty is initiated for concealment of income or furnishing of inaccurate particulars of income and accordingly in the absence of specific charge penalty levied u/s 271(1)(c) of the Act is required to be deleted.
2. On the facts and circumstances of the case, the CIT (Appeals) has erred in confirming penalty u/s 271(1)(c) of the Act of Rs.1,50,330/- on the addition of Rs.5,01,000/- made towards expenditure incurred on raising authorized share capital without appreciating the fact that the Appellant has provided all the necessary evidences and the same is supported by various Judicial Pronouncements.
3. The respondent craves leave to add, alter, amend and/or withdraw any ground or grounds of cross objections either before or during the course of hearing of the same.”
“1. On the facts and circumstances of the case, the CIT(A) has erred in confirming penalty u/s 271(1)(c) of the Act for furnishing inaccurate particulars of income. 1d. CIT(A) ought to have appreciated the fact that while levying penalty there was no clear finding as to whether penalty is initiated for concealment of income or furnishing of inaccurate particulars of income and accordingly in the absence of specific charge penalty levied u/s 271(1)(c) of the Act is required to be deleted.
2. On the facts and circumstances of the case, the CIT(A) has erred in confirming penalty u/s 271(1)(c) of the Act on the addition of Rs.3,05,399/- made towards capitalization of interest expenditure without appreciating bonafide contention of the Appellant that there were sufficient interest free funds were available with the Appellant and such interest free funds were utilized for making payment for capital work in progress.
3. On the facts and circumstances of the case, the CIT(A) has erred in confirming penalty u/s 271(1)(c) of the Act on the addition of Rs.6,36,336/- made towards Foreign Travelling Expenses without appreciating the bonafide explanation of the Appellant that the expenditure was incurred for the business of Appellant.
4. The respondent craves leave to add, alter, amend and/or withdraw any ground or grounds of cross objections either before or during the course of hearing of the same.”
3. In the instant case, the assessee company has gone into liquidation and Mr. Manoj Khattar has been appointed as liquidator for the purpose of liquidation of the corporate debtor i.e. the assessee. We observe that several notices have been issued to the official liquidator, however, despite having been granted several opportunities of hearing, there has been consistent nonappearance on the part of the official liquidator. Even in today’s hearing, none appeared on behalf of the assessee. Accordingly, we are proceeding to hear the case of the assessee on merits. We shall first take up appeal of the assessee for assessment year 2009-10.
4. The brief facts of the case are that during the course of assessment, the Assessing Officer observed that the assessee had increased the authorized share capital from Rs. 23 crores to Rs. 33 crores. The assessee had incurred expenditure of Rs. 5,01,000/- in connection with increase in authorized share capital. In the assessment proceedings, the Assessing Officer held that such expenditure of Rs. 5,01,000/- was capital in nature and accordingly, could not be allowed to the assessee as revenue expenditure. Accordingly, the Assessing Officer, after recording necessary satisfaction, proceeded to initiate penalty proceedings u/s. 271(1)(c). In the penalty proceedings u/s. 271(1)(c) of the Act, the Assessing Officer proceeded to impose penalty amounting to Rs. 1,50,330/- on disallowance of expenditure incurred on raising authorized share capital. The assessee filed appeal against the aforesaid order passed by the Assessing Officer imposing penalty u/s. 271(1)(c) of the Act, which was dismissed by the ld. CIT(A) with the following observations:-
“5.3 The submission is considered. The AO has levied penalty u/s.271(1)(c) of the Act on agreed disallowance of expenditure incurred for increase in authorized capital for Rs.5,01,000/-. The ARs of the appellant has drawn attention to he tax audit report u/s.44AB of the Act wherein at clause 17(a), tax auditor has stated that no expenditure of capital nature is debited in Profit & loss account which prove bonafide belief of appellant that such expenditure is allowable as revenue expenditure, it is seen from the facts as stated above that appellant has not given any explanation for claiming a wrong deduction which was not allowable under the law. The only explanation given is that it was an inadvertent mistake. This is no reason for making a claim patently not allowable under the law. No plausible explanation has been furnished to claim the non-allowable expenses. The claim was not withdrawn even in response to notice issued under section. 143(2). It was only during making of specific query by the AO, that such expenses were disclosed and on pointing out about their non-allowability, the claim was withdrawn. It was not a voluntary action. The argument of the appellant that no concealment has been proved by the Assessing Officer, is not acceptable in view of the fact that in the absence of any fresh material, no different conclusions can be arrived at in the present proceedings with regard to claim of the appellant.”
5. The assessee is in appeal before us against the aforesaid order passed by ld. CIT(A)
6. The limited issue for consideration before us is whether penalty u/s. 271(1)(c) of the Act could be levied on account of disallowance of claim of expenditure incurred by the assessee for increasing the authorized share capital. The Delhi High Court in the case of CIT vs. Brahamputra Consosium Ltd. 12 com 486 (Delhi) on similar facts held that the claim of deduction of the fee paid to ROC to increase the authorized share capital though cannot be treated as revenue expenditure, however, penalty cannot be imposed as the assessee had not filed any wrong particulars of income or made a false claim. While passing the order, the Delhi High Court observed as under:-
“In respect of penalty on the wrong claim qua payment of fee to the ROC, the penalty has been deleted on the ground that explanation given by the assessee could not be called mala fide and no particulars were concealed in this behalf. The Tribunal accepted the explanation of the assessee that it was claimed as revenue expenditure by placing reliance on several judicial pronouncements, and therefore, the claim was not mala fide.”
7. Similarly the ITAT Mumbai in the case of Jefferris India Pvt. Ltd. in ITA No. 7397/Mum/2018 vide order dated 28-03-2019 also held that no penalty can be imposed u/s. 271(1)(c) of the Act on account of disallowance of expenses incurred for increase of authorized share capital since no penalty can be imposed when there was no willful concealment and mistake involved only a human error.
7.1 In view of the above observations, we are of the considered view that considering the facts of the case and the judicial precedents on the subject as highlighted above, penalty imposed u/s. 271(1)(c) of the Act is liable to be set aside.
8. In the result, the appeal of the assessee is allowed A.Y. 2009-10.
9. Now, we shall take assessee’s appeal for assessment year 2010-11
10. Ground No. 1 is general and it does not require any adjudication.
Ground No. 2 of assessee’s appeal: CIT(A) had erred in confirming penalty u/s. 271(1)(c) of the Act on addition of Rs. 3,05,399/- made towards capitalization of interest expenditure.
11. The brief facts relating to this ground of appeal are that during the course of assessment, the Assessing Officer observed that the assessee had capital work in progress at Rs. 2,88,14,146/-. The assessee was asked to explain why the proportionate interest expense related to source of such capital WIP should not be capitalized. In response, the assessee submitted that the payment for capital expenditure WIP on plant and machinery is made out of own funds of the assessee company. The assessee submitted that assessee company had earned profit of Rs. 7.26 crores during the year under consideration and the reserve and surplus balance of the assessee company excluding the current year’s profit is of Rs. 16.23 crores. Further, the assessee submitted that the cash credit account from which the assessee company had made payment for WIP for plant and machinery. Thus, payment of Rs. 97.15 lakhs for WIP on plant and machinery is duly covered by own funds of the assessee and debtor realization of the assessee company. Further, it was submitted that the assessee company has also not taken any specific term loan for payment of WIP on plant and machinery. Hence, the assessee company has not allocated interest bearing funds for WIP on plant and machinery. The same is out of internal source/pool of funds available with the assessee company. However, the Assessing Officer did not agree with the contentions of the assessee and the Assessing Officer made proportionate disallowance of interest expenses of Rs. 3,05,399/- u/s. 36(1)(iii) of the Act. The Assessing Officer also imposed penalty u/s. 271(1)(c) of the Act in respect of the aforesaid disallowance.
12. In appeal against the penalty order u/s. 271(1)(c), the ld. CIT(A) dismissed the appeal of the assessee on the ground that no presumption can be raised that the assessee utilized interest free funds available with it for investment in WIP on plant and machinery. Accordingly, penalty imposed by Assessing Officer u/s. 271(1)(C) of the Act, with respect to this ground of appeal was upheld by ld. CIT(A).
13. The assessee is in appeal before us against the order passed by ld. CIT(A) confirming the penalty. In our considered view, on going through facts of the instant case and the submissions made by the assessee, we are of the considered view that the issue is debatable one, wherein the assessee on one hand has contended that the expenditure on work in progress related to plant and machinery was out of own funds, whereas the Assessing Officer was of the opinion that the assessee has not been able to demonstrate that interest bearing funds were not utilized for investment in work in progress of plant and machinery. However, it is well settled principle of law that mere disallowance by Assessing Officer in the assessee’s hands would not lead to automatic levy of penalty u/s. 271(1)(c) of the Act. In this case, the Assessing Officer has not established that the assessee has either concealed his income or furnished inaccurate particulars of income. The assessee has also given a detailed reasoning/working on availability of own fund for investment in work in progress of plant and machinery. However, simply because the Assessing Officer did not accept the contention of the assessee and confirmed addition of Rs. 3,05,399/- towards capitalization of interest expenditure by disregarding the contention of the assessee that there were sufficient interest free funds available with the assessee, would not be a fit case for levy of penalty u/s. 271(1)(c) of the Act. Accordingly, penalty imposed u/s. 271(1)(c) of the Act with respect to disallowance made u/s. 36(1)(iii) of the Act amounting to Rs. 3,05,399/- is directed to be deleted.
14. In the result, ground no. 2 of the assessee’s appeal is allowed.
Ground No. 3 assessee’s appeal: ld. CIT(A) erred in confirming penalty of addition of Rs. 6,36,336/- towards foreign travelling expenses.
15. The brief facts relating to this ground of appeal are that during the course of assessment, the Assessing Officer observed that the assessee had incurred foreign travelling expenses to USA amounting to Rs. 6,36,336/-. On being asked about the business rationale of such expenses, the assessee submitted that it was importing Soyabeen oil from a company based out of Singapore. The parent company of this Singapore based company was in USA. Accordingly, the aforesaid travelling expenses were made in connection with business visit to be done with USA based company. However, on being requisitioned, the assessee failed to submit report with respect to USA visit. Even in quantum proceedings, the assessee did not press this ground of appeal before ld. CIT(A), who confirmed the above additions. Accordingly, the Assessing Officer proceeded to impose penalty u/s. 271(1)(c) of the Act, which was upheld by the ld. CIT(A), in appellate proceedings.
16. The assessee is in appeal before us against the order of penalty passed by ld. CIT(A). Looking into the facts of the instant case, we are of the considered view that the assessee has not been able to substantiate the business rationale of the aforesaid travelling expense to USA. The assessee has only given a general explanation, which was rejected by the Assessing Officer. Further, the assessee did not press this ground of appeal before ld. CIT(A) in quantum proceedings. Accordingly, looking into the facts of the instant case, we are of the considered view that ld. CIT(A) has not erred in facts and in law in confirming the levy of penalty u/s. 271(1)(c) of the Act with respect to the aforesaid addition, in absence of any details/business rationale being provided by the assessee with respect to the aforesaid expenditure.
17. In the result, ground no. 3 of assessee’s appeal is dismissed.
18. In the result, the appeal of the assessee is partly allowed for assessment year 2010-11.
19. In the combined result, the appeals of the assessee are allowed for assessment year 2009-10 and partly allowed for assessment year 2010-11.
Order pronounced in the open court on 16-06-2023
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