Whether section 94 is attracted and penalty is justified when assessee sets off the loss on sale of its mutual fund units against profit on short term investments but does not claim the loss as a deduction
Merck Ltd Vs ACIT (ITAT Mumbai) – Provisions of sec. 94 are very much clear and it cannot be said that there is any ambiguity in the provisions and therefore, appellant should not have claimed the aforesaid loss knowing fully well that the provisions of sec. 94 are applicable to such transactions. Appellant has adjusted the aforesaid loss against the profit on sale of short term capital gains which is illegal. Appellant being a reputed company, advised by reputed and learned counsels for the past many years cannot be said to be not aware of the said provisions of the Act. For the above reasons, appellant’s submissions on this issue are rejected and it is held that AO is right in levying penalty u/s 271(1) and holding that the appellant has furnished inaccurate particulars of its income. – Assessee’s appeal partly allowed.
INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH ‘B’ MUMBAI
ITA No. 916/Mum/2008
Assessment year- 2002-03
M/s. Merck Ltd., Vs ACIT
This appeal preferred by the assessee is directed against the order dated 23.11.2007 passed by the ld. CIT(A)-XXVI for the Assessment Year 2002-03.
2. The assessee had filed its Return of income on 28th October, 2002 declaring total income of Rs 55,08,96,440/- and thereafter revised the return of income on 5th December, 2002 declaring total income of Rs. 55,21,49,160/-. The assessment was completed thereafter u/s 143(3) of the Act, making certain additions.
3. Aggrieved by the various additions/ dis allowances made by the AO, assessee preferred an appeal before the Ld. CIT(A). The Ld. CIT(A) passed the appellate order and allowed the reliefs in respect of certain items of additions and dis allowances and upheld the assessment order in respect of certain other items.
4. The assessee filed an appeal before the ITAT against the order of the Ld. CIT(A) and Tribunal has disposed off the same vide order dated 6.10.2009.
5. The AO has levied penalty at the rate of 100% on income sought to be evaded by the assessee in respect of the following items:
|Sl. No.||Particulars||Amount (Rs)|
|(a)||Short term capital loss incurred on sale of Mutual fund units as disallowed u/s 94(7) Of the Act.||99,396/-|
|(c)||Expenses relatable to investments u/s 14A Of the Act||4,44,600/-|
|(d)||Deduction u/s 80G of the Act not allowed on Account of non Production of receipts||1,42,002/-|
|(e)||Deduction u/s 80HHC of the Act has been Recomputed at Rs 86,64,947/- as against the Claim of Rs 90,20,718/-||2,76,147/-|
5. On appeal before the CIT(A) the assessee submitted as follows:
“The appellant submitted that, as regards the capital loss of Rs. 99,396/- is concerned, the same has arisen on account of the application of provisions of sec 94. The assessee submitted that the provisions of sec 94 of the Act are not applicable in respect of unit sold by the appellant company for the reasons that the investments in unit was made not with a view to incur loss and avoid tax. The provisions of sec 94 are attracted only when any person indulges in systematic and organized manner to enter into transactions. The appellant has set off such loss against profit on short term investments and therefore, the same was not claimed as deduction from total income and what was offered to tax was only net short term capital gain. Therefore, no penalty can be levied.”
6. The CIT(A) rejected the Assessee ‘s plea observing as under:
“I have considered the facts of the case and submissions of the AR/Appellant. The above explanation of the appellant is not tenable Provisions of sec. 94 are very much clear and it cannot be said that there is any ambiguity in the provisions and therefore, appellant should not have claimed the aforesaid loss knowing fully well that the provisions of sec. 94 are applicable to such transactions. Appellant has adjusted the aforesaid loss against the profit on sale of short term capital gains which is illegal. Appellant being a reputed company, advised by reputed and learned counsels for the past many years cannot be said to be not aware of the said provisions of the Act. For the above reasons, appellant’s submissions on this issue are rejected and it is held that AO is right in levying penalty u/s 271(1) and holding that the appellant has furnished inaccurate particulars of its income. Accordingly, levy of penalty is justified.”
7. The learned Counsel for the assessee Ms. Arati Vissanji reiterated the submissions made before the Ld. CIT(A).The learned Counsel argued that the very heading of sec. 94(7) is avoidance. In this case the counsel submitted that the A.O. cannot pick it up on stand alone basis. The learned Counsel also pointed out that the returned income of the company being large i.e. more than Rs. 55 Crores an amount of Rs 99,000/- is to be treated leniently.
8. The Ld. DR on the other hand pointed out that provisions of sec 94 are attracted when any person enters into a purchase and sale of securities, whose income is exempt, without complying with the period of holding stipulated in the section. Hence the levy of penalty for such a wrong claim has been rightly levied.
9. We heard both the parties. We are of the opinion that assessee has wrongly claimed the loss when he was aware that provisions of Sec. 94 are applicable to such transactions. We confirm the order of the Ld. CIT(A) on this issue.
10. The second issue on which penalty has been confirmed by AO is w.r.t SAP Expenses. Before the Ld. CIT(A) the assessee submitted that though the SAP project was implemented in the subsequent year, the consultancy fees professional charges and other incidental cost etc., should not be disallowed as capital expenditure as the appellant company has been carrying on business for number of years and it has been acquiring and implementing various hardware and software systems from time to time, The said hardware and software require continuous up gradation and modification. These expenses are incurred in respect of SAP implementation and is of revenue nature. AO has ignored the alternative plea of the appellant that if it is held as capital expenditure, the same should be considered in allowing depreciation u/s 32 of the Act. Therefore, penalty should not be levied on the same.
11. On appeal against the levy of penalty the CIT(A) held as follows:
“I have considered the facts of the case and the submissions made by the AR/Appellant and the same are not acceptable, Appellant has expenses of on SAP related project which has been capitalized by the appellant company itself as noted in the assessment order. Appellant has incurred total cost of Rs 217,23,586/- on SAP related project out of which an amount of Rs. 1,76,67,722/- has been recovered from the various overseas branches by the assessee and net expenses of Rs 40,55,864/- have been claimed as legal and professional expenses in the current year, which in my opinion is not in order. In fact in the course of appeal proceedings against the assessment order, while upholding the aforesaid dis allowances CIT(A) asked the appellant to clarify to which specific asset the aforesaid expenses related to. However, appellant could not offer any satisfactory explanation and stated that such capitalized expenses should be treated as related to computer/ software expenses. However CIT(A) was no satisfied with the above explanation of the appellant. CIT(A) for the following reasons dismissed the appellant’s appeal.”
“I do not find any irregularity in the AO’s action in disallowing these expenses during this year as the SAP project commenced only next year. Since legal/professional expenses were not related to any specific depreciable asset which was put on operation during this current assessment year, no depreciation can be allowed during the current year. Allowing the claim as revenue expenditure in next year is also rejected as the appellant has not been able to establish that this is revenue in nature. However, the AO will have to establish during the next assessment year whether the amount disallowed are connected with any specific depreciable asset and if it is so, only then the question of allowing depreciation during the next assessment year when the SAP project becomes operational, can be considered. Right now during the current assessment year there is no such issue under consideration and therefore all the alternate contentions taken by the appellant, are rejected. Therefore, the alternate grounds are also dismissed.”
It is thus noted that the appellant’s above claim in the course of appeal proceedings against the assessment order for A~ 2002- 03 has been dismissed by the CIT(A) vide order No. CIT(A)XXVI/ DC-6(3) /95/2005-06 dated 27.2.2006. For the above reasons, appellant’s above contentions are rejected. Therefore, it is held that the action of the AO is right in levying penalty u/s 271(1)(c) on the said amount holding that the appellant has furnished inaccurate particulars of its income and accordingly penalty levied on the same is upheld.”
12. Aggrieved, assessee is on appeal before us. The Ld. Counsel for the assessee Ms. Aarti Visanji submitted before us as follows:
“The ITAT vide order No. 2954/Mum/2006 dt. 6th October 2009 has directed the Assessing Officer to decide the issue afresh recording the clear finding of the exact nature of expenses claimed by the assessee company and allowing the same in case the expenses were incurred for study the market in connection with acquiring and implementing various hardware and software systems during the year and in case the product for purchase by the assessee has already been identified and the expenditure claimed by the assessee relates to activities which are after the identification ofthe product to be purchased by the assessee company, the same shall be capital in nature and not allowable. Further the appeal effect is pending. However, the necessary details have already been submitted to the assessing officer.”
13. In the quantum appeal since the issue has been set aside, we set aside the penalty levied in this regard.
14. The next issue is against the confirmation of the levy of penalty u/s 271(1)(c) in respect of dis allowance u/s 14A. As this issue has been set aside in the quantum appeal and the addition no longer stands, we set aside the levy of penalty also.
15. The next issue is with respect to penalty w.r.t. Donation of Rs 291502/- disallowed u/s 80G of the Act.
16. The assessee has claimed deduction of Rs 2,91,502/- u/s 80G of the Act. In the absence of receipts AO has disallowed a sum of Rs. 42,002/- and subsequently levied penalty on the same. The Ld.CIT(A) has confirmed the levy of penalty on the ground that the onus is on the assessee to prove the claim for deduction.
17. The Ld. CIT(A) held as follows:
“On levy of penalty on the same, appellant has submitted that dis allowance of deduction on account of non production of receipts cannot be considered as concealment of income or furnishing of inaccurate particulars of income. However, the contentions are not acceptable. Appellant has made a claim of deduction and the onus is on the appellant to furnish necessary evidence to substantiate that the aforesaid claim is genuine. In the absence of proper receipts, Assessing Officer rightly disallowed the same. Therefore, in my opinion, Assessing Officer is right in levying penalty u/s. 271(1)(c) on the same. Accordingly, the penalty levied is upheld.”
18. We find no infirmity in the order of the Ld. CIT(A). The receipt has not been made available before more than one authority i.e. before the Assessing officer, CIT(A) and before us and also before the authorities in the penalty proceedings. This only shows that there is a clear violation of the Section. Section 80G reads as follows:
“Sec. 80G – In computing the total income of an assessee, there shall be deducted, in accordance with and subject to the provisions of this section -“
Hence we confirm the penalty on this issue.
19. The next issue pertains to items of Rs.90,20,718/- excluded from business profits for computing deduction u/s.80HHC of the Act.
20. The facts are as follows:
“Assessee has claimed deduction of .90,04,210/- u/s. 80HHC in the original return of income, which has been revised to .90,20,718/- in the revised return. The Assessing Officer noticed that the assessee has claimed aforesaid deduction on DEPB Benefits which was not allowable. Accordingly, Assessing Officer disallowed deduction u/s.80HHC on DEPB benefits of Rs. 58,09,284/-. Assessing Officer also added .59,82,15,398/- on account of Excise Duty and SalesTax to the total turnover for the purpose of computing deduction u/s. 80HHC. as regards direct expenses attributable to the trading export business. Assessing Officer found that appellant has deducted estimated indirect cost of .50,000/-. However, Assessing Officer estimated the indirect cost at .3,88,912/- and recomputed the deduction u/s. 80HHC. Assessing Officer has also noticed that the assessee has earned other income including the following, which were not excluded from the profits of business for computing deduction u/s. 80HHC.
|1. Interest on deposits & others||11,66,338|
|2. Insurance claim||34,92,986|
|3. Miscellaneous income||1,15,40,294|
The Assessing Officer has excluded from the profit of business 90% ofthe above income for the purpose of computing deduction u/s. 80HHC of the Act. In view of the above, the Assessing Officer recomputed and allowed the deduction of N.73,83,585/- u/s. 80HHC as against N.90,20,718/- claimed by the assessee in the revised return of income. Assessee filed appeal against the aforesaid Assessing Officer’s action of reducing the deduction u/s. 80HHC. Assessing Officer has also observed in para 10.6 of the assessment order that assessee company has itself excluded 90% of the following items for computing deduction u/s. 80HHC.
1 Indenting commission 2,10,42,865
2 Export incentives 58,09,284
3 Consulting fee 73,78,327
4 Service charges 81,37,342
5 Interest on Income tax
However, from the order of CIT(A), it is seen that the same has been contested by the appellant before the CIT(A). in any case, assessee filed appeal before the CIT(A), who has partly allowed the appeal on this issue. Assessing Officer has levied penalty on the excess deduction claimed u/s. 80HHC of the Act.
Objecting to the levy of penalty, appellant had submitted that indirect cost of trading export has been computed by the appellant on estimate basis and available data. Assessing Officer has computed indirect cost taking into consideration the entire direct costs. Similarly, items of other income which have been claimed as part of business profits and excluded by the Assessing Officer are not to be excluded based on various judicial pronouncements including those int eh case of appellant’s own case. As regards excluding other income from the profit of business appellant has further, stated that if any particular item is taxed as part of the business profits and arises out of business, the nomenclature shall not decide whether it has to be excluded from the business profit or not or business u/s. 80HHC. Appellant had also relied upon the decisions in the following cases:
I) Commissioner of Income Tax Vs. Bangalore Clothing Co. (260 ITR 371)
II) Alfa Level India Ltd. Vs. DCIT(266 ITR 418)
Appellant also relied upon the decisions of Hon ‘ble. ITAT in the appellant’s own case for A.~. 1997-98 and 1998-99. Appellant has also stated that Assessing Officer has ot recorded satisfaction for initiating penalty proceedings u/s. 271(1)(c) whether the asessee has concealed income or furnished inaccurate particulars of such income. Therefore, the penalty proceedings initated are illegal and bad in law. In view of the above, AR/Appellant contended that no penalty can be levied on the same.”
21. Aggrieved, assessee preferred an appeal before the Ld. CIT(A). The Ld. CIT(A) confirmed the levy of penalty in respect of the following items u/s. 271(1)(c) of the Act.
(i) Indirect cost computed at Rs. 3,88,912 instead of Rs. 50,000/- relating to trading goods amounting to Rs. 3,88,912/-
(ii) Interest received including interest on income-tax refund to be excluded from business profits amounting to Rs. 1,32,27,661/-.
22. Aggrieved, assessee has preferred an appeal before us.
23. We heard both the Parties. Sec 8OHHC has undergone numerous amendments and has been subject matter of litigation and therefore the computation of relief u/s 8OHHC is a very controversial one. In the instant case the Assessee has furnished all the particulars of the individual components in computing relief u/s 8OHHC. They have not furnished any inaccurate particulars in the return. Also the claim of relief u/s 8OHHC is supported by a certificate by the Chartered Accountant. The Apex Court in the case of CIT vs Reliance Petroproducts Pvt. Ltd (322 ITR 158 SC),held that as long as the assessee had not given any information in the return which is incorrect, making an incorrect claim in law will not tantamount to furnishing inaccurate particulars and penalty u/s 271(1)(c is not attracted. Further as contended by the Assessee that the claim of deduction u/s 8OHHC is supported by a certificate by the chartered Accountant about the correctness of the claim. In the case of CIT v S.Dhanabal (309 ITR 268 del) the assessee inadvertently claimed 100% deduction of 80HHE instead of 80%. This was done on the basis of the advise of a chartered accountant. The Delhi High Court held that explanation was bonafide and all the material for computation was disclosed in the return. Hence penalty was not leviable. Respectfully following the above decisions of the Apex Court and the Delhi High Court we delete the penalty levied in respect of dis allowance u/s 80HHC.
23. In the result the appeal filed by the assessee is partly allowed.
Order pronounced on this 27th day of April, 2011