Delhi High Court

Avon Cranes (P) Itd. vs Dy. Cit on 23 June, 2003

Equivalent citations: (2004) 89 TTJ Del 1101

ORDER

R.M. Mehta, V.P.

These appeals were heard together and are disposed of by means of a consolidated order, for the sake of convenience.

2. The following common grounds are raised in these appeals, directed against the order passed by the Commissioner (Appeals) :

"1. That the Commissioner (Appeals) erred on facts and in law in confirming the action of the assessing officer levying penalty under section 271(1)(c) of the Income Tax Act ("the Act") for alleged filing of inaccurate particulars of income.

2. That the Commissioner (Appeals) erred on facts and in law in alleging that the appellant not only filed inaccurate particulars of income but also concealed particulars of' income of the relevant previous year.

3. That the Commissioner (Appeals) erred on facts and in law in alleging that the notice issued by the assessing officer under section 271 read with section 274 of the Act required the appellant to show cause why penalty be not levied under section 271(1)(c) of the Act, both for concealment of income and filing of inaccurate particulars of income by the appellant.

4. That the Commissioner (Appeals) erred on facts and in law in alleging that the appellant intentionally made dispoportionate/higher allocation of expenses towards the head office to claim higher deduction under section 80-I, to defraud the revenue and thus concealed/filed inaccurate particulars of income.

5. That the Commissioner (Appeals) erred on facts and in law in not appreciating that the assessing officer levied penalty under the substantive provisions of section 271(1)(c) of the Act and the onus was upon the revenue to prove that the appellant has concealed/filed inaccurate particulars of income which onus has not been discharged.

5.1 That the Commissioner (Appeals) erred on facts and in law in invoking for the first time Explanation 1 to section 271(1)(c) and alleging that 'the appellant has failed to prove that the explanation offered by it is bona fide and that the facts relating to the same and material to the computation of its total income were disclosed'. "

3. In respect of the present appeals the Commissioner (Appeals) has passed a consolidated order and it is an accepted position between the parties that the facts are identical for all the three assessment years under appeal and it is only the quantum, which varies.

4. Coming to the relevant facts of the case as extracted from the assessment order for assessment year 1988-89 the assessed is engaged in the business of manufacture and sale of various types of cranes. During the assessment year 1988-89 the total sales were a little over a crore of rupees and the gross profit was Rs. 18.60 lakhs. The gross total income declared by the assessed before claiming deductions under Chapter VI-A was Rs. 3,87,747 and against this figure deduction under section 80-I had been claimed to the tune of Rs. 2,78,500. Being of the view that the deduction so claimed was in excess of the amount, which was otherwise admissible to the assessed, i.e., 25 per cent of the gross total income, the assessing officer analyzed the matter further and in undertaking this exercise certain relevant facts emerged and which are as follows :

(i) The assessed had drawn up two separate P&L a/cs one for the fatory and the other for the head office and the sales in the former were shown at Rs. 99.89 lakhs and in the latter at Rs. 3.48 lakhs;

(ii) The factory account had shown a total net profit of Rs. 12.73 lakhs whereas the head office had shown a net loss of Rs. 8.65 lakhs;

(iii) The sales at the factory constituted as much as 96.5 per cent of the total sales and the balance 3.5 per cent of the sales had been accounted for in the books of the head office;

(iv) The total expenses booked in the Delhi head office were to the tune of Rs. 13.33 lakhs against the sales of Rs. 3.48 lakhs and the other income of Rs. 3.52 lakhs whereas in the factory account the expenditure booked was only Rs. 4.71 lakhs against the sales of Rs. 99.89 lakhs; and

(v) It clearly emerged that the factory profits had been artificially inflated by diverting the expenses from the factory account to the Delhi head office account and the motive was obvious, i.e., to claim a higher deduction under section 80-I.

5. After making the aforesaid observations with reference to the assessed's claim under section 80-I the assessing officer proceeded further to examine certain other relevant and connected details and ultimately he observed as under :

"On the whole, the total expenses booked in Delhi head office are Rs. 13,33,304 against the sales of Rs. 3,48,299 and other income of Rs. 3,52,637 and thus, resulting in a net loss of Rs. 8,65,453. On the other hand, the expenses booked in factory a/c are only Rs. 4,71,965 against the sales of Rs. 99,89,510. It would mean that approx. 74 per cent of the total expenses have been booked in Delhi head office books, against the meagre sales of only 3.5 per cent of the total sales, while in factory a/c only 26 per cent of the total expenses have been booked against 96.5 per cent of the total sales. It clearly indicate that the factory profits were artificially inflated by diverting expenses from factory a/c to Delhi H.O. a/c. The entire amount of interest and bank charges amounting to Rs. 1,54,659 has been debited to Delhi H.O. a/c while the money borrowed has been utilized by the factory. Even the expenses like advertisement and commission, etc., which has got a direct connection with manufacturing and sales of cranes has been debited to Delhi H.O. books, instead of factory books. The motive for making such adjustments is very obvious. The assessed wanted to claim a higher deduction under section 80-I by artificially jacking up its factory profits. "

6. According to the assessing officer the assessed had attempted to draw an artificial line of demarcation by preparing two separate P&L a/cs in an arbitrary manner and this was nothing, but a mere device to defraud the revenue by claiming higher deduction under section 80-I.

7. The other submissions on the part of the assessed before the assessing officer were with reference to the manner in which the deduction under section 80-I was to be calculated, the stand being that this was to be with reference to commercial profits and depreciation and investment allowance were not to be reduced while calculating the profit and gains. In support, reliance was placed on a decision of the Jaipur Bench of the Tribunal, but the assessing officer in turn referred to the provisions of section 80-AB and opined that various types of deductions such as depreciation, investment allowance, brought forward loss, etc., were to be deducted first and thereafter only the deduction under section 80-I was to be allowed on the balance profits. In the final analysis, the assessing officer rejected the claim for deduction under section 80-I as made out by the assessed and restricted the same to 25 per cent of the gross total income before making any deductions under Chapter VI-A.

8. Before the Commissioner (Appeals) submissions made before the assessing officer were reiterated and the first of these was that there were two separate, independent and distinct business centers at Delhi and Dundhahera and the deduction under section 80-I had been claimed in respect of the profits and gains derived from the industrial undertaking at Dundhahera. By means of the observations in para 9 of her order, the Commissioner (Appeals) agreed with the stand taken on behalf of the assessed and which was in the following terms :

"I am inclined to agree with the stand taken by the appellant's counsel that the units at Delhi and Dundhahera carried on separate lines of business, as accepted in the past. The Delhi office carrying on only trading and consultancy business cannot be said to be an industrial undertaking, much less an industrial undertaking qualifying under section 80-I The only industrial undertaking eligible for deduction under section 80-I, in any opinion, is one at Dundhahera and the deduction under section 80-I is to be calculated with reference to the profits and gains derived from the industrial undertaking. "

9. We may at this stage mention that one of submissions made before us by the learned counsel during the course of the present penalty appeals was that the very basis for initiation of penalty had changed since the assessing officer had taken the view that the separate P&L a/cs had been prepared only to draw an artificial line of demarcation whereas in fact the business activities carried out at the head office at Delhi were a part of the activities carried out at the factory whereas the Commissioner (Appeals) in her order had expressed an opinion to the contrary vis-a-vis para 9 of her order reproduced earlier.

10. Coming to the merits of the case the main submission was that separate books of accounts had been maintained at Delhi and Dundhahera and the expenditure debited in such separate books of accounts was the one which had actually been incurred. Considering the aforesaid main submissions as also the facts of the case the Commissioner (Appeals) proceeded to discuss in para 11 onwards of his order the different items of expenditure for the various assessment years under consideration and directing their apportionment, some on the basis of turnover and others wholly or partly the latter, on percentage basis. A reading of the order of the Commissioner (Appeals) would show that she has applied her mind in deciding the manner of apportionment and ultimately vide para 12 of his order she directed the assessing officer to undertake necessary calculations vis-a-vis the Delhi office and the Dundhahera office.

11. As regards the assessed's plea for relief in accordance with the commercial profits and gains the Commissioner (Appeals) agreed with the assessing officer rather than the assessed.

12. The further relevant facts are that the revenue filed appeals before the Tribunal and which confirmed the view taken by the Commissioner (Appeals) for the various assessment years under consideration. Before us, the learned counsel for the appellant reiterated the arguments advanced before the tax authorities. It was emphasized that the basis for levy of penalty had changed as a result of the order of the Commissioner (Appeals) in the quantum appeal vis-a-vis the basis on which the assessing officer had initiated the same. For the proposition that levy of penalty under the aforesaid circumstances was not valid in law the learned counsel placed reliance on CIT v. Dwarka Prasad Subhash Chandra (1974) 94 ITR 154 (All), CIT v. Ananda Bazar Patrilka (P) Ltd. (1979) 116 ITR 416 (Cal), CIT v. Shadiram Balmukand (1972) 84 ITR 183 (All), CIT v. Manu Engineering Works (1979) 122 ITR 306 (Guj) and Addl. CIT v. Nihal Chand Badrilal (1982) 135 ITR 519 (MP).

13. The further submission was to the effect that proper satisfaction as required by law had not been recorded in the assessment order and even on this ground the levy of penalty was illegal and invalid. Reliance was placed on CIT v. Ram Commercial Enterprises Ltd. (2000) 246 ITR 568 (Del) and Diwan Enteiprises v. CIT & Ors. (2000) 135 ITR 519 (Del). The next submission was that the manner of allowing deduction/relief was also the subject-matter of dispute since one view which was being canvassed was that the relief be allowed on the basis of commercial profits as assessed and the other was with reference to the calculation made in the return. A reference was made to 191 ITR 608 (sic) and Digchem Industries v. ITO (1987) 27 TTJ (Jp) 593. The last submission was to the effect that this was not a case of a false explanation but a case, where the explanation given was bona fide, valid and plausible, but not accepted by the revenue. On the basis of the aforesaid submissions, the learned counsel urged that the penalty for all the three years be cancelled.

14. The learned Departmental Representative, on the other hand, vehemently supported the consolidated order passed by the Commissioner (Appeals) and subsequent arguments advanced by her were a reiteration of the reasons recorded by the Commissioner (Appeals) in confirming the levy of penalty. According to the learned Departmental Representative there was a deliberate attempt on the part of the assessed to allocate expenditure in a manner, which would make available a larger deduction under section 80-I The further submission was to the effect that no valid explanation had been given by the assessed to the assessing officer at the penalty stage. Further, according to the learned Departmental Representative the Commissioner (Appeals) had upheld the orders of the assessing officer in respect of allocation of expenditure and the orders of the first appellate authority had not been challenged by the assessed before the Tribunal.

15. The learned Departmental Representative further submitted that the assessing officer had clearly expressed an opinion in the assessment order with reference to the concealment and the test laid down by the judgment of the Hon'ble Delhi High Court in (2000) 246 ITR 568 (Del) (supra) stood satisfied. The learned Departmental Representative thereafter proceeded to read out the relevant observations of the Commissioner (Appeals) and lastly placed reliance on Prasanna Enterprises v. CIT (2000) 244 ITR 188 (Kar).

16. In reply the learned counsel for the assessed contended that the decision in (2000) 244 ITR 188 (Kar) (supra) relied upon by the learned Departmental Representative was not relevant to decide the point at issue since the assessed was not raising any argument about the stage at which Explanation to section 271(1)(c) could be raised/invoked. The further emphasis on the part of the learned counsel was on the change in the basis of initiation and levy of penalty at the assessment stage as compared to the proceedings before the Commissioner (Appeals) and according to the learned counsel it was not the assessed who came to the Tribunal, but the revenue which did have a strong objection to the directions given by the Commissioner (Appeals) in the quantum appeal and which brought about some relief to the assessed. The last submission of the learned counsel was to the effect that the assessing officer had not undertaken the exercise of allocating expenditure as directed by the Commissioner (Appeals).

17. After examining the rival submissions, we are of the view that there is substantial merit in the arguments advanced by the learned counsel on behalf of the appellant. As rightly contended by him the basis of initiation and levy of penalty changed in case relevant observations in the assessment order are noted as compared to those recorded by the Commissioner (Appeals) in the order deciding the quantum appeal. According to the assessing officer the assessed had carried out an artificial line of demarcation between the Delhi office and the factory at Dundhahera by preparing two separate P&L a/cs whereas the finding of the Commissioner (Appeals) was that two separate lines of business were carried out at these two places. The factual finding of the Commissioner (Appeals) was not challenged by the revenue before the Tribunal. This would mean that to a large extent the basis for initiation of penalty would stand diluted since the subsequent discussion in the order of the Commissioner (Appeals) while deciding the quantum appeals reveals a difference of opinion and which clearly emerges from the ultimate order passed by the Commissioner (Appeals). As observed by us each item of expenditure was adverted to and detailed findings of fact given thereafter as to what is to be allocated to the factory and what is to be allocated to the head office. The relevant observations of the Commissioner (Appeals) and which according to us are relevant and would substantiate the aforesaid change are as under :

"The appellant's basis for claiming deduction under section 80-I is clearly not in order. I feel it would be fair to both the appellant and the revenue if the expenses incurred at Delhi are apportioned in a reasonable manner. I have gone through the details of expenses incurred at Delhi office and would direct that the said expenses be apportioned on the following basis to arrive at the profits derived from the industrial undertaking at Dundhahera :

(i) On the basis of the staff strength in Delhi, I would direct that 1/3rd of the following expenses would pertain to Delhi and the balance 2/3rd to the factory at Dundhahera

Asst. yr. 1988-89

Asst. yr. 1989-90

Rs.

Establishment expenses

1,65,997.30

8,26,165.96

Conveyance

30,295.30

80,979.70

Staff welfare expenses

23,224.67

43,088.99

General expenses

14,057.85

38,677.67

Business promotion

7,905.51

28,375.37

Car maintenance

46,725.99

84,994.00

Donations

5,350.00

4,605.00

Water & electricity

12,417.50

19,535.20

Office maintenance

15,340.47

40,655.79

Postage & telephones

63,280.60

1,74,599.35

Stationery

46,742.17

83,424.33

Rent

52,908.00

89,612.00

Local traveling

96,704.15

2,48,817.63

Professional & consultation

10,875.00

4,000.00

Car depreciation

1,17,612.80

1,58,745.24

(ii) The following expenses are directed to be apportioned on the, basis of turnover:

67,022.46

2,02,909.65

Bank charges & interest

1,04,984.40

2,93,395.86

Commission

24,495.00

66,442.15

Interest paid

49,675.00

54,756.00

Service charges

5.700.00

10,143.00

(iii) Bad debts and erection charges are directed to be debited to factory account while calculating deduction under section 80-I

(iv) 10 per cent of the audit fee and legal expresses will be held to be pertaining to Delhi office and the balance to the factory.

(v) Insurance charges, preliminary expenses as well as short and excess are held to be exclusively pertaining to Delhi office.

(vi) The appellant's submission that foreign traveling expenses debited in Delhi office are for exploratory visits abroad for initiating new lines of business and that the same have nothing to do with the running of the factory, is accepted. Accordingly, no portion of the foreign traveling expenses win be apportioned to the factory.

The assessing officer is directed to apportion the expenses debited in Delhi office on the lines indicated above and allow necessary relief to the appellant."

18. As rightly highlighted by the learned counsel it was the department, which came up in appeal to the Tribunal inasmuch as the assessed had obtained relief from the Commissioner (Appeals) in respect of the deduction under section 80-I. The question of the commercial profit coming up for consideration in allowing the relief was a matter of debate since the assessed canvassed one view-point and the Commissioner (Appeals) upheld the other view-point, which had been taken by the assessing officer.

19. In our opinion, the aforesaid facts clearly show that this is not a case in which it can be held that there was a deliberate attempt on the part of the assessed to claimer higher deduction under section 80-I by debiting more expenditure to the head office as compared to the factory since the matter is one of dispute between the parties and the assessed's stand is not at all far-fetched or absurd and in fact the stand taken is reasonable, valid and plausible. The Commissioner (Appeals) has followed a different basis for different items of expenditure allocating some, on the basis of the staff strength, others on the basis of turnover, yet others wholly, and some on the basis of percentage. In deciding the quantum appeal, the Commissioner (Appeals) and thereafter the Tribunal has at no stage made any observation which would lead to the conclusion that the assessed had any calculated design to claim a higher deduction under section 80-I by adopting foul means.

20. In the view that we have taken to delete the penalty on the aforesaid grounds, we do not find it necessary to deal with some of the other arguments advanced by the learned counsel and a specific reference may be made to the question of recording a satisfaction in the assessment order. In concluding, however, we must observe that the change in the basis of initiation and the ultimate levy of penalty is a relevant factor and which we on the facts of the present case have taken into account in deciding whether provisions of section 271(1)(c) are attracted or not. The various decisions relied upon by the learned counsel have been taken into account in deciding the present appeals, but we have not felt it necessary to detail each of these judgments. In the final analysis, the penalties under section 271(1)(c) levied by the assessing officer and confirmed by the Commissioner (Appeals) for the three assessment years under appeal are cancelled.

21. In the result, all the three appeals of the assessed are allowed.