Commissioner Of Income Tax ... vs Escorts Finance Limited
2009 Latest Caselaw 3315 Del

                                REPORTABLE
                  IN THE HIGH COURT OF DELHI AT NEW DELHI

                           + I.T.A. No. 1005/2008

                                                  Date of Hearing: 04.08.2009
                                                 Date of Decision: 24 .08.2009

#Commissioner of Income Tax Delhi-IV         .....Appellant

!                                            Through: Ms.Prem Lata Bansal
                                             with Ms.Anshul Sharma and
                                             Mr. Paras Chaudhary
                 Versus

$Escorts Finance Limited                     .....Respondents

                                             Through Mr. R.M. Mehta
CORAM :-
*THE HON'BLE MR.JUSTICE A.K.SIKRI
THE HON'BLE MR. JUSTICE VALMIKI J. MEHTA

       1.Whether Reporters of Local papers may be allowed to
         see the Judgment?
       2.To be referred to the Reporter or not?
       3.Whether the judgment should be reported in the Digest?

A.K. SIKRI, J.

:

1. In this appeal we are concerned with the decision of the Income-Tax

Appellate Tribunal (hereinafter referred to as 'the Tribunal' for short)

which has upheld the decision of the CIT (A) deleting the penalty of

Rs.13,18,151/- imposed by the Assessing Officer in exercise of his

powers contained in Section 271(1)(c) of the Income-Tax Act

(hereinafter referred to as the 'the Act' for short). The penalty

I.T.A. No. 1005/2008 Page 1 proceedings came to be initiated by the Assessing Officer under the

following circumstances:-

2. The respondent assessee filed the income tax return declaring income

at Rs.1,21,03,280/- on 30.11.1996. During the assessment

proceedings, the Assessing Officer noticed that the assessee had

claimed deduction of Rs.21,02,228/- under Section 35D of the Act

being 1/10th of Rs.2,10,22,279/- relating to public issue of shares. The

Assessing Officer required the assessee to explain as to why such

expenses be not disallowed as it is hit by provisions of Section 35D(2)

of the Act as it is neither an investment company nor an industrial

company. Assessee contended that the expenses had to be amortized

as per Section 35D of the Act. However, the Assessing Officer was not

convinced with the same and relying on the judgment of Supreme

Court in the case of Brook Bond India Limited v. CIT, 225 ITR 798

disallowed the same treating the expenditure as capital in nature.

During the assessment proceedings, the Assessing Officer further

found that assessee had claimed 50% of the entertainment expenses

as on account of employee's participating in the business meetings

while entertaining company's guests. In earlier years, employee's

participation was estimated only at 25%. Accordingly, he disallowed a

I.T.A. No. 1005/2008 Page 2 sum of Rs.1,18,247/- out of the total entertainment expenditure.

Similarly, the Assessing Officer further noticed that in the return of

income, assessee had declared long term capital loss at Rs.98,04,485/-

and short term capital gain at Rs.17,52,855/-. The Assessing Officer

required the assessee to explain as to why such long term capital loss

and short term capital gain be not treated as business loss/business

income and further as speculative loss and profit. The assessee

submitted that there was an inadvertent error while computing such

loss and gain as the indexed cost of investment had been reduced from

the profit on sale of investment instead of sale consideration. The

assessee filed a revised computation of capital loss and capital gain and

accordingly, the Assessing Officer made an addition of Rs.6,45,070/- to

the income of assessee on account of short term capital gain.

3. While framing the assessment order the Assessing Officer also decided

to initiate penalty proceedings under Section 271(1)(c) of the Act and

issued show cause notice for this purpose. The assessee did not give

any reply. After considering the matter, the Assessing Officer passed

orders dated 29.7.2005 imposing penalty of Rs.13,18,151/- on the

ground that the assessee had furnished inaccurate particulars of

income.

I.T.A. No. 1005/2008 Page 3

4. The assessee challenged this order by filing appeal before the CIT(A)

who allowed the appeal and set aside the penalty order passed by the

Assessing Officer. The CIT(A) was of the opinion that all the facts had

been duly disclosed by the assessee in the return of income and

therefore, it was not a case of furnishing inaccurate particulars for

concealing any income chargeable to tax. He was of the opinion that in

order to invoke the provisions of Section 271(1)(c) conscious

concealment was necessary. No doubt, initial burden of proof was on

the assessee but if that was discharged, no penalty was leviable unless

the explanation is found to be fantastic or without any basis. In the

opinion of the CIT(A), only a mistake had occurred on the part of the

assessee in respect of the assessee in respect of Rs.6,45,070/- which

was corrected by it during the course of the assessment proceedings

on its own as was clear from the assessment order. Further, in the

prospectus for issue of public shares it was clearly mentioned by the

statutory auditor, namely, M/s. N.D. Kapoor & Co. that the expenses

incurred in connection with the public issue of shares, such as

underwriting commission, brokerage and other charges etc. qualify for

amortization over a period of 10 years under Section 35D of the Act.

Thus, it was only a question of interpretation of Section 35D as to

I.T.A. No. 1005/2008 Page 4 whether the expenses claimed by the assessee could be allowed under

that Section or not and therefore, penalty could not be levied on this

amount. Regarding addition on account of capital loss, as per the

CIT(A) it was found to be correct. The assessee company had itself

filed a revised statement for the error committed which was a bona

fide mistake and therefore, there was no concealment. Qua

entertainment, expenses which were restricted to 35% instead of 55%

claimed by the assessee company, again it could not be said that

assessee company had concealed income or had furnished inaccurate

income. On this basis appeal was allowed and penalty deleted.

5. The Tribunal has upheld the order of CIT(A) on two grounds, namely:-

(a) in the assessment order the Assessing Officer had not

recorded his satisfaction regarding concealment of

income or for furnishing inaccurate particulars.

(b) On merits also the Tribunal opined that the error can be

termed as bona fide mistake, which was corrected by the

assessee of its own and the reasoning given by the CIT(A)

is echoed by the Tribunal.

I.T.A. No. 1005/2008 Page 5 We may point out that in view of amendment to Clause (1B) of

Section 271 retrospectively with effect from 1.4.1989. This ground is

no more available to the assessee. It is for this reason the matter was

argued on merits before us by counsel for both the sides.

6. Following substantial questions of law was framed by this Court while

admitting the appeal on 4.8.2009:-

"Whether ITAT was correct in law in which in deleting the penalty imposed by the Assessing Officer U/S 271(1)(c) of the Act?"

Since counsel for the parties were ready to argue the matter finally,

we heard the arguments on the aforesaid issue there and then.

7. There is no quarrel about the proposition of law for invoking provisions

of Section 271(1)(c) of the Act, particularly Explanation (I) thereof. This

Section with the Explanation (I) reads as under:-

"Failure to furnish returns, comply with notices, concealment of income, etc.,

271.(1) 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-

            (a)          xxx
I.T.A. No. 1005/2008                                                   Page 6
             (b)         xxx

            (c)         has concealed the particulars of his income

or furnished inaccurate particulars of [such income, or].

(d) xxx

Explanation 1.-Where in respect of any facts material to the computation of the total income of any person under this Act,-

(A) such person fails to offer an explanation or offers an explanation which is found by the [Assessing] Officer or the [Commissioner (Appeals) [or the Commissioner] to be false, or (B) such person offers an explanation which he is not able to substantiate [and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him],

then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purpose of clause (c) of this sub-section be deemed to represent the income in respect of which particulars have been concealed."

8. It is repeatedly held by the Courts that the penalty on the ground of

concealment of particulars or non-disclosure of full particulars can be

levied only when in the accounts/return an item has been suppressed

dishonestly or the item has been claimed fraudulently or a bogus claim

I.T.A. No. 1005/2008 Page 7 has been made. When the facts are clearly disclosed in the return of

income, penalty cannot be levied and merely because an amount is not

allowed or taxed to income, as it cannot be said that the assessee had

filed inaccurate particulars or concealed any income chargeable to tax.

Further, conscious concealment is necessary. Even if some deduction

or benefit is claimed by the assessee wrongly but bona fide and no

malafide can be attributed, the penalty would not be levied. A

fortiorari, if there is a deliberate concealment and false/inaccurate

return was filed, which was revised after the assessee was exposed of

the falsehood, it would be treated as concealment of income in the

original return and would attract penalty even if revised return was

filed before the assessment is completed. Likewise, where claim made

in the return appears to be ex facie bogus, it would be treated as case

of concealment or inaccurate particulars and penalty proceedings

would be justified.

9. The main plank of attack on the part of learned counsel for the

appellant was that on the facts of this case aforesaid principles are not

properly applied. She was emphatic in her submission that vital

aspects of the case are glossed over by the authorities below, which

would clearly demonstrate that there was a deliberate concealment of

I.T.A. No. 1005/2008 Page 8 facts amounting to inaccurate particulars furnished by the assessee in

its return.

10.Learned counsel for the respondent on the other hand submitted that

the authorities below had taken into consideration all the material

circumstances on the basis of which findings were arrived at that the

mistake of the assessee was bona fide and thus, he pleaded that order

of the Tribunal should not be interfered with. Both the counsel

referred to various judgments most of which are taken note of by the

CIT(A) as well as the Tribunal.

11.We find that action for penalty proceedings was initiated by the

Assessing Officer on various grounds. First ground was predicated on

the claim made by the assessee for entertainment expenses. As

against 50% amount claimed by the assessee on account of the

employees' participation, the Assessing Officer reduced the same to

35%. We of the opinion that the CIT(A) as well as the Tribunal rightly

observed that there was no concealment of income or furnishing of

inaccurate particulars. The addition was only on account of difference

in estimate made by the assessee and the other estimate made by the

Assessing Officer. Therefore, in so far as this claim is concerned, even

I.T.A. No. 1005/2008 Page 9 if the Assessing Officer reduced the same from 50% to 35%, that

cannot attract the penalty.

12.A sum of Rs.21,02,228/- under Section 35D of the Act was disallowed

by the Assessing Officer. This, according to the assessee, was made on

the basis of the opinion given by the Chartered Accountants, which is

clear from the prospectus for public issue of shares in which it was

clearly mentioned that the assessee company would be entitled to

relief under Section 35D of the Act. Expenses were incurred in

connection with the public issue of shares such as underwriting

commission, brokerage and other charges etc. which, as per the

opinion of the Chartered Accountants, qualify for amortization over a

period of 10 years under Section 35D of the Act. Submission of the

learned counsel for the Revenue was that merely because information

in this behalf was made available in the tax audit report, would not

absolve the assessee of the penalty proceedings when such a claim was

ex facie bogus. She submitted that hardly 5% returns are taken up for

scrutiny under Section 143(2) of the Act and assessment is made under

sub-section (3) of Section 143 of the Act. Therefore, with the hope that

his/her return may not come under scrutiny and may be assessed on

the basis of 'self-assessment', an assessee can venture to give wrong

I.T.A. No. 1005/2008 Page 10 information. Therefore, merely because information was available in

the tax audit report would not absolve the assessee. What was to be

seen was that whether the claim made was bogus.

13.We are inclined to agree with the aforesaid submission of learned

counsel for the Revenue. Even if there is no concealment of income or

furnishing of inaccurate particulars, but on the basis thereof the claim

which is made is ex facie bogus, it may still attract penalty provision.

Cases of bogus hundi loans or bogus sales or purchases have been

treated as that of concealment or inaccuracy in particulars of income

by the judicial pronouncements (See Krishna v. CIT, 217 ITR 645,

Rajaram v. CIT, 193 ITR 614 and Beena Metals, 240 ITR 222).

14.In the present case, we have to examine as to whether the claim made

under Section 35D of the Act was bogus or it was a bona fide claim.

The assessee pleaded bona fide, as according to it, it was based on the

opinion of the Chartered Accountant. Learned counsel for the

Revenue, however, submitted that a bare reading of Section 35D

would reveal even to a layman that there was no scope for getting

benefit of those provisions in respect of expenses incurred in

connection with the public issue of shares such as underwriting

commission, brokerage and other charges etc. inasmuch as certain I.T.A. No. 1005/2008 Page 11 expenses are allowable only when they are incurred with the

expansion of assessee's industrial undertakings or in connection with

his setting up of a new industrial undertaking or industrial unit

whereas the assessee is a finance company.

15.We are in agreement with the aforesaid submission of learned counsel

for the Revenue. We fail to understand as to how the Chartered

Accountants who are supposed to be expert in tax laws, could give

such an opinion having regard to the plain language of Section 35D of

the Act. It would be important to note that assessee has nowhere

pleaded that return was filed claiming benefit of Section 35D of the Act

on the basis of the said opinion. What was stated was that in the

prospectus it was mentioned that as per the opinion given by the

Chartered Accountants, the company would be entitled for relief under

Section 35D of the Act. Therefore, it is not the case of the assessee

that while filing the return it got assistance from the Chartered

Accountants who opined that the aforesaid expenses qualify for

amortization over a period of 10 years under Section 35D of the Act.

That apart, when we find that it is not a case where two opinions about

the applicability of Section 35D were possible. Therefore, it cannot be

a case of a bona fide error on the part of the assessee. As has been

I.T.A. No. 1005/2008 Page 12 pointed out above, the relief available under Section 35D of the Act to

a finance company is ex facie inadmissible as that is confined only to

the existing industrial undertaking for their extension or for setting up

a new industrial unit. It was, thus, not a 'wrong claim' preferred by the

assessee, but is a clear case of 'false claim'. In Commissioner of

Income-Tax v. Vidyagauri Natverlal and others, [1999] 238 ITR 91,

Gujarat High Court made a distinction between wrong claim as

opposed to false claim and held that if the claim is found to be false,

the same would attract penalty. We may also take note of the

following observations of the Supreme Court in the case of Union of

India and Others v. Dharmendra Textile Processors and Others, (2008)

13 SCC 369=306 ITR 277 (SC). In such a case it is difficult to accept the

plea that error was bona fide.

16.In so far as claim of capital loss is concerned, the assessee is absolved

by the authorities below on the ground that it was an inadvertent error

which was corrected by the assessee itself by filing revised return and

offering the same during the assessment proceedings. Admittedly, it

happened while the assessment proceedings were going on and the

explanation furnished by the assessee before the Assessing Officer in

those assessment proceedings was that there was an inadvertent error

I.T.A. No. 1005/2008 Page 13 while computing such loss and as the index cost of investment had

reduced from profit on sales instead of sale consideration. Though

there may an element of doubt as to whether it was an inadvertent

error on the part of the assessee or he filed the revised return only

after he was confronted with the same by the AO, however, when we

find that a finding of fact regarding "inadvertent error" is recorded by

the two authorities below, we are not interfering in the matter on this

aspect. It is more so when we find that while imposing the penalty the

Assessing Officer has nowhere contradicted that aforesaid error was

not inadvertent.

17.The issue is, thus, decided in the aforesaid manner as a result of which

appeal is partly allowed. In view thereof, matter is remitted back to

the Assessing Officer for determining the penalty afresh attributing the

conduct relating to claim under Section 35D of the Act only as

attracting penalty proceedings.

                                                         (A.K. SIKRI)
                                                           JUDGE



August 24, 2009                                      (VALMIKI J. MEHTA)
hp.                                                       JUDGE


I.T.A. No. 1005/2008                                                    Page 14