Commissioner Of Income Tax vs Nalwa Sons Investments Ltd.
2010 Latest Caselaw 3943 Del

                               Reportable

*    IN THE HIGH COURT OF DELHI AT NEW DELHI

+                   ITA No. 1420/2009

                          Judgment reserved on: August 3, 2010.
                          Judgment delivered on: August 26, 2010


Commissioner of Income Tax                  ..... Appellant
                Through:  Ms. Prem Lata Bansal, Advocate.

              Versus

M/s. Nalwa Sons Investments Ltd.             ..... Respondent
                 Through:  Mr. Ajay Vohra and Ms. Kavita Jha,
                           Advocates.

CORAM:

         HON'BLE MR. JUSTICE A.K. SIKRI
         HON'BLE MS. JUSTICE REVA KHETRAPAL

1. Whether reporters of local papers may be allowed
   to see the judgment?

2. To be referred to the Reporter or not?

3. Whether judgment should be reported in Digest?


A.K. SIKRI, J.

1. In this appeal, we are concerned with the penalty proceedings

initiated by the Assessing Officer in respect of the assessment year

2001-02. For the said assessment year the respondent-assessee had

filed return declaring loss at Rs.43.47 crores. Thereafter, the revised

return exhibiting the income at Rs.3,86,82,128/- was filed under the

provisions of Section 115JB of the Income Tax Act, 1961 (for short „the

Act‟). The assessment order was framed by the Assessing Officer

under Section 143(3) at a loss of Rs.36.95 crores as per normal

provisions and at book profits at Rs.4,01,63,180/- under Section 115

JB of the Act. While doing so, various additions were made by the

Assessing Officer including the following: -

a. In so far the claim of depreciation is concerned, the Assessing Officer disallowed the depreciation to the extent of Rs.32,51,906/-.

b. The addition towards the provident fund of Rs.3,030/- treating the same as income, was also made on the ground that this contribution was made belatedly by the assessee.

c. The Assessing Officer also disallowed deduction under Section 80HHC of the Act on the ground that the assessee had not adjusted the loss incurred on manufactured and traded goods exported out of India against incentives and had claimed deduction under Section 80HHC of the Act on 90% of the incentives.

2. These additions were upheld by the CIT (A) as well.

3. While drawing the assessment order, the Assessing Officer also

directed that the penalty proceedings be initiated against the assessee

by issuing a show cause notice under Section 271 (1) (c) of the Act.

The show cause notice was thus given to the respondent-assessee,

who submitted its reply thereto. However, the Assessing Officer was

not convinced with the reply and thus, passed the order dated 28th

September, 2007 imposing a penalty of Rs. 90,97,415/- in respect of

the aforesaid three additions holding that the assessee had furnished

inaccurate particulars of the income which fell within the purview of the

Section 271 (1) (c) of the Act and Explanation 1 thereto.

4. The assessee preferred an appeal there against, which was

allowed by the CIT (A), who set aside the penalty order. The Income

Tax Appellate Tribunal has affirmed the order of the CIT (A)

maintaining that no penalty could have been imposed upon the

assessee under the given circumstances. It is in this backdrop that the

present appeal is preferred under Section 260A of the Act.

5. In so far as the addition of Rs.3,030/- towards the provident fund

account is concerned, the CIT (A) as well as the ITAT held that the

claim for deduction on this account was debatable. It was not disputed

that all the payments were made. They were made beyond the due

date. Actually, the learned counsel for the Revenue states that this

amount was not paid at all. It is not necessary to go into this

controversy having regard to the meager amount involved, and

therefore, it is not necessary to interfere with the order of the Tribunal

in so far as the setting aside of the penalty on this account is

concerned.

6. As far as the claim of the assessee under Section 80HHC of the

Act is concerned, the explanation of the assessee was that after taking

into account the loss in trading goods and loss in manufacturing goods

there was a negative figure and, accordingly, relying on the judgment

of the Bombay High Court in the case of IPCA Laboratories vs. DCIT

251 ITR 451, the Assessing Officer held that it was not entitled to any

deduction under Section 80HHC. Whether the deduction under

Section 80HHC of the Act can be allowed or not was a debatable

issue as there were judgments of other High Courts as per which

under these circumstances, deductions under Section 80 HHC of the

Act were permissible. In these circumstances, when the law on this

issue had not been authoritatively determined and crystallized and two

opinions prevailed at that time, penalty under Section 271 (1) (c) could

not be imposed. The Tribunal, in support of this proposition has relied

upon the judgment in CIT vs. International Audio Visual Company

288 ITR 570. Therefore, we do not find any error in the orders of the

CIT (A) as well as the ITAT deleting the penalty on that score.

7. Coming to the imposition of the penalty on disallowance of

depreciation, the assessee had claimed depreciation on certain plants

and machinery in respect of which book entry was made on 31st March,

2001. When the Assessing Officer took note of the aforesaid fact, he

put a specific query to the assessee to explain as whether these

machineries were put to use for business purposes during the year

under consideration, and a show cause notice was also issued as to

why the claim of depreciation on the said plant and machinery be not

rejected as these assets were not put to use for business purpose

during the year under consideration. The assessee had replied that all

the assets were put to use and hence the depreciation on all these

assets be allowed in full. The assessment order further reveals that

during the course of hearing the assessee was specifically asked to

produce the supporting evidence including records etc. to prove their

claim. However, the assessee could not produce any evidence. From

this, the Assessing Officer concluded that the machineries, which were

shown to have been brought on record on 31st March, 1997 only, had

not put to use at all during the relevant assessment year. For this

reason, the claim of depreciation on this machinery was not allowable.

It was under these circumstances, the Assessing Officer had

disallowed the depreciation to the extent of Rs.32,51,906/-. On this

premise, the Assessing Officer, in the penalty proceedings, took the

view that the assessee had furnished inaccurate particulars, and had

tried to claim the depreciation by misleading the authorities even when

such a claim was not permissible in law. Thus, he imposed the penalty

on this account.

8. The order of the CIT (A) would demonstrate that the penalty on

this account is also set aside by relying upon its earlier order dated 15th

May, 2007 in respect of the assessment year 1999-2000. The portion

of that order dated 15th May, 2007 is extracted by the CIT (A) and it

reads as under: -

"Without prejudice to this, even on the merit the books of accounts of the appellant company and stores consumption record suggest clearly that the building and plant & machinery under consideration was not put to use only on 19.3.1998 but it was a continuous process.

Certain claim if made regarding any expenditure/allowance in the bona fide manner, which is disallowed by the A.O., does not prove itself that it was a clear case of furnishing of the

inaccurate particulars of income. Confirming the disallowance of any claim like depreciation by the appellate authority and confirming addition u/s 43B in itself does not prove that it was a proved case of furnishing of the inaccurate particular of income. Fact remains that in the penalty proceedings, the A.O. has not independently established that the appellant company has furnished inaccurate particulars of income. With this discussion, a penalty levied by the A.O. of Rs.26,68,625/- is hereby cancelled."

9. The CIT (A) was, therefore, of the opinion that as the facts in this

year were also the same, there was no reason to differ with the finding

as recorded in the earlier order and deleted the penalty. The CIT (A)

also observed that even on merits, such a penalty was not leviable and

rather there was no need of adjudication because the same

disallowance had not been considered while computing the income of

the assessee under Section 115JB Of the Act.

10. It is pointed out by Ms. Bansal, the learned counsel for the

appellant-Revenue that the reliance placed on the order dated 15th

May, 2007 in respect of the assessment year 1999-00 was totally

misconceived. She read out the aforesaid extracted portion of that

order and drew our attention to the fact that in that order, the CIT (A)

was concerned with the stores consumption. However, in this year no

such record was produced. On the contrary, submitted the learned

counsel, in so far as this assessment year is concerned, the order of

the Assessing Officer would clearly reveal that it was a case of plant

and machinery which was, as per books of accounts, bought on 31st

March, 2001 and there could not have been any question of using the

said machinery in that year. She further argued that the depreciation

was disallowed on the specific ground that the assessee could not

produce any evidence of its user during the year. She argued that this

aspect has not been dealt with by the CIT (A) at all in the impugned

order. Likewise, Ms. Bansal pointed out that the Income Tax Appellate

Tribunal has also totally ignored the aforesaid aspect. The ITAT has

simply noted the contention of the assessee that the machinery was

not purchased on the last date but it was issued from the stores and

was accounted for on the last date of the financial year, and that there

was no dispute about the purchase of the machinery, and on that basis

the ITAT observed that it was not the case of the Revenue that bogus

claim of depreciation was made by the assessee.

11. We find that the submission of Ms. Bansal to this extent appears

to be correct. The reason which prompted the Assessing Officer to

take steps to impose penalty against the assessee was that though the

assessee had bought the concerned machinery only on the last day of

the year in respect of which book entry was made on 31st March,

2001, it still claimed the depreciation which could be claimed only if the

machinery was put to use for the purpose of business during the year

under consideration. Even when the assessee was specifically asked

to produce the supporting evidence including records to prove that it

had used the machinery in the relevant year, the assessee could not

give any evidence. Claim for depreciation qua that machinery was

rejected on this ground. It thus becomes clear that the assessee had

claimed the depreciation on the said machinery projecting that it had

used the machinery which, turned out to be false. Neither the CIT (A)

nor ITAT looked into the matter from the proper perspective and rather

scuttled the real issue by deleting the penalty.

12. Mr. Vohra, the learned counsel appearing for the assessee,

however, gave a totally a different twist to the matter by predicating his

submission on Section 115JB of the Act. His contention was that as

per Explanation 4 of Section 271 (1) (c) of the Act, the penalty is levied

with respect to the amount of tax sought to be evaded. According to

him since the amount of tax had been paid by the assessee under

Section 115JB of the Act, no penalty could be levied in respect of the

additions/disallowances made by the A.O.

13. Before we proceed to take note of further argument on this point,

we reproduce the relevant provision of Section 271 (1) (c) of the Act:-

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

xxx xxx xxx

(c) has concealed the particulars of his income or furnished inaccurate particulars of such income, or xxx xxx xxx

He may direct that such person shall pay by way of penalty,-

xxx xxx xxx

(iii) in the cases referred to in clause (c) or clause (d), in addition to tax, if any, payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or fringe benefits or the furnishing of inaccurate particulars of such income or fringe benefits.

xxx xxx xxx

Explanation4- For the purposes of clause (iii) of this sub-section , the expression "the amount of tax sought to be evaded"-

(a) In any case where the amount of income in respect of particulars have been concealed or inaccurate particulars have been furnished has the effect of reducing the loss declared in the return or converting that loss into income, means the tax that would have been chargeable on the income in respect of which particulars have been concealed or inaccurate particulars have been furnished had such income been the total income;

(b) In any case to which Explanation 3 applies, means the tax on the total income assessed as reduced by the amount of advance tax, tax deducted at source, tax collected at source and self-assessment tax paid before the issue of notice under Section 148;

(c) In any other case, means the difference between the tax on the total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished xxx xxx xxx"

14. Mr. Vohra argued that even if the penalty was to be

imposed on the alleged concealment of income by the

assessee or in respect of income in which inaccurate

particulars have been furnished, the quantum of penalty is

quantified with reference to the amount of tax sought to be

evaded. His explanation was that the tax sought to be evaded

would be the difference between the tax due on the income

assessed and the tax that would have been chargeable had

such total income been reduced by the amount of concealed

income. Thus, the penalty is levied on the basis of tax on the

difference between the income assessed and the income

returned.

15. On this principle, the penalty could not be imposed in the

present case as the assessee had paid the tax at deemed

income under Section 115 JB of the Act, which income was

more than the income assessed as per normal procedure.

The Scheme of the Act is that if the tax payable under normal

procedure is higher, such amount is taxable income of the

appellant; otherwise book profits are deemed as the total

income of the assessee in terms of Section 115 JB of the Act.

He thus submitted that once „book profits‟ are, by a legal

fiction, deemed to be total income of the assessee, such

deeming fiction must be taken to its logical conclusion. As a

necessary corollary, in such a case where income of an

assessee company is finally assessed at „book profits‟ by

deeming the same to be total income of the assessee, penalty

imposable under Section 271(1) (c) of the Act could only be

levied in respect of any adjustment/addition/disallowance made

while computing such „book profits‟. In such a situation, the

revenue cannot be allowed to impose penalty with reference to

the additions/ disallowances made while computing normal

income since such income pales into insignificance, both for

the purpose of imposition of tax and all logical consequences

following thereon.

16. In nut shell, his submission was that when the tax was

imposed and calculated under the Act on the deemed income

under Section 115JB of the Act, for the purposes of the

imposition of penalty the department could not revert back to

the normal income as it would lead to an absurd situation of

two different incomes of the same person for the same

assessment year. Further more, when the income tax is paid

on the „book profits‟ by a legal fiction, such legal fiction has to

be taken to its logical conclusion. He referred to the following

decisions in support of his submissions:-

       (i)     A.S. Glittre Vs. CIT, 225 ITR 739 @ 744
       (ii)    M. Venugoal Vs. Divisional Manager, LIC of
               India, AIR 1994 SC 1343, 1347-48

(iii) UOI Vs. Jalyan Udyog, AIR 1994 SC 88, 96-97

(iv) Builders Association of India Vs. UOI, 73 STC 370 at 400 (SC)

17. Ms. Bansal countered the aforesaid arguments of Mr. Vohra by

submitting that the Supreme Court had now made it clear in CIT Vs.

Gold Coin Health Care Limited that even where the assessed

income and returned income both are at loss, penalty can be levied

under Section 271 (1) (c) of the Act. Her submission was that no

restricted meaning can be given to the term "amount of tax sought to

be evaded". Where the loss has been determined by the AO at a

figure less than the returned income then it would amount to

concealment of income and the tax on the said amount would be

treated as the amount of tax sought to be evaded.

18. Ms. Bansal justified the penalty by arguing that as per the

provisions of Section 115 JB of the Act where the book profit is

determined at a figure higher than the returned figure, then the penalty

could be levied, because as per the provisions of Section 115 JB (5)

save as otherwise provided in this Section, all other provisions of the

Act shall apply to the assessee and therefore, penalty is leviable with

respect to book profits. CIT (A) has observed in para 2.6 of his order

that as regards disallowance of depreciation of Rs. 32,51,906/- and

disallowance of Rs. 3,030/- under Section 2 (24) (x), there is no need

of adjudication because the same have not been considered while

computing the income u/s 115 JB of the Act, it had been considered

while computing loss under regular provisions of the Act and thereafter,

(CIT (A) had considered merits of the case. Thus CIT (A) has not

given any finding as to whether penalty could be levied on the

income/loss as per the normal provisions of the Act when positive book

profit is determined u/s 115JB of the Act.

19. However, it is to be stated that as per the scheme under Section

115JB, AO could not have made addition with respect to depreciation

and disallowance under Section 2 (24) (x) because as per the

judgment of Supreme Court I the case of Apollo Tyres Limited( 255

ITR 273) Balance Sheet prepared by the assessee as per Schedule VI

of the Companies Act is sacrosanct, and the AO cannot tamper with

the net profit declared in such Profit & Loss A/c. Therefore, AO could

not have tampered with the figure of depreciation as claimed by the

assessee as per the Companies Act, may be WDV method or straight

line method or any other method.

20. We have considered the rival submissions. Judgment of the

Supreme Court in Gold Coin's (supra) clarifies that even if there are

losses in a particular year, penalty can be imposed as even in that

situation there can be a tax evasion. As per Section 271 (1) (c), the

penalty can be imposed when any person has concealed the

particulars of his income or furnished incorrect particulars of the

income. Once this condition is satisfied, quantum of penalty is to be

levied as per clause (3) of Section 271 (1) ( c) which stipulates that

the penalty shall not exceed three times " the amount of tax sought to

be evaded". The expression "the amount of tax sought to be evaded"

is clarified and explained in Explanation 4 thereto, as per which it has

to have the effect of reducing the loss declared in the return or

converting that loss into income. It is in this context that in Gold

Coins (supra) the Supreme Court explained the legal position as

under:-

dated 24.7.1976 reported in 1977 (110) ITR 21 (St.) has also substantial relevance. Same reads as follows:-

New Explanation 4 defined „the amount of tax sought to be evaded‟. According to the definition, this expression will ordinarily mean the difference between the tax on the total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of which particulars have been concealed. In a case, however, where on setting off the concealed income, against any loss incurred by the assessee under other head of income or brought forward from earlier years, the‟ total income is reduced to a figure lower than the concealed income or even to a minus figure, „the tax sought to be evaded‟ will mean the tax chargeable on the concealed income as if it were the total income. Another exception to the general definition of the expression „tax sought to be evaded‟ given earlier is a case to which Explanation 3 applies. Here, the tax sought to be evaded will be the tax chargeable on the entire total income assessed.

A combined reading of the Committee‟s recommendations and the Circular makes the position clear that Explanation 4 (a) to Section 271 (1) (c) intended to levy the penalty not only in a case where after addition of concealed income, a

loss returned, after assessment becomes positive income but also in a case where addition of concealed income reduces the returned loss and finally the assessed income is also a loss or a minus figure. Therefore, even during the period between 1.4.1976 to 1.4.2003 the position was that the penalty was leviable even in a case where addition of concealed income reduces the returned loss.

When the word "income" is read to include losses as held in Harprasad‟s case (supra) it becomes crystal clear that even in a case where on account of addition of concealed income the returned loss stands reduced and even if the final assessed income is a loss, still penalty was leviable thereon even during the period 1.4.1976 to 1.4.2003. Even in the Circular dated 24.7.1976, referred to above, the position was clarified by Central Bureau of Direct Taxes (in short „CBDT‟). It is stated that in a case where on setting off the concealed income against any loss incurred by the assessee under any other head of income or brought forward from earlier years, the total income is reduced to a figure lower than the concealed income or even to a minus figure the penalty would be imposable because in such a case "the tax sought to be evaded‟ will be tax chargeable on concealed income as if it is "total income".

21. The question, however, in the present case, would be, as to

whether furnishing of such wrong particulars had any the effect on the

amount of tax sought to be evaded. Under the scheme of the Act, the

total income of the assessee is first computed under the normal

provisions of the Act and tax payable on such total income is

compared with the prescribed percentage of the „book profits‟

computed under section 115JB of the Act. The higher of the two

amounts is regarded as total income and tax is payable with reference

to such total income. If the tax payable under the normal provisions is

higher, such amount is the total income of the assessee, otherwise,

„book profits‟ are deemed as the total income of the appellant in terms

of Section 115JB of the Act.

22. In the present case, the income computed as per the normal

procedure was less than the income determined by legal fiction namely

„book profits‟ under Section 115 JB of the Act. On the basis of normal

provision, the income was assessed in the negative i.e. at a loss of

Rs. 369521018. On the other hand, assessment under Section 115 JB

of the Act resulted in calculation of profits at Rs. 40163180.

23. In view thereof, in conclusion, the assessment order records as

follows:-

"Assessed at Rs. 40163180 u/s 115 JB, being higher of two. Interest u/s 234B and 234C has been charged as per the provisions of Income Tax Act, 1961. Penalty proceedings u/s 271 (1) © of the Income Tax Act, 1961 have been initiated. Issue necessary forms."

24. The income of the assessee was thus assessed under Section

115 JB and not under the normal provisions. It is in this context that

we have to see and examine the application of Explanation 4.

25. Judgment in the case of Gold Coins (supra), obviously, does

not deal with such a situation. What is held by the Supreme Court in

that case is that even if in the income tax return filed by the assessee

losses are shown, penalty can still be imposed in a case where on

setting off the concealed income against any loss incurred by the

assessee under other head of income or brought forward from earlier

years, the total income is reduced to a figure lower than the concealed

income or even a minus figure. The court was of the opinion that „the

tax sought to be evaded‟ will mean the tax chargeable not as if it were

the total income. Once, we apply this rationale to Explanation 4 given

by the Supreme Court, in the present case, it will be difficult to sustain

the penalty proceedings. Reason is simple. No doubt, there was

concealment but that had its repercussions only when the assessment

was done under the normal procedure. The assessment as per the

normal procedure was, however, not acted upon. On the contrary, it is

the deemed income assessed under Section 115 JB of the Act which

has become the basis of assessment as it was higher of the two. Tax

is thus paid on the income assessed under Section 115 JB of the Act.

Hence, when the computation was made under Section 115 JB of the

Act, the aforesaid concealment had no role to play and was totally

irrelevant. Therefore, the concealment did not lead to tax evasion at

all.

26. The upshot of the aforesaid discussion would be to sustain the

order of the Tribunal, though on different grounds. Therefore, while

we do not agree with the reasoning and approach of the Tribunal, for

our reasons disclosed above, we are of the opinion that penalty could

not have been imposed even in respect of claim of depreciation made

by the assessee. This appeal is accordingly dismissed.

A.K. SIKRI (JUDGE)

REVA KHETRAPAL (JUDGE) August 26, 2010 sk/skb