Commissioner Of Income Tax vs Zoom Communication Pvt Ltd
2010 Latest Caselaw 2722 Del

                THE HIGH COURT OF DELHI AT NEW DELHI


%                                 Judgment Reserved on: 17.05.2010
                                  Judgment Delivered on: 24.05.2010


+               ITA 07/2010


COMMISSIONER OF INCOME TAX                              ... Appellant


                                  - versus -


ZOOM COMMUNICATION PVT LTD                           .... Respondents


Advocates who appeared in this case:
For the Appellant   : Mr Sanjeev Sabharwal
For the Respondent  : Mr Amit Dayal



CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE V.K. JAIN


     1.    Whether Reporters of local papers may be allowed to
           see the judgment?                                   Yes
     2.    To be referred to the Reporter or not?                 Yes

     3.    Whether the judgment should be reported in Digest? Yes

V.K. JAIN, J.

1. This appeal is directed against the order of the Income

Tax Appellate Tribunal dated 12.06.2009, passed in ITA

No.1189/Del/2008, whereby it allowed the appeal filed by the

assessee/respondent, against the order of the Commissioner of

Income Tax (Appeals), dismissing its appeal and confirming the

penalty imposed on it under Section 271(1)(c) of the Income

Tax Act (hereinafter referred to as „the Act‟).

2. The assessee company, which is engaged in the

business of hiring of audio and video equipments, filed return

declaring income of Rs 1,21,49,861/-. The case was selected

for scrutiny. It was noticed during assessment that in

Schedule 9, relating to Administration and other Expenses,

forming part of Profit & Loss Account, a sum of Rs

1,21,49,861/- had been debited under the head "equipment

written off". It was stated by the assessee that due to

oversight, this amount was not added back in computation of

income and the same ought to have been adjusted in the block

of assets. The aforesaid amount was added back to the income

of the assessee, with its consent. It was further noticed that

another sum of Rs 1 lakh had been debited under the head

"income tax paid", in the above-referred Schedule relating to

Administration and other Expenses. The assessee claimed that

due to oversight, this amount was not added back in the

computation of income. Hence, the Assessing Officer added

this amount also to the income of the assessee. Penalty

proceedings were also initiated against the assessee.

3. During penalty proceedings, the assessee claimed that

it had committed a bona fide mistake and all the facts material

to the computation were disclosed. The Assessing Officer was

of the view that there was no difference of opinion as regards

disallowance of these expenses and the incorrect computation

given by the assessee was an act of paying less tax than what

was due from it. He was of the view that the assessee was a big

company, assisted by a team of Tax Auditors and, therefore, it

was a case of concealment of income as well as of furnishing

wrong particulars for computation of income.

4. The Commissioner of Income Tax (Appeals) was of the

view that assessee had committed serious laxity, while filing

computation of income and the mistake committed by it could

not be said to be bona fide. He, therefore, upheld the penalty

imposed upon the assessee.

5. The Income Tax Appellate Tribunal accepted the

contention of the assessee that due to oversight and bona fide

mistake, the amount of income tax was not added back while

filing Return of income and that no person would claim the

amount of income tax as deduction, to evade payment of taxes.

As regards the amount of Rs 13,24,539/- debited to Profit &

Loss Account on account of equipments that had been written

off, having become unusable and discarded, the Tribunal was

of the view that as per the provisions of Section 32(1)(iii) of

Income Tax Act, the assessee could have claimed this amount

as a deduction and merely because it had claimed the same as

revenue deduction, which had been treated to be capital in

nature by the Assessing Officer, could not be a basis to levy

penalty under Section 271(1)(c) of the Act, when all the

relevant materials relating to that issue were duly disclosed by

the assessee in the course of the assessment proceedings. The

Tribunal accordingly deleted both the penalties.

6. The following substantial question of law arises for

our consideration in this Appeal:

Whether the Income Tax Appellate Tribunal erred in deleting the penalty, in respect of the aforesaid two items, amounting to Rs.4.74 lacs approximately imposed by the Assessing Officer under Section 271(1)(c) of the Income Tax Act, 1961?

7. Admittedly, in view of the provisions contained in

Section 40(ii) of the Income Tax Act, the amount of income tax

could not have been claimed as a deduction while computing

income of the assessee. It is, therefore, an undisputed

proposition that the assessee was not entitled to exclude the

amount of income tax while computing its income for the

purpose of income tax.

8. As regards the amount claimed on account of

unusable and discarded assets, the Tribunal, in our view, was

entirely incorrect in taking the view that the deduction claimed

by the assessee was admissible to it under Section 32(1)(iii) of

the Income Tax Act, though not as a revenue expenditure.

Section 32(1)(iii) of the Act provides for deduction, in the case

of any building, machinery, plant or furniture, in respect of

which depreciation is claimed and allowed under Clause (i) and

which is sold, discarded, demolished or destroyed in the

previous year (other than the previous year in which it is first

brought into use), of the amount by which money payable in

respect of such building, machinery, furniture, together with

the amount of scrap, if any, falls short of the written down

value thereof. Thus, this clause would apply only in the case

of machinery, plant, etc., in respect of which depreciation has

been claimed and allowed under Clause (i). If the

plant/machinery is such, to which the provisions of Clause (i)

do not apply, no deduction in respect of such plant or

machinery, etc. can be claimed under Clause (iii).

9. Clause (i) of sub-section (1) of Section 32 relates to

assets of an undertaking engaged in generation and/or

distribution of power. Admittedly, the assessee company was

not engaged in generation and for distribution of power, during

the relevant year. Thus, the provisions of clause (i) of sub-

section (1) of Section 32 do not apply in respect of the assets

claimed to have become unusable and written off. Therefore, it

cannot be disputed that the assessee had no justification to

claim this amount of Rs 13,24,539/- as a revenue expenditure.

10. Section 271(1)(c) of the Act, to the extent it is

relevant, provides for imposition of penalty in case the

Assessing Officer, in the course of any proceedings under Act,

is satisfied that any person had concealed particulars of his

income or had furnished inaccurate particulars of such

income. Explanation 1 to sub-Section (1) of Section 271

provides that where in respect of any facts material to the

computation of the total income of any person, such person

fails to offer an explanation or offers an explanation which is

found to be false or he offers an explanation which he is not

able to substantiate and fails to prove that such explanation is

bonafide 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 total income of such person, as a result thereof,

shall for the purpose of clause (c) be deemed to represent the

income in respect of which particulars have been concealed.

11. Thus, in case of failure of the assessee to offer any

explanation or the explanation furnished by him being found

false, penalty may be imposed on him. However, if an

explanation is offered by the assessee, mere failure on his part

to substantiate it will not be enough to warrant penalty, if the

explanation is bonafide and all the facts relating to the same

were disclosed by him in the Return. Explanation 1 to Section

271(1) would be inapplicable in respect of any amount added

or disallowed as a result of rejection of the explanation

furnished by the assessee, provided that his explanation is

shown to be bonafide and all the facts relating to the same and

material to the computation of his total income were disclosed

by him.

12. Relying upon the decision of Supreme Court in

Commissioner of Income Tax vs. Reliance Petro Products

Pvt. Ltd.: (2010) 322 ITR 158 (SC), it was contended by the

learned counsel for the respondent that since the factual

information in respect of the amounts wrongly included in

Schedule 9 of Profit & Loss Account was disclosed by the

assessee, this was not a case where penalty could be imposed

under Section 271(1)(c) of the Act. In the case before the

Supreme Court, the assessee had claimed interest under

Section 36(1)(iii) of the Act. The interest was paid on the loan

which the assessee had utilized for purchasing some IPL

shares by way of its business policies. However, the assessee

did not earn any income by way of dividend from those shares.

It was submitted before the Supreme Court that the assessee

company was an investment company and that in its own case

for the Assessment Year 2000-01 the Commissioner (Appeals)

had deleted the disallowance of interest made by the

Assessment Officer and the Tribunal had also confirmed the

stand of the Commissioner (Appeals) for that year and it was

on the basis of this that the expenditure was claimed. The

Income Tax Appellate Tribunal had, however, restored the

issue back to the Assessing Officer. In the appeal arising out

of penalty proceedings, the Tribunal, in these circumstances,

was of the view that the confirmation of disallowance by the

Tribunal did not mean that the assessee had concealed the

income or had filed inaccurate particulars thereof. Noticing

that the assessee had given an explanation vide its letter dated

March 22, 2006 giving reasons for claiming the interest as a

deduction, the Tribunal was of the view that the onus shifted

on the revenue to prove that the explanation offered by the

assessee was false. The Tribunal felt that the bona fides of the

explanation were clearly proved from the fact that the High

Court admitted the appeal of the assessee about the

disallowance of the interest. The Tribunal held that if there

could be two views about the claims of the assessee, the

explanation offered by it cannot be said to be false. The

penalty was accordingly deleted by the Tribunal. The order of

the Tribunal was maintained by the High Court. It was

contended on behalf of the Revenue, before the Supreme Court,

that only the amount of interest paid in respect of capital

borrowed for the purposes of the business or profession could

have been claimed under Section 36(1)(iii) of the Act and the

case before the Court was not in respect of the capital

borrowed by the assessee. It was further pointed out that

under Section 14A of the Act, no deduction could be allowed in

respect of the expenditure incurred by the assessee in relation

to income which did not form part of the total income under

this Act. The attention of the Court was also drawn to Section

10(33) to show that the income arising from the transfer of a

capital asset could not be reckoned as an income which formed

part of the total income. The contention thus was that the

claim made by the assessee was unacceptable in law.

13. The Supreme Court was of the view that under

Section 271(1)(c), there has to be concealment of income of the

assessee or he must have furnished inaccurate particulars of

his income. The contention of the Revenue that it was a case

of furnishing of inaccurate by making incorrect claim for the

expenditure on interest was rejected noticing that the words

"particulars" used in Section 271(1)(c) would embrace the

meaning of the details of the claim made by the assessee and

that the assessee before the Court had not given any such

information which was found to be incorrect or inaccurate. No

statement or details supplied by the assessee had been found

to be factually incorrect. The Court rejected the contention that

submitting an incorrect claim in law for the expenditure on

interest would amount to giving inaccurate particulars of such

income. The Court was of the view that by any stretch of

imagination, making an incorrect claim in law cannot

tantamount to furnishing inaccurate particulars.

14. After considering the meaning of "inaccurate" given in

Webster‟s Dictionary, the Court was of the view that inaccurate

particulars would mean the details supplied in the return

which are not accurate, not exact or correct, not according to

truth, or erroneous. It was held that making a claim which is

not sustainable in law, cannot, by itself, amount to giving

inaccurate particulars.

15. It was contended before the Supreme Court that since

the assessee had claimed deduction knowing that they were

incorrect, it amounted to concealment of income since the

falsehood in accounts can take either of the two forms; (i) an

item of receipt may be suppressed fraudulently; (ii) an item of

expenditure may be falsely claimed or an exaggerated amount

could be claimed and since attempts of both the types reduces

taxable income, both amount to concealment of particulars of

one's income as well as to furnishing of inaccurate particulars

of income. The contention was rejected by the Court.

16. The proposition of law which emerges from this case,

when considered in the backdrop of the facts of the case before

the Court, is that so long as the assessee has not concealed

any material fact or the factual information given by him has

not been found to be incorrect, he will not be liable to

imposition of penalty under Section 271(1)(c) of the Act, even if

the claim made by him is unsustainable in law, provided that

he either substantiates the explanation offered by him or the

explanation, even if not substantiated, is found to be bonafide.

If the explanation is neither substantiated nor shown to be

bonafide, Explanation 1 to Section 271(1)(c) would come in to

play and the assessee will be liable to for the prescribed

penalty.

17. The assessee before us is a company which declared

an income of Rs.1,21,49,861/- and accounts of which are

mandatorily subjected to audit. It is not the case of the

assessee that it was advised that the amount of income tax

paid by it could be claimed as a Revenue Expenditure. It is

also not the case of the assessee that deduction of income tax

paid by it was a debatable issue. In fact, in view of the specific

provisions contained in Section 40(ii) of the Act, no such advice

could be given by an Auditor or other Tax Expert. No such

advice has been claimed by the assessee even with respect to

the amount claimed as deduction on account of certain

equipment having become useless and having been written off.

As noticed earlier, the Tribunal was entirely wrong in saying

that Section 32(1)(iii) of the Act applies to such a deduction. It

was not the contention before us that claiming of such a

deduction under Section32(1)(iii) was a debatable issue on

which there were two opinions prevailing at the relevant time.

In fact, the assessee did not claim, either before the Assessing

Officer or before the Commissioner of Income Tax(Appeals) that

such a deduction was permissible under Section 32(1)(iii) of the

Act. No such contention on behalf of the assessee finds noted

in the order of the Tribunal. Thus it was the Tribunal which

took the view that Section 32(1)(iii) could be attracted to the

deduction claimed by the assessee. It is also not the case of

the assessee that it was under a bonafide belief that these two

amounts could be claimed as Revenue Expenditure. The

assessee, in fact, outrightly conceded before the Assessing

Officer that these amounts could not have been claimed as

revenue deductions. The only plea taken by the assessee

before the Income Tax Authorities was that it was due to

oversight that the amount of income tax paid by the assessee

as well as the amount claimed as deduction on account of

certain equipment being written off could not be added back in

the computation of income.

18. In the case of Reliance Petro Products Private

Limited(supra), the addition made by the Assessing Officer in

respect of the interest claimed as a deduction under Section

36(1)(iii) of the Act was deleted by the Commissioner of Income

Tax(Appeals) though it was later restored, by the Tribunal, to

the Assessing Officer. The appeal filed by the assessee against

the order of the Tribunal was admitted by the High Court. It

was, in these circumstances, that the Tribunal came to the

conclusion that the assessee had neither concealed the income

nor filed inaccurate particulars thereof. In recording this

finding, the Tribunal felt that if two views of the claim of the

assessee were possible, the explanation offered by it could not

be said to be false. This, however, is not the factual position in

the case before us. The facts of the present case thus are

clearly distinguishable.

19. It is true that mere submitting a claim which is

incorrect in law would not amount to giving inaccurate

particulars of the income of the assessee, but it cannot be

disputed that the claim made by the assessee needs to be

bonafide. If the claim besides being incorrect in law is

malafide, Explanation 1 to Section 271(1) would come into play

and work to the disadvantage of the assessee.

20. The Court cannot overlook the fact that only a small

percentage of the Income Tax Returns are picked up for

scrutiny. If the assessee makes a claim which is not only

incorrect in law but is also wholly without any basis and the

explanation furnished by him for making such a claim is not

found to be bonafide, it would be difficult to say that he would

still not be liable to penalty under Section 271(1)(c) of the Act.

If we take the view that a claim which is wholly untenable in

law and has absolutely no foundation on which it could be

made, the assessee would not be liable to imposition of

penalty, even if he was not acting bonafide while making a

claim of this nature, that would give a licence to unscrupulous

assessees to make wholly untenable and unsustainable claims

without there being any basis for making them, in the hope

that their return would not be picked up for scrutiny and they

would be assessed on the basis of self Assessment under

Section 143(1) of the Act and even if their case is selected for

scrutiny, they can get away merely by paying the tax, which in

any case, was payable by them. The consequence would be

that the persons who make claims of this nature, actuated by a

malafide intention to evade tax otherwise payable by them

would get away without paying the tax legally payable by them,

if their cases are not picked up for scrutiny. This would take

away the deterrent effect, which these penalty provisions in the

Act have.

21. We find that the assessee before us did not explain

either to the Income Tax Authorities or to the Income Tax

Appellate Tribunal as to in what circumstances and on account

of whose mistake, the amounts claimed as deductions in this

case were not added, while computing the income of the

assessee company. We cannot lose sight of the fact that the

assessee is a company which must be having professional

assistance in computation of its income, and its accounts are

compulsorily subjected to audit. In the absence of any details

from the assessee, we fail to appreciate how such deductions

could have been left out while computing the income of the

assessee company and how it could also have escaped the

attention of the auditors of the company.

22. The explanation offered by the assessee company was

not accepted either by the Assessing Officer or by the

Commissioner of Income Tax(Appeals). The view of Income Tax

Appellate Tribunal regarding admissibility of the deduction on

account of written off of certain assets, under Section 32(1)(iii)

of the Act is wholly erroneous. The Tribunal has not recorded

a finding that the explanation furnished by the assessee in

respect of the deduction due to certain assets being written off

was a bonafide explanation. The Tribunal has nowhere held

that it was due to oversight that the amount of this deduction

could not be added while computing the income of the assessee

company.

23. As regards deduction on account of income tax paid

by the assessee, the Tribunal felt that since no person would

claim the same as deduction, to evade payment of tax, the

claim made by the assessee was not malafide. In the absence

of the assessee company telling the Assessing Officer as to who

committed the oversight resulting in failure to add this amount

while computing the income of the assessee, under what

circumstances the oversight occurred and why it was not

detected by those who checked the Income Tax Return before it

was filed and later by the auditors of the assessee company,

we cannot accept the general view taken by the Tribunal. In

our view, no such view could have reasonably been taken, on

the facts and circumstances prevailing in this case and,

therefore, the decision of the Tribunal in this regard suffers

from the vice of perversity. We cannot accept the general

proposition that no person would ever claim the amount of

income tax as a deduction with a view to avoid payment of tax.

No hard and fast rule in this regard can be laid down and every

case will have to be decided considering the facts and

circumstances in which such a deduction is claimed, coupled

with as to whether the explanation offered by the assessee for

making the claim, is shown to be bonafide or not.

24. For the reasons given in the preceding paragraphs,

we answer the question of law framed in this case in favour of

the revenue and against the assessee. The Income Tax

Appellate Tribunal erred in law in deleting the penalty in

respect of the amount of Rs.1 lakh claimed as deduction on

account of payment of income tax and the amount of

Rs.13,24,539/- debited under the head „equipment written off‟,

in the Profit and Loss Account of the assessee. The appeal

stands disposed of accordingly.

(V.K. JAIN) JUDGE

(BADAR DURREZ AHMED) JUDGE MAY 24, 2010 bg/