Cit vs Sumangal Overseas Ltd.
2011 Latest Caselaw 5552 Del

*            IN THE HIGH COURT OF DELHI AT NEW DELHI

+                        ITA No.174 of 211

                                   Reserved on: 13th October, 2011
%                      Decision Delivered On: 18th November, 2011


      CIT                                             . . . APPELLANT

                              Through:    Mr. Sanjeev Sabharwal, Sr.
                                          Standing Counsel.

                               VERSUS

      SUMANGAL OVERSEAS LTD.                       . . .RESPONDENT

Through: Mr. Ved Jain, Advocate.

CORAM :-

HON'BLE THE ACTING CHIEF JUSTICE HON'BLE MR. JUSTICE SIDDHARTH MRIDUL

1. Whether Reporters of Local newspapers 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, Acting Chief Justice

1. Penalty of `73,85,322/- imposed upon the respondent

assessee by the Assessing Officer (AO) under Section

271(1)(c) of the Income Tax Act (hereinafter referred to as

„the Act‟) was affirmed by the CIT (A). However, the Income

Tax Appellate Tribunal („the Tribunal‟ for brevity) has

reversed the view taken by the AO and the CIT (A) and

deleted the said penalty. It is under these circumstances,

present appeal is preferred by the Revenue questioning the

wisdom of the Tribunal contained in its order dated

30.10.2009 and the appeal was admitted on the following

substantial question of law:

"Whether on the facts and in the circumstances of the case, the ITAT erred in law and on merits in deleting the penalty of Rs.73,85,322?- levied u/s 271(1)(c) of the Income Tax Act, 1961?"

2. The reason for initiating penalty proceedings was that the

AO in the assessment order framed on 29.12.2006 in

respect of assessment year 2004-05 held the view that the

assessee had falsely claimed bad debts of `2,05,86,262.75/-

The assessee had given various advances to its suppliers

which amounts to `2,89,56,836.75/-. Out of these amount,

the aforesaid amount of `2,05 Crores was written off as bad

and doubtful advances. The AO took the view that the

prerequisite conditions for writing off the amount as bad

debts had not been satisfied, as it was included in the

income of the previous year and therefore, there was no

question of treating is as bad debts under provision of

Section 36(1)(vii) and Section 36(2) of the Act. The

assessee had not challenged the order of the AO.

3. In the penalty proceedings, the AO held that the aforesaid

finding had become final and conclusive and it clearly

reflected the falsity of claim preferred by the assessee.

4. The CIT(A) dismissed the appeal of the assessee by holding

that undetection of the said claim, as 97% of the returns are

not subjected to scrutiny, would have rendered such false

claim to be untaxed. The claim on bad debts to be patently

wrong and erroneous in law is manifest in the conduct of the

assessee in admitting the falsity of the claim and not

preferring any further appeal. The CIT (A) observed that the

assessee was a corporate whose accounts were duly audited

by qualified Chartered Accounts and thus, the claim of bona

fide mistake, due to lack of professional held is untenable on

its very face. The CIT (A) rejected the claim of non-

leviability of penalty on the ground that the assessment was

a loss of `76,61,830/- in view of the provisions of

Explanation 4(a) to Section 271(1)(c) of the Act.

5. The Tribunal, however, while deleting the penalty has

examined the matter from a different perspective altogether.

It is observed that no doubt, the claim could not be written

off as bad debt. At the same time, however, going by the

nature of the transaction, viz., these were the loans and

advances given by the assessee to the suppliers and were

written off as unrecoverable, the same could have been

allowed to be written off as business advance under Section

29 read with Section 37(1) of the Act, simply because the

assessee made claim of deduction under a wrong head, viz.,

treating it as bad debt would not mean that the claim was

false and therefore, penalty could not be imposed. This

discussion is contained in the following paragraph of the

Tribunal‟s order:

"8. We have heard the rival contentions and perused the material on record. It has not been disputed that assessee had filed its return of income accompanied with Schedule E of accounts making a claim of doubtful advances written off. AO himself had observed that loans and advances to suppliers have been shown in the books of account, therefore, the correct proposition was the allowability of claim of the assessee in respect of business advances written off will fall u/s 29 read with Section 37(1). AO, however, proposed the addition on the ground that the same was not allowable as "bad debt" since these advances were not included in income as income in earlier years. Assessee on the proposition of AO realized that they were not included as income in earlier years and were not allowable a bad debt, therefore, the same was offer to tax specifically on this ground. In our view, the decision of Hon‟ble Delhi High Court in the case of Escort Finance (supra) is not applicable to assessee‟s case as the same is applicable in the cases of allowances or claims, which are ex facie i.e. on the fact itself inadmissible. In this case, ex facie the assessee‟s claim was of write off of advances and not of bad debt.

AO proposed the disallowance and accepted by the assessee as non-allowable being bad debts. In our view, the learned counsel has made out a proper case that assessee‟s specific claim was write off of business losses/advances which has not been examined at all. The learned counsel has relied on various case laws. In our view, the assessee had made proper disclosure of facts. The amount has been disallowed not as business advance, which was the actual claim of assessee but the same has been disallowed as bad debt on an impression that it was not included in the income of all the earlier years whereas there is no said requirement for allowability of business advances. Penalty should not be levied merely because it is lawful to do so, has been held by Hon‟ble Supreme Court in the case of Hindustan Steels Ltd., 83 ITR 26. Relying on these facts and authorities, we hold that the penalty u/s 271(1) (c) is not impossible in assessee‟s case, which is deleted."

6. After hearing the counsel for the parties that we are of the

opinion that it is a correct view taken by the Tribunal. Facts

are not in dispute. The amount relates to advances to

suppliers which were duly shown and declared by the

assessee in the Profit & Loss account. The AO did not

dispute the genuineness of these advances given. The stand

of the assessee that the advances to the extent of

`2,05,86,262.75/- had become irrecoverable was also not

disputed by the AO. However, the assessee had shown the

same in Profit and Loss Account under the head "bad and

doubtful advances written off" and did not use the words

"bad debts written off". During the assessment proceedings,

the AO treated the same as bad debts written off and for

that reason applied the provisions of Section 36(1)(vii) of

the Act and claiming that the conditions stipulated therein

were not satisfied, viz., when it was not shown as income in

the previous year, how it could be shown as debt written off.

7. It is trite law that during the penalty proceedings, it is open

to the Tribunal to look into the transaction to see as to

whether the claim was bona fide or it was bogus and result

of falsehood. From that angle, when the Tribunal examined

the matter, it found that on the facts of this case when

advances given to the suppliers were not written off as

irrecoverable, the same was allowable under Section 28 of

the Act. A trading loss has a wider connotation than a bad

debt. A bad debt may also be a trading loss, but a trading

loss need not necessarily be a bad debt. There may be a

bad debt which may not fall within the purview of Section

36(1)(vii) of the Act, but may well be regarded as one

eligible for deduction incurred in the course of carrying on

business will come under that category and will naturally

enter into computing the net total income as the real profit

chargeable to tax cannot be arrived at without setting off

legitimate trading loss.

8. On these facts, it is apparent that the claim was neither

mala fide nor false. It was a bona fide claim preferred by

the assessee, who had also disclosed all the facts relating to

and material to the computation of his income. In these

circumstances, the assessee fulfilled both the conditions to

be outside the purview of Explanation (1) to Section

271(1)(c) of the Act. The case of the assessee is covered by

the judgment of the Supreme Court in the case of CIT Vs.

Reliance Petroproducts (P) Ltd., 322 ITR 158 (SC),

where it was held that the assessee must be found to have

failed to prove that his explanation is not only bona fide, but

all the facts relating to the same and material to the

computation of his income were also not disclosed by him.

It was further held that the explanation must be preceded by

finding as to how and in what manner the assessee had

furnished inaccurate particulars of his income.

9. In fact, had the assessee pressed his claim in a proper

manner during the assessment proceedings, he might have

even succeeded in getting the said deduction allowed. Be as

it may, in such a case, the assessee cannot be fastened with

penalty also.

10. We, thus, answer the question in favour of the assessee and

dismiss this appeal.

ACTING CHIEF JUSTICE

(SIDDHARTH MRIDUL) JUDGE November 18, 2011 pmc