Commissioner Of Income vs Ng Technologies Ltd.
2014 Latest Caselaw 6322 Del

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*     IN THE HIGH COURT OF DELHI AT NEW DELHI
                               Date of decision: 1st December, 2014
+                   ITA No. 82/2012

      COMMISSIONER OF INCOME                     ..... Appellant
              Through     Mr. Rohit Madan, Sr. Standing
              Counsel with Mr. Ruchir Bhatia and Mr. Akash
              Vajpai, Advocates.

                          versus

      NG TECHNOLOGIES LTD.                         ..... Respondent
              Through     Mr. Ashish Makhija, Mr. Karamveer
              Jindal, Advocates for the Official Liquidator.

      CORAM:
      HON'BLE MR. JUSTICE SANJIV KHANNA
      HON'BLE MR. JUSTICE V. KAMESWAR RAO

SANJIV KHANNA, J. (ORAL)

This appeal by the Revenue under Section 260A of the Income

Tax Act, 1961 („Act‟, for short) pertains to assessment years 2006-07

and was admitted for hearing vide order dated 7th December, 2012, on

the following substantial question of law:-

"Whether the ld. ITAT was correct in law in allowing the appeal of the assessee in holding that the assessee had discharged the onus cast upon it under Explanation-I Section 271(1)(c) of the IT Act?"

We note that the assessee company has gone into liquidation and

the Official Liquidator has been appointed. Accordingly, we have

heard the counsel for the Official Liquidator, who has appeared for the

assessee.

2. The order impugned passed by the Income Tax Appellate

Tribunal (Tribunal, for short) is dated 13th September, 2010 and deletes

the penalty imposed under Section 271(1)(c) of the Act.

3. The respondent-assessee had filed e-return for the assessment

year in question on 30th November, 2006, declaring loss of

Rs.1,89,44,380/-. In the return, under head profit and loss, the assessee

had claimed business loss amounting to Rs.2,33,07,349/- on account of

sale of fixed assets.

4. During the course of assessment proceedings, details of which

we will refer to subsequently, the assessee filed a revised return on 8th

March, 2008 declaring total income of Rs.33,62,974/-. In the revised

return, the loss of Rs. 2,33,07,349 on account of sale of fixed assets

was not treated as "business loss", rather shown as capital loss. The

Assessing Officer, vide its assessment was order dated 5th June, 2008,

made some additions and assessed the total income of assessee at

Rs.40,19,974/- and taxable income at "NIL" after giving benefit of

brought forward losses.

5. Pursuant to the satisfaction recorded in the assessment order,

penalty proceedings for concealment under Section 271(1)(c) of the

Act were initiated and penalty equal to 100% of the tax payable of Rs.

80,66,400/- on the concealed income was imposed.

6. We will be referring to the reasoning given by the Assessing

Officer and Commissioner of Income Tax (Appeals), who affirmed the

penalty order subsequently.

7. The Tribunal by the impugned order, as recorded above, deleted

the penalty recording the following reasons:-

"6.1 Coming to the issue of the claim of loss on sale of assets, the facts are that the assessee sold machinery and plant in this year due to circumstances beyond its control. Actual loss was incurred in the transaction of sale. This loss was debited to profit and loss account. The schedule of fixed assets showed deduction of the assets on account of sale. According to the existing position of law, this loss could not have been claimed while computing the total income. The correct course of action would have been to reduce the amount of sale proceeds from the written down value of the block of assets relating to machinery and plant. As against the aforesaid, the assessee reduced the WDV of the machinery and plant sold in this year from the block of assets. The chartered accountant, who prepared the audit report and the return of income did not deduct the loss from the profit as per profit & loss account to reflect the correct state of loss in the computation of total income. The assessee has changed the chartered accountant since then, which is an admitted fact as per record.

6.2 x x x x x

6.3 x x x x x

6.4 We have considered the facts of the case and the submissions made before us in respect of this issue also. We have also perused the letters written by the AO to the assessee and replies furnished thereto. We find that the assessee was not asked to furnish the details of loss occurring

on account of sale of assets specifically. The assessee was also not required to explain how the loss is admissible in computing the total income. General questions were asked. The assessee was required to file tax-audit report and depreciation chart. Further, the assessee was required to furnish details of all exemptions and deductions. The assessee was also required to furnish details of addition to fixed assets. No question was asked about deduction from the assets. On the basis of these facts, the case of the Id. counsel is that the revised return was bona-fide. The learned DR has not been able to place on record any communication from the AO to the assessee seeking explanation regarding the claim of loss occurring on account of sale of assets. Therefore, in such circumstances, it has to be held that the revised return was bona-fidely filed u/s 139(5) of the Act.

6.5 Coming to the decision in the case of Reliance Petro Products Pvt. Ltd. (supra), the ratio of the case is that a claim in respect of which all facts have been disclosed will not lead to inference of furnishing inaccurate particulars of income under Explanation-1 of section 271 (I)(c). In this case, the assessee has furnished all facts along with the 'return of income. In particular, the details filed by it include the profit & loss account, statement of income and the schedule of fixed assets. The schedule of fixed assets shows deduction of the assets. It has also been explained that the return was prepared by the then chartered accountant and, thus, the assessee was not properly advised by the chartered accountant. In view thereof, his services were dispensed with and a new- chartered accountant was engaged. We may now examine the explanation of the assessee in the light of the decision in the case of Zoom Communication (P) Lid. (supra). In that case, the assessee had not explained the circumstances in which patently wro ng claim of deduction was made. It was also not explained as to who had committed the mistake. In this case the person and the circumstances have been specified by the assessee. Further, the Tribunal had not

recorded a finding on the plea of the bona fides of the explanation tendered by the assessee. This, according to us, is the crux of the matter as the bona-fides of the explanation have to be examined in view of the decision of Hon'ble Supreme Court in the case of Dharmendra Textile Processors (supra). W hen we look into the bona fides of the explanation, it is seen that the assessee cannot be expected to be well- versed in intricacies of the law. The loss was actually incurred. However, in view of the concept of block of assets, the loss could not have been claimed. Only the sale proceeds could have been deducted from the WDV of the block of assets. Obviously, the claim was patently wrong. But, the circumstances leading to such a wrong claim have been explained. All facts relating to the claim exist on record. No falsity has been found in the accounts in this regard. Therefore, we are of the view that the explanation tendered by the assessee is bona fide notwithstanding the fact that a wrong claim has been made. In such a situation, the claim can be said to be wrong only and not false. The mistake was rectified as soon as it was noticed by the assessee without any specific query from the AO. Thus, we are of the view that the assessee has discharged the onus cast on it under Explanation-1 and, therefore, it is not liable to be penalized u/s 271(1 )(c).

8. The Tribunal, after referring to judgment in Union of India Vs.

Dharmendra Textile Processors (2008) 306 ITR 277 (SC), has relied

upon decision of the Supreme Court in CIT Vs. Reliance Petro

Products (P) Ltd. (2010) 322 ITR 158 (SC).

9. Section 271(1)(c) and Explanation 1 thereto read as under:-

"271. (1) If the Assessing Officer or

the Commissioner (Appeals)] [or the Principal Commissioner or Commissioner in the course of any proceedings under this Act, is satisfied that any person--

(a) xxxxx

(b) xxxxx

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

"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 falls 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 bone 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 purposes of clause (c) of this sub- section, be deemed to represent the income in respect of which particulars have been concealed."

10. The word "concealment" would refer to somewhat malicious

and mala fide conduct on the part of the assessee. The expression

"inaccurate particulars" is copiously wider and broader and would

include cases where particulars furnished are not accurate and which

results in avoidance or evasion of tax. In Webster's Dictionary, the

word "inaccurate" has been defined as:

"not accurate, not exact or correct; not according to truth; erroneous; as an inaccurate statement, copy or transcript."

The word „particular‟ means detail or details of a claim or separate

items of an account. Thus the words "furnished inaccurate particulars"

would refer to inaccuracy which would cause under-declaration or

escapement of income. It may also refer to particulars which should

have been furnished or were required to be furnished or recorded in the

books of accounts etc. [See CIT v. Raj Trading Co. (1996) 217 ITR

208 (Raj.)] Inaccuracy or wrong furnishing of income would be

covered by the said expression

11. Mens rea is not a necessary attribute to impose penalty under

Section under Section 271(1)(c) of the Act. Penalty under the said

section is imposed as a civil liability/obligation. The provision is both

remedial and coercive in nature. It is far different and unlike any

penalty for a crime or a fine or forfeiture imposed under the criminal

and penal laws. Penalty under section 271(1) (c) of the Act refers to

blameworthy conduct for contravention of the Act and it equally

applies to tax delinquency cases. In Dharmendra Textile Processors

(supra), it was held that the earlier decision of the Supreme Court in

Dilip N. Shroff Vs. Joint Commissioner of Income Tax, Mumbai and

Anr. [2007] 8 Scale 304 (SC) (3) was wrongly decided as it did not

consider the effect and relevance of Section 271(1) (c) of the Act. The

object behind enactment of Section 271(1)(c) along with Explanations

was to provide for a remedy for loss of revenue and imposes a civil

liability. Willful conduct etc. is not an essential ingredient.

12. However, it is not necessary that penalty should be imposed in

all cases where inaccurate particulars have been furnished. This is the

object and purpose behind enacting Explanation 1, which consists of

two limbs i.e. clause (A) and clause (B). Clause (A) applies when an

assessee fails to furnish an explanation or when the explanation offered

is found to be false. In such cases, penalty can be imposed. Clause (B)

applies to cases wherein explanation is offered, but the assessee has not

been able to substantiate the same. The assessee can escape rigors of

penalty, provided he satisfies the two conditions, namely, (1) the

assessee should demonstrate that his explanation was bona fide; and

(2) he had furnished and disclosed facts and material relating to

computation of his income. Onus of establishing that the two

conditions are satisfied is on the assessee. Both the conditions are

cumulative and when the conditions are satisfied, penalty under section

271(1)(c) of the Act should not be imposed.

13. When we refer to the facts of the present case and the return of

income originally filed, it is noticeable that the assessee in Schedule-16

"General Expenses" of the profit and loss account had shown a debit of

Rs.2,33,07,349/- on account of loss on sale of the fixed assets. Thus,

the fact that the assessee had incurred losses was indicated in

Schedule-16 of the profit and loss account. To this extent, the facts

were stated in the original return. It is plausible for the assessee to

urge that material facts were submitted and stated in the original return.

14. The second question, which arises for consideration is whether

the assessee has been able to show that his conduct was bona fide.

15. We have recorded the findings of the Tribunal on the aforesaid

aspect in paragraphs quoted from the impugned order. The reasoning

of the Tribunal is two-fold. Firstly, the assessee had relied upon the

report submitted by the Chartered Accountant and the return of income

prepared by the said Chartered Accountant. The mistake or error had

occurred due to lack of proper legal advice. Secondly, the error or

mistake in claiming capital loss in the profit and loss account was

rectified and corrected by filing the revised return, before

detection or erratum being discovered.

16. We have examined the aforesaid reasoning, but are

unable to accept the said finding. All claims or deductions

wrongly made cannot be treated as bona fide and protected by

Explanation 1 to section 271(1)(c) of the Act . Whether or not

the conduct of the assessee was legitimate or mere

legerdemain would depend upon facts of each case, nature and

character of the claim, whether the legal provision applicable

was capable of two interpretations, whether the

claim/exemption was plausible and conceivable etc. In cases

where interpretive skills and divergent views are p lausible,

penalty for concealment should not be imposed. Assessee

need not be asked to pay penalty if he has taken a particular legal

stand and preferred an interpretation in his favour. However, at the

same time, the interpretation put forward or the claim made should not

be banal or a ruse, per se or ex facie incorrect or wrong. Platitudinous

conduct or claim is not a bonafide conduct.

17. In the facts of the present case, it is noticeable that the assessee

had claimed loss on account of sale of plant and machinery i.e. the

fixed assets, in the profit and loss account. This should not have been

obviously claimed. It was without any debate and discussion a capital

loss. The claim cannot be explained and justified by any argument and

reasoning. The claim was positively and meaningfully incorrect and

contrary to the principles of straight forward and primary accountancy.

It is true and correct that an assessee would normally rely upon legal

opinion of a Chartered Accountant, who is required to audit accounts

of the company and also submit an audit report, but penalty cannot be

deleted on guise or pretence of legal opinion as a smokescreen and

façade. The claim or the entry in the present case was contrary to

elementary and well-known basic principles of accountancy. The

present case is not a case of a debatable issue relating to legal or

accountancy principle which could have been interpreted differently.

18. It is mandatory and compulsory for a company to get their

accounts audited from a Chartered Accountant, who is required to

submit an audit report to be filed with the return. We cannot,

therefore, accept the contention of the assessee as universal and

comprehensive that all claims howsoever untenable, once certified by a

Chartered Accountant or the Directors of the company, cannot be made

a subject matter of penalty proceedings. This will be stretching and

making the requirement to prove bona fide conduct illusionary and

ineffective and would fail to, check and stop fanciful and incredible

claims. It is noticeable that most of the income tax returns are

accepted without scrutiny or regular assessment and self-compliance of

tax provisions is a rule required to be followed. The view, which we

have taken, is in consonance with the ratio expounded in Reliance Petro

Products Pvt. Ltd. (supra).

19. The second aspect, which arises for consideration , is

whether the revised return was filed voluntarily and before the

notice of the inaccurate particulars by the Assessing Officer.

Factum of filing a revised return to rectify an earlier mistake

is an important and relevant factor to determine whether the

conduct of the assessee was bona fide. The Tribunal, in the

impugned order has held that the revised return was filed

before any specific query was raised by the Assessing Officer.

Tribunal at the same time observed that the Assessing Officer

had directed the assessee to file tax audit report, depreciation

chart, details of all exemptions and deductions as well as

details of addition to fixed assets, but no question had been

raised about deduction in respect of the assets. The aforesaid

reasoning by the Tribunal accepts the fact that the assessee

had been asked to furnish details of fixed assets and details of

all deductions were called. Noticeably, in the assessment

order, the Assessing Officer has recorded the following facts: -

(i) The case was taken up for scrutiny assessment by issue

of notice under Section 143(2) dated 12 th October, 2007,

which was duly served on the respondent-assessee within the

prescribed statutory time limit.

(ii) the assessee was asked to furnish the following details: -

"Furnish the details of all exemptions and deductions claimed. Also justify as to why the same should not be accepted by the Department."

The assessment order specifically records that one of the

deductions claimed was debit of Rs.2,33,07,349/- recorded in

Schedule-16 "General Expenses" of the profit and loss account being

loss on account of sale of the fixed assets. Specific reference has been

made in the assessment order to this note. Thereafter, the vide notice

under Section 142(1) dated 1st February, 2008, the assessee was asked

to furnish the aforesaid details.

(iii) On 18th February, 2008, the assessee was asked about the reason

for regular loss. It was submitted by the authorized representative of

the assessee that there was a massive fire in the factory premises on

11th May, 2003 and thereafter the business had closed down. The

assessee was asked to furnish evidence of fire loss and insurance claim

received. The case was fixed for reply on 29th February, 2008. The

authorized representative was confronted on allowability of loss on

sale of plant and machinery and besides other details were sought to

justify loss along with supporting evidence.

(iv) Subsequently, a Chartered Accountant appeared and filed reply

dated 10th March, 2008 along with supporting evidence on sale of the

plant and machinery and its incorporation in the depreciation chart etc.

On 10th March, 2008, the authorized representative of the assessee

informed that they had filed a revised return on 8th March, 2008 in

which they had not claimed loss on sale of fixed asset in the profit and

loss account.

(v) On the basis of the revised return, the taxable income was

declared at a positive figure of Rs.33,62,974/- as against the loss

declared of Rs.1,89,44,380/- in the original return.

20. Therefore, it is clear to us that the assessee had not filed revised

return voluntarily, but had filed the revised return after the Assessing

Officer confronted the assessee and they were asked to explain how

and why loss on account of sale of fixed assets was claimed in the

profit and loss account. The said loss, capital in nature and could not

have been claimed in the profit and loss account.

21. In view of the aforesaid discussion, we answer the substantial

question of law in favour of the Revenue and against the respondent-

assessee. We uphold levy of penalty by the Assessing Officer under

Section 271(1)(c) of the Act. The appeal is disposed of. No costs.

SANJIV KHANNA, J.

V. KAMESWAR RAO, J.

DECEMBER 1, 2014 NA