Income Tax Appellate Tribunal - Ahmedabad
Rupam Mercantiles Ltd. (In ... vs Dy. Commissioner Of Income-Tax on 27 August, 2004
Equivalent citations: [2004]91ITD237(AHD), (2004)85TTJ(AHD)609
ORDER
Vimal Gandhi, President
1. The following question has been referred for my consideration under Section 255(4) of the Income-tax Act on account of difference of opinion between the Members who heard above referred four appeals:-
"Whether on the fact and in the circumstance of the case a penalty could be validly levied for concealment under Section 271(1)(c) read with Explanation 1 thereto."
2. The facts of the case are given in detail in the orders of the learned Brothers, yet for disposal of these cases, it is necessary for me to state them briefly.
3. The assesses before me are companies belonging to mardia Group. Facts in all four cases are identical and therefore, can be stated with reference to case of Rupam Mercantiles Ltd. The above company issued non-convertible redeemable debentures on 25.3.1995 carrying interest @ 62 and were redeemed after six years at par in one installment. A sum of Rs. 62/- was payable on each of the debenture up front on the date of allotment itself. The assessee therefore, claimed deduction of Rs. 1.55 crore towards interest paid @ Rs. 62/- per debenture in the year ending 31.3.1995 i.e . the year in which the debentures where allotted.
4. In the return of income filed by the assessee on 29.11.1995 and in the detail of interest paid, the assessee referred to note No. 4 as under:-
"Debenture interest (As per Note No. 4 to statement of accounts enclosed) Rs. 15,500,000"
The said Note No. 4 to the statement of accounts filed along with the return of income reads as under:-
"4. The payment of interest of Rs. 155 Lacs due on Non-Convertible Redeemable Debentures issued during the year, in Profit & Loss account, is for full term as per the terms of the issue."
5. The assessee further deducted tax at source on the entire amount of interest computed @ Rs. 62/- per debenture and the same with the Central Government as required.
6. The assessee justified claim of deduction of interest @ Rs. 62/- per debenture on the basis of following condition of redemption of debenture agreed to between the parties:-
"2. Interest:-
(A) Rate and manner of payment.
Each Debenture shall carry interest at Rs. 62 - payable upfront on the date of allotment.
(3) Repayment;
The company agrees and undertakes to redeem the debentures on payment in one installment at the end of sixth year from the date of allotment."
7. The assessing officer during the course of assessment proceedings held that interest on debenture could be allowed only for 7 days relating to the assessment year under consideration. The balance interest claimed was held not to pertain to the year of account and accordingly not deductible. The AO held that issue before him was fully settled against the assessee as per decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Ltd. v. CIT, 225 ITR 802. Relevant portion of the above decision is reproduced in the assessment order. It is also extracted by the learned Vice-President (Accountant Member) in para 7 of his proposed order.
8. On appeal the CIT(A) upheld the view of the AO with the following observations:-
"2.3 I have considered the contention of the appellant as also the observations of the Assessing Officer for making disallowance of the claim of interest on debentures to the extent of Rs. 1,54,50,457/-. There is also no substance in the appellant's claim made before the Assessing Officer that as per the agreement between the parties, the whole amount of interest on the amount of debentures was payable on day one and for the remaining period, the loan was interest-free. Para 4 of the notes forming art of accounts in the balance-sheet of the appellant company for assessment year 1995-96 states that the payment of interest of Rs. 1,55,00,000 due on non-convertible redeemable debentures issued during the year was for full term as per the terms of the issue. The ratio laid down by the Hon'ble Supreme Court in the case of Madras Industrial of the appellant. In view of the above, the disallowance made of Rs. 1,54,50,457/- is upheld."
9. On further appeal, the Tribunal in its order dated 28.10.1999 in ITA No. 1102/Ahd/1999, confirmed the disallowance with the following remarks:-
"7.1 Accordingly, the Hon'ble Supreme Court relying on the aforesaid decision of the M.P. High Court in the case of M.P. Financial Corporation 165 ITR 765 held that the assessee was correct in claiming deduction only in respect of the proportionate part of discount of Rs. 12500/- over the relevant accounting period in question. The Supreme Court further noted that the view taken by them was in conformity with the accounting practice of showing the discount in the "Discount of Debenture Account" which is written off over the period of the debentures. The facts of the case before us are similar to the facts of the case of Madras Industrial Investment Corporation (supra) and accordingly we do not find any merit in the ground taken by the four assessee companies, as the issue is squarely covered by the decision of the Supreme Court in Madras Industrial Investment Corporation (supra). Accordingly, we adjudicated ground No. 1 in all the appeals against the assessee and in favour of the Revenue."
10. The assesses challenged order of the Appellate Tribunal in further appeal before the Hon'ble Gujarat High Court and the same has been admitted by the Hon'ble High Court vide order dated 27.9.2000 and the following substantial question of law is pending adjudication:-
"Whether, in the facts and circumstances of the case, the ITAT was right in law in holding that the assessee was not entitled to the deduction of interest paid by it on debentures issued by it?"
11. At this stage it is relevant to mention that (SIC)recipients of interest on debentures namely Shri Rasik Lal, Rajiv & Rakesh in their returns showed interest only for the period ending 31.3.1995 and claimed that remaining interest was income of subsequent five years. However, the AO held that entire interest @ Rs. 62/- per debenture was income of the assessee and made assessment accordingly. The recipients challenged above assessment in appeal but remained unsuccessful. On further appeal in their cases (ITAT Nos. 1142, 1145 & 1101/Ahd./1999) vide order dated 28.10.1999 the ITAT held that only proportionate amount receivable till the end of 31.3.1995 was assessable. The balance amount in quantum appeal was deleted by the Tribunal. The revenue challenged above order of the Tribunal in appeal before the High Court under Section 260A of Income-tax Act and following substantial question of law framed by their Lordships is pending adjudication:-
"Whether, the Appellate Tribunal is right in law and on facts in holding that the interest income in the hands of the assessee who was allotted debentures by the Companies is required to be taxed only on proportionate basis and that the Commissioner of Income-tax (Appeals) was not justified in sustaining the addition of the whole amount of interest at the rate of Rs. 62/- per debenture in the accounting year in question?"
12. The AO also initiated penalty proceedings under Section 271(1)(c) of the Income-tax Act against the assessee and issued show cause notice to the assessee as to why penalty under Section 271(1)(c) be not levied for furnishing inaccurate particulars of income and concealing his income. The assessee filed reply to above notice on 8.4.2000 and relevant portion of said reply is reproduced in the penalty order. In nutshell, the assessee contended that neither main provisions of Section 271(1)(c) not Explanation to the said section were invoked in the notice nor these were otherwise applicable. The assessee further raised the following objections:-
(1) That deduction of interest on debenture was rightly claimed but wrongly disallowed. The liability was to be allowed under Section 36(1)(iii);
(2) That all the particulars of income were duly disclosed in the return. The assessee referred to statement of income and in particularly to Note. No. 4 (referred to above) in the statement of account.
(3) The assessee further pointed out that even revenue authorities were not sure whether entire interest claimed was expenditure/income and had added entire interest in the hands of debenture holders. In the above circumstances, initiation of penalty proceedings under Section 271(1)(c) was not justified.' (4) The assessee further pointed out that for making disallowance, revenue authorities and ITAT have relied upon decision in the case of Madras Industrial Investment Corporation Ltd. (supra) where claim of deduction under Section 37 of I.T. Act was considered. The assessee on the other hand, claimed liability under section 36(1)(iii) of the Income-tax Act and therefore above case was distinguishable.
(5) The assessee emphasized that loan through debentures represented capital borrowed for purposes of business. The entire interest of Rs. 62/- became payable up front on the date of allotment. Therefore, the liability to pay interest accrued on the date of allotment and was rightly claimed.
(6) The assessee further pointed out that the decision of Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. (supra) rendered only on 4.4.1997 whereas return of income was filed by the assessee company on 30th November, 1995. In other words, the decision applied against the assessee was not available to the assessee when the return was filed.
13. In order to support the claim that no penalty under Section 271(1)(c) was exigible in this case, the assessee relied upon large number of decisions reproduced in the penalty order.
14. The AO in the penalty order took into account observations made in the assessment order as well as by higher authorities on appeal. He held that out of total claim of expenditure, only Rs. 49,543/- i.e. interest for 7 days related to the year under consideration and the balance amount pertained to later years; it was only advance payment of interest. Thus under mercantile system of accounting only interest of 7 days could be allowed. He held that entire amount did not pertain to the year of account. He emphasized that entries made by the assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. The AO also noted decision of the Hon'ble Supreme Court in the case of McDowell & Co. v. CTO, 154 ITR 148 wherein their Lordships observed that colourable devices cannot be permitted to be part of tax planning and it is wrong to encourage or entertain the belief that payment of tax can be avoided by resorting to dubious methods. Ultimately, the AO held, that claim of the assessee of deduction was clearly wrong in the light of decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Ltd. (supra). He held that the assessee concealed true characters of its income chargeable to tax for the year under consideration. It tried to make false claim of expenditure by creating evidence in the form of agreement. It attempted to change the nature of transaction through structured deeds and designs. It used colourable devices to conceal its income. After rejecting all the contentions raised on behalf of the assessee, the AO levied penalty under Section 271(1)(c) of the Act with the following observations:-
"12. In view of the facts narrated above, I am satisfied that the assessee has concealed income by furnishing inaccurate particulars and provisions of Section 271(1)(c) are attracted. I accordingly levy a penalty of Rs. 72,00,000/- (Rupees Seventy two lakhs only) al against the maximum penalty leviable of Rs. 2,13,21,627/-."
15. The assessee carried the matter in appeal before the learned CIT(A) who noted the amount of penalty imposed under Section 271(1)(c) in all the four cases. He also noted the name of debenture holders and amount invested in them and how on face value of debenture of Rs. 100/-, interest of Rs. 62/- was allowed upfront right on the date of the allotment. For example in case of Rupam Mercantile Ltd., interest of Rs. 1,39,50,000/- was claimed as a deduction towards interest whereas they were entitled to interest of Rs. 49,543/- for 7 days of the accounting period. The learned CIT(A) further noted that revenue authorities had applied decision of the Apex Court in the case of Madras Industrial Investment Corporation Ltd., 225 ITR 803 which was squarely applicable.
16. The learned CIT(A) further noted that only issue raised before him was whether imposition of penalty was not justified as assessee neither concealed income nor furnished inaccurate particulars of any income. The learned CIT(A) rejected above contention by observing that the AO has held in clear terms that the assessee concealed income by wrongfully claiming deduction which was not admissible. The CIT(A) extensively quoted from decision of Madras Industrial Investment Corporation Ltd. (supra). Explanation I to Section 271(1)(c) of Income-tax Act was also held to be applicable to the case of the assessee. The directors of Mardia Group of companies have arranged their affairs with a view to reduce the tax liability of the appellant companies. The manner in which debentures were issued only to persons who were directors of the appellant company or relative of such directors, clearly showed that a device was adopted. The decision of the Hon'ble Supreme Court in the case of McDowell & Co., 154 ITR 1 was applicable in this case.
17. The learned CIT(A) took note of Explanation I to Section 271(1)(c) if Income-tax Act and held that the assessee failed to substantiate explanation given by him during the course of assessment proceedings. He held that decision of Hon'ble Calcutta High Court in the case of 130 ITR 710 and of Hon'ble Gujarat High Court in the case of CIT v. Manik Lal Hri Lal, 106 ITR 24 were not applicable to the facts of the case as these cases related to retrospective amendment which was not relevant before the learned CIT(A). The learned CIT(A) also rejected the contention of the assessee that the decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. (supra) was rendered on 4.4.1997 whereas the returns were filed by the assessee on 29.11.1995. He misquoted decision of Madras Industrial Investment Corporation Ltd. at page 10 of the impugned order and took the view that the light of the decision of Hon'ble Supreme Court in the case of State Bank of India v. CIT(1986) 157 ITR 67, the deduction could not be claimed. Accordingly plea of the Assessee was rejected. The learned CIT(A) also did not find any force in the argument that in the case of Madras Industrial Investment Corporation Ltd. (supra), the subject matter under consideration was deduction under Section 37 whereas the appellant raised his claim under Section 36(1)(iii) of Income-tax Act. He held that question to be considered was whether expenditure did accrue in the relevant previous year or not. It was immaterial and of academic interest whether claim was made under Section 37 or 36 of Income-tax Act. The learned CIT(A) also did not find any force in the submission of the assessee that the AO in the case of recipients i.e. Rakesh Murdia, Rasik Mardia and Rajiv Mardia had added total interest on debentures in their assessment orders made on protective basis. The learned CIT(A) on the other hand, noted that recipients in their returns had not shown the entire interest in their returns but only fraction of the same. It was AO who added back entire interest and this addition was confirmed on appeal. The CIT(A) emphasized that only expenditure which actually relates to the year under reference could be allowed on accrual basis. He further held that it would be absurd to accept the proposition that liability to pay interest on debenture had accrued to the appellant on the first day when debentures were issued to the recipients. He noted that recipient in each case was only one person who was either director of the company or his relative. It was a case of device on which decision of the Hon'ble Supreme Court in the case of McDowell & Co. (supra) was clearly applicable. The CIT(A) accordingly held that AO took a very lenient view in imposing penalty of 100% against maximum penalty of 300%. The order of penalty was accordingly confirmed.
18. All the assessees carried the matter in appeal before the Appellate Tribunal. After hearing the case, the learned Judicial Member in the proposed order confirmed the levy of penalty. His reasoning is as under:-
(A) All the four companies under consideration belonged to Mardia Group and were controlled by Shri Rakesh Mardia, Shri Rasik Mardia and Shri Rajiv Mardia to whom debentures were issued by the company.
(B) The interest @ 62 per debenture of face value of Rs. 100/- was allowed on the date of allotment of debentures. The learned JM noted the amount of loan allowed through debentures as also interest accrued to the debenture holders on the date of issue of debentures.
(C) He noted that ITAT in the case of these assessees as per order dated 28.10.1999 had only allowed deduction of interest on proportionate basis i.e. Rs. 49,543/- for a period of seven days in the accounting period against Rs. 1,39,50,000/- claimed by the assessee (M/s. Rupam Mercantiles Ltd.).
(D) The learned JM noted the decision in the case of Madras Industrial Investment Corporation Ltd. (supra) and findings in this case and confirmed the penalty with the following observations:-
"(1) As discussed above, the Explanation to Section 271(1)(c) is clearly applicable. Even though the AO has not specifically mentioned this in the body of the order, it has been held by the Supreme Court in the case of Madhusudan and Ors. referred in 251 ITR 99 that it is not essential that the same should be specifically mentioned in the orders. The onus in this respect is on the appellant to prove that the explanation or the claim made was bona fide. This has not been done in the instant case.
(2) In none of the returns filed by the recipients corresponding interest income was declared and offered for tax on their own. The plea of the appellant that there were valid bona fide explanation therefore lacks acceptability.
(3) It is clear from the facts narrated above that in all the four appellants cases, the transactions are within the closely knit Mardia Group of Companies and their Directors and that have been arranged only with a view to reduce the tax liability of the appellant companies. The transactions relating to issue of debentures are also between the appellant and only one person who is either a director of the appellant companies or is a relative of the director of the appellant. The decision of Supreme Court in the case of McDowell & Co. reported in 154 ITR 148 is also clearly applicable to the facts of the case.
(4) As discussed by the AO, the transactions in reality are only in the nature of advance payments paid to the respective recipients by the appellant companies for which the actual interest was accrued in a period spread over 6 years and not for this financial year (except for a period of only 7 days).
(5) It would be absurd to accept the proposition that liability to pay interest on the debentures can accrue to the appellant on the first date when the debentures are issue to the recipients. The view taken by the AO is, therefore, in full conformity with established principles of Accountancy as well as the provisions of the Income-tax Act, 1961 duly supported by ratio of the Apex Courts as discussed earlier in this order. As the appellant(s) having followed mercantile system it cannot change the real nature of the transaction by claiming a deduction on the basis of cash payments which have been held to the mere advance payments only.
(6) As referred earlier, the Apex Court in the case of State Bank of India referred in 157 ITR 67 have clearly observed that the substance of transaction has to be seen and not the form. Mere recording of entries in the books in itself cannot justify the stand taken by the appellants or make the explanation bona fide or taking on argument that liability for interest be accrued on the basis of the scheme and the said debentures between the appellant and recipients. Sine the said schemes were clearly devised in one go for all the four companies around the same time within the small group of family members of Mardia Group, it is obvious that the transaction is in the nature of a colorable device, as discussed earlier also in CIT(A)'s order.
(7) The AO has already taken the most lenient view in the matter and imposed minimum penalty of 100% as against 300% (maximum)."
19. The learned JM further supported his conclusion by referring to decision of Hon'ble Gujarat High Court in the case of Sarabhai Chemicals Pvt. Ltd. v. CIT, 257 ITR 355 and held that above decision was distinguishable. In the present case there was deliberate attempt to conceal income by furnishing inaccurate particulars of expenditure to reduce the income. Explanation 1 to Section 271(1)(c) of the Act was fully applicable in this case and levy of penalty was justified. The burden was on the assessee to rebut the presumption and as there was no satisfactory explanation, the said burden was not discharged. The claim of deduction of interest @ 62 per debentures was neither bona fide nor genuine. The assessee was trying to reduce its tax liability by adopting a device. On the facts and circumstances of the case the learned Judicial Member confirmed the levy of penalty.
20. The learned Vice President (Accountant Member) did not agree with the order proposed by the learned Judicial Member. In his dissenting order, he noted that assessee had issued debentures on 25.3.1995 which carried interest at Rs. 62/- payable upfront on the date of allotment of the debentures. The debentures were redeemable after six years at par. The assessee charged interest payable @ Rs. 62/- per debenture to the previous year and thus claimed deduction of Rs. 1.55 crores (in case of M/s. Rupam Mercantiles Ltd.) for assessment year 1995-96. The learned Vice President then referred to Note No. 4 in the statement of account about which specific reference was made in the return filed by the assessees on 29.11.1994. He noted that particulars of interest on debentures i.e. rate of interest payable and fact that these were redeemable at bar at the end of six years from the date of allotment were duly specified in the return and statement of accounts.
21. The learned Vice President (V.P.) further noted that the AO in the assessment allowed interest for a period of seven days, the balance amount of deduction claimed were held to have not accrued to the assessee. In other words, reduction of Rs. 49,543/- was allowed against the claim of interest of Rs. 1,54,50,457/-. The AO also initiated penalty proceedings under Section 271(1)(c) of the Income-tax Act, for making wrong claim. Relevant observations of the learned CIT(A) and of the Appellate Tribunal upholding the disallowance of claim are also extracted in the proposed order of the learned VP. It is further noted that both the assessee as well as the revenue have challenged the orders of the ITAT. The substantial question of law pending in the case of the assessee company and in the appeal of the revenue are noted by the learned V.P.
22. The learned VP has referred to the provision of Section 271(1)(c) along with Explanation 1. He has observed that above provision is penal in character and mere rejection of assessee's claim would not be sufficient to hold that the assessee is guilty of concealment. he has referred to decisions of Hon'ble Supreme Court wherein above propositions have been laid down in para 14 of his proposed order.
23. The learned VP then discussed various limbs of Part-B of Explanation 1 to Section 271(1)(c). The above provision has been minutely analyzed by the learned VP. He has split above part-B to examine import of the provision which is held to be as under:-
(i) Such person (to be penalized) offers an explanation which he is not able to substantiate;
(ii) And fails to prove that such explanation is bona fide;
(iii) And that all the facts relating to the same and material to the computation of his total income have not been disclosed by him.
It has been observed that explanation of claim cannot be treated as not substantiated where in respect of addition, the subject matter of penalty, an appeal has been admitted by the Hon'ble High Court under Section 206A of the Income-tax Act. In this connection, he has referred to and derived support from the decision of Bombay Bench of the Tribunal in the case of K.G. Nariman Alias N.K. Gajwani v. ITO, 33 TTJ (Bom) 565 and from the case of Emtici Engg. Ltd. in ITA No. 2278/A/92, 2984, 1341/Ahd/95 & other cases decided vide order dated 28.11.2002.
24. In respect of second sentence of Part-B of Explanation 1 i.e. "and fails to prove that such explanation is bona fide", the learned VP has referred to the decision of Madhya Pradesh High Court in the case of National News Print & Paper Mills Ltd., 114 ITR 172 wherein their Lordships have held "that the amount of interest could be claimed as deduction in a particular year, the assessee ought to have undertaken unconditionally to pay it to the Government." in the present case the assessee has undertaken unconditionally to pay interest of Rs. 62/- per debenture upfront on the date of allotment itself. The assessee could not be said to be wrong in making a claim in the year under consideration i.e. on the date of allotment of debenture. Thus there was no lack of bona fide on the part of the assessee if liability was claimed as a deduction on the basis of agreement between the parties.
25. As regards the requirement of the Explanation, "that all the facts relating to the same and material to the computation of his total income have been disclosed by him", the learned VP referred to note No. 4 in the statement of accounts and its mention in the return filed by the assessee. No material fact which was not disclosed, has been brought on record by the revenue authorities while making the disallowance in question. There is no allegation that debenture agreement is sham and bogus. For holding that above requirement was satisfied, the learned VP relied upon the decision of Hon'ble Gujarat High Court in the case of Sarabhai Chemicals, 257 ITR 355.
26. In support of his conclusion that Part-B of Explanation 1 to Section 271(1)(c) exonerates an assessee from levy of penalty who offers an explanation which was bona fide and that all facts relating to same and material to the computation of his total income have been disclosed by him, the learned VP relied upon decision of the Hon'ble Rajasthan High Court in the case of Shiv Lal Tak. Relevant extracts of the above decision are quoted in para 18 of the order. Other decisions taking the same view are available in para 19 of the proposed order of the learned V.P.
27. The learned VP further noted tat the decision of Supreme Court in the case of Madras Industrial Investment Corporation Ltd. (supra) was rendered on 4.4.1997 and thus was not available to the assessee on 29.11.1995 when the assessee filed the return. The learned VP has emphasized that act and conduct of the assessee as on the date of submission of the return is to be seen and therefore, a subsequent decision of Hon'ble Supreme Court or retrospective amendment of law would not affect the case of the assessee as far as bona fide conduct is concerned. The learned VP has supported his view with reference to the decision of Hon'ble Supreme Court in the case of CIT v. Hindustan Electro Graphites Ltd., 243 ITR 48(SC). On effect of subsequent decision of Hon'ble Supreme Court, the learned VP reproduced the following observation of the Hon'ble Gujarat High Court in the case of Maneklal Harilal Spinning & Manufacturing Co. Ltd., 106 ITR 24:-
"Though the effect of the Supreme Court decision by virtue of the provisions of the Constitution is that the Supreme Court declares the law of the land it must be held to have been always the law of the land, once it has so declared, it cannot be placed on the same footing as a retrospective piece of legislation and the legal fiction which goes with retrospective legislation cannot arise in the case of the decision of the Supreme Court declaring what the law of the land is."
28. The learned VP also discussed the decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. (supra) wherein the assessee claimed deduction of discount of Rs. 3,00,000/- allowed on debentures payable after a period of 12 years. The Hon'ble Supreme Court itself held that liability for discount has been incurred in the accounting year i.e. the year of allotment of debenture and that it was revenue in nature. It was incurred wholly and exclusively for purposes of business. As the assessee had secured a benefit over a number of years, the liability should be spread over the period of debenture. The learned VP has further quoted certain decisions wherein expenditure benefiting the assessee for several years was allowed in the year in which it was incurred by the assessee.
29. In the light of above discussion, the learned VP concluded that the assessee cannot be held guilty of concealment of income or furnishing inaccurate particulars of income thereof either under the main provision of Section 271(1)(c) or under deeming provision of Explanation 1 thereto. In his opinion, the appeals were required to be allowed.
30. Thereafter, the learned VP discussed all the points raised by the learned Judicial Member in the proposed order one by one and held that no case of levy of penalty was made out. The assessee did not adopt any device in claiming the deductions. The learned VP referred to the decision of the Hon'ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan, 263 ITR 706 wherein their Lordships of Hon'ble Supreme Court have discussed in detail the decision of McDowell & Co., 154 ITR 148. The relevant observations have been extracted by the learned VP in para 30 of his order. He has further observed that penalty is not justified in the light of the decisions quoted and extracted by him in paras 31 to 33 of his proposed order. He accordingly directed that appeals filed by the assessees be allowed.
31. I have heard both the parties in this case. The learned counsel for the assessee supported the order of the learned VP whereas the learned DR supported the order of the learned JM as also of the revenue authorities. The learned DR argued that the assessee adopted a device to hoodwink the revenue and furnished in accrued particulars of income. Therefore, levy of penalty was fully justified under main Section 27(1)(c) of the Income-tax Act.
32. After careful consideration of rival submissions of parties I see no good ground to take a view different from one taken by the learned VP. In fact the order of the learned VP is so comprehensive that I find it difficult to add anything to what has already been stated by him. The learned JM in his proposed order has merely relied upon what has been stated by the revenue authorities. The basis given for making disallowance and for holding that the assessee is guilty of concealment and furnishing inaccurate particulars of income, is that only interest for 7 days had accrued to the assessee and interest of balance period was wrongly claimed as a deduction. This was a device which the assessee company along with its directors adopted to evade taxes. The matter was taken to be fully covered by Explanation 1 to Section 271(1)(c) of Income-tax Act as assessee failed to substantiate the claim of deduction and further failed to show that plea was bona fidely raised by the assessee. The matter was taken as fully covered viz. the assessee as per decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. (supra). The learned VP on the other hand, has held in the proposed order that assessee's case is covered under clause-B of Explanation 1 to Section 271(1)(c) of the Act. He has held that the assessee has fully established that deduction of interest of entire period was bona fidely claimed and that no case of concealment of income or furnishing of inaccurate particulars of income has been established. I am inclined to agree with the above view of the learned VP for reasons given by him and further for the reasons discussed herein below.
33. The fundamental question therefore requires to be examined is whether the deduction of interest as claimed by the assessee can be said to be mala fide or is it possible to hold that case pleaded by the assessee that entire interest @ Rs. 62/- per debenture had accrued, was a plausible view and therefore, the question of levy of penalty would not arise in this case. As a corollary to the above question it is to be seen whether there is any justification for holding that interest as claimed could reasonably be treated to have accrued and was an expenditure which could legitimately be claimed as a deduction. In the case of Madras Industrial Investment Corporation Ltd. (supra) their Lordship quoted decision of Hon'ble Calcutta High Court in the case of CIT v. Indian Jute Mills Association (1982) 134 ITR 68, as to what is an expenditure incurred for computing profits and gains of business or profession under Sections 30 to 36 of Income-tax Act. Their Lordships have observed as under:-
"In that case, the Calcutta High Court was required to consider the claim of the assessee which was a non-trading association to depreciation on furniture, air-conditioner, etc., which were debited in its account. The Department contended that the assessee could not claim depreciation since it was a non-trading association. The Calcutta High Court held that having regard to the purpose of Section 44A the depreciation claimed should be construed as "expenditure incurred" and the assessee would be entitled to the beneficial construction of the provision. The Calcutta High Court differed in that case from the view taken by the Madras High Court in the judgment which is under challenge before us.
Therefore, although expenditure primarily denotes the idea of spending or paying out, it may, in given circumstances, also cover an amount of loss which has not gone out of the assessee's pocket but which is all the same, an amount which the assessee has had to give up. It also covers a liability which the assessee has incurred in praesenti although it is payable in futuro. A contingent liability that may arise in future is, however, not "expenditure". It would also cover not just a one-time payment but a liability spread out over a number of years."
Their Lordships further quoted and relied upon decision of the Hon'ble Supreme court in the case of Calcutta Co. Ltd. v. CIT (1959) 37 ITR 1 and after noting that decision derived following conclusion from the authorities:-
"Thus "expenditure" is not necessarily confined to the money which has been actually paid out. It covers a liability which has accrued or which has been incurred although it may have to be discharged at a future date. However, a contingent liability which may have to be discharged in future cannot be considered as expenditure."
34. In my view it would be necessary to quote little more from the above decision of the Supreme Court. In the above case the assessee a land developer had claimed expenditure on estimate basis of the "undertaking given by him" to carry out development within six months which was held to be not essence of the contract and undertaking was held to be carried out within reasonable time. No amount was actually expended and deduction was claimed on the basis of undertaking given by the assessee to carry out development in future. The AO disallowed the claim as expenses were not actually incurred "in the year of account". This disallowance was made right upto the Hon'ble High Court. About the undertaking given by the assessee to provide development in the shape of road, drains etc. their Lordships observed as under:-
"This undertaking having been incorporated in the deeds of sale themselves there was certainly a liability undertaking by the appellant to carry out these developments within six months from the date of those deeds. Time was of course not of the essence of the contract and the appellant therefore was at liberty to carry out that undertaking within a reasonable time. That, however, did not absolve it in any manner whatever from carrying out the undertaking and the purchasers were in a position to enforce the undertaking by taking appropriate proceedings in that behalf."
As at page 6 of the report, their Lordships noted distinction between legal enforceable liabilities and contingent liabilities. Their Lordships decide the question as under:-
"Approaching the question before us in the light of the observations made above we have got to determine what was the nature of the liability which was undertaken by the appellant in regard to the development of the lands in question, whether it was an accrued liability or was one which was contingent on the happening of a certain event in the future.
There is no doubt that the undertaking to carry out the developments within six months from the dates of the deeds of sale was incorporated therein and undertaking was unconditional, the appellant binding itself absolutely to carry out the same. It was not dependent on any condition being fulfilled or the happening of any event, the only condition being that it was to be carried out within six months which in view of the fact that the time was not of the essence of the contract meant a reasonable time. Whatever may be considered a reasonable time under the circumstances of the case, the setting up of that time limit did not prescribe any condition for the carrying out of that undertaking and the undertaking was absolute in terms. If that undertaking imported any liability on the appellant the liability had already accrued on the dates of the deeds of sale, though that liability was to be discharged at a future date. it was thus an accrued liability and the estimated expenditure which would be incurred in discharging the same could very well be deducted from the profits and gains of the business.
Inasmuch as the liability which had thus accrued during the accounting year was to be discharged at a future date the amount to be expended in the discharge of that liability would have to be estimated in order that under the mercantile system of accounting the amount could be debited before it was actually disbursed."
35. A plea or claim which is held by the Hon'ble High Court to give rise to a substantial question of law, cannot be treated to be frivolous or mala fide as to attract levy of penalty under Section 271(1)(c) of the Income-tax Act. What has the assessee concealed. The assessee agreed to pay Rs. 62/- i.e. entire interest on debentures. The interest paid is supported by the agreement and there is no dispute on this. The interest paid was subjected to deduction of tax at source and tax deducted was duly deposited in the Treasury as required by the statutory provision. Thus agreement was carried in letter and in spirit and there is no avoidance of payment of tax as far as assessee is concerned. Information about the interest paid is duly disclosed in return of income and in the statement of account, appropriate note was made to draw the attention of the revenue authorities to the deduction claimed. Evidently no attempt was made by the assessee to conceal any income or furnish inaccurate particulars of income. It is nobody's case that deduction of interest was not supported by contract or such contract was not filed during the course of assessment proceedings. It is therefore, difficult to conclude that the assessee failed to substantiate its claim during the course of assessment proceedings and therefore, Explanation 1 to Section 27(1)(c) of the Income-tax Act was attracted in this case. The said Explanation had no application for the above short reasons apart from elaborate reasons given by the learned VP in his proposed order.
36. The revenue has justified disallowance of interest of Rs. 62/- and levy of penalty as the assessee paid interest for six years when it could pay only for 7 days in the relevant period. It has been over emphasized by the revenue that interest for period other than 7 days, did not accrue to the assessee; the excess amount was paid as advance interest only on account of close relationship between the assessee and the recipients. In adopting the above approach the revenue has totally disregarded the agreement between the parties, which as noted in detail was given effect to and implemented. Finding that liability to pay interest other than for 7 days had not accrued is contrary to well settled principle of law. A liability accrues under an agreement the assessee was obliged to pay Rs. 62/- upfront on the date of issue of the debentures. Thus there was an accrued liability to pay whole of the interest and such a liability could legitimately be claimed as a deduction. I have already referred to the decision of the Hon'ble Supreme Court in the case of Calcutta Co. Ltd. (supra) and the learned VP in his proposed order, has referred to several other decisions to support the conclusion that the entire liability of Rs. 62 per debenture paid under agreement was accrued liability. The revenue authorities while holding to the contrary took into account the treatment given to the interest income by the recipients in their returns. They had shown interest only for 7 days and rest of he amount was claimed to be taxable in the subsequent years. Thus different treatment given to interest income by the payer and recipients and this has been taken in account to draw an adverse opinion against the assessee. In my considered opinion, action of the assessee was separate and distinct from that of recipients/directors or their relatives and two could not be combined. Moreover character of a receipt in the hands of recipient from the angle of taxability may be totally different from what it is in the hands of payer. This is demonstrated from the following observations of their Lordships in the case of Madras Industrial Investment Corporation Ltd. (supra):-
"Our attention was drawn to the case of Lomax (Inspector of Taxes) v. Peter Dixon and Son Ltd., a decision of the English Court of Appeal reported in [1944] 12 ITR (Suppl) 1, where the English Court had treated discount or premium in the hands of the recipient as a receipt of a capital nature. But the character of payment in relation to the payer can be different from the character of that payment in the hands of the recipient. In the light of the ratio laid down by this court in the case of India Cement Ltd. [1966] 60 ITR 52, any liability incurred for the purpose of obtaining the loan would be revenue expenditure."
Therefore, no addition or penalty could be levied on the assessee on how the recipient treated interest income in their returns.
37. The plea of the revenue that the assessee adopted a device and therefore, should be penalized in the light of decision of the Hon'ble Supreme Court in the case of McDowell & Co. (supra), has been properly dealt with by the learned VP with reference to subsequent decisions. In my view the assessee entered into a legal transaction and there is no case for levy of penalty on this account.
38. The bed rock of revenue's case is why did the assessee agree to pay entire amount of interest for six years on the date of issue of debentures. This was done to reduce the tax liability. How interest for the whole period could be agreed to be paid in advance? This was agreed to be paid to because of close relationship between the assessee and recipient directors or their relations. It is settled law that businessman is the best judge of his affairs and how they are to be conducted. The revenue authorities cannot apply subjective standard. In a recent decision in the case of CIT v. Dalmia Cement (B) Ltd. 254 ITR 377, their Lordships of Delhi High Court observed as under:-
"An expenditure to which one cannot apply an empirical or subjective standard is to be judged from the point of view of a businessman and it is relevant to consider how the businessman himself treats a particular item of expenditure. The term "commercial expediency is not a term of art. It means everything that serves to promote commerce and includes every means suitable to that end. In applying the test of commercial expediency, for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business the reasonableness of the expenditure has to be judged from the point of view of the businessman and not the Revenue (See CIT v. Walchand and Co. (P) Ltd. [1967] 65 ITR 381 (SC); J.K. Woollen Manufacturers v. CIT [1969] 72 ITR 612 (SC); Aluminium Corporation of India Ltd. v. CIT [1972] 86 ITR 11 (SC) and CIT v. Panipat Woollen and General Mills Co. Ltd. [1976] 103 ITR 66 (SC)."
39. Assuming against the settled law that revenue is the entitled to go behind the ostensible transaction to find out the real intention as also to see whether the purpose of the transaction is to avoid taxation by diversion of income, nobody in the present case asked the assessee to justify how it was prudent for the assessee to pay Rs. 62/- upfront as interest to debenture-holder of face value of Rs. 100/- on the date of issue of the debenture. There is no discussion on above point either in the assessment order or in the penalty order. It has been presumed rather than establishing that the assessee adopted a device to avoid and evade tax. The question has not been examined as required by law. No figures relating to benefit or loss on agreeing to pay Rs. 62/- per debenture, were asked for or collected in this case. The levy of penalty on presumption and assumption in my considered opinion, is not justified at all. The addition has been made and levy of penalty is justified on the basis of decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. (supra). As already noted the aforesaid decision was not available at the time of filing of the return. It is settled law as elaborated by the learned VP that question of penalty has to be decided on the basis of law existing at the time of filing of the return. The assessee did not have the advantage of above said decision in which it has been held that discount on debenture is to be spread over and allowed on proportionate basis. But even in the above decision, it has been accepted that discount was a loss and it accrued in the year of account in the business. Their Lordships observed as under:-
"Therefore, when a company issues debentures at a discount, it incurs a liability to pay a larger amount than what it has borrowed, at a future date. We need not go into the question whether this additional liability equivalent to the discount, which is incurred in praesenti but is payable in future, represents deferred interest or not. That may depend upon the totality of circumstances relating to the issue of debentures, including its terms. The liability, however, to pay the discounted amount over and above the amount received for the debentures, is a liability which has been incurred by the company for the purposes of its business in order to generate funds for its business activities. The amounts so obtained by issue of debentures are used by the company for the purposes of its business. This would, therefore, be expenditure." (Underlined to emphasis).
Their Lordships have given basis of their decision as under:-
"The Tribunal, however, held that since the entire liability to pay the discount had been incurred in the accounting year in question, the assessee was entitled to deduct the entire amount of Rs. 3,00,000 in that accounting year. This conclusion does not appear to be justified looking to the nature of the liability. It is true that the liability has been incurred in the accounting year. But the liability is a continuing liability which stretches over a period of 12 years. It is, therefore, a liability spread over a period of 12 years. Ordinarily revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Thus in the case of Hindustan Aluminium Corporation Ltd. v. CIT [1983] 144 ITR 474, the Calcutta High Court upheld the claim of the assessee to spread out a lump sum payment to secure technical assistance and training over a number of years and allowed a proportionate deduction in the accounting year in question."
40. It is evident from above that expenditure incurred wholly and exclusively for the purposes of business and of revenue nature can be allowed when lump sum payment is made or can be spread over in number of years, if allowing it in one year would give "distorted picture of profit" of that particular year. In the case of Hindustan Aluminium Corporation Ltd. (supra), lump sum payment was allowed to be spread over to a number of years on the instance of the assessee. This principle of "distorted picture" was laid down by their Lordships of Hon'ble Supreme Court for the first time and such principle is not available in earlier decisions of the Court.
41. The learned VP in the proposed order referred to several decisions where a lump sum payment was allowed as a permissible deduction in the year in which amount was spent although the assessee was to receive its benefit for many years to come. The payment of entire interest in advance is not unknown in the trading circle. Money-lenders as per above practice, take entire interest in advance on the money lent. I am therefore, inclined to hold that the agreement to pay entire interest in advance on the money lent. I am therefore, inclined to hold that the agreement to pay entire interest in advance and claim of above amount in the return, cannot be said to be mala fide. Such claim is not unknown to the commercial world, so as to justify the levy of penalty under Section 271(1)(c) of the Income-tax Act.
42. Before concluding I would like to quote the following observation of their Lordships of Hon'ble Supreme Court in the case of CIT v. Hindustan Electro Graphites Ltd. (2000) 243 ITR 48:-
"This court further said that if the view canvassed on behalf of the Revenue were accepted, the result would be that even if the assessee raises a bona fide contention that a particular item is not liable to be included in the taxable turnover, he would have to show it as forming part of the taxable turnover in his return and pay tax upon it on pain of being held liable for penalty in case his contention is ultimately found by the court to be not acceptable. That surely could never have been intended by the Legislature, this court so observed."
In the earlier portion of the said decision, their Lordships noted with approval the decision in the case of Modern Fibotex India Ltd. v. Dy. CIT (1995) 212 ITR 496 (Cal.) wherein while canceling the penalty levied on the assessee, their Lordships have observed as under:-
"An assessee cannot be imputed with clairvoyance. When the return was filed, the assessee could not possibly have known that the decision on the basis of which cash compensatory support had been claimed as not amounting to the assessee's income ceased to be operative by reason of retrospective legislation."
43. In the light of above discussion and for the reasons given in detail by the learned VP, I am of the view that all the four cases before me are not fit cases for levy of any penalty under Section 271(1)(c) of the Income-tax Act. I fully agree with the view expressed by the learned VP.
ORDER PER BENCH: In view of the majority decision, the penalties levied under Section 271(1)(c) of the IT Act, 1961 are deleted and the appeals are allowed.