Income Tax Appellate Tribunal - Delhi
Paharpur Industries Ltd, New Delhi vs Assessee on 12 February, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'F': NEW DELHI
BEFORE SHRI C.L. SETHI, JM AND SHRI A.K. GARODIA, AM
I.T. A. No.2051/Del of 2010
Assessment Year: 2006-07
M/s Paharpur Industries Ltd., Income-tax Officer,
806-807, Ashoka Estate, vs Ward 14(1), New Delhi.
24, Barakhamba Road,
New Delhi.
Appellant Respondent
Appellant by: Shri N.K. Poddar
Respondent by: Smt. Banita Devi Naorem
ORDER
PER C.L. SETHI, JM:
In this appeal filed by the assessee against the order dated 12.2.2010 passed by the learned CIT(A) in the matter of an order of penalty u/s 271(1)(c ) of the Income-tax Act, 1961 (the Act) pertaining to the Asstt. Year 2006-07, the following grounds have been taken by the assessee,.
"1. Whether the ld CIT(A) is right in law and on facts in confirming the order passed by ITO, Ward 14(1), New Delhi upholding the penalty levied u/s 271(1)(c) 2 amounting to Rs.34,95,718 levied by the AO in respect of the disallowance of claim u/s 47(v) of the I.T. Act. Such action of the ld. CIT(A) is completely arbitrary, unjustified unwarranted and illegal.
2. For that there is no finding in the appellate order that the appellant's return were found to be incorrect, erroneous or fault. Such not being the case, there would be no question of inviting penalty u/s 271(1)(c ) of the Act. A mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the appellant, therefore, the penalty which cannot be the subject matter of penalty u/s 271(1)( c).
3. For that the authorities below has relied on a decision of apex court, no longer a good law due to subsequent pronouncement by the apex court.
4. For the claim of exemption u/s 47(v) of the Act was not made an intend of avoiding or evading the tax liability but it was due to ignorance of accountant the claim was made."
2. The only issue involved in this appeal is as to whether the learned CIT(A) was justified in law and on facts in confirming the penalty amounting to Rs.34,95,718 levied u/s 271(1)(c ) of the Act by the AO in the Asstt. Year 2006-07.
3. The relevant facts, in brief, are discussed below: 3
3.1 The assessee filed e-return declaring total income at Rs.1,70,809 on 30.11.2006. The case was selected for scrutiny and notice u/s 143(2) was issued to the assessee on 5.10.07, which was served upon the assessee. In response to the notices issued by the AO, assessee's Chartered Accountant appeared before the AO and filed necessary details, as required. The matter was discussed with the authorized representative of the assessee.
3.2 The assessee company is engaged in the business of manufacturing flexible packaging products, pouches, coextruded film and ink etc. During the year, the assessee company transferred its plant and machinery to M/s Paharpur Cooling towers Ltd. for a sale consideration of Rs.1,55,29,500 for which the written down value as per the Income-tax Act was Rs.51,44,121. The difference of Rs.1,03,85,379, being short term capital gain was not shown as income in the return in view of the provisions of Section 47(v) of the Act wherein transfer of capital assets by wholly subsidiary company to holding company is not regarded as transfer u/s 45 of the Act.
3.3 During the course of assessment proceedings, the assessee company was asked to furnish the name and address of the 4 shareholders as on 31.3.05 and 31.3.2006. In response to the same, the assessee vide letter dated 1.12.2008 stating that the entire capital of the company is held by the holding company, namely, M/s Paharpur Cooling Towers Ltd., alongwith directors and their relatives. It was further pointed out by the assessee that there was no change in the shareholding of the company for the past many years, and the shareholders pattern were same as on 31.3.2005 and 31.3.2006. The assessee submitted the list of the shareholders, which is as under:
S.No. Shareholder's name Type of No. of Amount shares shares /share 1 Mrs. Sushila Narula Equity 250 10 2 Gopal Raj Swarup Equity 1250 10 3 BalbirChand Kapoor Equity 310 10
4 Mahendra Swaroop Equity 1000 10 5 Vikram Swaroop Equity 1000 10 6 Gaurav Swaroop Equity 1000 10 7 VimalChandra Hoon Equity 630 10 8 SumerVaidhya Nath Equity 120 10 Aiyer 9 M/sPaharpur Colling Equity 1704190 10 Towers Ltd 10 Ramesh Kumar Shukla Equity 50 10 11 Mahesh Kumar Equity 50 10 12 Ashok Bhatia Equity 50 10 5 13 Badri Prasad Gupta Equity 50 10 14 Rajinder Singh Tanwar Equity 50 10 Total 1710000 From the aforesaid details of shareholders, it was noticed by the AO that whole of the share capital of the assessee was not being held by M/s Paharpur Cooling Towers Ltd. but the share capital of the assessee company was held by other 13 persons besides Paharpur Cooling Towers Ltd. The AO, therefore, asked the assessee to show cause as to why the benefit of Section 47(v), as claimed by the assessee, should not be denied. The assessee was asked to furnish a reply to show cause notice.
3.4 After taking into account the provisions of Section 47(v), the AO observed that M/s Paharpur Cooling Towers Ltd. was not holding whole of the share capital of the assessee company as required u/s 47(v) of the Act in order to treat the transaction to be not in the nature of a transfer within the meaning of Section 45 of the Act. The AO collected the copy of the balance sheet of M/s Paharpur Cooling Tower Ltd. and find that investment of Paharpur Cooling Ltd. in the equity shares of the assessee company was only to the 6 extent of 1704190 shares out of total shares of 17,70,000 shares. The assessee vide reply dated 1.12.2008 submitted that entire capital of the assessee company was held by the holding company M/s Paharpur Cooling towers Ltd. along with their directors and relatives and thus, assessee was of the view that the conditions contemplated u/s 47(v) of the Act were deemed to be satisfied in the present case. The assessee's explanation was considered by the AO, who had taken a view that the directors and relatives were different entity, and they were not holding the shares in representative capacity of parent holding company M/s Paharpur Cooling Towers Ltd., and, therefore, it cannot be said that whole of the shares of the assessee company were held by holding company M/s Paharpur Cooling Towers Ltd. The AO also held that in order to take the benefit of Section 47(v) of the Act, the whole of the share capital of the assessee should be held by the holding company to whom the assets have been transferred. After analyzing the provisions of Section 47(iv), (v), Section 2(17), 2(26) of the Act and Section 4(1) of the Companies Act and keeping in account the distinction between Section 47(iv) and 47(v), the AO rejected the assessee's claim, and brought the sum of Rs.1,03,85,379 to tax as 7 short term capital gain on sale of plant and machinery by the assessee company.
3.5 Against this action of the AO, assessee did not prefer any appeal before the CIT(A), and, thus, the assessment order made by the AO had attained finality on this issue.
3.6 In the course of assessment proceedings, the AO initiated penalty proceedings u/s 271(1)(c ) of the Act by observing that the AO was satisfied that to the extent of the addition of Rs.1,03,85,379 the assessee had furnished inaccurate particulars or concealed its income.
3.7 In reply to the penalty notice issued u/s 271(1)(c ) of the Act by the AO, the assessee vide its letter dated 28.1.2009 submitted that assessee company neither furnished inaccurate particulars of income in its return nor concealed any income as the assessee was under bonafide belief that the short term capital gain arising to the assessee company on transfer of fixed assets to the holding company is not subject to tax by virtue of provisions of Section 47(v) of the Act as virtually the entire share capital of the assessee company to the extent of 99.64% was held by the holding company, 8 and even the balance 0.36% was held by its director, their relatives and past employees. It was further submitted that a disclosure to that effect was duly made in the annual accounts and in the tax audit report. It was, thus, submitted that it is not the case where something was discovered or detected by the department, which was not shown or declared in the return of income, as the information relating to short-term capital gain was very much given or furnished in the return of income itself. It was further submitted that mere because the assessee has accepted the addition and has not preferred any appeal against the assessment order, it cannot be said that assessee's claim was false with a malafide intention to evade payment of tax so as to levy penalty u/s 271(1)(c) upon the assessee.
3.8 The aforesaid explanation of the assessee was considered by the AO, but he found the same to be not satisfactory for the reasons given as under:
"The assessee's contention that it was under bonafide belief that the short term capital gain arising to the company on transfer of fixed assets to the holding company is not subject to tax by virtue of provisions of Section 47(v) of the Income tax Act is also not correct. The fact that 9 the whole of share capital was not held by M/s Paharpur Cooling Towers Ltd. must have been in the knowledge of the assessee. The assessee which claims to have a good track record must have also known various provisions of law and provisions for claiming the benefit of section 47(v). One of that provision envisages that the transferee company must hold whole share capital of the assessee company.
Mere showing the short term capital gain on sale of assets in the return and tax audit report but not offering the same for taxation purpose cannot by itself take out the case from the purview of furnishing inaccurate particulars. Therefore, the omission on the part of the assessee not to include an item of receipt i.e. short term capital gain in the income in the return certainly amounts to concealment or deliberate furnishing of inaccurate particulars of income as the omission was attributable to an intention or desire on the part of the assessee to hide or conceal the income so as to avoid the imposition of tax thereon. This view is strengthened by the fact that even after affording sufficient opportunity to the assessee, it failed to furnish the reply to the show cause letter during the course of assessment proceedings.
Thus, it becomes abundantly clear case where the assessee failed to substantiate its claim that the transaction with its holding company be not regarded as transfer as contemplated in section 47(v) of the Income-tax Act. If the assessee despite affording them an opportunity to 10 prove the transactions relied on by them for claiming benefit failed to substantiate, then a case for imposition of penalty is certainly made out. In other words, in such circumstances it becomes a case of concealment of true income chargeable to tax. When a wrong claim is made to evade tax and the same is proved to be wrong, as admitted by the assessee itself, then in these circumstances, the assessee is liable for penal provisions of the Act. It is for the reason that it exhibits animus on the part of the assessee in concealing the true income and further exhibits an attempt on the part of the assessee to set up a wrong claim just to avoid payment of legitimate tax which is otherwise due and payable on their true income for the year under consideration. Thus, it is proved that the assessee has consciously made the concealment or furnished inaccurate particulars of its income.
Mere accepting the addition made and making the payment of tax-raised consequent to the assessment do not in itself absolve the assessee from imposition of penalty. Various case laws cited by the assessee in its submission have also been gone through and it was found that ratios of those judgments are not applicable to the case of the assessee c0mapny as the facts in those cases were quite distinguishable from this case. The Hon'ble Supreme Court in the case of UOI & Ors. vs Dharmendra Textile Processors & Others in 305 ITR 277 has upheld that for attracting civil liability of penalty a willful concealment is not essential. It has also been held in the said 11 case that there is no implied required of mens rea or culpable mental status. As the penalty is imposable is governed by the provisions of Income-tax Act which no doubt do not require mens rea on the part of assessee as pre-condition for imposition of penalty.
In view of above discussion, undersigned holds that the assessee has concealed income and furnished inaccurate particulars of its income to the tune of `1,03,85,379."
4. Being aggrieved with the AO's order levying penalty u/s 271(1)( c), the assessee preferred an appeal before the first appellate authority i.e. CIT(A).
5. Before the CIT(A), the assessee submitted that mere because the assessee's claim has been not accepted is by itself not sufficient to levy penalty u/s 271(1)(c) of the Act when the claim made by the assessee was bonafide based on honest belief and when all the particulars relating to the claim were duly and fully disclosed voluntarily by the assessee even in the audit report as well as in the return of income. Before the learned CIT(A), the assessee has relied upon the following decisions:
(i) New Sorathia Engg. Co. vs CIT (2006) 282 ITR 64 (Guj)
(ii) Mimosa Investment Co. P. Ltd. vs ITO (2009) 28 SOT(AT) 470 (Mum) 12
(iii) Mehnga Ram Sharma vs ITO (2009) 26 DTR 380 (Amritsar Bench) It was further submitted by the assessee that non inclusion of the short term capital gain in the computation of income filed by the assessee was due to a bonafide belief of the accountant, who was of the view that the capital gain arising on transfer of plant and machinery by assessee company to its holding company shall not be regarded as a transfer within the meaning of Section 47(v) of the Act inasmuch as the holding company along with its director's relatives and past employees of the company holds 100% of share capital of the assessee company. The details of the shareholding pattern of the assessee company filed before the AO were also pointed out. It was thus contended that it was a bonafide mistake of the accountant and not a malafide conduct of the assessee to avoid tax or evade the tax liability, and since all the relevant particulars were furnished in the return of income, the assessee has been able to discharge the burden that lay upon it u/s 271(1)( c) of the Act.
6. After considering the assessee's submissions and the penalty order passed by the AO along with the relevant facts and 13 circumstances of the present case, the learned CIT(A) confirmed the penalty by observing and holding as under:
"4. I have carefully considered the submission made by the appellant and perused the penalty order passed by the AO.
4.1 Section 47 of the Income tax Act deals with transactions not regarded as transfer and section 47(v) describes a situation relating to transfer of capital to holding company. However, section 47(v) contemplates certain conditions to be fulfilled for claiming the benefit which are as under:
(i) Capital asset is transferred from the subsidiary company to the holding company.
(ii) The whole of share capital of a subsidiary
company is held by the holding company,
and
(iii) The holding company is an Indian
company.
The above conditions should be satisfied cumulatively and are not alternative.
If all the aforementioned conditions are satisfied only then an assessee is entitled to claim the benefit of section 47(v) and transfer of capital asset from subsidiary to holding company would be exempt from capital gain tax. Admittedly, the appellant company does not satisfy all the above conditions. The appellant company was well aware about the holding pattern of its holding company. The plea that the computation was made by the accountant 14 is of no help as final accounts and return of income is verified and signed by the directors of the company. Every citizen is presumed to known the law. In the case of a corporate entity, this presumption becomes stronger as it has its own company secretary and auditors.
Therefore, the submission that computation was made by the accountant cannot of any help in absolving responsibility of the appellant company.
4.2The appellant has not preferred any appeal against the assessment order and accepted the addition made by the AO.
Thus, the assessment order has attained the finality. As far the contention that the term wholly owned subsidiary company has not been defined in the Income-tax act is concerned, it is the primary rule of construction that the words should be given their plain, natural and grammatical meaning. Hon'ble apex court in the case of Orissa State Warehousing Corporation vs CIT 237 ITR 589 has held that the words are to be given their plain and grammatical meaning. The wholly owned simply means 100% owned. It does not require any separate definition. The appellant was very well aware that there are thirteen other shareholders and it was not wholly owned by the holding company.
Therefore, this contention is rejected.
4.3 The facts of the cases relied upon by the appellant were different from the facts involved in the appellant's case.
Those cases are clearly distinguishable on facts and therefore, are of no help to the appellant. On the contrary Hon'ble 15 Madras High Court in the case of CIT vs Tirupati Kumar Khemka (291 ITR 122) held that in economic offences the statutory liability to pay tax is a strict liability where the question of proving beyond the shadow of doubt the existences of bonafide belief does not arise.
4.4 Hon'ble High Court of Punjab & Haryana in the case of CIT vs Lal Chand Tirath Ram (1997) 225 ITR 675 has observed that "to avoid burden of penalty, the assessee should produce cogent and reliable evidence". Similarly, Hon'ble High Court of Kerala in the case of CIT vs Gates Foam and Rubber Co. (1973) 91 ITR 467 has held as under:
"The rights of an assessee to arrange the matters so as to reduce his tax liability to the minimum does not include a right to conceal his true income or to furnish inaccurate particulars of his income before the taxing authorities."
4.5 The jurisdictional High Court of Delhi in the case of CIT vs Escorts Finance Ltd.
(2009) 226 CTR(Del) 105, has held that where deduction u/s 35D is claimed which was not admissible, is not a bonafide error and levy of penalty was upheld. Hon'ble Supreme Court in Union of India vs Dharmendra Textile Processors (2008) 306 ITR 277 has held:
"...the explanations appended to section 271(1) (c) of I.T. Act, 1961, indicate the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing the return. The object behind enactment of Section 271(1)( c) read with explanations 16 indicates that the section has been enacted to provide for a remedy for loss of revenue. The penalty under that provision is a civil liability. Wilful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution u/s 271(1)(c)."
4.6 Hon'ble Supreme Court in the case of CIT vs Anwar Ali (1970) 76 ITR 696 has held as under:
"Section 271 is penal in character in the sense that its consequences are intended to be an effective deterrent which will put a stop to parties which the legislature considers to be against the public interest."
4.7 Hon'ble Supreme Court in the case of CIT vs Atul Mohan Buindal (2009) 225 CTR (SC) 248 has held that penalty u/s 271(1)(
c) is neither criminal nor quasi criminal but a civil liability, albeit a strict liability. Such liability being civil in nature, mens rea is not essential -
Explanation appended to section 271(1)(
c) indicates element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing the return. Dilip N. Shroff has been held to be not laying down good law.
In view of the above legal position on the issue, the contention of ld. AR are rejected.
5. The AO has given a clear finding that the appellant was given a show cause notice during assessment proceedings as to why income of Rs.1,03,85,379 should not be taxed as short term capital gain.
17
Admittedly, the appellant has failed to offer any explanation. It is an admitted fact that no appeal was filed against the assessment order. Thus, the assessment has attained finality. The only explanation given by the appellant is that the computation was made by the accountant and that the word wholly owned have not been defined in the Income tax Act. As discussed in the earlier part of this order, this cannot be an excuse for furnishing inaccurate particulars of income. The omission to include short term capital gain in the computation of income cannot be said to be a bonafide mistake.
In view of the above discussion, I am of the view that it is a fit case for levy of penalty u/s 271(1)(c ) of the I.T. Act, The AO was fully justified in levying penalty u/s 271(1)( c). I, therefore, uphold the order of the AO and confirm the penalty levied by him. Ground Nos. 1 to 8 are rejected."
7. Still aggrieved, the assessee is in appeal before us.
8. The learned counsel for the assessee has narrated the material facts giving rise to the penalty levied by the AO u/s 271(1)(c ) of the Act. After narrating material facts and the circumstances under which the assessee did not bring the short- term capital gain on sale of fixed assets to holding company, to tax, the learned counsel for the assessee submitted that in para 4(i)(c ) 18 of the auditor's report read with Notes on Accounts (iv) appearing as Schedule 21, forming part of the audit report, all the facts relating to transfer of plant and machinery by assessee company to its holding company for and aggregate consideration of Rs.1,55,29,500 as against the book value of Rs.2,17,54,921, resulting into a book loss of Rs.62,25,421, which has been charged to profit and loss account, has been fully and duly set out, and an opinion has been given by the auditor that the short term capital gain of Rs.1,03,85,379 arising on account of transfer of plant and machinery by assessee company to its holding company, being the difference between the sale consideration and written down value as per income-tax law, has not been included in the income-tax return in view of provisions contained in Section 47(v) read with Section 45 of the Income-tax Act, 1961. The above facts has also been reiterated in the Note below the depreciation chart forming part of the Tax Audit report signed by the auditors, namely, Gupta, Garg and Aggarwal, Chartered Accountants, and the auditor's opinion that the short term capital gain of Rs.1,03,85,379 has not been considered in the income-tax return in view of the provisions contained in Section 47(v) of the Act. The learned counsel for the 19 assessee further pointed out that in the income-tax return filed voluntarily by the assessee company, the assessee claimed the short term capital gain of Rs.1,03,85,379 as exempted in view of the auditor's opinion set out in the audited accounts and auditors report as well as Tax Audit report given by auditors u/s 44AB of the Act. It was thus contended that the assessee claimed the short term capital gain to be exempted under the bonafide and legal advise given by the tax auditors, as would be clear from the Notes given in the Annual Accounts audit report as well as Tax Audit Report filed along with the return of income.
9. It was further contended by the learned counsel for the assessee that details about holding pattern of shares of the assessee company were duly and voluntarily furnished in the course of assessment proceedings before the AO wherein it was pointed out that the holding company of the assessee company, namely, Paharpur Cooling Towers Ltd. Holding 99.64% of assessee's share capital along with balance 5810 shares of Rs.10 each, being held by holding company's directors and relatives in order to comply with the statutory provisions of the Company's Act, which requires that a public company must have minimum of at least 7 shareholders. It 20 was, thus, contended that assessee had no malafide intention to evade any payment of tax, but under the bonafide impression that since 99.64% of shares of the assessee's company were being held by its holding company and the balance remaining 0.36% held by its directors and relatives, the assessee company was entitled to a benefit available under the provisions of Section 47(v) of the Act, and, therefore, the question of levying penalty u/s 271(1)( c) does not arise. In this connection, the learned counsel for the assessee relied upon the decision of the Hon'ble Supreme Court in the case of Reliance Petroproducts P. Ltd. (2010) 322 ITR 158 (SC) along with the following decisions:
1. Yogesh R. Desai vs ACIT, ITAT Mumbai (2010) 38 DTR(Mum)(Trib) 101.
2. T. Ashok Pai vs CIT (2007) 292 ITR 11 (SC).
3. Union of India vs Dharmendera Textiles (2008) , 306 ITR 277 (SC)
4. Union of India vs Rajasthan Spinning & Weaving Mills,23 DTR (SC) 158.
10. The learned DR, on the other hand, submitted that since whole of the share capital of the assessee company was not held by the holding company i.e Paharpur Cooling Towers Ltd. as per requirement of Section 47(v)(a) of the Income-tax Act, the benefit of Section 47(v) was not prima facie available to the assessee 21 company, and no person of common prudent knowledge would have made such a claim in the return of income when it was clear that only 99.64% of shares were only held by holding company making the case being not covered by Section 47(v) of the Act. It was, thus, submitted that CIT(A) has rightly confirmed the penalty levied by the AO in the light of the fact that assessee failed to include short-term capital gain arising from sale of fixed assets sold to holding company, which was not holding the whole of the share capital of the assessee company in its income shown in the return. He, therefore, reiterated the AO's as well as CIT(A)'s order in levying penalty u/s 271(1)(c ) of the Act.
11. We have given our thoughtful consideration to the rival contentions of both the parties and have carefully perused the material on record.
12. In the present case, the AO has levied penalty for the reason that the assessee has failed to substantiate its claim of treating the transaction to be covered by Section 47(v) of the Act inasmuch as it was well known to the assessee that transferee company was not holding the whole share capital of the assessee company, and, therefore, the assessee has made a wrong claim making itself liable for penal provisions of the Act. The AO further stated 22 that there was an animus on the part of the assessee to set off a wrong claim just to avoid payment of legitimate tax, which is otherwise due and payable on the assessee's true income. The AO was also of the view that in the light of the decision of Hon'ble Supreme Court in the case of UOI & Ors. Vs Dharmendra Textiles Processors (2008) 306 ITR 277 (SC), willful concealment is not essential for attracting civil liability. It is no doubt true that for attracting civil liability of penalty leviable u/s 271(1)(c) of the Act, a willful concealment is not essential but in the light of the decision of Hon'ble Supreme Court in the case of Union of India vs Rajasthan Spinning & Weaving Mills, a penalty u/s 271(1)(c ) is not attracted in all cases where addition is made. In other words, each and every addition made in the assessment cannot automatically lead to levy of penalty for concealment of income. A case for imposition of penalty has to be looked into or appreciated in the light of the provisions contained in Explanation 1 to Section 271(1)(c ) of the Act as was observed by the Hon'ble Supreme Court in the case of CIT vs Reliance Petro Products P. Ltd. (2010) 332 ITR 158 (SC).
13. Section 271(1)(c ) of the Act provides for imposition of penalty in case the AO, in the course of any proceedings under the Act, is satisfied that any person has concealed particulars of his income or has furnished 23 inaccurate particulars of such income. Explanation 1 to Sub section (1) to Section 271 of the Act 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 bona fide and that all the facts relating to the same and material to the computation of its 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 purpose of clause (c ), be deemed to represent the income in respect of which particulars have been concealed. Thus, in the case of failure of the assessee to offer any explanation or explanation furnished by him being found false, penalty may be imposed on him. However, if the assessee offers an explanation, 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)(c ) 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 total income was disclosed by him. This 24 position has been summarized by various decisions of the courts from time to time and has been recently summarized by the Hon'ble High Court of Delhi in the case of CIT vs Zoom Communication P. Ltd. reported in (2010) 40 DTR (Del) 249, order being dated May 24, 2010. The position of law, thus, emerges 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 u/s 271(1)(c ) of the Act, even if the claim made by him is unsustainable in law, provided that he either substantiate the explanation offered by him or the explanation offered by him, even if not substantiated, is found to be bonafide. In other words, if the explanation is neither substantiated nor shown to be bonafide, Explanation 1 to Section 271(1)(c ) would come into play and the assessee will be liable to penalty leviable u/s 271(1)(c ) of the Act in respect of the additions or disallowances made by the AO in the assessment.
14. In the present case, the assessee filed its return of income declaring total income at Rs.1,70,809/-. The assessment was completed u/s 143(3) of the Income-tax Act at a total income of Rs.1,05,56,188/- by making an addition of Rs.1,03,85,379/- on account of short term capital gain arising on sale of fixed assets by assessee company to its holding company. It is an admitted position 25 that the short term capital gain of Rs.1,03,85,379/- computed under the provisions of Income-tax Act were not shown as income in the return of income filed by the assessee. During the year under consideration, the assessee company has transferred plant and machinery to its holding company for a total consideration of Rs.1,55,29,500, which was also valued at the same amount as per the valuation certificate of a chartered engineer. The written down value thereof as per books of account was of Rs.2,17,54,921/-. The difference of Rs.62,25,421/- i.e. between Rs.2,17,54,921-/ minus Rs.1,55,29,500/- was charged to profit and loss account as a loss on sale of fixed assets. As a result of the said transfer of plant and machinery, the manufacturing and conversion activities of Sahibabad plant of the assessee company had ceased functioning w.e.f. October, 2005. In the Schedule 18 attached to and forming part of accounts, the assessee has given details of manufacturing and other expenses amounting to Rs.456.36 lacs, which include loss on sale of fixed assets amounting to Rs.62.25 lacs. The assessee got its accounts audited u/s 44AB of the Income-tax Act, 1961 and an audit report to that effect was furnished along with the return of income. In Annexure 2 to form No.3 CD of audit report, the 26 assessee has furnished particulars of depreciation allowable as per the Income-tax Act. In the said Annexure 2, at the bottom, it has been mentioned and stated that during the year the company has transferred plant and machinery to its holding company for a total consideration of Rs.1,55,29,500/- for which the WDV as per the Income-tax Act is Rs.51,44,121/- and the difference of Rs.1,03,85,379/-, being short term capital gain has not been considered in the income-tax return in view of the provisions of Section 47(v) of the Act where transfer of capital assets by wholly owned subsidiary to holding company is not regarded as transfer u/s 45 of the Income-tax Act. From these note given below to Annexure 2, it is clear that auditor has not considered the short term capital gain of Rs.1,03,85,379/- as income in the income-tax return filed by the assessee in view of the provisions of Section 47(v) of the Act. In other words, the tax auditor was of the opinion that the short term capital gain arising to assessee company on transfer of plant and machinery to its holding company is not a transfer within the meaning of Section 45 of the Act as the case is covered by the provisions of Section contained in Section 47(v) of the Act. In the audited annual accounts under the Company's Act, under the head 27 "Notes to Accounts" at Item 21(iv), the auditor has stated that the assessee company has transferred plant and machinery to its holding company for a total consideration of Rs.1,55,29,500/- as per the valuation certificate of a chartered engineer and the difference of Rs.62,25,421/- between the WDV Rs.2,17,54,921 and sale consideration of Rs.1,55,29,500/- has been charged to profit and loss account as loss on sale of fixed assets, and, however, short term capital gain of Rs.1,03,85,379/- arising on account of said transfer, being difference between sale consideration and WDV as per Income-tax Act, has not been considered in the Income-tax return of the company in view of the provisions of Section 47(v) of the Income-tax Act, where transfer of capital assets by wholly owned subsidiary company to holding company is not regarded as transfer u/s 45 of the said Act. It is, thus, clear that in both, the annual account audit report under Company's Act as well as in Tax audit report under Income-tax Act, the auditor has clearly stated that the short term capital gain arising on account of transfer of plant and machinery to assessee's holding company is not considered as transfer u/s 45 of the Income-tax Act in view of the provisions of Section 47(v) of the Act. From the annual audit report 28 under the Company's Act as well as Tax audit report under the Income-tax Act, we find that the auditor has taken a view that the short term capital gain arising on account of transfer of plant and machinery by assessee company to its holding company is not to be considered as transfer within the meaning of Section 45 of the Income-tax Act inasmuch as the assessee's case is covered by provisions contained in Section 47(v) of the Act.
15. Now, the question arises as to whether view of the auditor can be considered to be a bonafide basis upon which the assessee has made a claim in the return of income that short term capital gain arising on transfer of plant and machinery to its holding company is not taxable. In this connection, we find it appropriate to have a look to the provisions contained in Section 47(v) of the Act, which reads as under:
"47. Nothing contained in Section 45 shall apply to the following transfers:-
(i) to (iv) .............
(v) any transfer of a capital asset by a subsidiary company to the holding company, if
(a) the whole of the share capital of the subsidiary company is held by the holding company, and 29
(b) the holding company is an Indian company."
16. On perusal of the provisions of Section 47(v) of the Act, it is clear that this section grants exemption in case of transfer of a capital asset as between holding company and wholly owned subsidiary, where the transferee is an Indian company. It provides that nothing contained in Section 45 of the Act shall apply to any transfer of a capital asset by a subsidiary company to the holding company if the whole of the share capital of the subsidiary company is held by the holding company and the holding company i.e. transferee is an Indian company. In the present case, it is not in dispute that the capital asset has been transferred by the assessee company, being a subsidiary company, to its holding company. The share capital of the assessee company to the extent of 99.66% is held by the holding company to which the capital assets were transferred. The balance share capital to the extent of 0.36% were held by the directors of holding company and their relatives. The auditor in the annual audit report has given an opinion that any loss or gain arising from the transaction of sale on fixed assets by the assessee company to its holding company shall be covered by Section 47(v) of the Act, and as such any gain arising therefrom 30 shall not be chargeable to tax u/s 45 of the Act. The observation made in the annual audit report under Companies Act is at the stage at which the accounts were first audited under the Companies Act. The assessee has to file its return of income as per provisions contained in the Income-tax Act. However, in the present case, the Tax Consultant, who is also the Tax Auditor of the assessee company, in its tax audit report u/s 44AB, has also given an identical view that the transaction in question shall be covered by Section 47(v) of the Act, and hence, short term capital gain arising on sale of plant and machinery shall not be chargeable to tax u/s 45 of the Act. This view given by the tax consultant and the tax auditor in its report is on the basis that 99.64% of the shares of assessee company were held by its holding company to which the assets were transferred and the remaining 0.36% of share capital were held by directors of holding company and their relatives implying thereby that whole of the share capital of the assessee company were being controlled or held by holding company. This opinion given by the tax auditor may not be acceptable in the light of the language used in Section 47(v) of the Act where one of the conditions provided is that whole of the share capital of the 31 subsidiary company must be held by the holding company. In the present case, 100% share capital of the subsidiary company was not held by the holding company but the share capital was being by the holding company only to the extent of 99.64%. There is not much difference between 100% share capital and 99.64% capital, which is held by the holding company particularly in view of the fact that the balance 0.36% of share capital of assessee company were held by the directors of holding company and their relatives. Therefore, the view taken by the tax consultant could be a plausible one taken to advance the benefit of transfer of assets by subsidiary company to holding company within the meaning of Section 47(v) read with Section 45 of the Act after giving a liberal and wider meaning to Section 47(v) of the Act. The assessee has acted upon the advise given by the auditor in both annual tax report prepared under Companies Act as well as Tax Audit repot prepared under Income tax Act. It is not the case where an opinion was given only at the time of preparing the audit report under Companies Act but it is the case where the opinion was also given by the Tax consultant while preparing the return of income for the assessee. It is thus, a case 32 where the assessee has acted upon the advice given by the tax auditor.
17. Now, the question arises as to whether the deduction claimed by the assessee on the basis of advise of the tax consultant supported by tax audit report as well as annual audit report can said to be a false claim made by the assessee so as to attract penalty provisions contained in Section 271(1)(c ) of the Act.
18. In the case of Yogesh R. Desai vs ACIT (supra), ITAT has taken a view that where the claim of deduction was made on the basis of advise of the tax consultant supported by tax audit report, there was no concealment or furnishing of inaccurate particulars on the part of the assessee and, therefore, penalty u/s 271(1)(c ) cannot be levied merely because the claim of deduction is disallowed in assessment proceedings. In this decision, the coordinate bench of the Tribunal has considered the following decisions:
1. Anantharam Veerasinghaiah & Co. vs CIT (1980) 16 CTR (SC) 189 : (1980) 123 ITR 457 (SC)
2. Glorious Realty (P) Ltd. Vs ITO (2009) 29 SOT 292 (Mumbai)
3. Kanbay Software India (P) Ltd. Vs DCIT (2009) 122 TTJ (Pune)721: (2009) 22 DTR (Pune)(Trib) 481 : (2009) 119 ITD 153 (Pune) 33
4. T. Ashok Pai vs CIT (2007) 210 CTR (SC) 259 : (2007) 292 ITR 11 (SC)
5. Union of India vs Dharmendra Textile Processors & Ors. (2008) 219 CTR (SC) 617: (2008) 14 DTR (SC) 114 :
(2008) 306 ITR 277 (SC)
6. Union of India vs Rajasthan Spinning & Weaving Mills (2009) 23 DTR (SC) 158 The operative portion of the order passed by the coordinate bench of the Tribunal in the above referred case in Yogesh R. Desai (supra) is reproduced below:
"We have carefully considered the submissions of the rival parties and perused the material available on record. It is settled law that penalty u/s 271(1)(c) is a civil liability and the revenue is not required to prove willful concealment as held by the Hon'ble Supreme court in the case of Union of India vs Dharmendra Textile Processors & Ors. (supra). However, each and every addition made in the assessment cannot automatically lead to levy of penalty for concealment of income. A case for imposition of penalty has to be examined in terms of the provisions of Explanation 1 to Section 271(1)( c). Secondly, it is also a settled legal position that penalty proceedings are different from assessment proceedings. The finding given in the assessment though is good evidence but the same is not conclusive in penalty proceedings as held by the Hon'ble 34 Supreme Court in the case of Anantharam Veerasignhaiah & Co. vs CIT (supra). In the instant case, we find that there is no dispute that the assessee has made the claim of deduction u/s80-O of Rs.14,12,642 on the basis of advice given by his tax consultant. This bona fide belief of the assessee was not controverted by the revenue even at this stage. It is also not the case of the revenue that the assessee has not disclosed complete particulars of his income or the claim made by the assessee is not supported by tax audit report. It is repeatedly held by the courts that when the facts are clearly disclosed in the return of income penalty cannot be levied. Merely because an amount is not allowed or taxed to income, it cannot be said that the assessee had field inaccurate particulars or concealed any income chargeable to tax. Even if some deduction or benefit is claimed by the assessee wrongly but bonafidely and no malafide can be attributed, the penalty would not be levied. This being so and keeping in view that the assessee's explanation that the claim of deduction under section 80-O of Rs.14,12,642 was claimed on the basis of advise of the tax consultant supported by tax audit report was not found to be false on untrue, we are of the view that there is no concealment or furnishing of inaccurate particulars on the part of the assessee. This view also finds support from the judgment of Hon'ble Rajasthan High Court in Chandra Pal Bagga vs ITAT &Anr (2003) 182 CTR (Raj) 185 : (2003) 261 ITR 67 (Raj) wherein it has been held "when the 35 assessee has disclosed the transaction which is the basis for capital gains tax, but that cannot be a case of penalty u/s 271(1)(c ) of the IT Act, 1961. If it has claimed any exemption after disclosing the relevant basic facts and under ignorance of the provisions of the Act of 1961, and not offered and under ignorance exemption after disclosing the relevant basic facts and under ignorance of the provisions of the Act of 1961 and offered that amount for tax in such cases, penalty should not be imposed....". In this view of the matter and keeping in view the ratio of decisions relied on by the learned counsel for the assessee the penalty imposed by the AO and sustained by the learned CIT(A) is deleted. The grounds taken by the assessee are, therefore, allowed."
19. Similarly, in the present case, all the details and complete particulars regarding transfer of fixed assets of assessee company to its holding company and as to why the short term capital gain arising from said transfer has not been offered to tax has been clearly disclosed in the annual audit report, tax audit report and return of income filed by the assessee. All the particulars regarding holding of shares of Assessee Company by holding company were duly furnished in the course of assessment proceedings. There is no allegation by the AO that assessee has furnished any inaccurate 36 particulars as to the transfer of plant and machinery by assessee company to its holding company, and as to the pattern of share holding of assessee company by holding company. The assessee's claim has been merely rejected for the technical reason that holding company of the assessee company did not held 100% share capital of the assessee company but it was holding 99.64% of share capital of the assessee company. There is not much difference between the 100% of share holding and actual share holding of 99.64% held by holding company, therefore, in the present case, the assessee has been able to discharge its burden by showing that assessee has made the claim on a bonafide belief based on advise of the tax consultant, and all the particulars relating to the claim were duly and fully disclosed by the assessee voluntarily during the assessment proceedings. We are, therefore, of the view that though the penalty proceedings u/s 271(1)(c) is a civil liability and the revenue is not required to prove willful concealment on the part of the assessee, the assessee has been able to discharge its burden that lay upon it under the provisions of Explanation 1 to Section 271(1)(c) of the Act inasmuch as the assessee has been able to make out a case that the claim has been made bonafidely on the 37 basis of legal advise and all the particulars thereto were duly and fully disclosed by the assessee, and, therefore, mere because the assessee's claim has been rejected under the provisions of law that by itself cannot be a basis to levy penalty u/s 271(1)(c) of the Act.
20. In this connection, we may rely upon the decision of Hon'ble Supreme Court in the case of ACIT vs Reliance Petroproducts P. Ltd., where it has been held that so long as assessee has not concealed any material fact or the factual opinion given by him has not found to be incorrect, he will not be liable to imposition of penalty u/s 271(1)(c), 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. In the present case, the assessee's explanation is found to be bonafide and all the material fact or factual opinion given by the assessee have not been found to be incorrect and, therefore, the decision of Hon'ble Supreme Court in the case of Reliance Petroproducts P. Ltd. (supra) will squarely apply to the present case.
38
21. Now, we shall deal with a decision of Hon'ble jurisdictional High Court of Delhi in the case of CIT vs Escorts Finance Ltd. (2009) 226 CTR (Del) 105 where assessee's claim of deduction u/s 35D was not found to be based on a bonafide error and, therefore, penalty was upheld. In that case, the claim u/s 35D was not at all maintainable even by any stretch of imagination inasmuch as assessee was a finance company, who claimed deduction u/s 35D of the Act, though deduction u/s 35D is only applicable to industrial company. Therefore, no bonafide advise could be given to finance company to claim deduction u/s 35D of the Act, and in that situation, penalty was upheld. However, in the present case, only one of the conditions that holding company must hold whole share capital of assessee company is not satisfied as it hold shares only to the extent of 99.64%, which has not much difference than the 100% of share capital, particularly in view of the fact that the balance 0.36% of share capital was being held by the directors of holding company and their relatives. Therefore, in the present case, the bonafide advise given by tax auditor cannot be said to be totally absurd and unimaginable.
39
22. At this stage, a useful reference may be made to a decision of Hon'ble Delhi High Court in the case of CIT vs Zoom Communication P. Ltd. (2010) 40 DTR (Del) 249 where the claim made by the assessee about the deduction of income-tax paid and deduction on account of certain equipment written off was disallowed and the assessee's explanation that the claim was made due to oversight was not found plausible, and penalty levied u/s 271(1)(c ) of the Act was upheld by the Hon'ble High Court. In that case, it was observed by the Hon'ble High Court that it was not the case of the assessee that it was advised that the amount of income-tax paid by it could be claimed as revenue expenditure. It was also not the case of the assessee that deduction of income-tax paid by it was a debatable issue. No advise was claimed by the assessee even with respect to the amount claimed as deduction on account of certain equipment have not become useless and have not written off. It was also not the case of the assessee that it was under a bonafide belief that these two amounts can be claimed as revenue expenditure. In that case, the assessee, in fact, out rightly conceded before the AO that these amounts could not have been claimed as revenue deduction and the only plea taken by the 40 assessee was that it was due to oversight. The Hon'ble High Court did not accept the case of the assessee that the claim was made due to oversight in the absence of any legal advise given by any auditor or other tax expert that such claim could be made. However, in the present case, the assessee has been able to establish that the claim of exemption u/s 47(v) of the Act has been made on the basis of the legal advise given by the Tax Auditor/Tax Consultant. The assessee has also explained that the circumstances under which the assessee entertained a bonafide belief that assessee's case was covered by Section 47(v) of the Act. All the particulars relating to the claim of exemption u/s 47(v) were duly furnished by the assessee before the AO. Though, there was a loss as per book value, the assessee has disclosed in the audit report that there was a short term capital gain on the basis of WDV as per Income-tax Act. In other words, as against the loss on sale of assets recognized in the books of accounts, the assessee worked out the short term capital gain voluntarily after adopting the WDV of assets as per Income-tax Act, which was lower than book value recorded in the books. Therefore, the fact that there would be a short term capital gain as against loss shown in the books has been duly 41 disclosed by the assessee in the audit report itself, and thus, it is not a case where assessee has concealed any material fact or the factual opinion relating to the transfer of fixed assets by assessee company to its holding company. The assessee has claimed the amount as exempted as per advise given by the Tax Consultant and that could be a bonafide basis on which the claim was made. Therefore, as discussed above, the assessee has been able to discharge its burden that lay upon it under Explanation 1 to Section 271(1)(c ) of the Act. As a result thereof, no penalty u/s 271(1)(c) is leviable.
23. Before parting with the issue, we may observe that the assessee made the claim on the basis of advise of the accountant is not found to be false. The only reason given by learned CIT(A) in rejecting assessee's this plea is that since final accounts and return of income was verified and signed by the directors of the assessee company, the plea that computation was made by accountant would not be of any help. In other words, it is not disputed by the department that the computation was made by the accountant but since it was signed and verified by the directors of the company, the same cannot be held a bonafide plea for the purpose of penalty 42 u/s 271(1)(c) of the Act. This approach of the learned CIT(A) is, in our considered view, is not found to be convincing inasmuch as in the present case, the assessee was totally dependent upon his tax consultant and the accountant, and on the basis that the assessee made the claim in the return of income. Therefore, it is a case where a bonafide claim was made on the basis of advise of accountant or tax consultant, which would absolve the assessee from penalty leviable u/s 271(1)(c) of the Act.
24. In the light of the discussions made above, we, therefore, set aside the orders of the authorities below and cancel the penalty levied in the present case.
25. In the result, appeal filed by the assessee is allowed.
26. Order pronounced in the open court on 31st August, 2010.
(A. K.GARODIA) (C.L. SETHI)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 31st August, 2010
Vijay
43
Copy to:
1. Appellant.
2. Respondent.
3. CIT
4. CIT(A)-XVII, New Delhi.
5. DR Assistant Registrar