Income Tax Appellate Tribunal - Delhi
Dcit, New Delhi vs Maharashtra Seamless Ltd.,, New Delhi on 13 June, 2018
INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "C": NEW DELHI
BEFORE SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER
AND
SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER
ITA No. 6458/Del/2015
(Assessment Year: 2009-10)
DCIT, Vs. Maharashtra Seamless Ltd,
Circle-16(1), Plot No. 5, 2nd Floor, Pusa
New Delhi Road, New Delhi
PAN: AAACM0511B
(Appellant) (Respondent)
Revenue by : Shri Sajnit Singh, CIT DR
Assessee by: Shri Ved Jain, CA
Date of Hearing 26/03/2018
Date of pronouncement 13/06/2018
ORDER
PER PRASHANT MAHARISHI, A. M.
1. This is an appeal filed by the revenue against the order of the ld CIT(A)-
6, New Delhi dated 15/09/2015 for the Assessment Year 2009-10. The ld CIT(A) has deleted the penalty u/s 271(1)(c) of the Income Tax Act, 1961 levied by the ld AO vide order dated 24.12.2014. Subsequently, rectified u/s 154 of the Act 21.08.2015. According to the rectified order u/s 154 the total penalty was revised to Rs. 18,59,95,055/- against the original penalty levied at Rs. 1,86,50,956/-.
2. The revenue has raised the following grounds of appeal:-
"1. Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) is justified in not upholding the penalty order passed by the Assessing Officer (the AO) u/s 271(1)(c) of the Income Tax Act, 1961 (the Act) amounting to Rs. 18,59,95,055/- in respect of the additions made by the AO pertaining to patently wrong claims of the assessee relating to encashment of bank guarantee, claim of loss on account of Mark to Market Transaction and claim of loss on foreign exchange?
2. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is justified in setting aside the penalty order u/s 271(1)(c) of the Act without considering provisions of Explanation 1 to Section 271(1)(c) of the Act?
Page | 1 DCIT Vs. Maharashtra Seamless Ltd, ITA No. 6458/Del/2015 (Assessment Year: 2009-10)
3. Whether on the facts and circumstances of the case and in law, the Ld. CIT (A) is justified in deleting the penalty u/s 271(1)(c) of the Act on disallowances made by the AO on account of claim of loss on account of Mark to Market Transaction amounting to Rs. 27,90,59,000/- and claim of loss on foreign exchange amounting to Rs. 18,28,67,127/- without considering a fact that as per assessee‟s own admission, these claims were not allowable during year under consideration?
4. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is justified in not upholding the penalty order u/s 271(1)(c) of the Act by ignoring ratio dicidendi as upheld by Hon‟ble jurisdictional High Court in the case of CIT vs. M/s. Zoom Communication Pvt. Ltd. (2010) 327 ITR 510 (Delhi)?
5. That the order of the Ld. CIT(A) is erroneous and is not tenable on facts and in law."
3. Though the grounds of appeal are four, however, the only grievance of the revenue is that penalty is levied by the AO, which has been deleted by the ld CIT(A).
4. Brief facts of the case shows that the assessee filed return of income 29.09.2009 at Rs. 3631342690/-. Three disallowances were made by the ld AO which are the issues in levy of penalty. The assessee filed appeal before the ld CIT(A) who confirmed the addition in dispute. Thereafter, the assessee preferred an appeal before the coordinate bench who deleted the addition on account of encashment of bank guarantee of Rs. 85279100/-. With respect to one more addition regarding the disallowances of notional loss on foreign exchange at Rs. 18.28 crores claimed by the assessee on actual basis, 154 proceedings the ld AO himself stated that it is allowable in Assessment Year 2008-09 and not in Assessment Year 2009-10. Therefore, in that disallowance only dispute is with respect to year in which it is allowable as deduction. The third issue is with respect to disallowance of loss on account of mark to market transaction. The above transaction related to hedging contract on account foreign exchange fluctuation. The ld AO for disallowance complied the CBDT instruction dated 23.03.2010 which was not available at the time of Page | 2 DCIT Vs. Maharashtra Seamless Ltd, ITA No. 6458/Del/2015 (Assessment Year: 2009-10) filing of return of income. Therefore, on these three addition which the ld AO levied the penalty. The ld CIT(A) deleted the same.
5. The ld DR relied upon the orders of the ld AO wherein, the ld AR submitted a written submission which is as under:-
"1. This is revenue‟s appeal filed against the order passed by Ld. CIT(A) in which the penalty amounting to Rs. 18,59,95,055/- levied by the AO on the following additions amounting to Rs. 54,72,05,227/- made by the AO was deleted.
(i) Addition on account of Rs.8,52,79,100/-
Encashment of bank guarantee
(ii) Disallowance on account of loss of Rs.27,90,59,000/-
market to market transaction
(iii) Disallowance of notional loss Rs. 18,28,67,127/-
Pertaining to earlier years Total Addition on which the penalty levied Rs.54,72,05,227/-
2. At the outset, it is submitted that the addition of Rs.8,52,79,100/-
made by the AO on account of encashment of bank guarantee was deleted by the Hon‟ble ITAT vide order dated 28/06/2017 in ITA No 2479/D/2014 (PB Pg. 143, Relevant findings are at Para 8 Internal Page 8, PB Pg 150). Since the addition on which penalty has been levied was deleted by the Hon‟ble ITAT. penalty on such addition does not survive.(K. C. Builders v. Asst. CIT [2004 (1) TMI 7 - SUPREME Court). Thus, penalty levied by the AO on this issue need to be deleted.
3. The second issue is regarding penalty on the disallowance of claim of loss on account of marked to market transaction amounting to Rs.27,90,59,000/-
During the year under consideration assesse company has claimed Marked to Market loss amounting to Rs.27,90,59,000/- on the hedged contract on account of foreign exchange fluctuation. During the assessment proceedings Ld. AO has applied instruction No. 03/2010 dated 23/03/2010 issued by CBDT and disallowed loss claimed by the assesse treating the such loss as contingent in nature and thus to be allowed on actual basis.
After the order passed by the Ld. AO accepting the legal position, the assesse revised its return within the time limit for revising Page | 3 DCIT Vs. Maharashtra Seamless Ltd, ITA No. 6458/Del/2015 (Assessment Year: 2009-10) return u/s 139(5) for the subsequent assessment year i.e.,AY 2010- 11 and has claimed such loss which was disallowed in AY 2009-10 of Rs. 27,90,59,000/- which is evident from (PB Pg. 49) The said claim was accepted by the AO in the assessment order passed u/s 143(3) for the AY 2010-11 (PB Pg. 52-63) as is evident from the page No. 62.
It is to be noticed that the instruction dated. 23/03/2010 relied on by the Ld. AO came after the due date of filing of return for the AY 2009-10 which is 30/09/2009 in the present case. Thus, at the time of filing of return, that instruction was not in existence which proves that assessee has bonafide claim at the time of filing of return of income.
Further, the penalty is levied on account of concealment of income, however, since the claim was admitted in the next year by the AO, there is no scope of concealment of income also.
Thus it is clear from the above facts, that AO himself belief that such loss claimed by the assessee is allowable and the only issue is the year of allowability of such loss after the issuance of instruction and thus the penalty should not be leviable.
4. Third issue is regarding the disallowance of notional loss of foreign exchange amounting to Rs.18,28,47,127/- claimed by the assessee on actual basis treating the same to be pertaining to the previous year.
During the AY 2008-09, assessee company has incurred a foreign currency loss of Rs. 18,28,47,127/- and the same loss being notional in nature was added by the assessee while filing its return of income for the AY 2008-09 (PB Pg 41). The assessee claim the same in AY 2009-10. However, Ld. AO in the impugned assessment year AY 2009-10 has disallowed the claim treating the same pertaining to preceeding year.
Thereafter, assessee moved the application for rectification u/s 154 of the Act before the AO to allow the claim in AY 2008-09 since Id. AO himself held that the same pertains to AY 2008-09 and not allowable in AY 2009-10 Then Ld. AO disposed of the application by passing a rectification order under section 154/143(3) of the Income tax Act dated 21/01/2013 (PB Pg.44-46) for the AY 2008-09 in allowed such loss in AY 2008-09. The assessee has himself added back the claim in AY 2008-09 which was subsequently allowed by AO by passing order u/s 154 of the Act clearly shows that the issue here is only in respect of different opinions and assessee is under the bonafide Page | 4 DCIT Vs. Maharashtra Seamless Ltd, ITA No. 6458/Del/2015 (Assessment Year: 2009-10) belief that the claim is allowable in the AY 2009-10 whereas AO allowed the same in AY 2008-09.
Further, the penalty is levied on account of concealment of income, however, since the claim was admitted in the preceding year by the AO, by passing order u/s 154/143(3) of the Act, there is no scope of concealment of income also.
In the present case, this notional loss claimed by the assessee is due to reinstatement of his assets and liabilities. The loss has been itself disallowed by the assessee and has been adjusted by it in the next year. However, since Ld. AO himself of the view that the loss is allowable in AY 2008-09 only, he allowed the claim of the assessee in AY 2008-09.
The fact that the assessee itself had already taxed such claim in AY 2008-09 at the time of filing of return in AY 2008-09. Thus, This is a clear case of bonafide mistake
5. In the present case, under both the issues the assessee had a bonafide belief that the claim is available in the impugned assessment year. The AO also admitted the claims made by the assessee. Thus, it is proved that there is no concealment of income. Thus, merelythe disallowance has been made itself cannot be ground for levying the penalty. Reliance is being placed on the judgment of Hon‟ble Supreme court in the case of CIT v. Reliance Petroproducts (P.) Ltd. [2010] 189 Taxman 322/322 ITR 158. In the said case, the apex court has made it very clear that the disallowance of a claim or a wrong claim made by the assessee, ipso facto, do not amount to furnishing of inaccurate particulars or thereby concealment of income. Further reliance is placed on the following judgements:
(ii) Shervani Hospitalities Ltd. v. CIT [2013] 261 CTR 449 (Delhi)
(iii) CIT v. Dharampal Premchand Ltd. [2011] 329 ITR 572 (Delhi)
(iv) CIT v. Societex [2013] 212 Taxman 73 (Delhi) (Mag.)
(v) Karan Raghav Exports (P.) Ltd. v. CIT [2012] 349 ITR 112 (Delhi) (Mag.)
6. Moreover, the notice issued u/s 271 r.w.s. 274 does not specify the limb under which the penalty was levied. In this regard, it is submitted that it is a well settled law, the AO, while issuing notice u/s 274 read with section 271 of the Act, has to mention as to under which limb of the Act he is levying penalty on the assessee whether for concealment or furnishing of inaccurate particulars. Therefore, entire penalty proceedings stand vitiated if the notice itself is not in accordance with law. Reliance in this regard is placed Page | 5 DCIT Vs. Maharashtra Seamless Ltd, ITA No. 6458/Del/2015 (Assessment Year: 2009-10) on the judgment of Hon‟ble Karnataka High Court in the case of CIT &Ors. vs. M/s Manjunatha Cotton and Ginning Factory &Ors. [2013] 359 ITR 565, wherein the Hon‟ble Court has held as under:
"50. A reading of Section clearly indicates that the assessment order should contain a direction for initiation of penalty proceedings. The meaning of the word direction is of importance. Merely saying that penalty proceedings are being initiated will not satisfy the requirement. The direction to initiate proceedings should be clear and not be ambiguous. It is well settled law that fiscal statutes are to be construed strictly and more so the deeming provisions by way of legal fiction are to be construed more strictly. They have to be interpreted only for the said issue for which it has deemed and the manner in which the deeming has been contemplated to be restricted in the manner sought to be deemed. As the words used in the legal fiction or the deeming provisions of Section 271 (1B) is Direction, it is imperative that the assessment order contains a direction. Use of the phrases like
(a) penalty proceedings are being initiated separately and (b) penalty proceedings under Section 271(1)(c) are initiated separately, do not comply with the meaning of the word direction as contemplated even in the amended provisions of law. The direction should be clear and without any ambiguity.
The word „direction‟ has been interpreted by the decision of the Apex Court in the case of RAJENDRANATH reported in 120 ITR pg.14, where it has been held that in any event whatever else it may amount to, on its very terms the observation that the ITO is free to take action, to assess the excess in the hand of the coowners cannot be described as a direction. A direction by a statutory authority is in the nature of an order requiring positive compliance. When it is left to the option and discretion of the ITO whether or not take action, it cannot be described as a direction.
51. Therefore, it is settled law that in the absence of the existence of these conditions in the assessment order penalty proceedings could not be proceeded with. The proceedings which are initiated contrary to the said legal position are liable to be set aside."
7. The above principle laid down by the Karnataka High Court has been further affirmed by the Apex Court in the case of CIT &Anr. Vs. M/s SSA‟s Emerald Meadows in CC No. 11485/2016 dated 05.08.2016.
8. Further reliance in this regard is placed on the following judgments:
Page | 6 DCIT Vs. Maharashtra Seamless Ltd, ITA No. 6458/Del/2015 (Assessment Year: 2009-10) • ITAT Delhi in the case of Duli Chand Sharma Vs ITO in ITA No. 4624/Del /2016 dated. 21.3.2017 • ITAT Delhi in the case of Sunstar Exposition P Ltd Vs ITO in ITA No, 4869/Del/2012 dated. 12.4.2017 • ITAT Delhi in the case of Agarwal Developers (P) Ltd. vs. ITO in ITA No. 1166/Del/2013 dated 27.07.2016 • ITAT Delhi in the case of Promain Ltd. vs. ACIT in ITA No. 5838/Del/2013 dated 25.04.2016
9. Therefore, in view of the above judgments, the order passed by the AO levying penalty on the assessee needs to be quashed in the absence of any valid initiation itself."
6. We have carefully considered the rival contentions and also perused the orders of the lower authorities. The ld CIT(A) has dealt with this penalty order of the ld AO as under:-
"The appeal has been filed against the assessment order passed by the Assistant Commissioner ol Income Tax. Range - 6, New Delhi under section 271(1 )(c) of the income Tax Act. 1961 for the assessment year 2009-10.
The return of income was filed on 29-09-2009 declaring total income of Rs.363,13.42.690/-. The case was selected for scrutiny and the Id. AO made following disallowances as per the Assessment Order:
a. Disallowance on account of Contingent Liability amounting to Rs.8,52,79.100/'-.
b. Disallowance on account of Mark to Market transactions amounting to Rs.27,90,59,000/-
c. Disallowance of Loss amounting to Rs. 18,28,67,127/-
3. a) Aggrieved appellant filed appeal before the CIT(A).
The Id. CIT(A) vide order dated 18.02.2014 in appeal no. 131/11-12 confirmed the addition at SI. No. 1 by holding as under (PB Page No. 226):-
"The main issue in this case is whether under the facts and circumstances of the case, the encashment of BG by IOCL is a contingent liability or ascertained liability. Hence, case laws cited are not applicable to the issue under examination. On this issue, the arguments provided by appellant are very Page | 7 DCIT Vs. Maharashtra Seamless Ltd, ITA No. 6458/Del/2015 (Assessment Year: 2009-10) weak and AO's findings are more relevant. The very fact that the appellant has not accepted the adjustment of BG and filed a counter claim establishes that it is a contingent liability as per AS-29. There is no agreement between IOCL and the appellant regarding expenditure of Rs. 85279100 which is in the nature of unascertained liability. In view of this, the addition made by AO is confirmed and the ground of appeal is dismissed.
b) Against the second addition i.e. disallowance of Rs.27,90,59,000/- on account of marked to market losses, the same was not adjudicated on the plea of the appellant that the issue has been considered by AO under section 154.
c) Similarly the third addition of Rs. 18,28,67,127/- on account of Disallowance of foreign exchange loss was not adjudicated on the appellant plea that the AO has allowed this amount vide order under section 154 dated 21.01.2013.
After receiving the order of Id. CIT(A), the Id. AO started penalty proceedings under section 271(1 )(c). After considering the explanation of the appellant, the Id. AO levied penalty total additions of Rs.54,72,05,227/- i.e. the additions made as per the assessment order dated 28.12.2011 for assessment year 2009-10. The AO in the penalty order has stated that minimum penalty (equal to hundred percent of tax sought to be evaded) is hereby imposed upon the assessee under section 271(1 )(c) of the Act with the prior approval of ADIT, Range-16 New Delhi. The penalty amount hover was computed as Rs. 1,86,50,956/-. It was noted that there was a mismatch in the computation of the amount of penalty.
Subsequently, the AO noted the discrepancy in the amount of penalty of Rs. 1,86,50,956/- and has passed an order under section 154/271(1)(c) dated 21.08.2105, of the l.T. Act, 1961 whereby the penalty amount has been rectified as Rs. 18,59,95,055/- being equal to hundred percent of tax sought to be evaded. This order has been submitted by the A/R of the appellant during the course of hearing.
CIT(A)‟S DECISION Ground No. 1, 2 are general in nature and are covered by other grounds of appeal. Hence not separately adjudicated upon.
Grounds Nos. 6, 7, 8 & 9 postulate the general objection of the assessee as to whether addition itself is tenable in law, whether there is concealment of income or furnishing of Page | 8 DCIT Vs. Maharashtra Seamless Ltd, ITA No. 6458/Del/2015 (Assessment Year: 2009-10) inaccurate particulars and whether penalty proceedings are independent proceedings. These issues / grounds are adjudicated separately with reference to penalty on each addition.
Ground No.3 relates to penalty u/s. 271(1)( c ) on the addition of 8.53 crores relating to encashment of bank guarantee.
Furnishing of bank guarantee by assessee in favour of IOCL w.r.t contract for supply of seamless pipes The assessee is a manufacturer of Seamless and ERW pipes. Indian Oil Corporation Ltd (Hereinafter referred to as „IOCL ) floated a tender no. PLM/CHBPL/07/14 for purchase of ERW Pipes. MSL in its normal course of business participated in the above tender with a view to supply pipes, get turnover & consequently earn profits. The above said tender was allotted to MSL and subsequently Letter of Intent, dated 09.04.2008 along with Purchase order, dated 22.04.2008 was issued to MSL. As per the terms of the above agreement (Clause 4.19.0 Pg No 143 of Paper book) MSL was liable to furnish a bank guarantee for 10% of Order value (Rs. 85,27,91,043/-) amounting to Rs. 8,52,79,100/- and accordingly MSL furnished a Bank guarantee numbered 316020213313-HP dated 13.05.2008 through its Banker namely Standard Chartered Bank.
Asssessee failing in quality parameters - cancellation of contract by IOCL.
IOCL "We have every reasons to believe that MSL is presently neither in a position to meet the quality parameters for Grade 70 pipes nor are in a position to meet the scheduled delivery requirement. "
Subsequently IOCL initiated action to procure the goods from some other alternative source at the risk & cost of M/s Maharashtra Seamless Ltd.
IOCL raising a claim on assessee and invoking bank guarantee.
IOCL raised a claim on MSL for the difference in price amounting to Rs. 17,98,48,063.63/- as per clause 4.23.3 of the purchase order vide letter, dated 29.11.2008 (PB Page No! 61). Subsequently IOCL issued letter, dated 01.12.2008 (PB Page Nol62-163) to bank namely Standard Chartered Bank for encashment of Bank Guarantee of Rs. 8,52, 79,100/-
Page | 9 DCIT Vs. Maharashtra Seamless Ltd, ITA No. 6458/Del/2015 (Assessment Year: 2009-10) in part consideration of the above said claim. The bankers of the appellant honored the claim, paid the amount of Bank guarantee to IOCL and debited the same to the appellant.
The appellant lodging arbitration proceedings and mention of the same in audit report.
The aforesaid facts were disclosed in the Balance Sheet in its Notes to Accounts. Notes to audited accounts are placed at PB page no.23 and the same is reproduced as under:
"Indian oil Corporation Ltd. (IOCL) had raised a claim of Rs. 179,848,,064/- during the financial year 2008-09 & against the above mentioned claim a performance bank guarantee of Rs. 85,279,100/- was given to IOCL, 1which was realized by them, and an equivalent amount is charged in the Profit & Loss Account in financial year 2008-09. The matter is still under dispute and arbitration proceeding is going on. Any further demand, if any, will be provided for on the date offinal settlement. "
The relevant extracts of the assessment order on page no.2 & 3 are as under:
"3. Subsequently IOCL terminated the contract vide letter dated 17.09.2008 alleging the quality of the bare pipes manufactured by MSL and also believed that MSL was neither in a position to meet the quality parameters for the bare pipes nor in a position to meet the delivery schedule.
4. Thereafter IOCL Proceeded to procure goods from some other alternative source. Since the price of goods had gone up by then, IOCL raised a claim on MSL vide letter dated 29.09.2008for the difference in price amounting to Rs 17,98,48,064/-
5. It is important to note that the assessee did not accept the claim of Rs. 17,98,48,064/- by IOCL and filed a claim before the arbitrator to the tune of Rs.2,04,09,02,954/- in respect of various damages suffered by the assessee, which included a claim for loss and damages on account of the unlawful encashment of Bank Guarantees of Rs. 8,52,79,100/- and Claim for loss and damages towards interest and commission charges towards the bank guarantees of Rs.4,79,09, 798/-
Page | 10 DCIT Vs. Maharashtra Seamless Ltd, ITA No. 6458/Del/2015 (Assessment Year: 2009-10)
6. Subsequently IOCL issued letter dated 01.12.2008 to the bankers of the assessee company for encashment of bank guarantee of Rs. 8,52, 79,100/- in part consideration of the above said claim. The bankers of the assessee paid the amount of bank guarantee to IOCL.
7. The assessee treated the total claim of IOCL of Rs. 17,98,48,064/- as a contingent liability as admitted in its notes to accounts to the audited financials, but claimed the amount of bank guarantee encashed as a revenue expenditure on the ground that the liability to that extent has accrued to the assessee.
The A.O. after elaborate discussions as given on page no. 3 to 22 of the Assessment Order concluded at page no, 20 of 22 of the Order as under :-
"Conclusion:
In view of the above discussions and the legal interpretations, the claim of Rs.8,92, 74,367/- on account of encashment of bank guarantee by IOCL is disallowed as the encashment of the same is against an admitted contingent liability. Further the encashment itself has been challenged before the arbitrator and therefore is subject to uncertainty in future. This gives it a colour of contingent liability which is not allowable as per the Income Tax Act. "
Definition of contingent liability As per AS- 29 " Provisions, Contingent Liabilities and Contingent " issued by the Institute of Chartered Accountants of India and notified under the Income Tax Act, 1956, "Contingent liability" is defined as under:
A Continsenl Liability is :
(a) a possible obligation that arises from past events and the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise;
Or
(b) a present obligation that arises from past events but is not recognized because:
Page | 11 DCIT Vs. Maharashtra Seamless Ltd, ITA No. 6458/Del/2015 (Assessment Year: 2009-10)
(i) it is not probable that an outflow of resources embodying economic benefit will be required to settle the obligation: or
(ii) a reliable estimate of the amount of the obligation cannot be made.
With encashment of bank guarantee - contingent liability assuming the character of ascertained liability as per assessee With regards to the aforesaid the liability on account of claim raised by IOCL to the extent of amount recovered by encashment of Performance Bank guarantee could not be said to be contingent/unascertained liability because the claim was actually recovered from MSL and the same was in agreement to terms of the purchase order. The said liability was contingent, no doubt, when the contract for sale was entered into by the assessee & bank guarantee was issued thereon, depending on the contingency of the failure of the assessee to fulfill the terms of the contract. That contingency had happened and the liability, therefore, became a liability in present. The liability also could not be said to be unascertained because the exact amount of the claim and Bank Guarantee which was encashed was known and fixed.
The fact that the assessee contested his liability will not alter the legal position at all. Once the liability or a loss accrues and is ascertained or is ascertainable, it becomes an allowable deduction at that point of time. It is significant to note that the assessee's attempt is just a preventive one for balance claim payable. The balance claim since has not been provided by the assessee and accordingly disclosed in the notes to accounts. Furthermore the legal opinion sought by the company on the issue categorically says that the recoverability of the amount of Bank guarantee encashed by IOCL is negative and accordingly the company has booked the same as expense in its books of accounts. (A copy of the same is enclosed for your kind perusal).
It is further more important to mention that the liability of Rs.8.53 crores has been paid by the appellant under a contract and thus the same is definitely an allowable expenditure.
The appellant filed an appeal before the Ld. CIT(A) against the disallowance of Rs 8,52,79,800 paid to IOCL for breach of contract.
Page | 12 DCIT Vs. Maharashtra Seamless Ltd, ITA No. 6458/Del/2015 (Assessment Year: 2009-10) Learned CIT(A) decided as under:
"6.3 The reason given by the AO and the submission of the appellant are considered. The appellant in his submission has given emphasis on the issue that encashment ofBG is a trading loss hence it should be allowed. For this, the appellant relied on various judicial decisions as mentioned in para 6.2 above. Llowever, all these judicial decisions are related to the issue whether encashment of BG is trading loss or not. The main issue in this case is whether under the facts and circumstances of the case, the encashment of BG by IOCL is a contingent liability or ascertained liability. Hence, case laws cited are no/ applicable to the issue under examination. On this issue, the arguments provided by appellant are very weak and AO's findings are more relevant. The very fact that the appellant has not accepted the adjustment of BG and filed a counter claim establishes that it is a contingent liability as per AS-29. There is no agreement between IOCL and the appellant regarding expenditure of Rs.85279100 which is in the nature of unascertained liability. In view of this, the addition made by AO is confirmed and the ground of appeal is dismissed.
From the above, the following facts emerge.
-There is a contract between assessee and IOCL for supply of pipes.
-IOCL raised a claim against assessee for failure to fulfill the terms of contract.
- IOCL also invoked the bank guarantee and collected 8.53 crores from the bank.
- The assessee went for arbitration.
- The amount recovered by IOCL was claimed by assessee as expenditure in P&L account.
- The AO disallowed the same treating it as contingent liability.
A claim made by assessee in ITR - whether can be treated as concealment of income.
The facts mentioned above show that there is a claim made by assessee regarding liability of Rs.8.53 crores.
Page | 13 DCIT Vs. Maharashtra Seamless Ltd, ITA No. 6458/Del/2015 (Assessment Year: 2009-10) The only dispute is whether it is contingent liability or ascertained liability.
Ground No.4 relates to penality on an amount of Rs.27.91 crores towards disallowance on account of loss on market to market transaction.
Factual matrix The assessee has offered income of Rs. 13,27,35,839/- on account of "Foreign exchange fluctuation (Net) " as is evident from Schedule No. 13, "Other Income " of annual accounts of the assessee. In computing this amount, Marked-to-market loss amounting to Rs.27,90,59,000/- on contracts that have not matured (open contracts) was adjusted.
Assessee‟s submission regarding justification of the claim Assessee submitted that this claim is as per AS-11 issued by the Institute of Chartered Accountants of India. The claim is also in line with the judgment of the Hon'ble Special Bench in the case of DC1T vs. Bank of Baharain & Kuwait (2010) 5 ITR 301 in ITA No. 4404 & 1883/Munt/2004 on identical issue.
In Para 47 of the judgment the Hon'ble 1TAT has held as under :-
"47. Now, we will consider the issue with reference to Accounting Standard -II (AS-11). The Hon‟ble Supreme Court in the case of Chellapali Sugar Mills, 98 ITR 167 and in the case of Woodward Governor of India P. Ltd (supra) observed that the accounting standards issued by the Institute of Chartered Accountants of India required that accounting policies must be governed by the principle of prudence. Accounting Standards are prepared by ICAI keeping in view of the principle of prudence and this principle has received judicial recognition. In other words, provisions should be made for loan liabilities and losses even though the amount cannot be determined with certainty and represents only the basic estimate in the light of available information. The Accounting Standard issued by ICAI which are mandatory for preparation of financial statements and have to be followed inasmuch as the deviation from the same is to be reported in the audit report. Section 145(2) gives power to the Central Government to notify the accounting standards to be followed by any class of assesses or in respect of any class of income. "
Again the Hon 'ble ITAT in Para 58 and 59 has concluded as under:-
Page | 14 DCIT Vs. Maharashtra Seamless Ltd, ITA No. 6458/Del/2015 (Assessment Year: 2009-10) "58. In view of the above discussion, we allow the assessee‟s appeal for the following reasons:-
i) A binding obligation accrued against the assessee the minute it entered into forward foreign exchange contracts.
ii) A consistent method of accounting followed by assessee cannot be disregarded only on the ground that a better method could be adopted.
iii) The assessee has consistently followed the same method of accounting in regard to recognition of profit or loss both, in respect of forward foreign exchange contract as per the rate prevailing on March 31.
iv) A liability is said to have cryslalised when a pending obligation on the balance sheet date is determinable with reasonable certainty.
The considerations for accounting the income are entirely on different footing.
v) As per AS-11, when the transaction is not settled in the same accounting period as that in which it occurred, the exchange difference arises over more than one accounting period.
vi) The forward foreign exchange contracts have all the trappings of stock-in trade.
vii) In view of the decision of Hon'ble Supreme Court in the case of Woodward Governor India (I) P.Ltd., the assessee's claim is allowable.
viii) In the ultimate analysis, there is no revenue effect and it is only the timing of taxation of loss/profit.
59. We, accordingly, hold that where a forward contract is entered into by the assessee to sell the foreign currency at an agreed price at a future date falling beyond the last date of accounting period, the loss is incurred to the assessee on account of evaluation of the contract on the last date of the accounting period i.e. before the date of maturity of the forward contract. "
The AO has disallowed the amount in view of CBDT Instruction No. 03/2010, dated 23-3-2010 by stating on Page 20/22 as under
"In view of the categorical Instructions of the CBDT on allowability of Marked-to- Market expenses, the claim of Rs.27,90,59,000/- on account of Marked-to-Market expenses is disallowed and added back to the income of the assessee. "
The AO disallowed the same stating that the loss would be allowed on actual settlement / conclusion of the contract. The assessee contention Page | 15 DCIT Vs. Maharashtra Seamless Ltd, ITA No. 6458/Del/2015 (Assessment Year: 2009-10) that the board circular is dated 23.03.2010 and is not applicable for assessment year 2009-10, was not accepted by the AO stating that the board instruction is clarificatory in nature and applies to all pending proceedings and further stated that this instruction was not referred to by the special bench of ITAT in the case of Bank of Bahirin and Kuwait.
Latest status regarding this disallowance.
The AO has allowed this amount as deduction in subsequent A. Y. 2010-
11. Ground No. 5 - Disallowance of Rs.18,28,67,127/- on of Foreign currency translation loss The assessee company has booked loss of Rs. 18,28,67,127/- on accrual basis in the annual accounts for the financial year 2007-08. The said loss being notional in nature was added back in the compulation of income at the time of filing return for assessment year 2008-09. The assessee company claimed the said loss while filing return for the current year i.e. assessment year 2009-10.
The AO, however, in the assessment order, under Para 2.4, Pane 21/22 has held as under:-
"A reference to the audited accounts show‟s that the same has been shown as a loss in immediately preceding assessment year. The said loss was a notional loss hence it should not have any bearing on the foreign exchange gain in this year as the foreign exchange gain this year is on actual realization. If the assessee claimed the loss in its audited accounts last year then the assessee has to correct that entry in that year itself and should have filed a revised return for claiming the bene fit of the said revised entry. If that mistake was committed by the assessee in the immediately preceding year then the same cannot be claimed by the assessee in this year in the computation of income. Therefore the notional loss computed in last year cannot be set off against actual foreign exchange gain of this year. "
Latest status regarding disallowance In line with the aforesaid observation of the learned AO, the assessee filed rectification application under section 154 pertaining to assessment year 2008-09. The DCIT vide its order, dated 21.01.2013 has allowed the loss of Rs.18,28,67,127/- in the precedins year i.e. assessment year 2008-09.
Gist of the above facts Penalty relating to addition of 8.53 crores relating to encashment of bank guarantee claimed as expenditure.
Page | 16 DCIT Vs. Maharashtra Seamless Ltd, ITA No. 6458/Del/2015 (Assessment Year: 2009-10) The dispute between the department and the appellant is that ‟whether it is contingent liability or ascertain liability, for the year under consideration.
Penalty relating to disallowance of 27.91 crores on account of loss on market to market transactions.
The disute between the department and the appellant is that whether it is allowable in this assessment year or in the year of contusion / settlement of contracts. This amount though disallowed by the AO in the present assessment year, has been allowed, by the AO in the subsequent assessment year i.e. AY 2010-11. Penalty relating to loss of 18.26 crores on account of foreign currency transaction.
The dispute between the department and the appellant is that whether it is allowable in this assessment year or in the earlier assessment year . This amount though disallowed by the AO in the present assessment year, has been allowed, by the AO in the earlier assessment year i.e. AY 2008-09.
Concealment of income / furnishing inaccurate particulars of income 3.3 Having examined the factual aspects relating to the imposition of penalty, it is now examined whether the impugned addition/disallowance made in the Assessment order in the case of the appellant attracts penal provisions u/s. 271(1 )(c) of the I.T. Act. The scheme of sec. 271(1 )(c) visualizes imposition of penalty when the assessee has concealed income or when the assessee has furnished inaccurate particulars of income.
(A) The expression „concealment of income‟ has not been defined in the Act, but the natural meaning of the expression „concealment‟ is „to keep from being seen, found, observed, or discovered‟. It would, therefore, follow that the expression concealment of income, in its natural sense and grammatical meaning, implies an income is being hidden, camouflaged or covered up so that it cannot be seen, found, observed or discovered.
(B) The expression „furnishing of inaccurate particulars of income‟ has also not been defined in the Act. In the context of „furnishing of inaccurate particulars‟, the expression „inaccurate‟ refers to 'not in conformity with the fact or truth‟. The expression „particulars' refers to „facts, details, specifics, or information about someone or something‟. Therefore, the plain meaning of the expression „furnishing of inaccurate particulars of income‟ implies furnishing of details or information about income which are not in conformity with the facts or truth.
(C) DEEMED PROVISIONS:-
Page | 17 DCIT Vs. Maharashtra Seamless Ltd, ITA No. 6458/Del/2015 (Assessment Year: 2009-10) In addition to these two situations, penalty can also be imposed, inter alia, when assessee is deemed to have concealed particulars of income under Explanation 1 to Sec. 271(1 )(c). A deeming fiction under explanation 1 to sec. 271(1 )(c) envisages two situations-(a) first, where in respect of any facts material to the computation of total income under the provisions of the Act. the assessee fails to offer an explanation or the explanation offered by the assessee is found to be false by the AO or the CIT(A); and, (b) second, where in respect of any facts material to the computation of total income under the provisions of this Act, the assessee is not able to substantiate the explanation and the assessee fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by the assessee.
Thus, the penalty under sec. 271 (1 )(c) is a penalty for concealment of income or for furnishing of inaccurate particulars, or, under the extended definition by the virtue of Explanation 1 to sec. 271(1 )(c), for a deemed concealment of income.
3.4 The facts of the present case are now tested vis-a-vis the above legal position to examine whether the present case is covered under the main part of the provisions or under the deeming provisions of Explanation 1 of section 271(1 )(c) or not.
Conclusions from the above facts.
The above facts, coupled with AO subsequent action for A Y 2008-09 and AY 2010-11 in allowing appealant claims shows that these are only claims made by the assessee for the current assessment year, whether they are acceptable to the revenue to be allowed or not. The AO in the penality order considered these claims as concealment of income, which is blatantly wrong.
A claim if not accepted cannot take the charater of concealment. A claim can at best be considered as furnishing of inaccurate particulars, if it is proved as or false claim and if made with malafide intention.
In order to establish that this was an incorrect claim, some concrete evidences have to be brought on record by the AO. The penalty cannot be imposed on presumptions and without concrete factual evidences. The disclosure in the return of income have been made by the appellant of all particulars necessary to compute income and the controversy has arisen only due to difference of opinion between the appellant and the AO.
Out of the three disallowances, two of them have been allowed by the AO himself in other assessment years.
Page | 18 DCIT Vs. Maharashtra Seamless Ltd, ITA No. 6458/Del/2015 (Assessment Year: 2009-10) In all the three cases, the department never disputed whether the expenditure was incurred or not. It was only disputing the propriety of claiming the expenditure in this assessment year.
From the above sequence of events, it is clear that the appellant is not covered by the main provision of section 271(1 )(c) and it cannot be conclusively said that the particulars furnished by the appellant in its return of income were inaccurate or that it had concealed the particulars of its income.
Now that the case of the appellant is found to be not covered under the main provisions of sec. 271(1 )(c), it would be necessary to examine the aspect of the deeming provisions of Explanation 1 to section 271 (1 )(c) which comes into play where in respect of any facts material to the computation of the total income of any person under this Act, (i) the assessee fails to provide an explanation, (ii) the assessee provides an explanation which is found to be false, and
(iii) the assessee provides an explanation which he fails to substantiate and he fails to prove that the explanation was bona fide and that all the facts necessary for the same and material for computation of income have been duly disclosed by the assessee.
The above explanation rendered by the appellant, is backed by the corroborative evidences. Considering the above explanations rendered by the appellant can be held to be in possession of bona fide explanation which a reasonable person can be expected to believe, particularly, since its is substantiated with some supporting evidences.
The basis and justification of levy of concealment penalty is to be decided in the facts and circumstances of each case. Undoubtedly, the Courts have held that where the issue is debatable or involves a matter of interpretation of complex legal provisions, or where the additions have been made on estimate basis without reference to any supporting materials/evidences, the assessee could not be held to be guilty of concealment.
The assessing officer never made any attempt in the penality proceedings to prove that the claim made by the assessee is false or made with malafide intention.
322 ITR 158 (SC)-RELIANCE PETROPRODUCTS PVT. LTD.
Incorrect claim - does not amount to furnishing in accurate particulars By no stretch of imagination can making an incorrect claim tantamount to furnishing inaccurate particulars. There can be no dispute that everything would depend upon the return filed by the Page | 19 DCIT Vs. Maharashtra Seamless Ltd, ITA No. 6458/Del/2015 (Assessment Year: 2009-10) assessee, because that is the only document where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. To attract penalty, the details supplied in the return must not be accurate, not exact or correct, not according to the truth or erroneous.
Where there is no finding that any details supplied by the assessee in its return are found to be incorrect or erroneous or false there is no question of inviting the penalty under section 27l(l)(c) . A mere making of a claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such a claim made in the return cannot amount to furnishing inaccurate particulars.
349 ITR 112 (Del)- KARAN RAGHAV EXPORTS P. LTD.
Disallowance of debatable claims - no penalty However, a distinction must be drawn betM‟een a false claim, which cannot be countenanced and claims which are made on the basis of legal provisions which are debatable and quite plausible. When a legal issue arises for consideration, which is debatable but the claim made by the assessee is not accepted, there is no justification to invoke the penalty provisions under section 271(l)(c) . Divergent legal views on legal interpretation of a statute can take place, but it is not necessary that there should be uniformity or consensus of opinion on the aspects of law. The assessee cannot be faulted and penalty should not be imposed because the assessee had taken a particular stand point, unless there are grounds or reasons to show that the assessee had not disclosed all the facts before the Departmental authorities concerned.
351 ITR 262 (Del)- JASWINDER SINGH AHUJA PENALTY -- CONCEALMENT OF INCOME -- FURNISHING INACCURATE PARTICULARS -- WHETHER INCOME FROM SALE OF STOCK OPTION ASSESSABLE AS SHORT-TERM CAPITAL GAINS OR AS LONG-TERM CAPITAL GAINS -- DEBATABLE ISSUE AT TIME OF FILING OF RETURN BY ASSESSEE -- NO PENALTY LEVIABLE -- INCOME-TAX ACT, 1961, s. 271(0(0 357 ITR 525 (Del)- SMT. NEENU DUTTA PENALTY -- CONCEALMENT OF INCOME -- FURNISHING INACCURATE PARTICULARS -- EMPLOYEES‟ STOCK OPTION SCHEME -- REVENUE TREATING GAINS NOT AS LONG-TERM CAPITAL GAINS BUT AS SHORT-TERM CAPITAL GAINS -- ASSESSEE SURRENDERING RIGHT TO CONTEST ISSUE ON CONDITION NO PENALTY WOULD BE IMPOSED -- WHETHER GAINS LONG-TERM OR Page | 20 DCIT Vs. Maharashtra Seamless Ltd, ITA No. 6458/Del/2015 (Assessment Year: 2009-10) SHORT¬TERM. A CONTENTIOUS ISSUE AT MATERIAL TIME -- NOT A CASE OF FURNISHING INACCURATE PARTICULARS OR CONCEALMENT OF INCOME -- NO PENALTY LEVIABLE -- INCOME- TAX ACT, 1961, s. 271(1 )(c) 357 ITR 665 (Del)- ELECTROLUX KELVENATRO LTD.
PENALTY -- CONCEALMENT OF INCOME -- NON-COMPETE FEE -- WHETHER CAPITAL OR REVENUE EXPENDITURE -- ISSUE DEBATABLE AND NOT FREE FROM DOUBT WHEN ASSESSEE FILING RETURN -- PENALTY COULD NOT BE IMPOSED -- INCOME-TAX ACT, 1961, s. 271(13(0 When the assessee makes claim for a deduction and disclosed all necessary facts relating to the same, this cannot be regarded as concealment even if the claim is rejected. As already mentioned, it is trite law that penalty proceedings are distinct from assessment proceedings and therefore, if any addition is made in the assessment year, it does not mean that the penalty will automatically be levied.
To sum up, therefore, by raising the bonafide legal claim in the return of income, even if the same is ultimately found to be non- acceptable, it cannot be said that income has been concealed or inaccurate particulars of income have been furnished. The appellant cannot be penalized for the consequences merely because the bonafide legal claim was made in the return of income, which was not accepted by the Tax Authorities or Appellate Authorities. I am, therefore, of the considered view that the case of the appellant cannot be said to be a case of "concealing particulars of income" or "furnishing inaccurate particulars of income".
7. On carefully consideration of the order of the ld CIT(A) and submission of the parties, it is apparent that penalty on the bank guarantee of Rs. 85279100/- encashed and claimed as deduction is already allowed by the coordinate bench, hence, addition itself is deleted. Therefore, on this sum penalty u/s 271(1)(c) cannot survive.
8. With respect to the disallowance of loss on foreign exchange of Rs. 18.28 crores. The only dispute is with respect to Assessment Year in which such loss is allowable. The claim of the assessee u/s 154 of the Act is that the same is allowable in Assessment Year 2008-09 and same is accepted by the ld AO the only dispute is that in which year same is allowable. The assessee originally claimed that in Assessment Year 2009-10 the ld AO Page | 21 DCIT Vs. Maharashtra Seamless Ltd, ITA No. 6458/Del/2015 (Assessment Year: 2009-10) allowed it u/s 154 of the Act for Assessment Year 2008-09. Therefore, it cannot be said that the assessee was not under the bona fide belief about the allowability of loss in Assessment Year 2009-10. In view this fact we do not find any infirmity in deleting the penalty on disallowance of notional loss of Rs. 18.28 crores.
9. Coming to last addition which is on account of loss of mark of market transaction on foreign exchange hedging contract disallowed by the ld AO on the basis of CBDT instruction dated 23.03.2010 which was not available to the assessee at the time of filing of the return of income. Such instruction was available only during the course of assessment proceedings. Till the time of instruction, there were several cases where it has been allowed as deduction as accrued allowability and not as contingent allowability. Where there are possible two views possible on an issue, penalty thereon cannot be levied. In view of the above facts we do not find any infirmity in the order of the ld CIT(A) in deleting the penalty u/s 271(1)(c) of the Act.
10. In the result the appeal of the revenue is dismissed.
Order pronounced in the open court on 13/06/2018.
-Sd/- -Sd/-
(SUDHANSHU SRIVASTAVA) (PRASHANT MAHARISHI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 13/06/2018
A K Keot
Copy forwarded to
1. Applicant
2. Respondent
3. CIT
4. CIT (A)
5. DR:ITAT
ASSISTANT REGISTRAR
ITAT, New Delhi
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