Madras High Court
Commissioner Of Income Tax vs M/S.Durr India Private Limited on 5 November, 2013
Author: T.S.Sivagnanam
Bench: Chitra Venkataraman, T.S.Sivagnanam
IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated : 05.11.2013 Coram The Honourable Mrs.Justice CHITRA VENKATARAMAN and The Honourable Mr.Justice T.S.SIVAGNANAM Tax Case (Appeal) No.403 of 2009 --- Commissioner of Income Tax, Chennai. ... Appellant -vs- M/s.Durr India Private Limited, Gowthami Towers, 2-A, 1st Street, Cenotaph Road, Chennai - 600 018. ... Respondent Tax Case Appeal filed under Section 260A of the Income Tax Act, 1961, against the order of the Income Tax Appellate Tribunal Madras 'A' Bench, dated 18.11.2008 in I.T.A.No.2802/Mds/2005. For petitioner : Mr.T.Ravikumar For Respondent : Dr.Anita Sumanth ORDER
(The Order of the Court was made by T.S.SIVAGNANAM, J.) This appeal by the Revenue is directed against the order passed by the Income Tax Appellate Tribunal (Tribunal) in I.T.A.No.2802/Mds/2005, for the assessment year 1998-99. The appeal has been admitted on the following substantial question of law:-
Whether on the facts and circumstances of the case, the Tribunal was right in holding that no penalty under Section 271(1)(c) was leviable on the assessee who had claimed a deduction of the liquidated damages provided for in the contract, even though there was no claim against it for the same?
Facts:-
2. The respondent/assessee filed its return of income on 30.11.1998, which was processed under Section 143(1)(a) of the Income Tax Act (Act). Subsequently, a notice under Section 148 of the Act was issued on 19.08.2002, proposing to reassess the income for the said assessment year. The assessment under Section 143(3) read with Section 147 of the Act was completed on 29.11.2002, disallowing the claim for provision for liquidated damages in respect of delays in supply of materials, amounting to Rs.74,50,000/-. The Assessing Officer thereafter issued a notice and initiated proceedings under Section 271(1)(c) of the Act. The assessee was called upon to clarify as to why penalty should not be imposed. The assessee submitted its reply vide letter dated 14.03.2005. Not satisfied of the reply, by order dated 17.03.2005, the Assessing Officer imposed penalty of Rs.26,50,000/-. Aggrieved by the assessment order dated 29.11.2002, the assessee preferred an appeal to the Commissioner of Income Tax (Appeals) and a separate appeal as against the order dated 17.03.2005, imposing penalty. With regard to the appeal filed against the assessment order dated 29.11.2002 (quantum appeal), after considering the contentions put forth by the assessee, by order dated 27.05.2003, the Commissioner of Income Tax (Appeals) dismissed the appeal. By order dated 05.10.2005, the appeal filed against the order dated 17.03.2005, imposing penalty was also dismissed. Aggrieved by both such orders, the assessee preferred appeals to the Tribunal in I.T.A.No.1702/Mds/2003, which is the quantum appeal and I.T.A.No.2802/Mds/2005, which is an appeal against the order confirming the penalty imposed. By common order dated 18.11.2008, the Tribunal dismissed the quantum appeal and allowed the appeal filed against the order of penalty. Aggrieved by such order, the Revenue has preferred this appeal before this Court.
3. Learned Standing counsel appearing for the Revenue contended that the Tribunal erred in deleting the penalty and the findings of the Tribunal that the assessee had not concealed any particulars either in its accounts or in other particulars, is an incorrect finding and the Tribunal ought to have seen that the assessee had wrongly claimed deduction on account of liquidated damages, when the contracting party had made no such claim. Further, it is contended that the Tribunal ought to have seen that the assessee chose to show the amount only in the year 2001-02, while claiming it as a deduction in the assessment year 1998-99, thereby choosing to offer to tax the amount in a year convenient to it and it was a clear case where penalty under Section 271(1)(c) is leviable. Learned counsel referred to the findings recorded by the first Appellate Authority and submitted that under the contract entered into between the assessee and M/s.Hyundai Motor India Ltd., (HMIL) the liquidated damages could be claimed only after 01.05.1998, whereas the assessee had calculated the alleged liquidated damages as on 31.03.1998 itself well before the liability accrue, which is sufficient to hold that the assessee is liable to penalty under Section 271(1)(c). Further, learned counsel submitted that the assessee has concealed its income and therefore, the order of the first Appellate Authority confirming the penalty, was perfectly justified. In this regard, reference was made to clause 10 of the Contract for Procurement, Supply and Erection entered into between the assessee and HMIL stating that HMIL shall have a right to claim penalty after 01.05.1998 and therefore, as on 31.03.1998, the question of claiming liquidated damages did not arise and therefore, the assessee could not have made provision for the said amount.
4. Per contra, the learned counsel appearing for the assessee submitted that the contract was a composite contract which required purchase of erecting of the paint shop for the automobile assembly equipment for HMIL. The counsel further stated that the assessee was responsible for all activities relating to procurement and supply of the materials to the site of the customer. The contract provided for handling fee for local content, supervision, fabrication, installation and commissioning assistance installation and as per the delivery schedule under clause 4.0 of the contract, dated 10.03.1997, the equipment shall be supplied between the delivery dates being April 1997 and July 1997. Clause 10 provided for penalty for late delivery subject to certain conditions that the HMIL would raise its claim only after 01.05.1998. Admittedly, there was delay in supply of equipment and therefore, the assessee was under the bonafide belief that HMIL being entitled to invoke clause 10 of the contract, which provided for payment of liquidated damages, if the delivery dates set forth in scope of supply for installation are not met due to reason attributable to supplier's (assessee) where force majeure is not involved it made a provision in its accounts on this liquidated damages. Further, reference was made to the various clauses of the contract more particularly clause No.1.7, which provided that the sub-contractor shall mean any person or firm or company (other than assessee) to whom any part of work had been entrusted by the assessee and the successors. Therefore, it is submitted that though the HMIL had placed orders directly to the suppliers, who effected supply in terms of the purchase order, the assessee was bound over and liable for liquidated damages in the event of failure to meet the delivery date as set forth in clause 4 of the contract. It is further submitted that the assessee for the financial year ended 31.03.1998, provided for a penalty for delayed supply of materials to their client HMIL, and it is an admitted fact that there was no delay in installation. The fact that there had been a delay in supply of materials was accepted by the first Appellate Authority while considering the quantum appeal in his order dated 27.05.2003. Further, it is submitted that the assessee never stated that HMIL had made a written claim for liquidated damages, however in view of the penal clause, clause 10.1 in the contract, the assessee bonafidely believed that it would be liable to liquidated damages and therefore, provided for the liability in its books of accounts, after computing the liability on delays upto 31.03.1998. Further, it is submitted that the delay in supply occurred due to the delay committed by the assessee in placement of orders, delay in approval of materials etc., and the sub-suppliers or sub-contractor were in no way responsible for the delay. It is further submitted that though HMIL could enforce the claim for liquidated damages under the contract only after 01.05.1998 as per clause 10.1, the liability to the assessee accrued as soon as the delay had occurred, though it is only after 01.05.1998, that the liability would be payable. It is further submitted that after it became clear that the provision for liquidated damages would not be payable, the assessee voluntarily had written back the provision in the books of accounts and offered it to tax in the assessment year 2001-02 and therefore, it is clear that the assessee had no malafide intention of concealing income, and infact, there was no escapement of income.
5. We have heard Mr.T.Ravikumar, learned counsel appearing for the Revenue and Dr.Anita Sumanth, learned counsel appearing for the assessee and carefully considered the submissions and materials available on record.
6. The contract entered into between the assessee and HMIL dated 10.03.1997, is a contract for procurement, supply and erection of automobile assembly equipment. In terms of clause 1.1.0, delivery date has been defined to mean the date of final acceptance i.e., 01.10.1998. Clause 2 deals with scope of supply, purchase and erection. The assessee has to procure the equipment as per the List in Scope of Supply from local Indian market in the name and on account of HMIL and act as a purchase agent with regard of purchasing of materials from Indian sub-suppliers. The Indian subsuppliers shall invoice directly to the HMIL and the assessee has to approve the invoices and release them for payment to the Indian sub-suppliers by HMIL. The total value for materials and fabrication is as specified in clause 2.1.1. The Contract price and terms of payment are as contained in clause 3.0. The first payment in terms of clause 3.3.1 being Rs.50,000,000/- was to be made by cheque within one week from the date of the order, against a bank guarantee, with a validity until 30th April, 1998. The second and third payment were to be made against the invoices raised by the assessee at different stages. The fourth payment was to be made after issuance of the final acceptance letter i.e., 01.10.1998, and the assessee was required to furnish a bank guarantee equivalent to 5% of the total value. The final payment as per clause 3.3.5 was payable at the end of warranty period i.e., 01.10.1999. Clause 4 deals with 'delivery' and the delivery ought to commence from April 1997 and concluded by 31st of July 1997 in terms of clause 4.1. Clause 10 deals with penalties for late delivery. In terms of clause 10.1, if the delivery dates set forth in scope of supply for installation are not met due to any reason attributable to the supplier's responsibility where force majeure is not involved, HMIL shall have the right to claim penalty after 01.05.1998 of zero point one (0.1) percent per day on the portion of the price of the equipment in question. However, the aggregate of the said penalties shall not exceed ten (10) percent of the contract price. Thus, in terms of clause 10.1, the owner namely, HMIL shall have the right to claim penalty, if the assessee fails to meet the delivery dates set forth in the contract.
7. It is an admitted case that there was delay in supply of material i.e., the delivery schedue as mentioned in clause 4.0 was not adhered to, since the materials were not supplied before 30th, July, 1997. It is further not in dispute that there was no delay insofar as installation as it was done within the date of final acceptance (i.e.,) 01.10.1998. The assessee's specific case is that the delay in supply occasioned due to the delay committed by them being delay in placement of orders, delay in approval material etc., and the sub-suppliers were no way responsible, liable or cause for the delay. Therefore, the assessee would state that there is no malafide intention of concealing the income and considering the terms of the contract that they would be liable for liquidated damages in terms of clause 10.1 of the contract, though such claim could be made only after 01.05.1998, the assessee voluntarily made provision in their books of accounts. It is the further case of the assessee that after the end of the warranty period (i.e.,) 01.10.1999, it became clear that no liquidated damages would be payable, the assessee had written back the provision in their books of accounts and offered it to tax in the assessment year 2001-02. Therefore, it is the case of the assessee that there is no malafide intention of concealing income and in fact, there was no escapement of income.
8. Section 271 of the Income Tax Act deals with failure to furnish returns, comply with notices, concealment of income etc. Section 271(1)(c) of the Act states that if the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under the Act is satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income shall pay penalty as per clause (iii) of Section 271(1)(c). Explanation 1 to clause (iii) of Section 271(1) would be relevant, which states that where in respect of any facts materials to the computation of the total income of any person under the Act and such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the Commissioner to be false or such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bonafide and that all the facts relating to the same and materials to the computation of his total income have been disclosed by him, then the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of sub-section (1) of Section 271 of the Act, be deemed to represent the income in respect of which particulars have been concealed.
9. Therefore, the assessee to be brought under Section 271(1)(c) of the Act, it has to be found that the assessee's explanation is either false or the assessee is not able to substantiate the explanation offered and fails to prove that such explanation is bonafide, then the amount added or disallowed in computing the total income of such person as a result thereof shall be deemed to represent the income in respect of which particulars have been concealed.
10. In order to appreciate the scope and ambit of the Explanation 1 to Section 271(1)(c) of the Act, we may refer to the decision of the Hon'ble Supreme Court in the case of Union of India and Ors vs. Dharmendra Textiles Processors & Ors., reported in [2008] 306 ITR 277 (SC), wherein the Hon'ble Supreme Court held that the explanations appended to Section 271(1)(c) of the Income Tax Act, indicate the element of strict liability on the assessee for concealment or for giving inaccurate particulars, while filing the return and the object of the said provision indicates that the Section has been enacted to provide for a remedy for loss of revenue. The penalty under the 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 under Section 276C of the Act. The said decision in the case of Union of India and Ors vs. Dharmendra Textiles Processors & Ors., (supra) was taken note of in a subsequent decision of the Hon'ble Supreme Court in the case of Commissioner of Income Tax vs. Reliance Petroproducts Pvt., Ltd., reported in [2010] 322 ITR 158 (SC), and the Hon'ble Supreme Court after referring to the decision in the case of Union of India vs. Rajasthan Spinning and Weaving Mills reported in (2009) 13 SCC 448, held that it must be shown that the conditions under Section 271(1)(c) must exist before the penalty is imposed. There can be no dispute that everything would depend upon the return filed, 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. In the case of Dilip N.Shroff vs. Joint CIT reported in [2007] 6 SCC 329, the Hon'ble Supreme Court while explaining the terms of 'concealment of income' and 'furnishing inaccurate particulars', held that in order to attract penalty under Section 271(1)(c) bonafide of the conduct was necessary, as according to the Court, the word 'inaccurate' signified a deliberate act or omission on the part of the assessee. Further, it was held that clause (iii) of Section 271(1)(c) provided for a discretionary jurisdiction upon the Assessing Authority, inasmuch as the amount of penalty could not be less than the amount of tax sought to be evaded. The Hon'ble Supreme Court in the case of Commissioner of Income Tax vs. Reliance Petroproducts Pvt., Ltd., (supra), observed that it was only on the point of mens rea, the judgment in Dilip N.Shroff vs. Joint CIT (supra), was upset and pointed out that in the case of Union of India and Ors vs. Dharmendra Textiles Processors & Ors., (supra), after considering Section 271(1)(c) of the Act, the Apex Court came to the conclusion that the said Section indicates the element of strict liability on the assessee for the concealment or for giving inaccurate particulars while filing return, and there was no necessity of mens rea.
11. In the case of Commissioner of Income Tax vs. Zoom Communication P. Ltd., reported in [2010] 327 ITR 510 (Delhi), the Division Bench of the Delhi High Court after considering the Section 271(1)(c) of the Act and Explanation 1, observed that it is true that mere submitting a claim which is incorrect in law would not amount to giving inaccurate particulars of the income of the assessee, but it cannot be disputed that the claim made by the assessee needs to be bona fide. If the claim besides being incorrect in law is mala fide, Explanation 1 to Section 271(1)(c) of the Act would come into play and work to the disadvantage of the assessee.
12. Thus, the sum and substance on the above referred decisions are that penalty being a civil liability, the requirement of mens rea is not an essential element, but the claim of the assessee should be bonafide and mere submission of inaccurate particulars by itself cannot be held against the assessee under the provisions of Section 271(1)(c). In the background of the above case laws, the findings of the Tribunal as regards the bonafide as against the assessee has to be considered. The Tribunal held that the assessee had not concealed any particulars either in its accounts or in other particulars and the contract was made available before the Assessing Officer. The Tribunal noticed that the contract provided a clause by which HMIL could claim liquidated damages from the assessee for delay caused in executing the work and HMIL did not invoke the provision and the assessee was not put to any liability. But, the contract provided for such liability, which is otherwise enforceable in law. The Tribunal observed that the assessee took precaution and provided for the penalty, claimed the same as deduction at the earliest point of time being the assessment year 1998-99. Therefore, the Tribunal held that the precaution taken by the assessee could not be compared with concealment of income and concealment of income means concealment per se for the purpose of avoiding payment of tax, whereas in the case of the assessee, there was no case of concealment at all. In its good faith, the assessee was claiming the deduction at the earlier point of time by furnishing all the details.
13. The battle of brains between the assessee and their consultants on one hand as to its liability under the contract and the Revenue on the other in making the provision, has thus resulted in different interpretation, which is evident in the case on hand on clause 10.1 of the contract. As long as there is nothing on record to show that the assessee concealed the income with a dishonest intention or furnished inaccurate particulars either deliberately or as a result of gross negligence which was not capable of being regarded as an innocent act, penalty is not to be ordinarily levied.
14. In the light of the above findings and taking note of the conditions contained in the contract between the assessee and HMIL we are fully convinced that the assessee's claim for deduction at the earliest point of time for the assessment year 1998-99, cannot be stated to be lacking in bonafides or with the malafide intention with intent to conceal in particulars of income for the purpose of avoiding payment of Tax.
15. In the light of the above, we agree with the findings recorded by the Tribunal and dismissed the Tax Case filed by the Revenue. No costs.
(C.V.,J) (T.S.S.,J) 05.11.2013 Index :Yes Internet:Yes pbn To 1.The Assistant Commissioner of Income Tax, Company Circle I(4) (i/c),
121, Mahatma Gandhi Road, Aayakar Bhavan, New Block, VI Floor, Chennai 34.
2. The Commissioner of Income Tax, (Appeals)-III, 121, Mahatma Gandhi Road, Chennai 34.
3. The Income Tax Appellate Tribunal, Bench 'A' Chennai CHITRA VENKATARAMAN, J.
and T.S.SIVAGNANAM, J.
pbn Tax Case (Appeal) No.403 of 2009 05.11.2013