Income Tax Appellate Tribunal - Delhi
Shervani Hospitalities Ltd , New Delhi vs Assessee on 17 August, 2009
I.T.A. No. 4120 /Del/2009
1/34
IN THE INCOME TAX APPELLATE TRIBUNAL,
NEW DELHI, BENCH 'G '
BEFORE SHRI A. K. GARODIA, ACCOUTANT MEMBER
AND SHRI GEORGE MATHAN, JUDICIAL MEMBER
ITA No. 4120 /Del/2009
(Assessment Year 2001-02)
Shervani Hospitalities Ltd., Vs. DCIT, Circle 8(1),
(Formerly Known as Star Hotels Ltd.,) New Delhi.
11, Sunder Nagar, New Delhi.
(Appellants) (Respondents)
PAN / GIR No. AASACS0211J
Appellant by: Shri Salil Aggarwal, Adv.,
Respondent by: Smt. Surabhi Ahluwalia, Sr. DR
ORDER
PER GEORGE MATHAN, JM:
1. This appeal by the assessee has been preferred against the order of Ld. CIT(A) XI, New Delhi in appeal No.256/2008-09 dated 17.08.2009 for the Assessment Year 2001-02. Shri Salil Aggarwal, Advocate represented on behalf of the assessee and Ms. Surabhi Ahluwalia, Sr. DR represented on behalf of the revenue.
2. It was the submission by the Ld. A.R. that the assessee is a company engaged in the business of hotels and restaurants. It was the submission that in the course of I.T.A. No. 4120 /Del/2009 2/34 assessment various additions have been made which were subject matter of appeal before the CIT(A) and subsequently before the ITAT. It was the submission that in the decision of the Tribunal certain relief given by the CIT(A) have been reversed. It was the further submission that after giving effect to the order of CIT(A) and that of the ITAT, the following additions made by the A.O. remained:
(i) Donations to an extent of Rs.10,494/-,
(ii) The loss of subsidiary company of an amount of Rs.1,39,595/-,
(iii) Loss of closure of South Extn. unit of Rs.25,37,521/-,
(iv) Depreciation on the assets purchased from M/s.
Star Hospitality to an extent of Rs.3,03,433/-,
(v) Capital expenditure for interior designing for an amount of Rs.1,32,000/-.
2.1 It was the submission that penalty proceeding initiated in the course of assessment proceedings had been replied to by the assessee and the reply of the assessee had not found favour with the A.O. and the penalty was levied u/s 271(1)(c) of the Act had also been confirmed by the CIT(A). It was the submission that the assessment proceedings and penalty proceedings were separate proceedings. For this proposition, the Ld. A.R. placed reliance on the decision of the Hon'ble High Court of I.T.A. No. 4120 /Del/2009 3/34 Delhi in the case of Chetan Dass Laxman Dass reported in 214 ITR 726 wherein the Hon'ble High Court has held as follows:
"Although penalty has been regarded as an additional tax in a certain sense and for certain purposes, it is not possible to hold that penalty proceedings are essentially a continuation of the proceedings relating to assessment where a return has been filed. For all practical purposes proceedings for imposition of penalty, though emanating from proceedings for assessment, are independent and separate aspects of the proceedings and, therefore, the Tribunal is justified in considering the evidence as disclosed from records independently without in any way considering the earlier findings in the quantum appeal."
2.2 He also relied upon the decision of Hon'ble High Court of Delhi in the case of J K Synthetics Ltd. reported in 219 ITR 267 wherein the Hon'ble High Court has held as follows:
"Moreover, the proceedings for the imposition of penalty and assessment proceedings are two separate proceedings and independent proceedings and, therefore, separate and distinct provisions have been enacted in the statute for initiation of the same. Therefore, the findings recorded by the Tribunal in the quantum appeal cannot be said to be decisive. In the penalty proceedings the Tribunal had not found that the assessee had concealed the particulars of the income or had furnished inaccurate particulars of its income. There was no error apparent from the record which had to be corrected."
I.T.A. No. 4120 /Del/2009 4/34 2.3 It was the submission that in regard to the issue of loss on the closure of South Extn. unit the assessee had opened a restaurant being Rodeo South Extension in May 2000 which was closed in March 2001. It was the submission that the assessee was expecting a turnover of more than Rs.30,000/- per day which was the break even revenue whereas the assessee was able to attain only a turnover of Rs.17,100/- per day and consequently the assessee was unable to break even and as the assessee did not expect the business to break even, the assessee had closed down the said business and the operation loss expenses were charged off in the same Assessment Year. It was the further submission that the loss on the closure of the unit was disallowed by the A.O. was on account of the following 4 items being (i) plant & machinery to an extent of Rs.47,166/-, (ii) furniture and fixtures to an extent of Rs.19,978/-, (iii) computer to an extent of Rs.32,259/- and
(iv) building on lease to an extent of Rs.24,38,118/-. It was the submission that the building on lease represented the partition work, wooden fixtures and wooden flooring wall to ceiling framework, sanitary and drainage etc. It was the submission that these were actually capital expenditure on which the assessee had claimed I.T.A. No. 4120 /Del/2009 5/34 depreciation and the depreciation had also been allowed but as the assessee had closed down the unit and the said items could not be put to use in any other unit of the assessee, the same had to be discarded. It was the submission that the loss was on account of write off of the depreciable assets. It was the submission that the A.O. in the course of the assessment, had held that the write of was a capital loss. It was the submission that the Ld .CIT(A) had in the appellate proceedings, deleted the disallowance holdings that none of the items could have been removed and put to use by the assessee on closure and they could only be abandoned. It was the submission that the ITAT had on appeal filed by the revenue reversed the finding of Ld. CIT(A). It was the submission that the ITAT had held that the expenditure was capital in nature and the decision relied upon by the CIT(A) for deleting the disallowance was in relation to the period before 1988-89 when the Explanation (1) to Section 32(1) was not on the statute. It has the submission that the tribunal had held that the provisions of Section 32(1)(iii) of the Act was also not applicable. It was the submission that as the CIT(A) had found favour with the assessee's explanation, the explanation as given by the assessee was a possible explanation. It was the further submission that just I.T.A. No. 4120 /Del/2009 6/34 because a claim made by the assessee was erroneous, no penalty was applicable. It was the further submission that as per the provisions of Section 271(1)(c) of the Act and the Explanation (1) thereto what was required was that the assessee should have failed to give an explanation or the A.O. finds the explanation, which has been furnished by the assessee, to be false. It was the submission that neither was the case. It was the further submission that an erroneous claim by the assessee which is not a false claim would not lead to the levy of penalty. For this proposition, he placed reliance on the decision of Hon'ble High Court of Delhi in the case of Bacarde Martini India Ltd. reported in 288 ITR 585 wherein it has been held as follows:
"It is not a case where the assessee had not been able to explain any expenditure or had failed to give any details and the A.O. had added the same to the income. In Durga Timber Works v. CIT (1971) 79 ITR 63 (Del.), relied upon by the appellant, during the course of assessment proceedings the Income tax Officer had noticed cash credits and investments shown in the books of account and asked the assessee to give an explanation. The assessee could not give an explanation of the entries nor could it explain the source of income and admitted that the two amounts be treated as his concealment. Under thee circumstances the court observed that there was concealment of income and penalty was justified. In the present case the assessee had explained all the expenditure and had actually incurred the I.T.A. No. 4120 /Del/2009 7/34 expenditure but the expenditure were disallowed because of difference of opinion between the assessee and the A.O. This is not a case where a revised return was filed as a result of discovery of some facts by the A.O. or inability of the assessee to explain the expenditure. The revised return was filed as a result of discovery of some facts by the A.O. or inability of the assessee to explain the expenditure were disallowed by the Commissioner of Income tax (Appeals) for the year 1998-99 although the expenditure were not doubted. There are cases where an expenditure is disallowed by the A.O. and it is allowed by the Commissioner of Income-tax (Appeals). It is again disallowed by the Income-tax Appellate Tribunal and in appeal allowed by the High Court and may be disallowed by the Supreme4 Court. Merely because there is a difference of opinion for allowing or disallowing the expenditure between the assessee and the A.O., it cannot be said that the assessee had intention to conceal the income. The filing of the revised return excluding some of the disallowed expenditure and claiming expenditure ofRs.2 crores, which was actually spent by the assessee in the relevant assessment year as deduction, does not amount to concealment or furnishing inaccurate particulars. The assessee had given all particulars of expenditure and income and had disclosed all facts to the A.O. It is not the case of the A.O. or the appellant that in reply to the questionnaire of the A.O., some new facts were discovered or the A.O. had dug out some information which was not furnished by the assessee."
2.4 He also relied upon the decision in the case of International Audio Visual Company reported in 288 ITR I.T.A. No. 4120 /Del/2009 8/34 570 and the decision of Hon'ble High Court of Delhi in the case of Nath Brothers Exim International Ltd. 288 ITR 670 where it has been held as follows:
"Held, dismissing the appeal, that there was full disclosure of all relevant material. It could not be said that's the conduct of the assessee attracted the provisions of section 271(1)(c). The cancellation of penalty was justified."
2.5 He further relied upon the decision of Hon'ble High Court of Delhi in the case of PHI Seeds India Ltd. reported in 301 ITR 13 (Del.) wherein it has been held as follows:
"Held, dismissing the appeals, that where two options were possible, adopting one of them could scarcely be viewed as mala fide, with an intent to evade payment of income-tax. Recompense had been provided for in section 234 of the Act by way of levy of interest, which, in the present case had been paid without demur. The Tribunal had found as a fact that there was no concealment of income. The cancellation of penalty was justified."
2.6 It was the submission that all the details in respect of the write off was available in the return and was also produced in the course of assessment proceedings and just because the A.O. was of the opinion that the claim of loss on the closure of South Extension Unit was a capital loss and the same has been upheld by the Tribunal could not be viewed as a concealment of income especially when the CIT(A) I.T.A. No. 4120 /Del/2009 9/34 had accepted the claim of the assessee. It was thus a submission that there are two views possible and consequently no penalty was leviable.
2.7 In regard to the loss of the subsidiary company, it was the submission that the assessee had incorporated a company in Nepal under the name M/s. Star Hospitality Pvt. Ltd. Nepal and the said company was liquidated on 02.02.2000. It was the submission that the assessee had claimed loss of Rs.1,39,595/- under a mistaken impression and the same had also been disallowed by the A.O. It was the submission that even before the CIT(A) the assessee has though raised the ground, had not pressed the same and the same had been dismissed as not pressed. It was the submission that the loss was erroneously claimed, as the assessee was under the bona fide belief that from the security deposit given to the land lord and the land lord had deducted an amount of Rs.1,45,345/- on account of bringing the premises used by the assessee in Nepal to the same condition as it was given to the assessee and the assessee had been able to recover only an amount of Rs.8,875/- and the balance of Rs.1,39,595/- had been charged as a loss. It was the submission that it was a mistaken claim on which no penalty was exigible.
I.T.A. No. 4120 /Del/2009 10/34 2.8 In regard to the issue of depreciation on the assets brought from M/s. Star Hospitality Pvt. Ltd., Nepal, It was the submission that the assessee had on the winding up of M/s. Star Hospitality Pvt. Ltd., Nepal taken over and transferred to the head office account as per the report submitted to the RBI, plant & machinery of a value of Rs.3,12,956/-, furniture and fixture of Rs.36,618/-, computer of Rs.66,169/- and wooden/planks removed from the building valued at Rs.9 lacs. It was the submission that the A.O. had disallowed depreciation on the said item and had made the disallowance of Rs.3,03,433/- on the ground that the asset stated to have been brought from Nepal were nowhere reflected in the ledger account filed and no proof for the use of the same by the assessee for Rodeo South Extension was produced. It was the submission that the fact that the assessee had brought back the said items was clear from the letter to the RBI. It was the further submission that that in the reply to the penalty proceedings, the assessee had specifically given the copies of the ledger also. It was the submission that the depreciation itself was fully allowable and in the course of penalty proceedings, the proof of the assets having been brought form Nepal was produced in the form of ledger I.T.A. No. 4120 /Del/2009 11/34 account. It was thus the submission that no penalty on this count was exigible.
2.9 In respect of the capital expenditure for interior designing, it was the submission that the assessee had incurred the expenditure of Rs.1,65,000/- on the interior designing of the premises of Rodeo South Extn. and the A.O. had held the said expenditure to be capital expenditure as the interior designing of the building and restaurant taken on rent is for a new asset and of enduring in nature. It was the submission that on appeal the CIT(A) had deleted the addition but on the revenue's appeal, the tribunal had reverted the finding of CIT(A). He relied upon the decision of Hon'ble High Court of Orissa in the case of CIT Vs Indian Meals and Ferro Alloys Ltd. reported in 211 ITR 35 to support his contention that whether an expenditure is capital or revenue is a matter of opinion. It was the submission that just because the A.O. was of the opinion that the expenditure was a capital expenditure, it would not lead to the levy of penalty.
2.10 In regard to the penalty levied and confirmed on account of the disallowance of donation, it was the submission that the assessee had paid an amount of Rs.15,494/-. Out of the said amount Rs.10,000/- was paid towards Gujarat Earthquake Relief Fund through the Hindustan Benevolent I.T.A. No. 4120 /Del/2009 12/34 Trust, an amount of Rs.500 was given to Delhi Fire Services and an amount of Rs.4,995/- to various others. It was the submission that the A.O. had disallowed the claim of deduction on the ground that the amount paid through M/s. Hindustan Benevolent Trust was not eligible for 100% deduction as it was not set up by a State Government and consequently the provisions of Section 80G(2)(iii)(ga) did not apply. It was the further submission that in regard to the other donations totaling to Rs.5,494/- receipt could not be produced and the same had been disallowed. It was the submission that on the disallowance of claim of expenditure more so payment of donations no penalty was exigible. He further relied upon the decision of Mumbai Bench of ITAT in the case of VIP Industries to support his submissions that when all the necessary particulars are declared by the assessee in its return, it cannot be said that the assessee has concealed its income or furnished inaccurate particulars in respect of the claim of deduction which stands repelled by the authorities. The finding of ITAT Mumbai A bench in the case of ACIT Vs. VIP Industries Ltd., reported in 122 TTJ 289 is also extracted here for better appreciation:
"Held : The necessary elements for attracting Explanation 1 to s. 271(1(c) are three-fold: (a) the person fails to offer the explanation; or (b) he offers I.T.A. No. 4120 /Del/2009 13/34 the explanation which is found by the authorities to be false, or (c) the person offers 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 have been disclosed by him. It is vivid that the first element is not satisfied because the assessee ahs offered the explanation about the claim of deduction. The case of the assessee also does not fall in second category. He made a claim for deduction at one hundred per cent u/s 35 in respect of the car used by it for the purpose of R&D and the A.O. has not found that such car was not used for the purpose of R&D. Further s. 35(1)(iv) states that the deduction "in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee, shall be allowed". Thus if capital expenditure is incurred on scientific research relating to the business carried on by the assessee, the entire amount is deductible under s. 35(1)(iv). Albeit the assessee has lost its claim under his section at hundred per cent deduction on the motor car purchased and used by it for scientific R&D but the A.O. had allowed depreciation at 20 per cent on the cost of car purchased. It has not been denied by the A.O. that the car was not used in connection with the activities relating to R&D. Thus, it is clear that the assessee offered explanation, which was not found to be false by the A.O. The third ingredient for the applicability of the deeming provision is that the person offers an explanation, which he is not able to substantiate and fails to prove that such explanation is bona fide. The assessee's case does not fall within the parameters of this provision also for the reason that he offered explanation that ht car was used for the purposes of scientific R&D. His explanation is bona fide and this fact has not been refuted by the A.O. I.T.A. No. 4120 /Del/2009 14/34 Simply because the A.O. chose to negative the assessee's claim in entirety, it would not ipso facto mean that the explanation is not bona fide. Whether an explanation is bona fide or not depends on the cumulative effect of the attending circumstances prevailing in each case. No straitjacket formula can be devised for ascertaining whether or not the explanation offered by the assessee is in the R&D activity, for which deduction under s.35 was claimed at Rs.47.40 lacs, which included a sum of Rs.23.23 lacs towards purchase of car for the R&D activity. The facts that the assessee had carried out R&D activity and the car was also purchased by it for the use by the R&D staff have not been denied by the A.O. The explanation of the assessee for claiming full deduction under s.35 cannot be said to be fanciful. Further, the assessee disclosed all the facts relating to its claim by way of statement annexed to the audit report, which forms part and parcel of the return of income, in which it has been specifically mentioned about the R&D expenses debited to the P & L a/c 'including depreciation'. Hence the case of the assessee cannot be covered in the third category also. Under these circumstances, it is patent that the necessary conditions for invoking Expln. 1 to s.271(1)(c) are lacking. It is austere from the language of s.271(1)(c) that the penalty is imposable for the concealment of the particulars of income or furnishing of inaccurate particulars of such income. The literal meaning of the word 'conceal' is 'to hide'. Be that as it may, in order to be covered within the mischief of this section, the act (intentional or unintentional) of the assessee should result into the concealment of income. In a case where a genuine claim is made for deduction which is not accepted by the Revenue but all the necessary particulars are I.T.A. No. 4120 /Del/2009 15/34 declared by the assessee in the return of income, it cannot be said by any stretch of imagination that the assessee has concealed his income or furnished inaccurate particulars of income in respect of the claim of deduction which stands repelled by the authorities. If penalty is imposed under such circumstances also then probably there will remain no course open to the assessee for genuinely claiming a deduction, which in his opinion is admissible, because the fear of such claim being rejected in eventuality will expose him to the rigor of penalty. Obviously, such a proposition is beyond any recognized canon of law. Penalty proceedings are distinct from the assessment proceedings and hence it becomes amply clear that any addition made does not automatically lead to the imposition of penalty u/s 271(1)(c). In the penalty proceedings the assessee is given a chance to explain his case. If he successfully explains his position and is not trapped within the parameters of cl. (c) of s. 271(1) along with the Explanations deeming the concealment of income, the penalty cannot be imposed. Adverting to the facts of the instant case, admittedly, he assessee had bona fidely made a claim for deduction u/s 35 in respect of cost of car purchased for the purpose of R&D activity by disclosing all the necessary particulars in the audit report. The facts that the car was purchased by the assessee and also used for the purpose of the business have not been controverted by the Assessing Officer. Further, the granting of depreciation at 20 per cent instead of hundred per cent deduction claimed by the assessee shows that there was a genuine difference of opinion between the assessee and the Assessing Officer on this aspect of the matter. It cannot be said that the assessee, under such circumstances, has concealed his income and is caught within the four I.T.A. No. 4120 /Del/2009 16/34 corners of section 271(1)(c). Therefore, CIT(A) has rightly not imposed penalty on this addition - Union of India & Ors. Vs. Dharamendra Textile Processors & Ors. (2008) 219 CTR (Supreme Court) 617: (2008) 306 ITR 277 (Supreme Court) explained and applied."
2.11 He further relied upon the decision of Pune bench of ITAT in the case of Cambay Software India Pvt. Ltd. to submit that the rejection of assessee's bona fide claim would not lead to automatic penalty and before the penalty is levied, the A.O. has to satisfy that the assessee has concealed its income or the assessee has furnished inaccurate particulars of income and that the case of the assessee is covered by the deeming fiction of one of the explanations appended to section 271(1)(c) of the Act.
2.12 He also relied upon the decision of Hon'ble High Court of Delhi in the case of Lotus Trains Travels Pvt. Ltd. reported in 177 Taxman 37 (Del.) to support his contention that if the assessee furnishes material fact relevant to the claim it would not be said that the assessee has concealed its income by furnishing inaccurate particulars so as to attract penalty u/s 271(1)(c) of the Act. It was thus the submission that the penalty as levied was liable to be cancelled.
3. In reply the Ld. D.R. drew our attention to page 1 of the assessment order. It was submitted that the assessee had filed a loss return and after making the disallowance of the I.T.A. No. 4120 /Del/2009 17/34 income the assessment had resulted in a positive figure. It was the further submission that the fact that the assessee has not filed any further appeal from the decision of the tribunal on three of the issues and the fact that the assessee has not filed appeal against the order of the CIT(A) on two of the issues clearly shows that the assessee has concealed particulars of its income. It was the further submission that the assessee has been cornered in this case in regard to the concealment of the fact in the assessment as also in the reply to the show cause notice of penalty. The reply given is totally unsubstantiated and the evidences filed along with the reply to the show cause notice also clearly prove that the assessee has concealed its income. She further relied upon the decision of the Hon'ble Supreme Court in the case of Dharmendra Textile Process and Others reported in 306 ITR 277 (S.C.) to support her contention that the penalty u/s 271(1)(c) of the Act is a civil liability and mens rea of the assessee need not be proved by the A.O. In reply, the Ld. A.R. submitted that none of the lower authorities have given a finding that the explanation as given by the assessee is false.
4. We have considered the rival submissions. The Hon'ble Supreme Court in the case of the Dharmendra Textiles Process and Others reported in 306 ITR 277 has held that I.T.A. No. 4120 /Del/2009 18/34 penalty u/s 271(1)(c) of the Act is a civil liability. However it has not be said that any of the addition as made in the assessment and sustained in the appellate proceedings would lead to an automatic levy of penalty. In the decision of Mumbai Bench of ITAT in the case of VIP Industries Ltd. referred to supra the tribunal has specifically explained the decision in the case of Dharmendra Textiles Process. This has also been extracted earlier. We are also in full agreement with the explanation as given in the said decision. However, whether an explanation is bona fide or not would depend on the cumulative effect of the facts and explanations submitted in each case. It is not as if every case where disallowance is made and confirmed penalty would become automatic. As rightly pointed out by the Ld. A.R., penalty proceedings and assessment proceedings are separate and independent proceedings. This view has also been repeatedly expressed by the various courts, including the Hon'ble Jurisdictional High Court of Delhi in the case of Chetan Dass Laxman Dass and in the decision in the case of J K Synthetics Ltd. referred to supra. Once it is found that the penalty proceedings are separate and independent proceedings, it would have to be held that even though an addition is made in the assessment and the I.T.A. No. 4120 /Del/2009 19/34 same has been confirmed in the appellate proceedings, liberty is available to the assessee to produce all such evidences in the course of penalty proceedings to support his claim as made in the return which has been rejected by the A.O. and the appellate authority. With this in mind, if we see various additions which have been made during the course of assessment and had been confirmed in the appellate proceedings, and the explanation given by the assessee, it appears as follows:
i) Donations - Rs.10,494/-
It is noticed that in the return filed, the assessee had claimed donation of Rs.15,494/- and the A.O. had disallowed donation to the extent of Rs.10,494/-. The donations were of 3 categories. 1st one being to Hindustan Benevolent Trust for an amount of Rs.10,000/- which have been claimed as 100% exemption: Hindustan Benevolent Trust was found to not fall within the provisions of Section 80G(2)(iii)(ga) and consequently the A.O. had allowed only 50% of the same. 2nd donation was in regard to the Delhi Fire Services for an amount of Rs.500/- and the 3rd to various other for an amount of Rs.4,995/-. The assessee was unable to produce the receipt in respect of the donation given to Delhi Fire I.T.A. No. 4120 /Del/2009 20/34 Services and various others and consequently these two amounts had also been disallowed. Thus a total disallowance of Rs.10,495/- ought to have been made but had been made of Rs.10,494/-. The assessee has not contested this addition. In the reply to the show cause notice, which was found at page 2- 8 of the Paper Book, the assessee has not made any submission. The assessee in the course of hearing before us has only submitted that it was only because the donation to Hindustan Benevolent Trust was not eligible for 80G(2)(iii)(ga) the addition had been made. The fact shows otherwise. The disallowance on this count was only Rs.5,000/- and the balance of Rs.5,494/- was on account of the fact that the assessee could not produce any evidence to show the claim of donation. Even in the penalty proceedings the assessee has not given any explanation nor produced any evidence in respect of this disallowance of donation. The assessee has also not been able to show his bona fide for making the claim that the donation to Hindustan Benevolent Trust was eligible for 100% exemption i.e. whether the receipt claimed the trust to be eligible for 80G(2)(iii)(ga). In these circumstances, the assessee having failed to I.T.A. No. 4120 /Del/2009 21/34 offer an explanation, in regard to the disallowance, the penalty u/s 271(1)(c) on this disallowance is liable to be upheld and we do so.
ii) Loss of subsidiary company- 1,39,595/-
In regard to the loss of subsidiary company, it is noticed that the assessee has claimed that loss under the head 'head office'. The submission of the assessee in the course of assessment proceedings was that a sum of Rs.1,45,345/- had been deducted by the land lord of the premises taken on lease by M/s. Star Hospitality Pvt. Ltd. M/s. Star Hospitality Pvt. Ltd. was dissolved in Feb 2000 and the A.O. had held that if any expenditure had related to associates or a wholly owned subsidiary such expenditure would not be considered in the hands of the assessee as the associate or subsidiary were separately taxable entity. Even though the assessee has filed an appeal to the CIT(A) on this issue the same was not pressed in the appellate proceedings. In this reply given to the show cause notice, it is noticed that the assessee has not given any reply in respect of the said disallowance. In the hearing before us, it has been the submission of the assessee that it was a mistake and an erroneous claim and when the assessee came I.T.A. No. 4120 /Del/2009 22/34 to know the mistake he had accepted the same and had not proceeded with the appeal. Other than claiming only that it is an erroneous claim made, nothing has been produced before us or before the lower authorities either in the assessment proceedings or in the penalty proceedings to show that error had occurred. Error could be in the nature of arithmetic error or in the nature of factual error. But it is for the assessee to explain the error and how it has crept in. Here, it is noticed that this is not a case where the assessee has given an explanation and the same has been rejected it is a case where no explanation is given. In these circumstances, the penalty proceedings being initiated in the assessment proceedings, and the assessee having been given an opportunity in the penalty proceedings to substantiate its case and the assessee having failed to do so more so the assessee having not filed any explanation, the bona fides of the assessee does not stand as established and consequently we are of the view that this addition does call for a levy of penalty and consequently the levy of penalty as confirmed by the Ld. CIT(A) on this issue stands upheld.
I.T.A. No. 4120 /Del/2009 23/34
iii) Depreciation on the assets purchased from M/s. Star Hospitality Pvt. Ltd.:-
In regard to the depreciation on the assets purchased from M/s. Star Hospitality Pvt. Ltd. it is noticed that the assessee had a subsidiary company under the name of Star Hospitality Pvt. Ltd. which is operating a Rodeo Restaurant in Nepal. On the dissolution of the said Star Hospitality Pvt. Ltd., the assessee has claimed to have been taken over the assets and the same were transferred to the Head office accounts. In the course of assessment proceedings, the assessee had been directed to show that these assets being plant & machinery having a value of Rs.3,12,956/-, furniture and fixtures at a value of Rs.36,618/-, computer having a value of Rs.66,169/-, wooden planks removed from the building valuing Rs.9 lacs had been used by the assessee. The assessee had not produced the proof of the use of the assets and consequently the A.O. had disallowed the depreciation. It is noticed by the A.O. that the assets stated to have been brought from Nepal were nowhere reflected in the ledger account filed. Consequently, he had disallowed the depreciation. On appeal before the Ld. CIT(A) in the quantum I.T.A. No. 4120 /Del/2009 24/34 proceedings, the Ld. CIT(A) had vide his order dated 20.12.2004 allowed the assessee's claim of depreciation. While allowing the depreciation, the Ld. CIT(A) has given a findings that the evidence on record appears that the assets were transferred in 2000-01 and the same had been used the South Extension Restaurant which had opened in May 2000 and closed down in March 2001. Since the restaurant was opened during 2001-02 and CIT(A) had directed to allow the depreciation but had given a direction to the A.O. to withdraw the depreciation on the assets allowed during the Assessment Year 2000-
01. On the appeal by the revenue to the Tribunal, the Tribunal had reversed the finding of the order of CIT(A) vide its order in I.T.A. No.1206/Del/2005 dated 25.45.2008. While reversing the order of Ld. CIT(A) the tribunal had held that the finding of Ld. CIT(A) was not based on any evidence that the assets were actually used. It is an accepted fact that the penalty proceedings are separate from assessments proceedings. Thus in the assessment proceedings, the disallowance of depreciation is basically on two grounds one being non availability of evidence of the ledger account and physical use at Rodeo South I.T.A. No. 4120 /Del/2009 25/34 Extension along with purchase bill for having brought the said assets from Nepal and 2nd proof of usage of the said assets in the business of restaurant Rodeo South Extn. In the course of penalty proceedings, the assessee has given a reply on the issue wherein he has referred to the report of RBI. A perusal of the Paper Book at pages 104-117 shows the correspondence with the RBI for applying for permission to close down the business of Star Hospitality Pvt. Ltd., wholly owned subsidiary of Star Hotels Ltd. In the said correspondence in item Nos. 7, 8, 9 & 10 in the correspondence submitted to the RBI and from RBI is mentioned that the transfer is reflected in the financial accounts though the copies of the same are not available in the Paper Book. Star Hotels Ltd. has brought back the assets mentioned therein. More specifically in the letter dated 14th June 2002 which is found at pages 107- 110 of the Paper Book to have been brought into India from Nepal on the liquidation of the business of Star Hospitality Pvt. Ltd. As per the said letter dated 14.06.2002 addressed to RBI found at page 107 in Para 7 it has been categorically mentioned that the assets have been transferred to Star Hotels Ltd.
I.T.A. No. 4120 /Del/2009 26/34 and has been reflected in the annual report for the financial year 1999-2000. The annual report of Star Hotels Ltd. for the financial year 1999-2000 has not been produced before us or before the lower authorities. Thus, the evidence of the assets specified to have been transferred from M/s. Star Hospitality Pvt. Ltd. Nepal to the assessee still remains unproved. However the ledger account, which was found at pages 111-117 of the Paper Book does not support this stand in so far as it does not show the transfer from M/s. Star Hospitality Pvt. Ltd., Nepal to the assessee. All it shows is opening balance. Obviously when an asset is taken over, the consideration for the same must have flown from the assessee to M/s. Star Hospitality Pvt. Ltd., Nepal especially in view of the fact that Star Hospitality Pvt. Ltd. was under liquidation. In the assessment proceedings the assessee has mentioned that the assets were taken by the assessee company at book value. Further, the ledger account also does not show the transfer of these assets to the Rodeo South Extension unit. In these circumstances, the ledger account produced does not show the actual transfer of the assets to the assessee company for the use in I.T.A. No. 4120 /Del/2009 27/34 the Rodeo South Extension. Thus, even in the penalty proceedings, the assessee has not been able to prove the take over of the assets and the use of the same. The fact that the assessee has failed to prove the ownership of the said assets as also the usage of the said asset in the course of assessment proceedings or in the course of appellate proceedings before the Tribunal or in the course of penalty proceedings before the A.O. or the Ld. CIT(A) or before us, it cannot be said that the claim of the assessee is bona fide. In these circumstances, we are of the view that the penalty as levied by the A.O. and as confirmed by the Ld .CIT(A) on this issue is liable to be upheld and we do so.
iv) Loss on closure of South Extension unit: - In regard to the issue of disallowances of loss on the closure of South Extension Unit, it is noticed that in the course of assessment proceedings the assessee had claimed a loss on account of closure of Rodeo South Extension Unit to an extent of Rs.25,37,521/-. It is noticed that in the course of assessment proceedings, the assessee has submitted that the loss is on account of write off of the plant & machinery for a value of Rs.47,166.-, furniture and fixtures for the value of Rs.19,978/-, I.T.A. No. 4120 /Del/2009 28/34 computer of a value of Rs.32,259/- and building on lease of value of Rs.24,238,118/-. The A.O. in the course of assessment proceedings has disallowed the loss holding that the assets described were part and parcel of the block of assets of the assessee company and depreciation as per the I T rules had been claimed on all the assets. Since the assets were depreciable asset and were of capital nature and part of the block of assets brought here, the loss on these assets is a capital loss and cannot be allowed as expenditure revenue in nature. It was also noticed by the A.O. that the assessee has not furnished any proof of any scrap value or realizable value of the assets had also not been recovered on the closure of the unit and if there was a scrap value which is realized the same should have been reduced from the block of assets and the WDV after deprecation was available to the assessee. It is noticed that the CIT(A) in the appellate proceedings had deleted the disallowance by holding that the assessee could not have removed any of the items on closure and as they can only be abandoned the assessee was entitled to the write off of the said amount of loss. In the appeal of the revenue to the tribunal, the Tribunal has I.T.A. No. 4120 /Del/2009 29/34 categorically given a finding that the write off under the revenue head was not permissible in view of the specific provision u/s 32(1)(iii) of the Act. The Tribunal has also categorically given a finding that the decision relied upon by the Ld. CIT(A) for deleting the disallowance relating to the period prior to the Assessment Year 1988-89 when the Explanation (1) to Section 32(1) was not on the statute. In the course of penalty proceedings, the assessee has mentioned that the claim was based upon some legal lines of reasoning and it cannot be said to be as absurd claim. When there is specific provision in the statute, and when the accounts of the assessee are under audit, non-application of a specific provision cannot give any leverage for bona fides to the assessee. Here even though the assessee has given an explanation in the penalty proceedings, the explanation as given by the assessee cannot be substantiated by any form of hair splitting or legal jugglery. Besides this, it is also noticed that the assessee has earlier mentioned that it had brought in plant & machinery of a value of Rs.3,12,956/-on the liquidation of Star Hospitality Pvt. Ltd., Nepal which machinery had been used in the Rodeo South I.T.A. No. 4120 /Del/2009 30/34 Extension Restaurant. However the plant & machinery found to have been written of is of a value of Rs.47,166/-. How can this happen? What happened to the balance of plant & machinery? The assessee was able to bring back plant & machinery on the liquidation of subsidiary in Nepal as per their letter to RBI but on the closure of a unit in South Extension Delhi the assessee is not able to use the plant & machinery and has to abandon the same is too far fetched claim to substantiate any bona fide. Furniture and fixtures from Star Hospitalities Pvt. Ltd., Nepal is of a value of Rs.36,618/- while what is written of is Rs.19,978/-.
Coming to the issue of building on lease, the Ld. CIT(A) in the appellate order in the quantum proceedings has termed the same to include the partition and fixing of wooden fixtures, wooden flooring, false ceiling, frame work, sanitary and drainage. In the letter addressed to the RBI in respect of bringing back the movable assets more specifically the letter dated 14.06.2002 an amount of Rs.9 lacs has been shown as wood/planks removed from the building on rent. If such items can be removed from a building on rent in Nepal and be I.T.A. No. 4120 /Del/2009 31/34 used in Rodeo South Extension Restaurant as claimed by the assessee, it shows that at least such items were dismentable. Then how can it be said that the total of the amount shown under the building on lease had to be abandoned. Thus on all these counts the claim of the assessee lacks bona fides and consequently the explanation as given by he assessee being not substantiated, the penalty as levied by the A.O. and as confirmed by the Ld. CIT(A) is upheld.
v) Capital expenditure for interior designing:- In regard to the issue of capital expenditure for interior designing, it is noticed that in the course of assessment proceeding, the assessee has incurred an amount of Rs.1,65,000/-towards the Architect Fee for the designing of Rodeo South Extn. Restaurant. The A.O. had disallowed the same on the ground that the said expenditure was capital expenditure. In the course of 1st appellate proceedings, the Ld. CIT(A) had deleted the disallowance on the ground that the said expenditure relate to the Rodeo South Extn. Unit, which had been closed down, on the same ground that the CIT(A) had deleted the disallowance of the loss on account of Rodeo South Extn. The tribunal had reversed the finding of Ld. CIT(A) on I.T.A. No. 4120 /Del/2009 32/34 this issue on the same ground as the loss on the Rodeo South Extn. unit have been reversed. In the penalty proceedings the assessee has not given any reply to explain its stand other than mentioning that the question as to whether the expenditure is capital or revenue, is a debatable question on which two views are possible. Undisputedly, the expenditure have been incurred before the commencement of the operation in respect of Rodeo South Extn. Unit. Any pre commencement expenditure is well accepted as a capital expenditure. There is no dispute on this. The Ld. CIT(A) has also not given any reason for allowing the said expenditure in the quantum appellate proceedings nor has the assessee been able to justify its claim and substantiate its explanation given in the course of penalty proceedings or before us. The issue as to whether expenditure is capital or revenue would depend upon the facts of each case. The facts in the assessee's case clearly show that the said expenditure was a pre-commencement expenditure and the same was capital in nature. In these circumstances the penalty as levied by the A.O. and as confirmed by the CIT(A) is found to be on right footing and the same is upheld.
I.T.A. No. 4120 /Del/2009 33/34 The decisions as quoted by the Ld. A.R. of Hon'ble Jurisdictional High Court and the coordinate benches of this Tribunal would not come to the rescue of the assessee in so far as in all those cases, it has been held that where there is difference of opinion for allowing or disallowing the expenditure between the assessee and the A.O., it cannot be said that the assessee had intention to conceal its income. In all those cases, the assessee had given all the particulars of expenditure and the income and had disclosed all the facts to the A.O. In the present assessee's case, the facts itself are missing. In the course of assessment proceedings, the A.O. has asked for evidences, have not been produced nor has the assessee been able to substantiate its claim even in the penalty proceedings or in the appellate proceedings. The assessee has not been able to even explain the circumstances in which it has claimed the expenditure which have been disallowed by the A.O. In these circumstances, the bona fides of the assessee have not been proved and we are of the view that the decision of the Hon'ble Jurisdictional High Court and the coordinate benches of this Tribunal as referred to by the assessee, do not help the assessee. In these I.T.A. No. 4120 /Del/2009 34/34 circumstances, the appeal of the assessee is dismissed.
5. In the result, the appeal of the assessee stands dismissed.
6. This decision was pronounced in the open court on 26th Mar., 2010.
Sd./- Sd./-
(A.K. GARODIA) (GEORGE MATHAN)
ACCOUNTANT MEMBER JUDICIAL MEMBER
th
Dated:26 Mar., 2010
Sp.
Copy forwarded to
1. Appellant
2. Respondent
3. CIT True copy: By order
4. CIT(A)
5. DR Dy. Registrar, ITAT, New Delhi