Income Tax Appellate Tribunal - Delhi
Nuchem Ltd. vs Deputy Commissioner Of Income-Tax on 23 August, 1993
Equivalent citations: [1993]47ITD487(DELHI)
ORDER
J.P. Bengra, Judicial Member
1. These are two appeals by the assessee against confirmation of penalty under Section 271(1)(c) of the Income-tax Act, 1931, passed by the Commissioner of Income-tax (Appeals), Faridabad, pertaining to the assessment years 1984-85 and 1985-86. Since certain issues involved in both these appeals are common, therefore for the sake of convenience, these appeals are being disposed of by this consolidated order.
Assessment year 1984-85
2. In assessment year 1984-85 the assessment was completed under Section 143(3) at an income of Rs. 1,29,29,120 as against the original and revised returned loss of Rs. 1,58,02,710 and Rs. 96,35,750 respectively vide order dated 12-1-1988. In the assessment various additions/ disallowances were made at the assessment stage. The assessee went in appeals against these additions and disallowances made by the Assessing Officer and finally as a result of the Tribunal's order the following main disallowances/additions were confirmed:
(i) Disallowance of expenditure amounting to Rs. 34,03,163 on purchase of 1146 KVA diesel generator.
(ii) Addition/disallowance of Rs. 10,33,553 on account of amount paid to M/s. Dalai Consultants.
(iii) Interest on FD Rs amounting to Rs. 32,84,506.
(iv) Expenses relating to earlieryears (61,024 + 2,86,252) = Rs. 3,47,276.
On the basis of Tribunal's order wherein the above additions/disallowances were confirmed, the Assessing Officer initiated penalty proceedings under Section 271(1)(c). In reply to the show-cause notice the assessee submitted written reply vide letter dated 27-7-1992 wherein it was pleaded that imposition of penalty under Section 271(1)(c) would be unjustified. Pointwise additions and disallowances considered by the Assessing Officer are as under:
(i) Expenditure on purchase of Diesel Generating Set:
The assessee incurred an expenditure of Rs. 34,03,163 on the purchase of 1146 KVA diesel generator and claimed it as a revenue expenditure on the basis that this diesel generator was purchased and installed to replace an old, obsolete derated Generator and since the Generator is an integral part of the assessee's profit-earning machinery, in view of the acute power crisis in the State of Haryana, the expenditure should be treated as a revenue expenditure. The Tribunal noted that the assessee initially treated this expenditure as capital expenditure and also claimed depreciation on its cost. Later on, however, it filed a revised return wherein expenditure on generator in question was claimed as a revenue expenditure. Consequently the claim for depreciation was proportionately reduced. The Appellate Tribunal finally held that the chart and other material on record which consists of mere submissions, does not establish that the generator in question was installed to replace any old generator. It was further observed that if earlier generator owned by the assessee had become useless and was actually replaced, then the assessee should have claimed its written down value as a terminal allowance under Section 32(1)(iii). No such claim had been made before the Assessing Officer nor any amount in respect thereof shown to have been written off in the books of account. It was also observed that on facts the assessee's contention that the generator is not an independent machinery was also negatived by the facts admitted by the assessee. It is evident that the generator had been purchased not only to make up the energy requirements but also for the assessee to meet its power requirements but that would not make the expenditure to be of revenue character. Therefore, it was held that the expenditure incurred on purchase of generator was a capital expenditure. The Assessing Officer was of the view that the assessee has furnished inaccurate particulars of its income in the return so far as the claim of expenditure on purchase of diesel generator set as revenue expenditure was concerned.
(ii) Amount paid to M/s. Dalai Consultants :
The next addition related to expenditure amounting to Rs. 10,33,553 in respect of sum paid to M/s. Dalai Consultants. The assessee undertook project of scientific research in its line of business which was called "Semi Commercial Poly Carbonate Project" and was approved by the Department of Science & Technology in 1982 and the expenditure approved was Rs. 1.5 crore. The assessee incurred total expenditure of Rs. 18,06,553 on which it claimed weighted deduction under Section 35(2B) of the Act. This amount included payment of Rs. 10,40,000 to M/s. Dalai Consultants. On revising the claim under Section 35(2B) the expenditure of Rs. 7,73,000 was allowed by the Assessing Officer. The dispute remained only in respect of payment of Rs. 10,40,000 paid to M/s. Dalai Consultants and Engineers Ptv. Ltd. under agreement dated 31-10-1983. Under this agreement M/s. Dalai Consultants and Engineers Pvt. Ltd. was to render various services to the assessee and the assessee had to pay lump sum fees of Rs. 15,25,000. 10 per cent of Rs. 15,25,000 was to be paid as advance and 60 per cent was to be paid in 12 equal monthly instalments. In pursuance to this agreement the assessee paid Rs. 10 lakhs as ad hoc advance fee. The amount was to be adjusted towards consultants progress invoices from time to time. This sum of Rs. 10 lakhs paid by the assessee to M/s. Dalai Consultants was passed over as a deposit to M/s. Nuware India Ltd., a company connected with the assessee. The Assessing Officer in the absence of work schedule given to M/s. Dalai Consultants and evidence to show whether they had rendered any service, decline to grant deduction for the payment to M/s. Dalai Consultants as this expenditure was also not approved by the Department of Science and Technology. On these facts the Tribunal also concurred with the finding given by the Assessing Officer and held that in the absence of any evidence to show that the rendering of services by M/s. Dalai Consultants had been commenced within the accounting year, no part of this amount could be allowed as a deduction even under Section 37 of the Act. On these facts the Assessing Officer was of the view that the assessee had furnished inaccurate particulars with regard to the claim of deduction. Since it could not give any evidence to show that rendering of services by M/s. Dalai Consultants had been commenced within the accounting period, provision of Explanation 1 to Section 271(1)(c)(iii) of the Act is attracted and it shall be treated as assessee's concealed income in respect of which inaccurate particulars have been furnished.
(iii) Interest on FDRs amounting to Rs. 32,84,506 :
The assessee claimed deduction in respect of interest accrued on FDRs amounting to Rs. 32,84,506. The claim of the assessee was that this amount should not be taxed as the original amount on which this interest has accrued is still a matter subjudice before the Hon'ble Delhi High Court and in view of the contingency that if the matter is decided against it the assessee had to pay the entire amount along with interest, this amount does not belong to the assessee. The assessee is manufacturing UF/MF moulding, UF Prescol Glues, Formaldehyde and Hexamine. A dispute arose between the assessee and the Central Excise authority about the payment of excise duty on certain articles manufactured by the assessee. The assessee, therefore, filed writ petition before the Hon'ble High Court of Delhi to restrain the Excise Department from enforcing the demand of excise duty. The Hon'ble High Court ordered the clearance of goods by Excise Department on the assessee furnishing bank guarantee for the amounts in dispute. Pursuant to the orders passed by the Hon'ble Delhi High Court the assessee paid full amount to the bank covering the differential amount of duty, obtained a bank guarantee and on furnishing the bank guarantee to the excise authorities obtained a clearance of the goods. In order to issue a bank guarantee in favour of the Government as directed by the Hon'ble Delhi High Court the assessee's bank, i.e., New Bank of India, Faridabad required the assessee to deposit the amount equal to the amount of disputed excise duty in fixed deposit. In the guarantee furnished by the bank to the Excise Department the Bank had unequivocally and unconditionally agreed to pay the sum mentioned in the guarantee only to the Excise authorities on the matter being decided by the Delhi High Court. It has undertaken to pay the money on demand to the Central Excise authorities without a demur of the said amount. When the High Court decides the matter against the assessee, all that the Central Excise authorities have to do is to request the Bank to make the payment. On these facts the Assessing Officer was of the view that the amount accrued on the FDRs remained the property of the assessee and it was crediting the interest received on the FDRs in its accounts and for the interest amount, the assessee was getting either FDRs made with the bank or was availing the same in its C/C overdraft and other hypothecation accounts. Thus, he held that the interest belonged to the assessee as do the FDRs. So no deduction was allowed. The Appellate Tribunal also held that the interest accrued on FDRs is income of the assessee. On this basis the Assessing Officer was of the view that provision of Explanation 1 to Section 271(1)(c)(iii) is attracted and this amount is a concealed income of the assessee in respect of which inaccurate particulars have been furnished by the assessee.
(iv) The Assessing Officer also initiated penalty proceedings in respect of disallowance of expenses relating to earlier year and legal & professional charges of Shri D.D. Verma. However, in the appeal, the CIT (Appeals) accepted the assessee's contention and hence this item was not considered as an item of concealment for the purpose of levy of penalty. Therefore, this is not a subject matter of penalty in appeal before us.
Penalty under Section 271(I)(c) in respect of Assessment year 1985-86 :
3. Assessment in this case was completed under Section 143(3) at an income of Rs. 21,83,860 as against the returned loss of Rs. 90,55,870. Various disallowances and additions were made in the assessment order. However, at the final stage the final additions/disallowances were confirmed as a result of appeal before the Appellate Tribunal:
(i) Addition on account of interest Rs. 34,35,220
on FDRs
(ii) Addition/disallowance of expenditure
incurred on purchase of NPC Twin
Screw Machine and Transformer
(Rs. 31,39,839 + 4,15,000). Rs. 35,54,834
(iii) Addition/disallowance of Gratuity. Rs. 1,44,500
[iv) Addition/disallowance of expenditure
on repairs and shifting of Diesel
Generating set. Rs. 1,70,997
(v) Addition/disallowance of expenditure
held to relate to preceding years Rs. 1,58,425
After the additions/disallowances were confirmed by the Appellate Tribunal, the Assessing Officer initiated penalty proceedings under Section 271 (1)(c) of the Income-tax Act, 1961. The penalty was levied in respect of the following items:-
(i) Addition on account of interest on FDRs :
The facts and circumstances under which this disallowance was made in this year are the same as for the assessment year 1984-85. The CIT (Appeals) as well as the Tribunal has confirmed the addition on the basis of order in assessment year 1984-85. In the penalty order the Assessing Officer was of the view that provision of Explanation 1 to Section 271 (1)(c)(iii) is attracted. Therefore, the amount is treated as concealed income of the assessee in respect of inaccurate particulars have been furnished by the assessee. Since the facts have been given in assessment year 1984-85, there is no need to repeat the same.
(ii) Addition/disallowance of expenditure amounting to Rs. 35,54,834 on account of purchase of NPC Twin Screw Machine and Transformer for Rs. 31,39,839 and Rs. 4,15,000 respectively. The assessee claimed cost of replacement of an old machinery namely Busco Kneader machine with new NPC Twin Screw Machine at the cost of Rs. 31,39,837 and also the cost of transformer purchased for Rs. 4,15,000 to replace 500 KVA burnt out transformer. This was claimed as a revenue expenditure. The Tribunal observed that Busco Kneader machine is an independent machine which can work even without there being other machine. At no stretch of imagination the purchase of new machine like that be allowed as revenue expenditure because there is no technical evidence produced by the assessee to show that Busco Kneader Machine was such a subordinate part of the assessee's plant that its replacement would amount to effecting repairs to the remaining plant. Similarly an electric transformer is an independent machine performing specific and independent function. This expenditure cannot be treated as expenditure revenue in nature rather it is an expenditure of capital in nature. Therefore, the claim of the assessee was rejected. The Assessing Officer was of the view that the assessee put-forth the claim which could not be substantiated by any evidence. Therefore, provision of Explanation 1 to Section 271(1)(c)(iii) is attracted.
(iii) Addition/disallowance of Gratuity Fund amounting to Rs. 1,44,500:
The Assessing Officer disallowed the provision for payment of gratuity under Section 40A(7) on the basis of Tax Audit Report. This was confirmed by the CIT (Appeals). Similarly the Appellate Tribunal following its order for assessment year 1980-81 wherein it was held that after the inception of Section 40A(7) disallowance cannot be allowed except when the amount is actually paid to the trust and not otherwise, upheld the disallowance. The Assessing Officer was of the view that the assessee has furnished inaccurate particulars in respect of this issue and the amount is treated as assessee's concealed income in respect of which inaccurate particulars have been furnished by the assessee.
(iv) Addition/disallowance of expenditure on repairs and shifting of Diesel generating set :
The assessee claimed deduction of Rs. 3,47,096 on account of repair and shifting of Diesel generating set as revenue expenditure. The claim of the assessee was rejected on the ground that the expenditure included a sum of Rs. 1,70,997 on account of consumption in relation to the said diesel generating set and it was not clear how this has happened and further the expenditure was debited as 'addition to machinery'. It was not explained as to why this was done so. When the matter was carried before the Appellate Tribunal, the Appellate Tribunal observed that the expenditure incurred on consumption of diesel oil could not be related to repair or shifting and it was not explained that why this expenditure was included in repair or addition to the machinery account. Therefore, addition to the extent of Rs. 1,70,997 was confirmed. On these facts the Assessing Officer was of the view that the assessee has furnished inaccurate particulars in respect of its claim of this expenditure as revenue which it could not substantiate. Therefore, provision of Explanation 1 to Section 271(1)(c)(iii) is attracted. It was treated as concealed income in respect of which inaccurate particulars have been furnished.
4. The Assessing Officer also levied penalty in respect of addition/ disallowance of expenditure relating to earlier years amounting to Rs. 1,58,425. However, the CIT (Appeals) accepted the assessee's contention and held that no penalty is attracted in respect of this item. Therefore, this item is not a subject matter of penalty before us.
5. Penalty levied under Section 271(1)(c) by the Assessing Officer for assessment years 1984-85 and 1985-86 was confirmed by the CIT (Appeals) except for expenditure incurred in earlier years. Aggrieved by that order the assessee filed appeals before us.
6. The learned counsel for the assessee Shri M.P. Mehrotra very vehemently argued that the penalty has been levied on account of concealment of income and for concealing particulars of income as well. The penalty order does not specifically mentioned the relevant default categorised under Section 271(1)(c) under which the penalty has been imposed. Section 271(1)(c) can be invoked in a situation where there is a positive concealment of income or there is a positive act of furnishing inaccurate particulars of such income. But there is no finding by any authority that the assessee had concealed either the particulars of income or furnished inaccurate particulars of income so as to attract penalty under Section 271(1)(c). The Assessing Officer has applied Explanation 1 to Section 271 (1)(c)(iii). In order to bring a case within the purview of this Explanation following ingredients have to be found :
(a) whether there are any facts material to the computation of the total income of any person - If such material facts are there i.e., the person has failed to offer an explanation or an explanation is found by the Assessing Officer or by the revenue authorities to be false, or
(b) where such person offered an explanation which he is not able to substantiate.
If these ingredients are established, then only the amount added or disallowed in computing the total income of such person as a result thereof for the purpose of Clause (c) of the section could be deemed to represent the income in respect of which particulars of income have been concealed. The Assessing Officer applied Explanation 1 in this case in respect of additions or disallowances held to be attributed to suppression of materials facts or to explanation, which has been found to be false or unsubstantiated. By this, he is trying to establish that Explanation 1 to Section 271(1)(c) is attracted because all additions and disallowances are attributed to suppression of material facts. But none of appellate authority have held that the material facts relating to computation of income have been suppressed by the assessee. Neither they have held that the explanation given by the assessee is false nor there is a finding that the explanation remained unsubstantiated. It is pertinent to mention here that the Tribunal has discussed the facts of law applicable on each item of addition/disallowance and there is no finding that the assessee had suppressed material relating to these disallowances. Therefore, it cannot be said that the assessee is guilty of suppressing material facts relating to computation of income. The revenue authorities as well as the Appellate Tribunal expressed various reasons for making disallowances and had not accepted the assessee's claim in respect of these items. This may be on account of difference of opinion which is always possible amongst various authorities. This will not justify that the explanation given by the assessee is false or unsubstantiated. There is no finding by any authority that full material facts have not been disclosed by the assessee. It only mentioned that the authorities have not accepted this explanation for certain reasons. The fact that the assessee's explanation had been duly considered by the Assessing Officer without holding the explanation of assessee false, fraudulent or mala fide, itself proves that the explanation given by the assessee is bonafide. The onus is on the department to show that the explanations offered were not substantiated. It is a different matter if the explanations have not been accepted by the authorities. Mere rejection of explanation does not amount that the assessee has failed to substantiate it. Under the deeming provision if the explanation offered is bonafide and all facts relating to the explanation and material to the computation of total income are disclosed by the assessee. Explanation 1 will not apply. It is an established law that legal fiction should only be limited for the purpose for which it is intended and there cannot be any justification for extending it. Reliance in this connection was placed on the decision of the Supreme Court in the case of CIT v. C.P. Sarathy Mudaliar [1972] 83 ITR 170.
7. It was brought to our notice that in respect of disallowance of expenditure amounting to Rs. 34,03,163 on purchase of diesel generator, the assessee in his statement of revised income-tax return has specifically mentioned that the assessee is claiming the expenditure as revenue in nature. If this amount is not allowable as a revenue expenditure, then without prejudice to the merit of the assessee's claim if it is treated as a capital expenditure, depreciation allowance and investment allowance be granted. It was submitted that the alternative claim made by the assessee cannot amount to concealment of income or furnishing of inaccurate particulars in respect of income because there is no intention of the assessee to conceal either the income or furnish inaccurate particulars of income. The assessee has not tried to hoodwink the revenue by furnishing inaccurate particulars. Therefore, the item of disallowance even if confirmed by the Appellate Tribunal, cannot attract penalty under Section 271(1)(c). Reliance was placed on the decision of the Appellate Tribunal In the case of Shama Raising Chandel v. ITO [1992] 41 ITD 212 (Ahd.).
8. In respect of disallowance of Rs. 10,33,553 on account of amount paid to M/s. Dalal Consultants the learned counsel pointed out that factum of payment of this amount to M/s. Dalai Consultants is not in dispute. The authorities have not given finding that the payment is bogus. The Tribunal has given finding that this expenditure is not allowable in this year, it may be allowed in the next year. Therefore, in such a situation if an expenditure has been claimed in one year but is not allowable by the authorities in that year, the genuineness of the payment is established. There is no concealment of income or concealment of particulars of income. In respect of accrued interest on FDRs it was pointed out that the assessee had credited the accrued interest on FDRs in its Profits & Loss account on the basis of legal advice and interpretation of legal situation. However, the fact remained that the ownership of this income is in dispute and is still a matter subjudice before the Delhi High Court. While filing the return the assessee claimed this interest on the ground that this income is contingent in nature. It was pointed out that the payment of excise duty through bank guarantee has been held to be actual payment under the provision of Section 43B and as such those FDRs cannot be held to be owned by the assessee. As long as the case is pending before the Delhi High Court relating to Excise matter, the ownership of the assessee on those FDRs is in doubt. Therefore, the interest accrued is not an income of the assessee. It is true that it has been held as assessee's income but it has not been held that it is a concealed income of the assessee. Since the assessee has brought all material facts relating to its claim, Explanation 1 to Section 271(1)(c) cannot be attracted. Reliance was placed on the following decisions:
(1) Cement Marketing Co. of India Ltd. v. Asstt. CST [1980] 124 ITR 15 (SC);
(2) CIT v. Devi Dayal Aluminium Industries (P.) Ltd. [1988] 171 ITR 683 (All.);
(3) Addl CIT v. Chhotey Lal Radhey Shyam [1991] 190 ITR 316 (All.); and (4) CITv. NepaniBiri Co. Trust [1991] 190 ITR 402 (All.).
9. In respect of addition/disallowance on expenditure on account of purchase of NPC Twin Screw Machine the submission of the learned counsel for the assessee was that the issue involved was whether the expenditure was revenue or capital in nature. The assessee claimed it as a revenue expenditure. However, the Tribunal has held it to be of capital in nature. The conclusion of the Assessing Officer is that the assessee had furnished inaccurate particulars in its return. Therefore, Explanation 1 to Section 271(1)(c) is attracted. In this connection it was submitted that all facts which were necessary and material for computation of total income have been duly disclosed and based on these facts a legal question whether the expenditure is of a revenue or capital in nature, is decided. The assessee to the best of his knowledge and information has tried to substantiate his claim. If the same has not been accepted, it cannot be said that the claim of the assessee was mala fide. The assessee had given bona fide explanation and also produced all material facts relating to computation of total income. It cannot be said that Explanation 1 to Section 271(1)(c) is attracted.
10. The next item of disallowance is in respect of gratuity. This amount related to the payment of approved gratuity fund under Section 40A(7) and it was claimed to be expenditure of revenue in nature. The claim was disallowed under Section 43B. Since there was a controversy on this issue, the assessee has been making the claim as per legal advice. All the facts and material were disclosed by the assessee in its return. Balance-sheet, Profit & Loss account and other necessary documents were furnished before the Income-tax authorities. It is before the Appellate Tribunal that the assessee's counsel has surrendered the claim vinder provision of Section 40A(7) because so many decisions on the provision of Section 43B have come by that time and they were quoted before the Appellate Tribunal. Explanation given by the assessee is bona fide and its rejection will not bring the case within the provision of Explanation 1 to Section 271 (1)(c). There is no finding that any material or fact has been suppressed or concealed by the assessee. In respect of disallowance of expenditure on repair and shifting of diesel generator set Rs. 1,70,997, the assessee's claim was that all material facts for the computation of income were produced. The assessee has claimed it as a revenue expenditure but the same was not accepted. However, Explanation 1 to Section 271 (1)(c) cannot be attracted. When the assessee had not suppressed any material fact and offered an explanation which is bona fide.
11. As against this, the learned Departmental Representative Shri D.K. Srivastava very vehemently argued that Explanation 1 to Section 271(1)(c) is attracted in the present case. It was submitted that Explanation 1 to Section 271 (1)(c) is a rule of evidence. Two questions arise namely (1) who will discharge the burden and (2) what type of burden is to be discharged. Due care and caution should be taken while deciding this issue. In the present case when the Tribunal has dismissed the explanation of the assessee with regard to claim of the assessee and additions/disallowances have been confirmed, Explanation 1 to Section 271(1)(c) is attracted. The burden is on the assessee to prove that explanation given is bona fide which he could not prove by producing evidence. Therefore, penalty was rightly upheld by the CIT (Appeals).
12. We have considered the rival submissions and have gone through the material available on the record. In this case penalty has been levied by attracting Explanation 1 to Section 271(1)(c). Explanation 1 to Section 271(1)(c) reads as under:
Explanation 1: Where in respect of any facts material to the computation of the total income of any person under this Act,-
(A) such person fails to offer an explanation or offers an explanation which is found by the Income-tax Officer or the Appellate Assistant Commissioner or the Commissioner (Appeals) to be false, or (B) such person offers an explanation which he is not able to substantiate, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purpose of Clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed :
Provided that nothing contained in this Explanation shall apply to a case referred to in Clause (B) in respect of any amount added or disallowed as a result of the rejection of any explanation offered by such person, if such explanation is bona fide and all the facts relating to the same and material to the computation of his total income have been disclosed by him.
Reading of this explanation makes it clear that where the person offers an explanation with respect to computation of his income and if it is found false, then it shall be presumed that the assessee had concealed the particulars of income. In the present case, we find that the assessee claimed expenditure (1) on the purchase of generator set; (2) on repair and shifting of diesel generator set; (3) on purchase of NPC Twin Screw Machine; and (4) purchase of transformer as revenue expenditure. However, the revenue authorities as well as the Appellate Tribunal rejected the assessee's claim and treated it as expenditure of capital in nature. In respect of payment to M/s. Dalai Consultants, this claim was not allowed in this year and finding was given that it would be allowed in the next year. In respect of accrued interest on FDRs, the addition was made on account of the fact that it is an income of the assessee though the claim of the assessee was that the nature of income at the moment is that it is a contingent in nature because the matter is still pending before the Hon'ble High Court. In case the matter goes against the assessee, he has to pay the amount along with interest in entirety. To cover-up such a situation as per legal advice, the accrued interest was being credited. However, this claim was not accepted. In respect of provision of payment of gratuity the disallowance was confirmed in view of provision of Section 43B on the basis that the amount was not actually paid in this year. However, the claim of the assessee was rejected by the revenue authorities as well as by the Appellate Tribunal but it is pertinent to mention here that neither the CIT (Appeals) nor the Appellate Tribunal has given any finding that the explanation given by the assessee was found false. In order to attract Explanation 1 to Section 271(1)(c). It will also be pertinent to mention here that in respect of purchase of diesel generator set, the assessee in the return itself claimed as a revenue expenditure. However, an alternative claim was also made by him that in case his claim of revenue expenditure is not accepted, without prejudice to the merit of the claim, the depreciation allowance and investment allowance be granted, if it is treated as capital expenditure. Can by any stretch of imagination be said that where the assessee had made alternative claim by disclosing all material facts for the computation of its income, Explanation 1 to Section 271(1)(c) is still attracted. Similarly in respect of Items enumerated as (2) to (4) in this paragraph, the assessee claimed these items as revenue expenditure. However, the Appellate Tribunal for its reasoning, has not accepted assessee's claim and treated it as expenditure capital in nature. In the course of relevant proceedings, all the authorities have discussed the explanations submitted threadbare and have discussed the view expressed for the various reasons stated in their respective orders but none of the authorities have held that the material evidence relating to the computation of income in respect of these items have been either suppressed or they were found to be false. The additions were confirmed. This may be on account of difference of opinion amongst various authorities but this will not justify the conclusion that an explanation given by the assessee was either unsubstantiated or mala fide. Rather from the facts found it is clear that the assessee had given full material facts relating to the computation of income. If he has taken a stand that expenditure incurred is a revenue expenditure and if it is held otherwise as a capital expenditure, it cannot be said that the explanation given by the assessee was not bonafide.
13. The next item in respect of which penalty is levied under Explanation I to Section 271(1)(c) is accrued interest on FDRs. The finding of the Appellate Tribunal is that this is an income of the assessee. Despite the assessee has claimed that on legal advice and interpretation of the legal situation, the interest accrued is not taxable because the matter is still subjudice before the Hon'ble Delhi High Court. Therefore, the ownership of this income is still in doubt. In case the case is reversed the assessee has to pay the entire amount with interest. It is true that it has been held as assessee's income but it has not been held that the assessee had concealed income or particulars relating to this income. Since the matter is subjudice, the claim of the assessee cannot be said to be mala fide.
14. The last item of penalty is provision of payment of gratuity in respect of which the finding of the Appellate Tribunal is that the assessee had acceded that this amount has not been actually paid in this year. Therefore, it is not allowable under Section 43B but it is clear that the assessee has given all the material particulars relating to this claim but the same were not accepted by the Tribunal. In our opinion, the addition/ disallowance of expenditure was a matter of opinion and it cannot be said that the claim of the assessee was mala fide specially when the assessee himself has filed revised return with explanation for revising the return and also made a claim and disclosed all material facts relating to the computation of income. In such a situation can it be said that Explanation 1 to Section 271(1)(c) is attracted. In our view the claim of the assessee was bonajide based on material evidence. Therefore, it cannot be said that Explanation 1 to Section 271(1)(c) is attracted.
15. In the case of Cement Marketing Co. of India Ltd. [supra], a question arose whether the amount of freight which was included in the "free on rail destination railway station" price, but which was paid by the purchasers and hence deducted from the price shown in the invoices sent to the purchasers, formed part of the sale price so as to be liable to be included in the taxable turnover of the assessee. The assessee proceeding on the basis that the amount of freight did not form part of the sale price and was not includible in the taxable turnover, did not show it in the returns, but the Assistant Commissioner of Sales-tax took the view that having regard to the provision of the Cement Control Order, the amount of freight formed part of the sale price and was includible in the taxable turnover of the assessee. The question arose whether it can be said that this was a frivolous contention taken up merely for the purpose of avoiding liability to pay tax. The Hon'ble Supreme Court observed as under:
A return cannot be 'false' unless there is an element of deliberateness in it. It is possible that even where the incorrectness of the return is claimed to be due to want of care on the part of the assessee and there is no reasonable explanation forthcoming from the assessee for such want of care, the court may, in a given case, infer deliberation and the return may be liable to be branded as a false return. But where the assessee does not include a particular item in the taxable turnover under a bonajide belief that he is not liable so to include it, it would not be right to condemn the return as a 'false' return inviting imposition of penalty:
Held accordingly, that where the assessee did not include in its return of turnover the amount of freight included in the price of sugar in the bona fide belief that it was not liable to be included in the taxable turnover, the assessee could not be said to have filed a 'false' return and penalty could not be imposed on the assessee under Section 43 of the M.P. General Sales Tax Act, 1958 and Section 9(2) of the Central Sales Tax Act, 1956.
The case of the assessee stands on the better footing. Here the assessee has disclosed all the material facts. Therefore it cannot be said that the claim of the assessee was frivolous or mala fide.
16. In the case of Devi Dayal Aluminium Industries (P.) Ltd. (supra), the claim of the assessee with regard to melting loss was not accepted by the Income-tax Officer. The ITO held that a certain quantity of stainless steel was not reflected in the stock. Thus additions were made. The Tribunal sustained the addition. The penalty proceedings were initiated by ITO under Section 271(1)(c) and the matter went up to the stage of Hon'ble Allahabad High Court where it was held that although the explanation of the assessee was not accepted, there was no material on which it could be said that it was not bonajide. The rejection of explanation of the assessee did not render it false so as to attract Section 271(1)(c) of Income-tax Act. Though the assessee failed to substantiate the claim of melting loss or wastage so long as the claim was bona fide, could not be held to be false. In the case of CIT v. C.R. Niranjan [1991] 187 ITR 280 (Mad.), the ITO rejected the account books and estimated the business income. On appeal, the Tribunal partly deleted the additions and partly sustained the additions on account of unexplained cash credit. When the matter of penalty came before the Hon'ble Madras High Court, it was held that the department had not brought any material to show that the assessee had concealed income or furnished inaccurate particulars of income. In the case of Chhotey Lal. Radhey Shyam (supra), the Hon'ble Allahabad High Court observed that the difference between the assessed income and the returned income arose because of certain additions and certain disallowances. The penalty was levied which travelled up to the stage of Hon'ble High Court. The Hon'ble High Court has held that no penalty can be levied because the assessee has disclosed all the particulars relating to computation of its income. Similar view was taken by the Hon'ble Gujarat High Court in the case of KM. Bhatia (Quarry) v. CIT [1992] 193 ITR 379. In the case of J.K. Jajoo v. CIT [1990] 181 ITR 410 (MP) certain expenditures were disallowed which were claimed by the assessee. When the revenue authority imposed penalty the matter travelled up to the Hon'ble Madhya Pradesh High Court where it was held that on mere fact that a claim for certain expenditure was rejected, it could not be held that the claim for expenditure made by the assessee was false or inaccurate to his knowledge or was a result of gross negligence. Therefore, penalty was deleted. In the case of CIT v. Ajay Hari Dalmia [1986] 157 ITR 145, the Hon'ble Delhi High Court has observed as under:
In order to attract penalty under Section 271(1)(c) of the Income-tax Act, 1961, what is required is a concealment, either of the income or the particulars thereof. In penalty proceedings, it is not only necessary to inform the assessee of the particular concealment but it is also necessary for the department to prove positively that there was a concealment.
17. From the above discussion and various decisions it is clear that where certain additions and disallowances were made which were confirmed up to the stage of the Tribunal, unless there is a finding that the explanation given by the assessee was false, the claim of the assessee cannot be treated as mala fide. In the present case, we find that the assessee had disclosed all material facts pertaining to the computation of income before the revenue authorities and the same were not found false by any authority then it cannot be said that in the given facts and circumstances, the assessee's claim was not bonafide. Further, it cannot be concluded that the assessee had concealed either particulars of income or furnished inaccurate particulars of income. If after furnishing all necessaiy particulars of income the assessee claimed benefit of certain provisions of the Act and raised contention but it did not find favour with the authorities, it may be on account of difference of opinion on particular set of facts but it does not amount that there had been a concealment of particulars of income. In view of our above discussion, we are of the opinion that penalty levied in the given facts and circumstances is illegal and invalid. We, therefore, cancel the same.
18. In the result, both the appeals are allowed.
G. Krishnamurthy, President
1. I entirely agree with the reasoning and conclusions reached by my learned Brother in cancelling the penalties levied under Section 271(1)(c). I would only like to add that unless the amounts disallowed were deemed to represent the income in respect of which particulars have not been furnished, no conclusion of concealment of income can be reached. This was what was clearly provided for in the Explanation 1 added to Section 271(1)(c). The very same Explanation also provided that nothing contained in that Explanation would apply to a case where the amount added or disallowed as a result of the rejection of any explanation offered by such person, if such explanation is bona fide and all the facts relating to the same and the material to the computation of his total income have been disclosed by him. Thus the safety valve provided to a honest assessee making a bona fide claim is contained in this exclusionary provision. This also places a burden on the revenue authority to establish as a matter of fact before a penalty is imposed treating the amount added or disallowed as concealment of income, that the explanation offered was not bonafide and all the material facts were not disclosed. The detailed and elaborate order passed by my learned Brother show that all the facts relating to the same contentions along with supporting material was furnished to the Assessing Officer and only alternative claims were raised interpreting the concerned Sections of the Income-tax Act in favour of the assessee. Nowhere it was said at any stage that the concerned particulars or materials necessary for the computation of total income were not disclosed by the assessee. Placing a different interpretation to put it otherwise, interpreting a section of an Act in favour of the assessee by placing all the necessary facts cannot be said to be a mala fide exercise of the right to interpret the Act. The facts of this case demonstrate that the assessee had with very great care, caution and good faith submitted an explanation, which is bona fide, made alternative claims disclosing at all times all the necessary materials. There was neither negligence nor deliberateness in the claims made. Disregarding this important aspect it is not proper and fair to still hold that the assessee was guilty of concealment of income all because the explanation offered by the assessee was not found to be acceptable. Such a situation does not warrant the levy of penalty for concealment of income. The penalties levied in this case are therefore rightly cancelled.