Income Tax Appellate Tribunal - Delhi
National Fertilizers Ltd.,, New Delhi vs Assessee on 17 June, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH : 'F' NEW DELHI)
BEFORE SHRI RAJPAL YADAV , JUDICIAL MEMBER AND
SHRI K.D. RANJAN, ACCOUNTANT MEMBER
I.T.A. No. 1418/Del./2010
(Assessment Year : 2004-05)
National Fertilizers Ltd., Vs. DCIT, Circle 13(1),
Scope Complex, Core-III, New Delhi.
7, Institutional Area, Lodi Road,
New Delhi.
(PAN/GIR No.AAACN0189N)
(Appellant) (Respondent)
Assessee by : Shri Ved Jain & Mrs. Rano Jain, CAs
Revenue by : Shri Kishore B., Sr.DR
ORDER
PER K.D. RAJNAN, AM
This appeal by the assessee for assessment year 2004-05 arises out of the order of CIT(A)-XVII, New Delhi.
2. The only issue for consideration relates to confirming the penalty u/s 271(1)(c) of the I.T. Act, 1961. The relevant grounds of appeal are reproduced as under:
"1. On the facts and circumstances of the case, the order passed by CIT(A) confirming the penalty u/s 271(1)(c) is bad both in the eye of law and on facts.
2. On the facts and circumstances of the case, the CIT(A) has erred both on facts and in law in confirming penalty of ` 124,50,425/- u/s 271(1)(c) on the addition made by Assessing Officer on account of valuation of loose tools.
3. On the facts and circumstances of the case, the CIT(A) has erred both on facts and in law in confirming penalty despite the fact that the appellant has submitted explanation in support of its contention that there is neither concealment nor furnishing of inaccurate particulars of income.2 I.T.A. No.1418/Del./2010 (A.Y. : 2004-05)
4 On the facts and circumstances of the case, the CIT(A) has erred both on facts and in law in confirming penalty despite the fact that the claim made by the appellant was bonafide and that all the facts relating to the same have been disclosed and as such no penalty can be levied even under Explanation 1 to Section 271(1)c) of the Act.
5 On the facts and circumstances of the case, the CIT(A) has erred both on facts and in law in confirming penalty u/s 271(1)(c) as no finding has been given on merit regarding concealment in the order passed by the Assessing Officer.
3. The facts of the case stated in brief are that the assessee is a public sector undertaking of the Govt. of India. During the course of assessment proceedings, the Assessing Officer observed that the assessee had made change in its accounting policy in respect of writing off of the loose tools from a period of three years to one year. The opening inventory of loose tools amounting to ` 32,12,000/- and loose tools of value of ` 21,82,000/- issued during the year were charged to revenue account. The Assessing Officer held that loose tools were part of plant and machinery u/s 32 of the Act and, therefore, the same could not be claimed as revenue expenditure. The Assessing Officer treated the tools as capital expenditure and allowed deprecation @ 25%.
4. Before the CIT(A), the assessee contested the order of the Assessing Officer by stating that change in the accounting of policy was made in accordance with Accounting Standard AS-2 issued by Institute of Chartered Accountants of India. The claim of the assessee was rejected on the ground that AS 2 deals only with the inventories held for the purpose of resale and, therefore, As 2 was not applicable. In the case of the assessee, AS-10 was applicable which deals with the fixed assets which provides that spares etc. should be written off over a period of time, representing the useful life thereof. The stand taken by the Assessing Officer was upheld by the CIT(A) which was also confirmed by the ITAT.
5. During the course of penalty proceedings u/s 271(1)(c) of the Act, it was submitted by the assessee that treatment of loose tools was made as per 3 I.T.A. No.1418/Del./2010 (A.Y. : 2004-05) Accounting Standard-2 prescribed by the Institute of Chartered Accountants of India and, therefore, assessee had bona fide belief that the amount was allowable. Therefore, assessee had not furnished any inaccurate particulars of his income. This contention of the assessee was rejected by the Assessing Officer on the ground that after introduction of Explanation 1 to section 271(1)(c) of the Act, the Revenue is not required to prove mens rea on the part of the assessee. He placed reliance on the decision of Hon'ble Supreme Court in the case of K.P. Madhusudanan vs. CIT, 251 ITR 99. The Assessing Officer further noted that the assessee had deliberately claimed the expenses of ` 40,43,000/- which was not allowable to it as revenue expenditure. The Assessing Officer, therefore, imposed penalty of ` 14,50,425/- being 100% of tax sought to be evaded on account of furnishing of inaccurate particulars of income of ` 40,43,000/-.
6. On appeal before the CIT(A), it was submitted by the assessee that the assessee is a PSU of the Govt. of India and, their accounts are audited by the C&AG. These accounts were laid before the Parliament. It was also submitted that the assessee had neither concealed any income nor furnished any inaccurate particulars of income. The Ld.AR of the assessee submitted that the AS-2 was revised in 1999. The assessee had disclosed in its annual report that they have changed the method of accounting. In para.10 of the Notes of the annual report, it has been clearly mentioned that in line with AS- 2, the company had changed the accounting policy of writing off loose tools over a period of three years to charging of such loose tools in the year of issue of use. Consequently, the opening inventory of loose tools amounting to ` 32.12 lakhs had been charged to revenue during the current year. Further, loose tools amounting to ` 21,52,000/- issued during the relevant year have also been charged to revenue account. Consequently, the profit for the year was lower at ` 28.69 lakhs. Ld.AR of the assessee placed reliance on various decisions including the decision of Hon'ble Supreme Court in the case of Addl.CIT vs. Jeevan Lal Shah, 205 ITR 244, wherein it has been held that Explanation 1 to section 271(1)(c) introduced by the Finance Act, 1964 shifts the burden of proof on the assessee to establish that the failure to return correct income was not on account of fraud or gross or willful neglect.
4 I.T.A. No.1418/Del./2010 (A.Y. : 2004-05)In the case of Dena Bank vs. IAC, 25 ITD 109 (Bom.), it has been held that assessee being a nationalized bank owned by the Govt. of India, there was no question of fraudulent claim of deduction and penalty was not justified. In the case of Bharat Heavy Electrical Ltd. vs. DCIT, 98 TTJ 565, the Tribunal held that the assessee, a PSU followed well established procedure of writing off of the value of its dead stock and its accounts were scrutinized by statutory auditors and by the C&AG. Since, its procedure was genuine, the deduction of provision for dead stock required to be allowed.
7. The CIT(A) considered the arguments of the assessee. He observed that the assessee had debited a sum of ` 41.20 lakhs to the P&L A/c on account of loose tools written off. The assessee had relied on AS-2 issued by Institute of Chartered Accountants of India to justify its claim, but AS-2 is only guidelines. The income which is chargeable to tax is required to be computed in accordance with the provisions of the I.T. Act, 1961 and not as per guidelines issued by Institute of Chartered Accountants of India. The assessee had failed to explain as to how AS-2 was applicable in its case and how the life of loose tools changed from three years to one year. The Tribunal in the quantum appeal had rejected the contention of the assessee and has held that AS-2 was not applicable in the case of the assessee. The Ld.CIT(A) has further noted that penalty u/s 271(1)(c) of the Act is civil liability and mens rea is not required to be established by the Revenue. He further observed the decisions relied upon by the assessee were distinguishable on facts and were of no help to the assessee. The Hon'ble Madras High Court in the case of CIT vs. Thirupati Kumar Khemka, 291 ITR 122 has held that as in economic offences, statutory liability to pay tax is a strict liability where the question of proving beyond the shadow of doubt the existence of bona fide belief does not arise. He also placed reliance on the decision of Hon'ble Delhi High Court in the assessee of Escorts Finance Ltd., 266 CTR(Del.) 105 wherein it has been held that where deduction u/s 35 of the Act is claimed, which was not admissible, was not a bona fide error and levy of penalty was upheld. The Ld.CIT(A) relying on various decisions has held that penalty in the case of the assessee was leviable. He accordingly confirmed the penalty levied by the Assessing Officer.
5 I.T.A. No.1418/Del./2010 (A.Y. : 2004-05)8. Before us, Ld.AR of the assessee submitted that assessee had disclosed the accounting policy in the return of income and based on the same, the value of loose tools was charged to P&L A/c as revenue expenditure. Therefore, there is no concealment on the part of the assessee. The assessee had disclosed all facts in the return of income. Further, he has submitted that assessee is a public sector company whose accounts are audited by the statutory auditors appointed by the C&AG. Since, full and true disclosure of all material facts necessary for assessment was in the return of income penalty u/s 271(1)(c) cannot be levied. Further there is no revenue effect whether the amount claimed in one year or in three years.
9. On the other hand, Ld.Sr.DR supported the order of CIT(A).
10. We have heard both the parties and gone through the material available on record. From above discussion, it is clear that the assessee had changed its accounting policy in view of AS-2. AS-2 issued by Institute of Chartered Accountants of India reads as under:
"4. Inventories encompass goods purchased and held for re-sale, for example, merchandise purchased by a retailer and held for resale, computer software held for resale, or land and other property held for resale. Inventories also encompass finished goods produced, or work in progress being produced, by the enterprise and include materials, maintenance supplies, consumables and loose tools awaiting use in the production process. Inventories do not include machinery spares which can be used only in connection with an item of fixed asset and whose use is expected to be irregular. Such machinery spares are accounted for in accordance with Accounting Standard (AS) 10. Accounting for fixed assets."
The change of accounting policy has not been approved by ITAT and quantum addition made by the Assessing Officer has been upheld. The Assessing Officer had made addition based on the information contained in audit report filed along with the return of income which disclosed the entire facts.
6 I.T.A. No.1418/Del./2010 (A.Y. : 2004-05)Therefore, it is not a case of concealment of income. The assessee had disclosed all material facts necessary for his assessment. Further, assessee is a Central Govt. undertaking and, therefore, there cannot be any intention to conceal any income or to furnish inaccurate particulars thereof with a view to evade proper taxes due to the Govt. of India. Clause (A) of Explanation 1 to section 271(1)(c) of the Act deals with a situation where a person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the CIT(A) to be false. Clause (B) of the Explanation 1 deals with a situation where a person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same material of computation of his total income have been disclosed by him. In both the situations, the amount added or disallowed in computing the total income shall be deemed to represent the income in respect of which particulars have been concealed. In the instant case, the assessee had changed its accounting policy and has disclosed, this fact in the audited accounts. Therefore, the assessee was under a bona fide belief that the value of loose tools could be claimed as revenue expenditure in one year as against claimed by the it earlier in three years. During the course of hearing, it was also pointed out by the Ld.AR of the assessee that the accounting policy was changed on the advice of the C&AG. Therefore, in our considered opinion, it is not a case where assessee had not been able to offer an explanation or offered explanation which was found to be false. Since the explanation offered by the assessee is bona fide and there cannot be a case of understatement of income as the assessee company is owned by the Govt. of India. Therefore, it is not a case where penalty u/s 271(1)(c) of the Act should be imposed. We accordingly delete the penalty.
12. In the result, the appeal filed by the assessee is allowed.
Order pronounced in open court on17.06.2011.
Sd/- Sd/-
(RAJPAL YADAV) (K.D. RANJAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: June 17, 2011
SKB
7 I.T.A. No.1418/Del./2010
(A.Y. : 2004-05)
copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)-XVII, New Delhi.
5. DR
Deputy Registrar