Whether once Commissioner while excersing his revisional powers has stated that non-initiation of penalty proceedings by AO does not warrant any interference, hands of AO are tied on invoking penalty on remand - NO:HC

THE issues before the Bench are - Whether once the Commissioner while excersing his revisional powers has stated that non-initiation of penalty proceedings by the AO does not warrant any interference, the hands of the AO is tied on invoking the penalty provisions on remand; Whether such penalty proceedings cannot be initiated, although the assessee was later found to have made bogus claims and concealed income during such fresh assessment; Whether
in such a situation, if the provisions of the Act on penalty are attracted, the AO has to go by the dictates of the law or rather by the order of the Commissioner; Whether mere submitting a claim which is incorrect and untenable in law would not give rise to imposition of penalty; Whether if such claim made by the assessee is not bona fide and with mala-fide intention, Explanation 1 to Section 271(1)(c) would come into play and penalty shall be levied and Whether penalty can be imposed in a civil liability, once it is established that the assessee has wilfully provided a wrong explanation to conceal its income. And the verdict goes in favour of the assessee.

Facts fo the case

Assessee is a private limited company dealing in Iron and Steel , whose assessment order was made originally for the AY 2002-03. Thereafter, the assessment was subjected to revisional proceedings by the Commission of Income Tax ("Commissioner") on account of unreliability of the accounts as regards the gross profit as well as on Bill discounting charges. The assessee submitted that considering the recession in the Iron and Steel market and the resultant crisis thereon, they could not pay attention on accounting; and in the circumstances, to buy peace with the department, the assessee offered an estimated addition of Rupees Four lakhs towards deficiencies in Gross Profit and Rupees Ten Lakhs towards discounting charges. The Commissioner held that in the peculiar circumstances of the case, the assessee's offer be accepted and the AO was accordingly directed to assess the additional estimate of income offered by the assessee, and also observed that the AO's decision in not initiating penalty proceedings did not need any interference.

Thereafter, during the fresh assessment for the AY 2002-03, the AO noted that there was concealment of income by the assessee within the meaning of Section 271(1)(c) of the Act, and hence, proposed penalty for both the years. As far as the AY 2003-04 was concerned, the addition in this year arose on account of disallowance of the assessee's claim on depreciation and the claim of deduction on question of payment of penalty and fine under the Customs Act apart from additions on disallowing the claim towards LC discounting charges rejected.

Regarding the claim of depreciation, during the survey u/s 133A, a sworn statement was recorded from the assessee's Company Director, in which it was mentioned that the machineries were sent for repair to SIPCOT Commercial Complex, Gummidipoondi, and thereafter, received from their stock yard. However, no supporting documents were produced in respect of this claim and as on 31.3.2003 since, there was no machinery received after service for the purpose of using it in the business; consequently, the claim on depreciation was disallowed. Regarding the fine and penalty payment under the Customs Act, the said levy were made under the Customs Act on account of price variation. The AO rejected the plea of the assessee to take a lenient view, and made an addition. Finally, regarding the discounting of Letter of Credits, the AO found that there was no physical movement of goods and sale invoices were prepared only to help the group companies, when they required money and thereafter, bogus bills prepared were discounted. Based on the above said materials, in the penalty orders passed, the Assessing Officer levied minimum penalty u/s 271(1)(c) of the Act.

On appeal, the CIT(A) deleted the penalty, and aggrieved, the Revenue had filed an appeal before the Tribunal. The Tribunal relied on several decisions and held that being a civil liability, wilful concealment is not an essential ingredient for attracting penalty u/s 271(1)(c), and it confirmed the penalty levied by the AO.

Aggrieved by this, the present Tax Case Appeals has been filed by the assessee before the High Court.

The counsel for the assessee contended, that when the Commissioner had pointed out, that there was no case for penalty and had only ordered the AO to assessee the additional income offered by the assessee, the AO was not correct in initiating the penalty proceedings. As far as AY 2003-04 was concerned, the counsel submitted that disallowance, per se, would not lead to an inference of concealment, leading to levy of penalty. The counsel relied on various decisions in support of his contentions.

On the other hand, the Departmental Representative placed reliance on the decision in the case of Union of India Vs. Rajasthan Spg. & Wvg. Mills as well as the decision of the Delhi High Court in the case of Commissioner of Income Tax Vs. Zoom Communication P. Ltd., and submitted that even going by the decisions of this Court relied on by the counsel for the assessee, penalty was leviable in this case. He submitted that the claim of the assessee that the additions made were not on account of concealment was totally incorrect. His contention can be summarized that unreliability of the accounts and false claims were clearly instances of concealment, which warranted levy of penalty.

Having heard the parties, the High Court held that,

++ we agree with the contentions of the Standing counsel appearing for the Revenue. It is no doubt true that in the order passed under Section 263 of the Act dated 08.12.2004, the Commissioner of Income Tax pointed out to the offer made by the assessee for addition and ultimately held that in view of the submissions of the assessee and the facts of the case, the decision of the Assessing Officer in not initiating penalty proceedings did not need interference. Having said so, while remanding the matter for fresh consideration for Assessing Officer for further examination and decision, the Assessing Officer was directed to consider the claim of the assessee as per the provisions of the Act. Thus, contrary to the assertion of the assessee, all that the Commissioner of Income Tax did in the revisional Order was that while accepting the plea of the assessee for restricting the addition, he merely pointed out that a non initiation of penalty proceedings did not warrant any interference. This, however, does not mean that the hands of the Assessing Officer is tied on invoking the provisions under the Act, which, otherwise, would be applicable to the facts of the case. Thus, in the given fact situation, if the provisions of the Act on penalty are attracted, the Assessing Officer has to go by the dictates of the law rather than by the order of the Commissioner of Income Tax. In fact, we may even say that the Commissioner did not comment anything at all on this. In the circumstances, we reject the plea of the assessee that based on the order under Section 263 of the Act, there could not be any penalty;

++ as far as levy of penalty is concerned, as rightly pointed out by the Standing counsel for the Income Tax Department, the claim for bill discounting for both assessment years was found to be totally untrue, as there was no physical movement of goods. The bills were found to be bogus one. Apart from that, the addition was made towards gross profit for the assessment year 2002-2003 only on account of non-reliability of the books of accounts. As far as assessment year 2003-04 is concerned, the claim for depreciation was also found as a bogus claim. As far as the claim on depreciation on machinery is concerned, admittedly, the machinery was not at all put to use during the said year. As far as the claim for deduction towards fine and penalty is concerned, evidently, the assessee cannot legally sustain this claim in terms of Section 37 of the Act. Thus, in the garb of the bona fide claim, the assessee cannot escape levy of penalty;

++ in the circumstances, we have no hesitation in rejecting the plea of the assessee that additions were not substantial additions and hence there could be no penalty. The reliance made by the counsel for the assessee on the unreported decisions of this Court in the Commissioner of Income Tax, Ward IV (1), Chennai Vs. P.Rojes does not, in any manner, support the case of the assessee;

++ in the circumstances, we find that the unreported decisions of this Court relied on by the counsel for the assessee stand on factual findings and are distinguishable. The plea made by the counsel for the assessee, hence, stands rejected on the facts of the case on hand;

++ on the other hand, the reliance placed by the Revenue on the decisions of the Apex Court and in the case of Commissioner of Income Tax Vs. Zoom Communication P. Ltd., merits acceptance. In the decision in Commissioner of Income Tax Vs. Zoom Communication P. Ltd., the Delhi High Court viewed that so long as the assessee had not concealed any material fact or the factual information given by him has not been found to be incorrect, even if the claim made by him is unsustainable in law, he will not be liable to imposition of penalty under Section 271(1)(c) of the Income Tax Act, 1961, provided that he either substantiates that the explanation offered by him or the explanation, even if not substantiated, is found to be bona fide. If the explanation is neither substantiated nor shown to be bonafide, Explanation 1 to Section 271(1)(c) of the Act would come into play and the assessee will be liable for the prescribed penalty;

++ we are in entire agreement with the view expressed by the Delhi High Court. The Delhi High Court observed that it is true that mere submitting a claim which is incorrect in law would not amount to giving inaccurate particulars of the income of the assessee but it cannot be disputed that the claim made by the assessee needs to be bona fide. If the claim besides being incorrect in law is mala fide, Explanation 1 to Section 271(1)(c) would come into play and work to the disadvantage of the assessee;

++ the decision of the Apex Court in the case of Union of India and others Vs. Dharmendra Textiles Processors and Others, which is referred to by the Income Tax Appellate Tribunal and the subsequent decision in the Union of India Vs. Rajasthan Spg. & Wvg. Mills clearly point out that the penalty is leviable for deliberate deception of the claim. Thus levy of penalty would depend on the existence or otherwise of the conditions calling for levy of penalty. The object behind the enactment of Section 271(1)(c), read with the Explanations, indicates that the Section has been enacted to provide for a remedy for loss of revenue, by reason of concealment of particulars of income. Thus, being a civil liability and that the explanation offered by the assessee not being a bona fide one, particularly on the facts of the case, we have no hesitation in confirming the order of the Income Tax Appellate Tribunal.