THE twin questions before the Bench are - Whether when the
assessee wittingly reports a particular income under a wrong head to take
certain benefits, penalty imposed for concealment is sustainable in law and
Whether merely making a claim, which was not sustainable in law should not
result in penalization u/s 271(1)(c). And the first question is answered in
favour of the Revenue.
The assessee filed its return of income declaring loss and the return was processed u/s 143(1) of the Act. Subsequently, re-assessment notice was issued after noticing that the assessee had claimed depreciation on plant and machinery though no manufacturing activity was conducted during the year under consideration and had wrongly claimed capital loss on sale of investments amounting to Rs.59,15,000/- as business loss.
The assessee on receipt of reasons for reopening, filed objections to the initiation of the re-assessment proceedings and contested the notice u/s 148 of the Act. The said objections of the assessee were rejected vide order sheet entry dated 24th December, 2007.
During the course of assessment proceedings, the assessee filed a revised computation in which they accepted that Rs.59,15,000/- was wrongly claimed as a revenue loss and was in fact capital loss. The assessee also accepted that unpaid interest charges of Rs.4,46,13,877/- should have been disallowed u/s 43B cannot be accounted for in the P&L account. Similarly, the respondent had erroneously accounted Rs.12,610/- and Rs.4,715/-, due and payable on account of provident fund and ESI in the P&L account, although this was not permissible and was contrary to Section 43B of the Act. The AO disallowed depreciation claim of Rs 89,95,173/- and claim on account of loss on sale of vehicles, which was treated by the assessee as revenue loss of Rs.1,27,930/-. This loss it was observed was a capital loss. On account of the aforesaid additions, total loss of the assessee was reduced as against the claimed losses. Proceedings u/s 271(1)(c) of the Act were initiated.
The AO imposed penalty of Rs.2,13,75,229/- on account of concealment and/or furnishing of inaccurate particulars. He rejected the contention of the assessee that the claims/entries were bona fide and lapse had occurred because the assessee was without competent professional staff due to closure of running operations and that the return was filed by a junior accountant, who was not well versed with the tax laws. CIT(Appeals) upheld the order imposing penalty.
Tribunal deleted the penalty, inter alia, recording that all details with regard to the loss suffered were filed along with the return of income and the change of head of income cannot be considered as concealment or furnishing inaccurate particulars of income. The legal claim made by the assessee was not found to be allowable under the head “business loss” but the same was allowed as a “capital loss”.
On appeal by the Revenue, the High Court held that,
++ claim of depreciation was a debatable issue. Passive use entitles an assessee to claim depreciation. No manufacturing activities were conducted during the assessment year in question but the assessee had approached Board of Financial Reconstruction for rehabilitation of the company under the provisions of Sick Industrial Companies (Special Provisions) Act, 1985. Penalty imposed in the last year for same reason was deleted by the tribunal;
++ the view expressed by the tribunal cannot be agreed that change of head under which income is to be assessed per se would justify cancellation of penalty for concealment for the reason that it is not a case of furnishing of inaccurate particulars. Furnishing of inaccurate particulars of income can have different connotations and may arise when income is enhanced, deduction denied or when head of income, is changed resulting in a higher rate of tax or increase in income. The real question is application of Explanation 1. Paragraphs 5.2 and 5.3 of the Tribunal order refer to the disallowance u/s 43B and observe that ESI and PF deductions as claimed were a mistake and a case of not giving proper effect to P&L account. However, this cannot be read in isolation as the assessee had not made disallowance u/s 43B even in respect of interest payable but not paid, to the financial institutions;
++ paragraphs 5.4 and 5.5 of the Tribunal order record that the respondent was continuously loss making concern for last many years and, therefore, decision in another case was distinguishable. Whether or not the assessee makes loss is not the relevant criteria or factor to determine whether penalty should be imposed u/s 271(1)(c) or not. Of course, lack of or inability to engage a good professional tax consultant is a different matter but there should be proof and basis to hold that the losses incurred prevented an assessee from getting proper tax advice and the issue in question was complicated or required professional advice of a highly expert nature. Further, this is not the correct way of applying Explanation 1. In paragraph 5.5 of the Tribunal order it is recorded that one cannot be oblivious to the explanation and justification given by the assesse. Indeed one has to take into consideration the explanation and the justification given by the assessee but it cannot be accepted as bona fide and true on mere asking. Onus under Explanation 1 is on the assessee to prove the reason as to why a particular claim or deduction was made. The justification and cause shown should be bona fide and acceptable. Penalty cannot be deleted by merely recording the explanation, though not proved and established. It is not for the Revenue to show that the explanation offered is not false or bogus;
++ section 271(1)(c) of the Act as applicable has been considered and interpreted in several judgments of the Supreme Court and the Delhi High Court. The said Section is invoked when an assessee furnishes inaccurate particulars or conceals his income. Explanation 1 can come to the rescue of the assessee in case he had offered an explanation but was unable to substantiate it, provided he is able to establish that the explanation offered was bona fide and the facts relating to furnishing of inaccurate particulars and material for computation of total income were duly disclosed by him. In the present case, the assessee had furnished inaccurate particulars of income and this is established beyond doubt. Assessment order passed u/s 143(3)/147 of the Act dated 28th December, 2007 was accepted by the assessee in which the aforesaid disallowance/additions were made. In fact, submission of the assessee is that the aforesaid errors pointed out in the assessment order were conceded to and accepted by the assessee during the course of the assessment proceedings by filing a revised computation. In these circumstances, the contradictory contention of the assessee that they had not furnished inaccurate particulars of their income is not acceptable. The moot question and issue is whether the assessee has discharged the burden under Explanation 1 to Section 271(1)(c) of the Act or rather more precisely whether the tribunal has correctly applied the said Explanation as mandated and required by the statute;
++ mens rea is not required and necessary to impose penalty for concealment. In Union of India vs. Dharmendra Textile Processors (2008-TIOL-192-SC-CX-LB), the Supreme Court examined Section 271(1)(c) of the Act and other provisions for imposition of penalty in different statutory enactments. It was held that penalty in such cases imposed for tax delinquency is a civil obligation, remedial and coercive in nature and is far different from penalty for crime or a fine or forfeiture as stipulated in criminal or penal laws. It refers to blameworthy conduct for contravention of the Act and it equally applies to tax delinquency cases. Mens rea or willful failure or conduct is not required to be proved and established. Mens rea is essential or sine-qua-non for criminal offences but is not an essential element for imposing penalty for breach of civil obligations or liabilities.
++ thus, penalty u/s 271(1)(c) is imposed when an assessee conceals his income or furnishes incorrect particulars. In terms of explanation I, we have to examine whether the case in question falls within the two limbs viz. clause (A) and (B) i.e. which of the two limbs and effect thereof. Clause (A) applies when an assessee fails to furnish explanation or when an explanation is found to be false. Clause (B) applies to cases where explanation is offered but the assessee is not able to substantiate the explanation. In such cases, we have to examine two conditions: (1) Whether the assessee has been able to show that his explanation was bonafide; (2) whether the assessee had furnished and disclosed facts and material relating to computation of his income. Onus of establishing that the assessee satisfies the two conditions is on the assessee. Both the conditions have to be satisfied. In case the assessee satisfies the twin condition, penalty should not be imposed;
++ on the second aspect, which relates to addition on account of disallowance u/s 43B of the Act, position remains the same. In the audited accounts, there is no mention or reference to the said Section or that in the P&L account expenditure which has to be disallowed u/s 43B has been debited and claimed. The fact that interest due and payable to the financial institution has not been paid but was treated as expenditure in the P&L account was not stated or adverted to. Thus, full facts relating to the assessment of income were not stated;
++ in the present case, additions or disallowance has been made on account of wrong claim of revenue loss, which was in fact capital loss and disallowance u/s 43B. From the reasoning given by the tribunal, it is not possible to decipher and hold that the explanation given by the assessee shows as to why his claims were bona fide and justified. The onus of establishing the reasons for the claim made is on the assessee. Penalty cannot be imposed because an assessee has taken a particular legal stand. However, this does not mean that the assessees can claim wrong deductions or claim without any basis or foundation to justify the claim. False, spurious and mendacious claims do not fall in this class;
++ in the guise of wrong or improper legal opinion, an assessee should not be permitted and allowed to escape penalty when the accounts are audited by a Chartered Accountant, when the provision and position in law is well-known and well-understood. It is not a case of a debatable issue or a legal provision which could have escaped or missed notice or consideration of the Chartered Accountant or the accountant or the directors of the company. We cannot stretch the plea that the issue was debatable or there was wrong advice beyond the point to believe or accept contentions when the claim itself is impossible to accept and is contrary to fundamentals of tax or accountancy. Income tax returns are mostly accepted without scrutiny or regular assessment. Self and due compliance of tax provisions is required. In the present case, the original return filed by the assessee was accepted u/s 143(1) of the Act. Subsequently, noting discrepancies, notice u/s 148 of the Act was issued. Even at that time, the assessee did not accept the fault and in their letter dated 9th August, 2007 stated that the original return may be treated as filed in response to the reassessment notice. Objections to re-opening were raised and the stand and stance of the assessee changed when they were repeatedly confronted. It is not a case where the assessee suo motu on his own or on immediately noticing the wrong claim rectified or corrected the purported errors and understatements. It is only when the assessee was cornered and confronted by the AO that the revised computation was filed. The revised computation was filed after the objections to the re-opening were dismissed by the AO;
++ whether an assessee had offered an explanation and whether the explanation was bona fide when discussed and examined as stipulated in Explanation 1, is a question of fact and depends upon several factors, including whether the assessee is an individual or corporate assessee, literate or illiterate, the nature, character and quantum of the deduction, his past conduct relating to the same claim/deduction, the provision or section applicable etc. (Failure to apply Explanation 1, as per law would make it, mixed question of law and fact) It is not one fact but several factors which have to be taken into consideration to determine whether or not the claim or explanation of an assessee is bona fide;
++ in view of the aforesaid discussion, the question of law in favour of the Revenue and against the assessee and uphold levy of penalty u/s 271(1)(c) of the Act in respect of loss on account of investments, vehicle and disallowance u/s 43B. The claims were ex facie wrong being contrary to fundamental/basic principles of accounts and Act, would not have escaped notice or missed. However, penalty not was justified and proper on the wrong claim for depreciation of plant and machinery as the legal position on the said claim was debatable.
Facts of the
case
The assessee filed its return of income declaring loss and the return was processed u/s 143(1) of the Act. Subsequently, re-assessment notice was issued after noticing that the assessee had claimed depreciation on plant and machinery though no manufacturing activity was conducted during the year under consideration and had wrongly claimed capital loss on sale of investments amounting to Rs.59,15,000/- as business loss.
The assessee on receipt of reasons for reopening, filed objections to the initiation of the re-assessment proceedings and contested the notice u/s 148 of the Act. The said objections of the assessee were rejected vide order sheet entry dated 24th December, 2007.
During the course of assessment proceedings, the assessee filed a revised computation in which they accepted that Rs.59,15,000/- was wrongly claimed as a revenue loss and was in fact capital loss. The assessee also accepted that unpaid interest charges of Rs.4,46,13,877/- should have been disallowed u/s 43B cannot be accounted for in the P&L account. Similarly, the respondent had erroneously accounted Rs.12,610/- and Rs.4,715/-, due and payable on account of provident fund and ESI in the P&L account, although this was not permissible and was contrary to Section 43B of the Act. The AO disallowed depreciation claim of Rs 89,95,173/- and claim on account of loss on sale of vehicles, which was treated by the assessee as revenue loss of Rs.1,27,930/-. This loss it was observed was a capital loss. On account of the aforesaid additions, total loss of the assessee was reduced as against the claimed losses. Proceedings u/s 271(1)(c) of the Act were initiated.
The AO imposed penalty of Rs.2,13,75,229/- on account of concealment and/or furnishing of inaccurate particulars. He rejected the contention of the assessee that the claims/entries were bona fide and lapse had occurred because the assessee was without competent professional staff due to closure of running operations and that the return was filed by a junior accountant, who was not well versed with the tax laws. CIT(Appeals) upheld the order imposing penalty.
Tribunal deleted the penalty, inter alia, recording that all details with regard to the loss suffered were filed along with the return of income and the change of head of income cannot be considered as concealment or furnishing inaccurate particulars of income. The legal claim made by the assessee was not found to be allowable under the head “business loss” but the same was allowed as a “capital loss”.
On appeal by the Revenue, the High Court held that,
++ claim of depreciation was a debatable issue. Passive use entitles an assessee to claim depreciation. No manufacturing activities were conducted during the assessment year in question but the assessee had approached Board of Financial Reconstruction for rehabilitation of the company under the provisions of Sick Industrial Companies (Special Provisions) Act, 1985. Penalty imposed in the last year for same reason was deleted by the tribunal;
++ the view expressed by the tribunal cannot be agreed that change of head under which income is to be assessed per se would justify cancellation of penalty for concealment for the reason that it is not a case of furnishing of inaccurate particulars. Furnishing of inaccurate particulars of income can have different connotations and may arise when income is enhanced, deduction denied or when head of income, is changed resulting in a higher rate of tax or increase in income. The real question is application of Explanation 1. Paragraphs 5.2 and 5.3 of the Tribunal order refer to the disallowance u/s 43B and observe that ESI and PF deductions as claimed were a mistake and a case of not giving proper effect to P&L account. However, this cannot be read in isolation as the assessee had not made disallowance u/s 43B even in respect of interest payable but not paid, to the financial institutions;
++ paragraphs 5.4 and 5.5 of the Tribunal order record that the respondent was continuously loss making concern for last many years and, therefore, decision in another case was distinguishable. Whether or not the assessee makes loss is not the relevant criteria or factor to determine whether penalty should be imposed u/s 271(1)(c) or not. Of course, lack of or inability to engage a good professional tax consultant is a different matter but there should be proof and basis to hold that the losses incurred prevented an assessee from getting proper tax advice and the issue in question was complicated or required professional advice of a highly expert nature. Further, this is not the correct way of applying Explanation 1. In paragraph 5.5 of the Tribunal order it is recorded that one cannot be oblivious to the explanation and justification given by the assesse. Indeed one has to take into consideration the explanation and the justification given by the assessee but it cannot be accepted as bona fide and true on mere asking. Onus under Explanation 1 is on the assessee to prove the reason as to why a particular claim or deduction was made. The justification and cause shown should be bona fide and acceptable. Penalty cannot be deleted by merely recording the explanation, though not proved and established. It is not for the Revenue to show that the explanation offered is not false or bogus;
++ section 271(1)(c) of the Act as applicable has been considered and interpreted in several judgments of the Supreme Court and the Delhi High Court. The said Section is invoked when an assessee furnishes inaccurate particulars or conceals his income. Explanation 1 can come to the rescue of the assessee in case he had offered an explanation but was unable to substantiate it, provided he is able to establish that the explanation offered was bona fide and the facts relating to furnishing of inaccurate particulars and material for computation of total income were duly disclosed by him. In the present case, the assessee had furnished inaccurate particulars of income and this is established beyond doubt. Assessment order passed u/s 143(3)/147 of the Act dated 28th December, 2007 was accepted by the assessee in which the aforesaid disallowance/additions were made. In fact, submission of the assessee is that the aforesaid errors pointed out in the assessment order were conceded to and accepted by the assessee during the course of the assessment proceedings by filing a revised computation. In these circumstances, the contradictory contention of the assessee that they had not furnished inaccurate particulars of their income is not acceptable. The moot question and issue is whether the assessee has discharged the burden under Explanation 1 to Section 271(1)(c) of the Act or rather more precisely whether the tribunal has correctly applied the said Explanation as mandated and required by the statute;
++ mens rea is not required and necessary to impose penalty for concealment. In Union of India vs. Dharmendra Textile Processors (2008-TIOL-192-SC-CX-LB), the Supreme Court examined Section 271(1)(c) of the Act and other provisions for imposition of penalty in different statutory enactments. It was held that penalty in such cases imposed for tax delinquency is a civil obligation, remedial and coercive in nature and is far different from penalty for crime or a fine or forfeiture as stipulated in criminal or penal laws. It refers to blameworthy conduct for contravention of the Act and it equally applies to tax delinquency cases. Mens rea or willful failure or conduct is not required to be proved and established. Mens rea is essential or sine-qua-non for criminal offences but is not an essential element for imposing penalty for breach of civil obligations or liabilities.
++ thus, penalty u/s 271(1)(c) is imposed when an assessee conceals his income or furnishes incorrect particulars. In terms of explanation I, we have to examine whether the case in question falls within the two limbs viz. clause (A) and (B) i.e. which of the two limbs and effect thereof. Clause (A) applies when an assessee fails to furnish explanation or when an explanation is found to be false. Clause (B) applies to cases where explanation is offered but the assessee is not able to substantiate the explanation. In such cases, we have to examine two conditions: (1) Whether the assessee has been able to show that his explanation was bonafide; (2) whether the assessee had furnished and disclosed facts and material relating to computation of his income. Onus of establishing that the assessee satisfies the two conditions is on the assessee. Both the conditions have to be satisfied. In case the assessee satisfies the twin condition, penalty should not be imposed;
++ on the second aspect, which relates to addition on account of disallowance u/s 43B of the Act, position remains the same. In the audited accounts, there is no mention or reference to the said Section or that in the P&L account expenditure which has to be disallowed u/s 43B has been debited and claimed. The fact that interest due and payable to the financial institution has not been paid but was treated as expenditure in the P&L account was not stated or adverted to. Thus, full facts relating to the assessment of income were not stated;
++ in the present case, additions or disallowance has been made on account of wrong claim of revenue loss, which was in fact capital loss and disallowance u/s 43B. From the reasoning given by the tribunal, it is not possible to decipher and hold that the explanation given by the assessee shows as to why his claims were bona fide and justified. The onus of establishing the reasons for the claim made is on the assessee. Penalty cannot be imposed because an assessee has taken a particular legal stand. However, this does not mean that the assessees can claim wrong deductions or claim without any basis or foundation to justify the claim. False, spurious and mendacious claims do not fall in this class;
++ in the guise of wrong or improper legal opinion, an assessee should not be permitted and allowed to escape penalty when the accounts are audited by a Chartered Accountant, when the provision and position in law is well-known and well-understood. It is not a case of a debatable issue or a legal provision which could have escaped or missed notice or consideration of the Chartered Accountant or the accountant or the directors of the company. We cannot stretch the plea that the issue was debatable or there was wrong advice beyond the point to believe or accept contentions when the claim itself is impossible to accept and is contrary to fundamentals of tax or accountancy. Income tax returns are mostly accepted without scrutiny or regular assessment. Self and due compliance of tax provisions is required. In the present case, the original return filed by the assessee was accepted u/s 143(1) of the Act. Subsequently, noting discrepancies, notice u/s 148 of the Act was issued. Even at that time, the assessee did not accept the fault and in their letter dated 9th August, 2007 stated that the original return may be treated as filed in response to the reassessment notice. Objections to re-opening were raised and the stand and stance of the assessee changed when they were repeatedly confronted. It is not a case where the assessee suo motu on his own or on immediately noticing the wrong claim rectified or corrected the purported errors and understatements. It is only when the assessee was cornered and confronted by the AO that the revised computation was filed. The revised computation was filed after the objections to the re-opening were dismissed by the AO;
++ whether an assessee had offered an explanation and whether the explanation was bona fide when discussed and examined as stipulated in Explanation 1, is a question of fact and depends upon several factors, including whether the assessee is an individual or corporate assessee, literate or illiterate, the nature, character and quantum of the deduction, his past conduct relating to the same claim/deduction, the provision or section applicable etc. (Failure to apply Explanation 1, as per law would make it, mixed question of law and fact) It is not one fact but several factors which have to be taken into consideration to determine whether or not the claim or explanation of an assessee is bona fide;
++ in view of the aforesaid discussion, the question of law in favour of the Revenue and against the assessee and uphold levy of penalty u/s 271(1)(c) of the Act in respect of loss on account of investments, vehicle and disallowance u/s 43B. The claims were ex facie wrong being contrary to fundamental/basic principles of accounts and Act, would not have escaped notice or missed. However, penalty not was justified and proper on the wrong claim for depreciation of plant and machinery as the legal position on the said claim was debatable.
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