Commissioner of Income-tax v. M/s Steel Authority of India Ltd
[Citation -2014-LL-0925-44]

Citation 2014-LL-0925-44
Appellant Name Commissioner of Income-tax
Respondent Name M/s Steel Authority of India Ltd.
Court HIGH COURT OF DELHI AT NEW DELHI
Relevant Act Income-tax
Date of Order 25/09/2014
Judgment View Judgment
Keyword Tags installation and commissioning • public sector undertaking • concealment of income • plant and machinery • date of acquisition • higher depreciation • reassessment order • regular assessment • trial production • concealed income • work in progress • excess interest • audit objection • new machinery • interest paid • audit report
Bot Summary: In order to comply with and meet the said audit objection, the excess interest was de-capitalized by debiting interest and crediting the assets in the two assessment years. The impact of the said adjustments was reflected in the Profit Loss a/c as an Adjustment relating to an earlier years, since the interest related to earlier years, though the decision was taken during the current years. For the assessment year 1999-2000, respondent assessee claimed various deductions including interest of Rs 366 lacs being an Adjustment relating to an earlier years. In the regular assessment proceedings, no disallowance was made, but then, the Assessing Officer found that income had escaped assessment as adjustment relating to earlier years had been allowed as a deduction in the assessment years in question. In the re-assessment orders, the Assessing Officer held that interest claimed pertained to earlier years, and was not related to the years in consideration. The assessee had given truthful and cogent explanation without concealing or hiding facts why interest relating to earlier years, which was capitalized, had been accounted for as a liability in the current years. Since the interest was credited in the earlier years, the reversal by debiting interest has been shown as an adjustment relating to earlier years.


$ 32 & 33 * IN HIGH COURT OF DELHI AT NEW DELHI Date of Decision: September 25, 2014 + ITA 599/2014 & CM No. 15750/2014 COMMISSIONER OF INCOME TAX ..... Appellant Through: Ms.Suruchi Aggarwal, Sr.Standing Counsel Versus M/S STEEL AUTHORITY OF INDIA LTD. ..... Respondent Through: + ITA 600/2014 COMMISSIONER OF INCOME TAX ..... Appellant Through: Ms.Suruchi Aggarwal, Sr.Standing Counsel versus M/S STEEL AUTHORITY OF INDIA LTD. ..... Respondent Through: CORAM: HON'BLE MR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTICE V. KAMESWAR RAO SANJIV KHANNA, J (ORAL) CM No. 15750/2014 in ITA No. 599/2014 Exemption allowed, subject to all just exceptions. Application stands disposed of. ITA No. 599/2014 ITA No. 600/2014 These two appeals filed by revenue under Section 260A of Income Tax Act, 1961 (Act, in short) relate to Assessment Years 1999-2000 and 2000-2001. 2. By common impugned order dated 24.01.2014, Income Tax Appellate Tribunal ( Tribunal , in short), has affirmed order of Commissioner of Income Tax (Appeals) [ CIT(A) , in short], deleting penalty levied under Section 271 (1)(c) of Act amounting to Rs 128.10 lacs for assessment year 1999-2000 and Rs 19.25 lacs for assessment year 2000-2001. 3. respondent assessee, Public Sector Undertaking during relevant period operated integrated steel plants and was engaged in activities relating to manufacturing and sale of steel articles etc. respondent-assessee had shown considerable capitalization of assets on account of expansion and modernization. As installation, erection and commissioning of new machinery involved substantiated gestation time, Interest, relatable to borrowings from date of acquisition to date of putting asset to use, were added to value of assets and accordingly capitalized. This capitalization of interest became subject matter of audit objections by Chief Vigilance Commission (CVC, for short) and Comptroller and Auditor General of India (CAG, for short) for reason that interest capitalized was higher or more than justified/required. In other words, part of interest capitalized should have been claimed as revenue expenditure. These objections were raised subsequent to statutory audit and long after filling of tax returns and even assessments for respective years. In order to comply with and meet said audit objection, excess interest was de-capitalized by debiting interest and crediting assets in two assessment years. impact of said adjustments was reflected in Profit & Loss a/c as "Adjustment relating to earlier years", since interest related to earlier years, though decision was taken during current years. 4. For assessment year 1999-2000, respondent assessee claimed various deductions including interest of Rs 366 lacs being "Adjustment relating to earlier years". Likewise for assessment years 2000-2001, respondent assessee claimed various deductions including interest of Rs 50 lacs being "Adjustment relating to earlier years". 5. In regular assessment proceedings, no disallowance was made, but then, Assessing Officer found that income had escaped assessment as adjustment relating to earlier years had been allowed as deduction in assessment years in question. Consequently, notices under section 148 of Act were issued. 6. In re-assessment orders, Assessing Officer held that interest claimed (Rs. 366 lacs and Rs. 50 lacs for assessment years 1999-2000 and 2000-01) pertained to earlier years, and was not related to years in consideration. Therefore, said interest claimed in profit and loss account was disallowed. We are not concerned with quantum order in these appeals, but with penalty of Rs. 128 lacs and Rs. 19.25 lacs, for concealment of income, imposed by Assessing Officer, under section 271(1)(c) of Act, for furnishing inaccurate particulars of income by claiming prior period expenses. 7. Before we dwell on appellate orders, we notice with regret, failure of Assessing Officer to consider justification and reasons given by assessee for making claim and failure to notice and consider Explanation 1 to Section 271(1)(c) of Act. two penalty orders are identically worded and for sake of convenience, entire reasoning given by Assessing Officer is reproduced below:- AO observed that claim of assessee was not admissible as it could not be proved that liability has been incurred during year consideration. This issue was confirmed by CIT(A) also. interest had been capitalized by assessee from date of commencement of production. C&AG auditors appear to have counted trial production as full production. interest has, therefore, been de-capitalized based on wrong premises. Moreover, it is not possible to capitalize & de-capitalized in this way. In my opinion, action of AO in not allowing reversal account of decapitalization was justified. Hence, it is clear that assessee has claimed capitalized interest on certain Plant & Machinery which was not allowable as per provisions of Act. Hence I am satisfied that assessee had concealed particulars of income and had also furnished inaccurate particulars of its income and thus committed default within meaning of explanation 1 to Sec. 271 (1 )(c). (The first two sentences in above quote refers to orders passed in quantum proceedings.) 8. Penalty imposed under section 271(1)(c) is civil liability. section is enacted as provision to assist and to vigorously check and prevent loss of revenue, but penalty for concealment can be imposed after noticing and applying provisions of Section 271 (1)(c) of Act including Explanation 1. This is primary and basic flaw in penalty orders passed by Assessing Officer. 9. C.I.T (A) by common order dated 20.5.2013 set aside penalty and observed that it was case of wrong interpretation and understanding of legal and accounting principles. Justification of assessee should be accepted as bona fide. He observed:- After considering facts of case and submissions of appellant which have sufficient force, I am inclined to hold that appellant has neither concealed income nor furnished inaccurate particulars for ,AY 1999-2000 and 2000-01. entries have been passed in books of account in bona fide manner and as per guidelines of auditors and there is no case for penalty. Hence penalty of RS.1 ,28,10,000/- and Rs. 19,25,000/- imposed by Assessing officer is hereby deleted. 10. Tribunal has affirmed said finding, holding that assessee had declared and disclosed full and true material facts in returns. Tribunal held: 4. We have heard rival contentions and perused material available on record. It has not been disputed that changes in capitalization or de- capitalization of interest were effected by assessee consequent to well controlled and regulated statutory regime under aegis of Central Government. assessee's book results after statutory audit are subjected to audit and correction of CVC and CAG. changes carried out by assessee are in consonance to recommendations of CVC and CAG. Besides, these details were filed along with return of income. All these factors make assessee's case squarely falling within purview of Supreme Court judgment in case of Reliance Petroproducts (supra) and other case laws cited by assessee. On over all consideration of facts and circumstances, we see no infirmity in order of CIT(A) deleting these penalties. His orders are upheld . 11. appellate orders by C.I.T (A) and Tribunal take due notice of factual matrix and examine question of bonafides. It stands recorded that returns filed and income declared was as per statutory audit report and interest paid had been capitalized. Subsequently, audit objections that excessive interest had been capitalized, were raised by CVC and CAG. In other words, part of interest so capitalized should have been treated as revenue expenditure. In order to comply with said objections, excess interest was decapitalised. This impacted, profit and loss account for current years, even when interest related to earlier years, as enteries in profit and loss account and in books were made in current years. de-capitalization was under-taken in two assessment years and therefore had compressed profits in years in question. reason given was that decision to de-capitalize was taken in years in question. On issue, relating to capitalization and de- capitalization, assessee was guided by opinion of auditors and consultants. These were certainly accountancy issues, complex and capable of different opinions and understanding at each step. 12. assessee had given truthful and cogent explanation without concealing or hiding facts why interest relating to earlier years, which was capitalized, had been accounted for as liability in current years. It cannot be doubted or even questioned that assessee had disclosed all facts relating to explanation offered. Nothing was hidden or concealed. quantum of interest capitalized and decapitalized as mentioned by assessee has not been doubted. It is not case of revenue that assessee had tried to wrongly classify or camouflage prior period expenses . On contrary, assessee had given full particulars and details in returns. In notes of accounts, filed with original returns, assessee had prudently and being tentative, mentioned:- Normally erection, installation and commissioning of plant and machinery in our case takes considerable time - more than one year. interests incurred on borrowing related to it are capitalized. capitalization of interest is by debiting capital WIP/Plant & machinery and crediting interest. company hasa number of expansion schemes in progress at any given time. When plant is commissioned, it is shifted from Capital work in progress (WIP) to plant on basis of capitalization report. Insome cases, subsequent events bring out capitalization of particular scheme over and under capitalized on erroneous adjustments between schemes or on account of error in date of start or finish or erection, etc. such error are correct when discovered. It has been found in this year ( 1999-2000) that interest of 366 lacs had been excess capitalization in various expansion schemes ( 50 lac in year 2000-2001). It has thus reduced capitalization of interest by debiting interest and crediting Plant & Machinery. Since interest was credited (and capital WIP debited) in earlier years, reversal by debiting interest (and crediting P&M) has been shown as adjustment relating to earlier years. If department does not accept this reversal then it will have to allow higher depreciation on Plant & Machinery year after year. Otherwise, cost WOV of Plant & Machinery cannot be adjusted u/s 43 of I. T. Act. 13. C.I.T (A) in quantum proceedings against reassessment order did not entirely agree with Assessing Officer and held that interest once capitalized cannot be de-capitalised. Thus, depreciation was allowed on entire interest which had been capitalized without de-capitalization. It is noticeable that capitalization of interest in earlier years was to detriment of assessee as it had resulted in higher taxation in said assessment years. This reflects and indicates bona fides, rather than attempt or desire to evade taxes. conduct of assessee or adjustment made in current assessment years were duly disclosed and informed to Assessing Officer by way of note in original return. anomaly and error was sought to be corrected and ratified for future years. This was justification and reason given. 14. Tribunal and CIT (Appeals) after examining factual matrix and explanation given by assessee, have come to conclusion that said explanation of assessee was bona fide. This factual finding is reasonable, plausible and essentially question of fact. finding does not require interference and cannot be categorized as perverse. 15. appeals are accordingly dismissed. SANJIV KHANNA, J V. KAMESWAR RAO, J SEPTEMBER 25, 2014/akb Commissioner of Income-tax v. M/s Steel Authority of India Ltd
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