Commissioner of Income-tax v. NG Technologies Ltd
[Citation -2014-LL-1201]

Citation 2014-LL-1201
Appellant Name Commissioner of Income-tax
Respondent Name NG Technologies Ltd.
Court HIGH COURT OF DELHI AT NEW DELHI
Relevant Act Income-tax
Date of Order 01/12/2014
Assessment Year 2006-07
Judgment View Judgment
Keyword Tags accountancy principle • official liquidator • plant and machinery • regular assessment • written down value • tax audit report • concealed income • insurance claim • business loss • capital loss • fixed asset • wrong claim • imposition of penalty • mens rea • furnishing of inaccurate particular
Bot Summary: JUDGMENT The judgment of the court was delivered by Sanjiv Khanna J.-This appeal by the Revenue under section 260A of the Income-tax Act, 1961, pertains to the assessment years 2006-07 and was admitted for hearing, vide order dated December 7, 2012, on the following substantial question of law: Whether the learned Income-tax Appellate Tribunal was correct in law in allowing the appeal of the assessee in holding that the assessee had discharged the onus cast upon it under Explanation 1 to section 271(1)(c) of the Income-tax Act We note that the assessee-company has gone into liquidation and the official liquidator has been appointed. In the return, under the head profit and loss, the assessee had claimed business loss amounting to Rs. 2,33,07,349 on account of sale of fixed assets. The learned Departmental representative has not been able to place on record any communication from the Assessing Officer to the assessee seeking explanation regarding the claim of loss occurring on account of sale of assets. The assessee can escape rigours of penalty, provided he satisfies the two conditions, namely, the assessee should demonstrate that his explanation was bona fide; and he had furnished and disclosed facts and material relating to computation of his income. In the facts of the present case, it is noticeable that the assessee had claimed loss on account of sale of plant and machinery, i.e., the fixed assets, in the profit and loss account. On February 18, 2008, the assessee was asked about the reason for regular loss. On March 10, 2008, the authorised representative of the assessee informed that they had filed a revised return on March 8, 2008, in which they had not claimed loss on sale of fixed asset in the profit and loss account.


JUDGMENT judgment of court was delivered by Sanjiv Khanna J.-This appeal by Revenue under section 260A of Income-tax Act, 1961 ("the Act", for short), pertains to assessment years 2006-07 and was admitted for hearing, vide order dated December 7, 2012, on following substantial question of law: "Whether learned Income-tax Appellate Tribunal was correct in law in allowing appeal of assessee in holding that assessee had discharged onus cast upon it under Explanation 1 to section 271(1)(c) of Income-tax Act?" We note that assessee-company has gone into liquidation and official liquidator has been appointed. Accordingly, we have heard counsel for official liquidator, who has appeared for assessee. order impugned passed by Income-tax Appellate Tribunal ("the Tribunal", for short) is dated September 13, 2010, and deletes penalty imposed under section 271(1)(c) of Act. respondent-assessee had filed e-return for assessment year in question on November 30, 2006, declaring loss of Rs. 1,89,44,380. In return, under head profit and loss, assessee had claimed business loss amounting to Rs. 2,33,07,349 on account of sale of fixed assets. During course of assessment proceedings, details of which we will refer to subsequently, assessee filed revised return on March 8, 2008, declaring total income of Rs. 33,62,974. In revised return, loss of Rs. 2,33,07,349 on account of sale of fixed assets was not treated as "business loss", rather shown as capital loss. Assessing Officer, vide its assessment was order dated June 5, 2008, made some additions and assessed total income of assessee at Rs. 40,19,974 and taxable income at "nil" after giving benefit of brought forward losses. Pursuant to satisfaction recorded in assessment order, penalty proceedings for concealment under section 271(1)(c) of Act were initiated and penalty equal to 100 per cent. of tax payable of Rs. 80,66,400 on concealed income was imposed. We will be referring to reasoning given by Assessing Officer and Commissioner of Income-tax (Appeals), who affirmed penalty order subsequently. Tribunal by impugned order, as recorded above, deleted penalty recording following reasons: "6.1 Coming to issue of claim of loss on sale of assets, facts are that assessee sold machinery and plant in this year due to circumstances beyond its control. Actual loss was incurred in transaction of sale. This loss was debited to profit and loss account. schedule of fixed assets showed deduction of assets on account of sale. According to existing position of law, this loss could not have been claimed while computing total income. correct course of action would have been to reduce amount of sale proceeds from written down value of block of assets relating to machinery and plant. As against aforesaid, assessee reduced written down value of machinery and plant sold in this year from block of assets. chartered accountant, who prepared audit report and return of income did not deduct loss from profit as per profit and loss account to reflect correct state of loss in computation of total income. assessee has changed chartered accountant since then, which is admitted fact as per record... 6.4 We have considered facts of case and submissions made before us in respect of this issue also. We have also perused letters written by Assessing Officer to assessee and replies furnished thereto. We find that assessee was not asked to furnish details of loss occurring on account of sale of assets specifically. assessee was also not required to explain how loss is admissible in computing total income. General questions were asked. assessee was required to file tax audit report and depreciation chart. Further, assessee was required to furnish details of all exemptions and deductions. assessee was also required to furnish details of addition to fixed assets. No question was asked about deduction from assets. On basis of these facts, case of learned counsel is that revised return was bona fide. learned Departmental representative has not been able to place on record any communication from Assessing Officer to assessee seeking explanation regarding claim of loss occurring on account of sale of assets. Therefore, in such circumstances, it has to be held that revised return was bona fidely filed under section 139(5) of Act. 6.5 Coming to decision in case of Reliance Petroproducts Pvt. Ltd. (supra), ratio of case is that claim in respect of which all facts have been disclosed will not lead to inference of furnishing inaccurate particulars of income under Explanation 1 to section 271(1)(c). In this case, assessee has furnished all facts along with return of income. In particular, details filed by it include profit and loss account, statement of income and schedule of fixed assets. schedule of fixed assets shows deduction of assets. It has also been explained that return was prepared by then chartered accountant and, thus, assessee was not properly advised by chartered accountant. In view thereof, his services were dispensed with and new chartered accountant was engaged. We may now examine explanation of assessee in light of decision in case of Zoom Communication (P.) Ltd. [2010] 327 ITR 510 (Delhi). In that case, assessee had not explained circumstances in which patently wrong claim of deduction was made. It was also not explained as to who had committed mistake. In this case, person and circumstances have been specified by assessee. Further, Tribunal had not recorded finding on plea of bona fides of explanation tendered by assessee. This, according to us, is crux of matter as bona fides of explanation have to be examined in view of decision of hon'ble Supreme Court in case of Dharamendra Textile Processors (supra). When we look into bona fides of explanation, it is seen that assessee cannot be expected to be well-versed in intricacies of law. loss was actually incurred. However, in view of concept of block of assets, loss could not have been claimed. Only sale proceeds could have been deducted from written down value of block of assets. Obviously, claim was patently wrong. But, circumstances leading to such wrong claim have been explained. All facts relating to claim exist on record. No falsity has been found in accounts in this regard. Therefore, we are of view that explanation tendered by assessee is bona fide notwithstanding fact that wrong claim has been made. In such situation, claim can be said to be wrong only and not false. mistake was rectified as soon as it was noticed by assessee without any specific query from Assessing Officer. Thus, we are of view that assessee has discharged onus cast on it under Explanation 1 and, therefore, it is not liable to be penalised under section 271(1)(c). Tribunal, after referring to judgment in Union of India v. Dharamendra Textile Processors [2008] 306 ITR 277 (SC), has relied upon decision of Supreme Court in CIT v. Reliance Petroproducts (P.) Ltd. [2010] 322 ITR 158 (SC). Section 271(1)(c) and Explanation 1 thereto read as under: "271.(1) If Assessing Officer or Commissioner (Appeals) or Principal Commissioner or Commissioner in course of any proceedings under this Act, is satisfied that any person-... (c) has concealed particulars of his income or furnished inaccurate particulars of such income, or... Explanation 1.- Where in respect of any facts material to computation of total income of any person under this Act,- (A) such person falls to offer explanation or offers explanation which is found by Assessing Officer or Commissioner (Appeals) or Commissioner to be false, or (B) such person offers explanation which he is not able to substantiate and fails to prove that such explanation is bone fide and that all facts relating to same and material to computation of his total income have been disclosed by him, Then, amount added or disallowed in computing total income of such person as result thereof shall, for purposes of clause (c) of this sub- section, be deemed to represent income in respect of which particulars have been concealed." been concealed." word "concealment" would refer to somewhat malicious and mala fide conduct on part of assessee. expression "inaccurate particulars" is copiously wider and broader and would include cases where particulars furnished are not accurate and which results in avoidance or evasion of tax. In Webster's Dictionary, word "inaccurate" has been defined as: "not accurate, not exact or correct; not according to truth; erroneous; as inaccurate statement, copy or transcript." word "particular" means detail or details of claim or separate items of account. Thus, words "furnished inaccurate particulars" would refer to inaccuracy which would cause underdeclaration or escapement of income. It may also refer to particulars which should have been furnished or were required to be furnished or recorded in books of account, etc. See CIT v. Raj Trading Co. [1996] 217 ITR 208 (Raj). Inaccuracy or wrong furnishing of income would be covered by said expression. Mens rea is not necessary attribute to impose penalty under section 271(1)(c) of Act. Penalty under said section is imposed as civil liability/obligation. provision is both remedial and coercive in nature. It is far different and unlike any penalty for crime or fine or forfeiture imposed under criminal and penal laws. Penalty under section 271(1) (c) of Act refers to blameworthy conduct for contravention of Act and it equally applies to tax delinquency cases. In Dharamendra Textile Processors (supra), it was held that earlier decision of Supreme Court in Dilip N. Shroff v. Joint CIT [2007] 291 ITR 519 (SC); [2007] 8 Scale 304 (SC) was wrongly decided as it did not consider effect and relevance of section 271(1)(c) of Act. object behind enactment of section 271(1)(c) along with Explanations was to provide for remedy for loss of revenue and imposes civil liability. Willful conduct, etc., is not essential ingredient. However, it is not necessary that penalty should be imposed in all cases where inaccurate particulars have been furnished. This is object and purpose behind enacting Explanation 1, which consists of two limbs, i.e., clause (A) and clause (B). Clause (A) applies when assessee fails to furnish explanation or when explanation offered is found to be false. In such cases, penalty can be imposed. Clause (B) applies to cases wherein explanation is offered but assessee has not been able to substantiate same. assessee can escape rigours of penalty, provided he satisfies two conditions, namely, (1) assessee should demonstrate that his explanation was bona fide; and (2) he had furnished and disclosed facts and material relating to computation of his income. Onus of establishing that two conditions are satisfied is on assessee. Both conditions are cumulative and when conditions are satisfied, penalty under section 271(1)(c) of Act should not be imposed. When we refer to facts of present case and return of income originally filed, it is noticeable that assessee in schedule 16 "general expenses" of profit and loss account had shown debit of Rs. 2,33,07,349 on account of loss on sale of fixed assets. Thus, fact that assessee had incurred losses was indicated in schedule 16 of profit and loss account. To this extent, facts were stated in original return. It is plausible for assessee to urge that material facts were submitted and stated in original return. second question, which arises for consideration is whether assessee has been able to show that his conduct was bona fide. We have recorded findings of Tribunal on aforesaid aspect in paragraphs quoted from impugned order. reasoning of Tribunal is two-fold. Firstly, assessee had relied upon report submitted by chartered accountant and return of income prepared by said chartered accountant. mistake or error had occurred due to lack of proper legal advice. Secondly, error or mistake in claiming capital loss in profit and loss account was rectified and corrected by filing revised return, before detection or erratum being discovered. We have examined aforesaid reasoning but are unable to accept said finding. All claims or deductions wrongly made cannot be treated as bona fide and protected by Explanation 1 to section 271(1)(c) of Act. Whether or not conduct of assessee was legitimate or mere legerdemain would depend upon facts of each case, nature and character of claim, whether legal provision applicable was capable of two interpretations, whether claim/exemption was plausible and conceivable, etc. In cases where interpretive skills and divergent views are plausible, penalty for concealment should not be imposed. assessee need not be asked to pay penalty if he has taken particular legal stand and preferred interpretation in his favour. However, at same time, interpretation put forward or claim made should not be banal or ruse, per se or ex facie incorrect or wrong. Platitudinous conduct or claim is not bona fide conduct. In facts of present case, it is noticeable that assessee had claimed loss on account of sale of plant and machinery, i.e., fixed assets, in profit and loss account. This should not have been obviously claimed. It was without any debate and discussion capital loss. claim cannot be explained and justified by any argument and reasoning. claim was positively and meaningfully incorrect and contrary to principles of straight forward and primary accountancy. It is true and correct that assessee would normally rely upon legal opinion of chartered accountant, who is required to audit accounts of company and also submit audit report but penalty cannot be deleted on guise or pretence of legal opinion as smokescreen and faAade. claim or entry in present case was contrary to elementary and well- known basic principles of accountancy. present case is not case of debatable issue relating to legal or accountancy principle which could have been interpreted differently. It is mandatory and compulsory for company to get their accounts audited from chartered accountant, who is required to submit audit report to be filed with return. We cannot, therefore, accept contention of assessee as universal and comprehensive that all claims howsoever untenable, once certified by chartered accountant or directors of company, cannot be made subject matter of penalty proceedings. This will be stretching and making requirement to prove bona fide conduct illusionary and ineffective and would fail to, check and stop fanciful and incredible claims. It is noticeable that most of incometax returns are accepted without scrutiny or regular assessment and selfcompliance of tax provisions is rule required to be followed. view, which we have taken, is in consonance with ratio expounded in Reliance Petroproducts Pvt. Ltd. (supra). expounded in Reliance Petroproducts Pvt. Ltd. (supra). second aspect, which arises for consideration, is whether revised return was filed voluntarily and before notice of inaccurate particulars by Assessing Officer. factum of filing revised return to rectify earlier mistake is important and relevant factor to determine whether conduct of assessee was bona fide. Tribunal, in impugned order, has held that revised return was filed before any specific query was raised by Assessing Officer. Tribunal at same time observed that Assessing Officer had directed assessee to file tax audit report, depreciation chart, details of all exemptions and deductions as well as details of addition to fixed assets but no question had been raised about deduction in respect of assets. aforesaid reasoning by Tribunal accepts fact that assessee had been asked to furnish details of fixed assets and details of all deductions were called. Noticeably, in assessment order, Assessing Officer has recorded following facts: (i) case was taken up for scrutiny assessment by issue of notice under section 143(2) dated October 12, 2007, which was duly served on respondent-assessee within prescribed statutory time limit. (ii) assessee was asked to furnish following details: "Furnish details of all exemptions and deductions claimed. Also justify as to why same should not be accepted by Department." assessment order specifically records that one of deductions claimed was debit of Rs. 2,33,07,349 recorded in schedule 16 "general expenses" of profit and loss account being loss on account of sale of fixed assets. Specific reference has been made in assessment order to this note. Thereafter, vide notice under section 142(1) dated February 1, 2008, assessee was asked to furnish aforesaid details. (iii) On February 18, 2008, assessee was asked about reason for regular loss. It was submitted by authorised representative of assessee that there was massive fire in factory premises on May 11, 2003, and, thereafter, business had closed down. assessee was asked to furnish evidence of fire loss and insurance claim received. case was fixed for reply on February 29, 2008. authorised representative was confronted on allowability of loss on sale of plant and machinery and besides other details were sought to justify loss along with supporting evidence. (iv) Subsequently, chartered accountant appeared and filed reply dated March 10, 2008, along with supporting evidence on sale of plant and machinery and its incorporation in depreciation chart, etc. On March 10, 2008, authorised representative of assessee informed that they had filed revised return on March 8, 2008, in which they had not claimed loss on sale of fixed asset in profit and loss account. (v) On basis of revised return, taxable income was declared at positive figure of Rs. 33,62,974 as against loss declared of Rs. 1,89,44,380 in original return. Therefore, it is clear to us that assessee had not filed revised return voluntarily but had filed revised return after Assessing Officer confronted assessee and they were asked to explain how and why loss on account of sale of fixed assets was claimed in profit and loss account. said loss, capital in nature and could not have been claimed in profit and loss account. In view of aforesaid discussion, we answer substantial question of law in favour of Revenue and against respondent-assessee. We uphold levy of penalty by Assessing Officer under section 271(1)(c) of Act. appeal is disposed of. No costs. *** Commissioner of Income-tax v. NG Technologies Ltd
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