Chartered Accountant Finance: [aaykarbhavan] Judgments,

IT : Eligibility of a 100 per cent EOU for deduction under section 10B is that it should be approved by Central Govt. through appropriate authority constituted under section 14 of Industries (Development and Regulation) Act; and if a 100 percent EOU is only approved by Director, STPI it would not be a valid approval

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[2012] 27 taxmann.com 322 (Delhi)

HIGH COURT OF DELHI

Commissioner of Income tax

Regency Creations Ltd.*

S. RAVINDRA BHAT

AND R.V. EASWAR, JJ.

IT Appeal Nos. 69 of 2008, 783 of 2009 & 1239 of 2011

SEPTEMBER 17, 2012

Section 10B, read with section 10A, of the Income-tax Act, 1961 - Export oriented undertaking - Grant of approval - Assessment years 2003-04, 2004-05, 2006-07 and 2007-08 - Whether though considerations which apply for granting approval under sections 10-A and 10-B may to an extent, overlap, yet deliberate segregation of these two benefits by statute reflects Parliamentary intention, that to qualify for benefit under either, specific procedure enacted for that purpose has to be followed - Held, yes - Whether, therefore, approval granted to a 100 per cent EOU set up under Software Technology Park Scheme cannot be deemed to be an approval under section 10-B - Held, yes [Para 14] [In favour of revenue]

Circulars and Notifications : Circular Nos. 1 of 2005, dated 6-1-2005, 149/194/2004/TPL, dated 6-1-2005, 200/20/2006, dated 31-3-2006 and 694, dated 23-11-1994; Instruction No. 1 of 2006, dated 6-1-2005

FACTS

Facts

• Assessee was engaged in 100 per cent export of artware handicrafts, home furnishing and software exports and had three respective divisions.

• It claimed deduction under section 10B in respect of its software export income.

• The Assessing Officer, however, denied the claim on ground that the assessee should be a 100 per cent export oriented unit approved by the Central Government through its appropriate authority under section 14 of the Industries (Development and Regulation) Act, 1951, which it was not.

• On appeal, the Commissioner (Appeals) held that the claim for exemption under section 10B was admissible to the assessee since it was registered with the Central Government i.e. Software Technology Park of India, (STPI).

• The Tribunal confirmed the order of the Commissioner (Appeals) by relying upon Circular No. 149/194/2004/TPL dated 6-1-2005 and Circular No. 200/20/2006/Income tax Act, 1961-I, dated 31-3-2006, wherein it was directed that the grant of registration by STPI be treated as valid for the purposes of section 10B.

• Being aggrieved, the revenue preferred instant appeals.

Arguments of revenue

• Benefit of deduction under section 10B is radically different from the one envisioned under section 10A.

• None of the circulars or clarifications, as relied upon by the Commissioner (Appeals) or Tribunal, ever spelt out any misunderstanding on the part of the income tax authorities that approval by the Director, STPI could be deemed valid approval for the purpose of section 10-B.

Arguments of the assessee

• The rationale for granting approval to software technology park units was to augment export of services and products. The intention of section 10B has therefore, to be read into the context of the concerned scheme, i.e. STPI which was meant to permit growth of foreign trade in the sector, i.e., computer software.

• The Appellate Commissioner and the Tribunal were alive to the fact that the power to give approvals was initially with the Inter-Ministerial Standing Committee which was later delegated to the Director, STPI.

Issues involved

• Whether approval granted to start 100 per cent EOU under the STP scheme could be deemed to be one issued under section 10B.

HELD

Pre-conditions that govern units set up under STP scheme and units set up as 100 per cent EOUs are different, though certain other conditions does overlap :

• The assessee had received approval to start 100 per cent EOU under STP scheme. The question is whether this approval can be deemed one under section 10-B. For that purpose a 100 per cent EOU is only that which is so approved by the Board appointed by Central Government in exercise of powers conferred under section 14 of IDAR Act, 1951. The preconditions that govern units set up under STP scheme are different from those that govern the units set up as 100 per cent EOUs and so approved by the Board. Some conditions may undoubtedly overlap yet, criteria, such as fulfilment of the employment criteria, foreign exchange, etc., are not common. [Para 13]

• The Interministerial Standing Committee set up for granting licences under STP scheme is also appointed by the Central Government in exercise of powers conferred under, section 14 of IDAR Act. However, the question is whether that part of the Board's function (under section 14 IDR Act) - to grant approval under section 10-B also stands delegated. For the Court to conclude that the Inter-ministerial Committee was authorized to issue approval under section 10-B and that its imprimatur or approval under section 10-A ought to be deemed as an approval under section 10-B, there ought to be more direct, or express authorization. [Para 14]

• Section 10A extends the exemption to the units set up under STP scheme which start production of goods during the previous year relevant to the assessment year commencing on or after 1-4-1994. The assessee's plea about eligibility of a 100 per cent EOU STP eligible for exemption would render the amendment brought about by the Finance Act, 1993 (extending the benefit under section 10A to the STPs from 1-4-1994) superfluous. There is no reason for Parliament to amend the law, and extend benefits of section 10A to units under STP scheme and, restrict the benefits to those commencing their operations in the year of account relevant to the Assessment year 1994-95, if a STP unit is otherwise eligible for exemption under section 10B of the Act on the ground of its being 100 per cent EOU. [Para 15]

Interpretation of statutes

• It is a settled principle of law that unless there is express authorization, in terms of a statue, and an actual delegation of power, a statutory authority in whom jurisdiction or power is reposed, is alone vested with it, to the exclusion of others. In the absence of a statutory power to delegate, and, further, to that power, an actual delegation in accordance with law, such functions cannot be performed or deemed to have been performed by a third agency or authority. Another cardinal rule which binds the court to interpret statutes is that where power is given to do a certain thing in a certain way, the thing must be done in that way or not at all, and other methods of performance are necessarily forbidden. [Para 16]

Conclusion

• In the instant case, there is no notification or official document suggesting that either the Interministerial Committee, or any other officer or agency was nominated to perform the duties of the Board (constituted under section 14 of the IDR Act), for purposes of approvals under section 10-B. Though the considerations which apply for granting approval under sections 10-A and 10-B may to an extent, overlap, yet the deliberate segregation of these two benefits by the statute reflects Parliamentary intention that to qualify for benefit under either, the specific procedure enacted for that purpose has to be followed. There is nothing in any of the circulars or instructions relied on by the Tribunal in all the orders, implying that approval for purposes of an STP also entitled the unit to a benefit under section 10-B. The orders of the Tribunal are consequently, erroneous, and its reasoning, unsupportable. [Para 17]

• In the light of the above discussion, the question of law framed is answered in favour of the revenue, and against the assessee; the appeals are, therefore, allowed. [Para 18]

CASES REFERRED TO

Radhasoami Satsang v. CIT [1992] 193 ITR 321/60 Taxman 248 (SC) (para 7), CIT v. Jagson International Ltd. [IT Appeal No. 75 of 2006, dated 14-11-2007] (para 7), Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480 (SC) (para 9), Hari Chand Aggarwal v. Batala Engineering Co. Ltd. AIR 1969 SC 483 (para 16), Ajaib Singh v. State of Punjab AIR 1965 SC 1619 (para 16) and Nazir Ahmed v. King Emperor [1936] ILR 17 Lah 629 (para 16).

Ms. Rashmi Chopra and Harpeet Singh Ajmani for the Appellant. Kuldip Singh, Harish Malhotra and Rajender Aggarwal for the Respondent.

JUDGMENT

S. Ravindra Bhat, J. - These appeals have been preferred by the Revenue claiming to be aggrieved by the common orders of the Income Tax Appellate Tribunal (ITAT) in respect of the two assessees, i.e. M/s. Regency Creations Ltd. and Valiant Communications Ltd. The questions of law which arises in all the appeals is common, i.e.

"Whether the Tribunal fell into error in holding that the claim of deduction under Section 10-B of the Income Tax Act in respect of the assessees' income derived from export of computer software was permissible."

2. The facts pertaining to the cases of Regency Creations Ltd. [IT Appeal Nos. 69/2008 and 783/2009] in respect of Assessment Years 2003-04 and 2004-05 are that it is engaged in 100% export of artware handicrafts, home furnishing and software exports. The assessee had three divisions respectively, in connection with the said three activities - i.e. artware handicrafts, home furnishing and software division, which was named M/s. Maxtech iSolution. The assessee claimed exemption under Section 10B in respect of its software export income. The Assessing Officer held that to qualify for such benefit, the assessee should be a 100% Export Oriented Unit (EOU) and approved by the Central Government through its appropriate authority under Section 14 of the Industries (Development and Regulation) Act, 1951 (IDR Act). The Assessing Officer concluded that the Assessee had no valid certificate for software export and had not mentioned in its Articles of Memorandum of Association that it could carry-out business in computer software and that M/s. Maxtech iSolution was not shown to be an undertaking of the assessee, in its Articles of Memorandum of Association. The assessees' appeal was allowed for academic years 2003-07; the Appellate Commissioner held that the claim for exemption under Section 10B was admissible since it was registered with the Central Government, i.e. Software Technology Park of India (STPI) and that the business activity of software export was permissible with the main and the ancillary object spelt-out in the Memorandum of Association. The CIT (Appeals) relied upon a Circular of the Central Board of Direct Taxes (CBDT). The Revenue appealed to the Tribunal, which dismissed the appeal, holding as follows:

"5. We have considered the rival contentions and found from the record that the assessee had established a software division under the name and style of Maxtech iSolutions, which was approved and registered with the STPI, a unit of Ministry of Information and Technology. This is a nodal agency for grant of approval for establishment of 100% export oriented software. As per the permission letter dated 7th November, 2006, as placed on the record, we found that STPI had granted registration to the assessee vide letter dated 5.12.2000 for setting up a 100% EOU under Software Technology Park Scheme which was valid for 5 years. The assessee was granted extension to continue the operations under Software Technology Park Scheme up to 31.03.2009. CBDT in its Circular No. 149/194/2004/TPL dated 06.01.2005 and Circular No. 200/20/2006/Income Tax Act, 1961-I dated 31.3.2006 has directed to treat the grant of registration by STPI as valid agency for purposes of Section 10B.

6. In the instant case, the assessee has got approval from STPI, an organization of government duly authorized by CBDT Circular as stated above. Memorandum of Association of the Company in its main object clause clearly states the export of all kinds of goods all over the world. Goods thus includes computer software. Clause 11 of the Incidental objects as set out in memorandum empowers to set up any unit or division by the company for carrying on any business. Thus the setting up of Maxtech iSolution is one of the divisions of assessee is authorized by Memorandum. The details about branches and production units of assessee have been clearly informed to Assessee Officer during the assessment proceedings which he ought to have treated as sufficient compliance. The information about the places of business of assessee have been clearly mentioned in CA report which accompanies the return.

7. In view of the above, we do not find any infirmity in the order of the CIT (Appeals) for granting exemption under sec. 10-B to the assessee unit. The finding recorded by the CIT (Appeals) at pages 5 & 6 of his appellate order has not been controverted by the department by bringing any positive material on record."

3. For the assessment year 2004-05, the Assessing Officer disallowed the claim for deduction under Section 10B. The Appellate Commissioner accepted the assessees' argument following his previous order for the assessment year 2003-04 and also after observing that the appellant had exported computer software through proper banking channels and after duly complying with conditions for getting export invoices endorsed by the STPI, (the Central Government body which is also the nodal agency established for monitoring exports of computer software). The Revenue's appeal was allowed by the ITAT which followed its previous order.

4. For the assessment year 2007-08, the Assessing Officer and the Appellate Commissioner rejected the claim for benefit under Section 10B. The assessee in its appeal relied upon the previous two orders of the Tribunal. Before the Tribunal, the assessee relied upon Ex. No. 62 - Press Note 5 (1997 Series) and Ex. No. 38 - Press Note 2 (1993 Series) and also the letter dated 31.03.2011 issued by the Ministry of Commerce and Industry. The Tribunal noticed that Press Notes 2 and 5 which had been relied upon clearly stated that the Inter-Ministerial Standing Committee for EHTPS and ESTPC was competent to grant approval for STPI units to claim 100 % benefits under EOU Scheme. On the basis of this interpretation placed upon the letter dated 09.03.1993 (which was disclosed through communication dated 31.03.2011), the Tribunal held that the assessee was entitled to benefit of deduction under Section 10B of the Act. The said communication/letter dated 31.03.2011 reads as follows:

"Please refer to your RTI application dated March 10, 2011 received on 17.03.2011) on the subject mentioned above and to inform that no approval/ratification of STPI approval is required from BOA formed by Ministry of Commerce by power conferred under Section 14 of IDR Act, 1951. Inter-Ministerial Standing Committee for EHTPs and ESTPs (IMSC) is competent in grant approval for STPI unit to claim all benefits under 100% EOU Scheme as per Press Note 2 of 1993 (copy enclosed)."

5. The facts in respect of M/s Valiant Communications (ITA 2002/2010 - Assessment Year 2005-06; ITA 438 to 441/2012 - Assessment Years 2003-04, 2004-05, 2006-07 and 2007-08) are that the assessee, like in the case of Regency claimed deduction under Section 10B. It is engaged in the business of manufacturing and export of telecom transmission equipment. It had a registered unit with the Software Technology Park of India as a 100% EOU under Electronic Hardware Technology Park (EHTP) Scheme. The Assessing Officer had rejected the claim, stating that approval from STPI cannot be equated with the approval of the Board appointed under Section 14 of the Industries (Development and Regulation) Act, 1951. The CIT (Appeals) had held that the assessee was entitled to the benefit. The Revenue's appeal before the Tribunal for the appeal year 2005-06 was rejected; the Tribunal had relied upon its ruling in the case of Regency Creations.

6. It is argued by the Revenue in all the appeals that the benefit of deduction under Section 10B of the Act is radically different from the one envisioned under Section 10A. It was held that the Press Note -2 and Press Note 5 which had been relied upon by the Tribunal merely indicated that the Inter-Ministerial Standing Committee had been set-up for considering applications to set-up units under EHTP Scheme and the STP Scheme. Such Inter-Ministerial committees were deemed to be for the purpose of Section 10A. This position was clarified by Circular No. 1 of 2005 relied upon during the course of Tribunal's orders. Similarly, Instruction No. 1 of 2006 also underlined the fact that the Software Technology Park Scheme notified under Section 3 of the Foreign Trade Development (Regulations) Act, approvals received by the Inter-Ministerial Standing Committee qualified for deduction under Section 10A. It was submitted that neither of these circulars nor even the subsequent clarification dated 06.05.2009 ever spelt-out any misunderstanding on the part of the income tax authorities that approval by the Director STPI could be deemed valid approval for the purpose of Section 10-B.

7. Learned counsel for the assessees contended that the rationale for granting approval for Software Technology Park units was with the intention of their exporting services and products. The intention of Section 10B had to be, therefore, read in the context of the concerned Scheme, i.e. ETPI and STPI which was meant to permit growth of foreign trade in the sector, i.e. computer software. It was argued, besides, that the rule of consistency, enunciated by the Supreme Court in Radhasoami Satsang v. CIT [1992] 193 ITR 321/60 Taxman 248 (SC) and followed by this Court in CIT v. Jagson International Ltd. [IT Appeal No. 75 of 2006, Dated 14-11-2007], estopped the Revenue from contending that the assessee did not possess the requisite approval. It is also submitted that the Tribunal had correctly relied upon a clarification dated 31.03.2011 which put the matter beyond any shadow of doubt, i.e. that Press Notes 2 and 5 enured in favor of the assessee. They could clearly avail the benefit of deduction under Section 10B.

8. It is argued that the Appellate Commissioner and Tribunal were alive to the fact that the power to give approvals was initially with the Inter-Ministerial Standing Committee which was later delegated to the Director STP by the Note No. 5 (1997 Series). The assessee further relied upon the following extract of the CBDT circular dated (Notification under SO 388(E) dated 30.04.1995, which by para 2.10 stated as follows:

"2.10 The provisions of paragraphs 96,104,109, 110 and 112 to 117 of Chapter IX of the Export and Import Policy (1992-97) applicable to export oriented units (EOUs) and units in Export Processing Zones (EPZs) shall also apply to the STP units subject to the following modifications:

a. The word "STP" shall be substituted for the word "EOU/EPZ" "EOU" OR "EPZs" wherever they occur, in the paragraphs.

b. The words "Development Commissioner" wherever they occur shall be substituted by the words "Chief Executive of the STP Society."

c. The word "BOA" wherever it occurs, shall be substituted by the word "IMSC"."

9. Learned counsel for the assessee urged that the construction or interpretation to be adopted by the Court should be in consonance with the liberal interpretation of Parliament in promoting growth and development. In this regard judgment of the Supreme Court in Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480 was relied upon. The Supreme Court in that case had held as follows:

"A provision in taxing statute granting incentive for promoting growth and development should be construed liberally, the restriction on it too has to be construed so as to advance objective of the provision and not to frustrate it."

Provisions of Law

10. Before a discussion about the rival contentions regarding merits of the case, it would be necessary to extract the relevant provisions, i.e. sections 10-A and Section 10B. They read as follows:

"Section 10A .Special Provision in Respect of Newly Established Industrial Undertakings in Free Trade Zones

(1) Subject to the provisions of this section, any profits and gains derived by an assessee from an industrial undertaking to which this section applies shall not be included in the total income of the assessee.

(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely :-

(i) It has begun or begins to manufacture or produce articles or things during the previous year relevant to the assessment year -

(a) Commencing on or after the 1st day of April, 1981, in any free trade zone; or

(b) Commencing on or after the 1st day of April, 1994, in any electronic hardware technology park or, as the case may be, software technology park;

(ia) In relation to an undertaking which begins to manufacture or produce any article or thing on or after the 1st day of April, 1995, its exports of such articles or things are not less than seventy-five per cent of the total sales thereof during the previous year;

(ii) It is not formed by the splitting up, or the reconstruction, of a business already in existence :

Provided that this condition shall not apply in respect of any industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section;

(iii) It is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

Explanation : The provisions of Explanation 1 and Explanation 2 to sub-section (2) of section 80-I shall apply for the purposes of clause (iii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section.

(3) The profits and gains referred to in sub-section (1) shall not be included in the total income of the assessee in respect of any five consecutive assessment years, falling within a period of eight years beginning with the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things specified by the assessee at his option

Provided that nothing in this sub-section shall be construed to extend the aforesaid five assessment years to cover any period after the expiry of the said period of eight years……

Explanation : For the purposes of this section, -

(i) "free trade zone" means the Kandla Free Trade Zone and the Santacruz Electronics Export Processing Zone and includes any other free trade zone which the Central Government may, by notification in the Official Gazette, specify 316 for the purposes of this section;

(ii) "Relevant assessment years" means the five consecutive assessment years specified by the assessee at his option under sub-section (3);

(iii) "Manufacture" includes any -

(a ) Process, or

(b) Assembling, or

(iv) "Electronic hardware technology park" means any park set up in accordance with the Electronic Hardware Technology Park (EHTP) Scheme notified by the Government of India in the Ministry of Commerce 318b ;

(v) "Software technology park" means any park set up in accordance with the Software Technology Park Scheme notified by the Government of India in the Ministry of Commerce;

(vi) "Produce", in relation to articles or things referred to in clause (i) of sub-section (2), includes production of computer programmes…."

"Section 10B. Special Provision in respect of Newly Established Hundred Per Cent Export-Oriented Undertakings.

(1) Subject to the provisions of this section, any profits and gains derived by an assessee from a hundred per cent export- oriented undertaking (hereafter in this section referred to as the undertaking) to which this section applies shall not be included in the total income of the assessee.

(2) This section applies to any undertaking which fulfils all the following conditions, namely :-

(i) It manufactures or produces any article or thing;

(ia) In relation to an undertaking which begins to manufacture or produce any article or thing on or after the 1st day of April, 1994, its exports of such articles and things are not less than seventy-five per cent of the total sales thereof during the previous year;

(ii) It is not formed by the splitting up, or the reconstruction, of a business already in existence :

Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section;

(iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

(3) The profits and gains referred to in sub-section (1) shall not be included in the total income of the assessee in respect of any consecutive assessment years, falling within a period of eight years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things, specified by the assessee at his option :

Provided that nothing in this sub-section shall be construed to extend the aforesaid five assessment years to cover any period after the expiry of the said period of eight years……

Explanation : For the purposes of this section, -

(i) "Hundred per cent export-oriented undertaking" means an undertaking which has been approved as a hundred per cent export-oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by section 14 of the Industries (Development and Regulation) Act, 1951 (65 of 1951), and the rules made under that Act…."

Notifications, circulars and instructions referred to

11. During the proceedings in this case, the Tribunal as well as the assessee relied upon certain circulars to say that once a software technology park received approval to function as such, since the notified approval was in the Central Government's circulars, given by an Inter Ministerial Committee, which in turn had been delegated to the Director, the unit was also entitled to avail the benefit under Section 10-B. It would therefore, be relevant to notice the circulars; they are extracted below.

12. The Tribunal relied on a circular of 2005; it reads as follows:

"CIRCULAR NO.1 OF 2005, DT. 6TH JAN., 2005

Sub: Tax holiday under section 10B of the Income-tax Act to 100% Export Oriented Undertaking - Certain clarification - Reg

6/1/2005

Exemptions

Section 10B

Section 10B of the Income-tax Act provides for 100% deduction of profits derived by a hundred per cent export oriented undertaking, form export of articles or things or computer software manufactured or produced by it. The deduction is available for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software. However, no deduction under section 10B is available after assessment year 2009-10.

2. The deduction under section 10B is available to an undertaking which fulfils all the following conditions:

(i) it manufacturers or produces any article or thing or computer software;

(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence except in the circumstances specified under section 33B of the IT Act.

(iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

3. Representations have been received from various quarters as to whether an undertaking set up in Domestic Tariff Area, which is subsequently approved as 100% EOU by the Board appointed by the Central Government in exercise of powers conferred under section 14 of the Industries (Development and Regulation) Act, 1951, is eligible for deduction under section 10B of the Income-tax Act.

4. The matter has been examined and it is hereby clarified that an undertaking set up in Domestic Tariff Area (DTA) and deriving profit from export of articles or things or computer software manufactured or produced by it, which is subsequently converted into a EOU, shall be eligible for deduction under section 10B of the IT Act, on getting approval as 100% export oriented undertaking. In such a case, the deduction shall be available only from the year in which it has got the approval as 100% EOU and shall be available only for the remaining period of ten consecutive assessment years, beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as a DTA unit. Further, in the year of approval, the deduction shall be restricted to the profits derived from exports, from and after the date of approval of the DTA Unit as 100% EOU. Moreover, the deduction to such units in any case will not be available after assessment year 2009-10.

5. To clarify the above position, certain illustrations are given as under:

(i) Undertaking 'A' is set up in Domestic Tariff Area and starts manufacture or production of computer software in financial year 1999-2000 relevant to assessment year 2000-01. It gets approval as 100% EOU on 10th September, 2004 in the financial year 2004-05 relevant to assessment year 2005-06. Accordingly, it shall be eligible for deduction under section 10B from assessment year 2005-06 i.e., the year in which it fulfills the basic condition of being a 100% EOU. Further, the deduction shall be available only for the remaining period of ten years i.e. from assessment year 2005-06 to assessment year 2009-10. This deduction under section 10B for assessment year 2005-06 shall be restricted to the profits derived from exports, from and after the date of approval of the DTA unit as 100% EOU.

(ii) Undertaking 'B' set up in Domestic Tariff Area, begins to manufacture or produce computer software in financial year 1996-97 relevant to assessment year 1997-98. It gets approval as 100% EOU in Financial year 2007-08 relevant to assessment year 2008-09. No deduction under section 10B shall be admissible to undertaking B as the period of 10 years expires in financial year 2005-06 relevant to assessment year 2006-07, prior to its approval as 100% EOU.

(iii) Undertaking 'C' is set up in Domestic Tariff Area in the financial year 2000-01 relevant to assessment year 2001-02 and engaged in the business of providing computer related services, other than those notified by the Board for the purpose of section 10B. In financial year 2002-03, it acquires more than 20% of old plant and machinery and starts manufacturing computer software. It also gets approval as 100% EOU in financial year 2002-03. Undertaking 'C' shall not be eligible for deduction under section 10B, as there has been transfer of old plant and machinery.

(iv) Undertaking 'D' is set up and starts producing computer software in financial year 2003-04 relevant to assessment year 2004-05. It gets approval as 100% EOU in financial year 2006-07 relevant to assessment year 2007-08. It shall be eligible for deduction under section 10B from assessment year 2007-08. However, the deduction shall not be available after assessment year 2009-10.

(v) Undertaking 'E' is set up and starts producing computer software prior to 31st March, 1994. It gets approval as 100% EOU in financial year 2004-05 relevant to assessment year 2005-06. Undertaking 'E' shall not be eligible for deduction under section 10B as the period of deduction of 10 years expires prior to assessment year 2005-06."

The second document relied on were the Instructions of 2006, dated 31st March, 2006:

"INSTRUCTIONS NO.1 OF 2006, DT. 31ST MARCH, 2006

SUB: Deduction under Section 10A-Clarification-Reg.

31/3/2006

EXEMPTIONS

SECTION 10A

1. Section 10A of the Income-tax Act, 1961 provides for 100 per cent deduction of profits and gains derived by an undertaking from export of articles or things or computer software manufactured or produced by it. The deduction is available for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software. The tax benefit under section 10A is available to an undertaking which fulfils all the following conditions:

(i) it has begun or begins to manufacture or produce articles or things or computer software during the previous year relevant to the assessment year -

(a) commencing on or after 1st April, 1981, in any Free Trade Zone; or

(b) commencing on or after 1st April, 1994, in any Electronic Hardware Technology Park or Software Technology Park; or

(ii) it is not formed by the splitting up or the reconstruction of a business already in existence except in the circumstances and within the period specified in section 33B of the Income-tax Act;

(iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.

2. 'Software Technology Park' has been defined to mean any park set up in accordance with the Software Technology Park Scheme notified by the Government of India in the Ministry of Commerce and Industry.

3. In exercise of the powers conferred by sub-section (1) of section 3 of the Foreign Trade (Development and Regulation) Act, 1992, the Ministry of Commerce notified the Software Technology Park Scheme wherein it was provided that a Software Technology Park may be set up by the Central Government, State Government, Public or Private Sector Undertakings or any combination thereof. An STP may be an individual unit by itself or it may be one of such units located in an area designated as STP Complex by the Department of Electronics. The scheme was required to be administered by the Department of Electronics, Government of India, through Directors of respective Software Technology Parks which form part of the Software Technology Parks of India (STPI), a society established by the Department of Electronics and registered under the Societies Registration Act, 1860. An application in the prescribed form for establishing a STP unit was required to be submitted to the Chief Executive of STP Complex along with the details of the Software project. Such application was to be considered by an Inter-Ministerial Standing Committee (IMSC) constituted under the Chairmanship of Secretary, Department of Electronics, Government of India.

4. Subsequently, vide Notification No. 4/(RE-95/92-97), dated 30th April, 1995 issued by the Director General (Foreign Trade), Ministry of Commerce, in exercise of powers conferred in sub-section (1) of section 3 of the Foreign Trade (Development and Regulation) Act, 1992, notified the amended STP Scheme. Para 2.3 of the aforesaid notification provides that the scheme is administered by the Department of Electronics, Government of India, through Directors of respective STPs which form part of the STPI, a society established by the Department of Electronics and registered under the Societies Registration Act, 1860. An application in the prescribed format for establishing a STP unit may be submitted to the Chief Executive of STP Complex along with the details of the software project. Such application will be considered by an Inter-Ministerial Standing Committee constituted under the Chairmanship of Secretary, Department of Electronics.

5. Instances have been brought to the notice of the Board that a large number of units registered/approved by the Directors of the STPI are claiming deduction under section 10A whereas the STP scheme requires approval by the Inter-Ministerial Standing Committee of the Department of Electronics. Accordingly, the cases of such claimants have been reopened by the field authorities.

6. The matter has been examined in consultation with the officers of the Department of Information Technology (earlier, Department of Electronics). In view of the ambiguity in the legal status of the approval by Director of STPs, the Inter-Ministerial Standing Committee will meet to consider the approvals by Director of STPs issued in the past. Therefore, with a view to avoid infructuous demand raised in assessment and reassessment of assessees claiming deduction under section 10A, it has been decided that the claim of deduction under section 10A of the Income-tax Act, shall not be denied to STP units only on the ground that the approval/registration to such units has been granted by the Directors of Software Technology Parks. However, it has to be ensured that all other conditions specified in section 10A are fully satisfied before allowing any such claim.

7. In cases where assessments/reassessments have already been completed, and the claim, under section 10A, has been disallowed only on the ground that the approval to the STP has not been granted by the Inter-Ministerial Standing Committee in accordance with the Scheme, the demand so arising should be kept in abeyance until further orders."

12.1 It would also be relevant at this stage to notice that Circular No. 694, dated 23-11-1994, one of the earliest instructions issued by the Central Government, pertinently stated that:

"….it is clarified that units in EPZs/EOUs which export software are as much eligible for availing of the five-year tax holiday under sections 10A and 10B as any other units in EPZ/EOU, even for the period prior to the previous year relevant to the assessment year 1994-95. The conditions stipulated in the provisions have, of course, to be fulfilled. The insertion of the Explanation of the term "produce" in 1993 should not be taken as a ground for denying the tax holiday to such units for earlier years. "

Earlier, the Department of Industrial Development, Ministry of Industry had, by notification No. 117-E dated 22-2-1993 constituted a committee to perform the functions specifically delegated, including the grant of approval for EHTPs and STPs. The said Notification reads as follows:

"Ministry of Industry

(Department of Industrial Development)

New Delhi, the 22nd Feb., 1993

Notification

S.O. No. 117(E)--In exercise of the powers conferred by Section 14 of Industries (Development and Regulation) Act, 1951 (65 of 1951), r/w Sub-rule (2) of Rule 10 of the Registration and Licensing of Industrial undertakings Rules, 1952 the Ministry of Industry, Department of Industrial Development, hereby appoints the following committee which shall perform the functions specified:

Inter-Ministerial Standing Committee for units in the Electronic Hardware Technology Parks (EHTP) and Software Technology Parks (STP)

Chairman

1. Secretary, Department of Electronics, or his nominee

2. Secretary, Department of Industrial Development, or his nominee

3. Secretary, Department of Science and Technology, or his nominee

4. Secretary, Ministry of Commerce, or his nominee

5. Chairman, Central Board of Excise and Customs, or his nominee

6. Secretary, Deptt. of Economic Affairs, Ministry of Finance, or his nominee

7. Secretary, Planning Commission, or his nominee

8. Economic Adviser, Department of Electronics

9. Secretary, Department of Small Scale Industries and Agro and Rural Industries or his nominee

10. Joint Secretary, Department of Electronics, Member- Secretary.

Functions of the Inter-Ministerial Standing Committee :

(i) The Committee shall consider all applications for setting up of units in the Electronic Hardware Technology Parks (EHTP) under the scheme of special facility (hereinafter referred to as the said scheme framed under the Government of India, Ministry of Commerce, Notification No. 42 (N-8)/1992-97 dt. the 14th Sept., 1992). The Committee shall also consider all applications for setting up of units under Software Technology Park scheme operated under Customs Notification Nos. 138 and 140 dt. 22nd Oct., 1991. The Committee shall consider proposals for industrial licence, foreign technical collaboration agreements and import of capital goods. The Committee shall not consider applications involving foreign equity with or without any other industrial approvals.

(ii) The Committee shall review the progress of implementation of letters of intent and industrial licences granted under the said scheme upto the stage of actual commissioning of capacity.

(iii) The Committee shall consider and make a report on policy questions arising from applications received under the said scheme or from the implementation of individual proposals thereunder in accordance with the policy laid down by the Central Government from time to time.

(iv) The Committee may refer any matter in its discretion for the consideration and decision of the Central Government in respect of matters falling within its competence".

Analysis

13. There is no dispute about the essential facts. Both assesses had received approval to start 100 per cent EOU under STP scheme. The question is whether this approval can be deemed one under Section 10-B of the Act. For that purpose a 100 per cent EOU is only that which is so approved by the Board appointed by Central Government in exercise of powers conferred under Section 14 of IDAR Act, 1951. The pre-conditions that govern units set up under STP scheme are different from those that govern the units set up as 100 per cent EOUs and so approved by the Board. Some conditions may undoubtedly overlap yet, criteria, such as fulfilment of the employment criteria, foreign exchange, etc., are not common.

14. The Inter-Ministerial Standing Committee set up for granting licences under STP scheme is also appointed by the Central Government in exercise of powers conferred under, Section 14 of IDAR Act. However, the question is whether that part of the Board's function (under Section 14 IDR Act) - to grant approval under Section 10-B also stands delegated. The assesses submit that the Inter-Ministerial Standing Committee has been replaced by the Board on the basis of the contents of para 2 of the notification of the Ministry of Commerce dt. 22nd March, 1994, is unpersuasive. That notification states that for the purpose of paras 111 to 117 of Chapter IX of the Export and Import Policy (1992-97), Board of Approval shall be substituted by the Inter-Ministerial Standing Committee. Paras 111 to 117 of Chapter-DC of Export and Import Policy (1992-97) do not deal with that aspect, but other questions such as subcontracting by EOU/EPZ, Sale of imported materials, Disposal of scrap, Private bonded warehouses, period of bonding, and de-bonding. The notification therefore extended incentives to EOUs to set up units under the STP scheme. However, for the Court to conclude that the Interministerial Committee was authorized to issue approval under Section 10-B and that its imprimatur or approval under Section 10-A ought to be deemed as an approval under Section 10-B, there ought to be more direct, or express authorization.

15. Section 10A extends the exemption to the units set up under STP scheme which start production of goods during the previous year relevant to the assessment year commencing on or after 1st April, 1994. The assessee's plea about eligibility of a 100% EOU STP eligible for exemption would render the amendment brought about by the Finance Act, 1993 (extending the benefit under Section 10A of the Act to the STPs from 1st April, 1994) superfluous. There is no reason for Parliament to amend the law, and extend benefits of Section 10A to units under STP scheme and, restrict the benefits to those commencing their operations in the year of account relevant to the Assessment year 1994-95, if a STP unit is otherwise eligible for exemption under Section 10B of the Act on the ground of its being 100 per cent EOU.

16. It is a settled principle of law that unless there is express authorization, in terms of a statute, and an actual delegation of power, a statutory authority in whom jurisdiction or power is reposed, is alone vested with it, to the exclusion of others (Ref. Hari Chand Aggarwal v Batala Engineering Co. Ltd AIR 1969 SC 483; and Ajaib Singh v. State of Punjab AIR 1965 SC 1619). In the absence of a statutory power to delegate, and further to that power, an actual delegation in accordance with law, such functions cannot be performed or deemed to have been performed by a third agency or authority. Another cardinal rule which binds the court to interpret statutes is that "where power is given to do a certain thing in a certain way, the thing must be done in that way or not at all, and other methods of performance are necessarily forbidden…" (See Nazir Ahmed v King Emperor [1936] I. L. R. 17 Lah 629).

17. In the present case, there is no notification or official document suggesting that either the Inter Ministerial Committee, or any other officer or agency was nominated to perform the duties of the Board (constituted under Section 14 of the IDR Act), for purposes of approvals under Section 10-B. Though the considerations which apply for granting approval under Sections 10-A and 10-B may to an extent, overlap, yet the deliberate segregation of these two benefits by the statute reflects Parliamentary intention that to qualify for benefit under either, the specific procedure enacted for that purpose has to be followed. There is nothing in any of the Circulars or instructions relied on by the Tribunal in all the orders, implying that approval for purposes of an STP also entitled the unit to a benefit under Section 10-B. The orders of the Tribunal are consequently erroneous, and its reasoning, unsupportable.

18. In the light of the above discussion, the question of law framed is answered in favour of the revenue, and against the assessee; the appeals are therefore allowed.

IT : Where assessee-firm failed to offer any explanation in respect of source of amount credited in its books of account in name of partners, Assessing Officer was justified in adding said amount to assessee's taxable income and passing a penalty order in respect of addition so made

■■■

[2012] 27 taxmann.com 323 (Delhi - Trib.)

IN THE ITAT DELHI BENCH 'A'

Bright India Body Builders

Income-tax Officer, Ward-20(4), New Delhi*

R.K. GUPTA, JUDICIAL MEMBER

AND A.N. PAHUJA, ACCOUNTANT MEMBER

IT APPEAL NO. 4411 (DELHI) OF 2009

[ASSESSMENT YEAR 2005-06]

OCTOBER 5, 2012

Section 271(1)(c) of the Income-tax Act, 1961 - Penalty - For concealment of income - In case of firm/partners - Assessment year 2005-06 - During assessment proceedings, Assessing Officer noted that assessee had introduced certain amount as capital in name of two partners - Since assessee-firm failed to explain source of said amount, Assessing Officer added same to assessee's taxable income - He also passed a penalty order under section 271(1)(c) - Whether since assessee did not offer any cogent explanation in respect of amount credited in its books of account which was later surrendered as income of year under consideration, it was to be concluded that assessee failed to discharge burden lay upon them by Explanation 1 to section 271(1)(c) and, consequently, impugned penalty order was to be confirmed - Held, yes [Para 8] [In favour of revenue]

FACTS

Facts

• The assessment in assessee's case was completed on a loss in pursuance to return filed declaring nil income. The additions made by the Assessing Officer were set off against brought forward loss which included inter alia, an amount of Rs. 30 lakh introduced in the name of two partners.

• To a query by the Assessing Officer, the assessee did not explain the source of aforesaid cash introduced in the name of partners and instead surrendered the amount to tax. Accordingly, the Assessing Officer added said amount and also passed penalty order under section 271(1)(c).

• The Commissioner (Appeals) upheld the findings of the Assessing Officer.

Issue involved

• Whether on the facts of the case, the Commissioner (Appeals) was justified in sustaining the penalty imposed under section 271(1)(c).

HELD

Interpretation of provisions of section 271(1)(c)

• As is evident from the clause (c) of section 271(1), the words used are 'has concealed the particulars of his income' or furnished 'inaccurate particulars of such income'. Thus, both in case of concealment and inaccuracy, the phrase 'particulars of income' has been used. The legislature has not used the words 'concealed his income'. From this it would be apparent that penal provision would operate when there is a failure to disclose fully or truly all the particulars.

• The words 'particulars of income' refer to the facts which lead to the correct computation of income in accordance with the provisions of the Act. So when any fact material to the determination of an item as income or material to the correct computation is not filed or that which is filed is not accurate, then the assessee would be liable to penalty under section 271(1)(c).

• The expression 'has concealed the particulars of income' and 'has furnished inaccurate particulars of income' have not been defined either in section 271 or elsewhere in the Act. However, notwithstanding the difference in the two circumstances, it is now well established that they lead to the same effect namely, keeping off a certain portion of the income from the return. [Para 5.1]

• If the disclosure of facts is incorrect or false to the knowledge of the assessee and it is established, then such disclosure cannot take it out from the purview of the act of concealment of particulars or furnishing inaccurate particulars thereof for the purpose of levy of penalty. The penalty under section 271(1)(c) is leviable if the Assessing Officer is satisfied in the course of any proceedings under this Act that any person has concealed the particulars of his income or furnished inaccurate particulars of such income. [Para 5.2]

Burden of assessee to rebut presumption raised by Explanation 1 to section 271(1)(c)

• It is well established that whenever there is difference between the returned and assessed income, there is inference of concealment . The Explanation 1 to section 271(1)(c) raises a presumption that can be rebutted by the assessee with reference to facts of the case. Thus, the onus is on the assessee to rebut the inference of concealment . The absence of explanation itself would attract penalty.

• The onus laid down upon the assessee to rebut the presumption raised under Explanation 1 would not be discharged by any fantastic or fanciful explanation. It is not the law that any and every explanation has to be accepted. In the absence of any explanation regarding source of cash ,apparently the assessee miserably failed to discharge the onus laid down in this explanation. In such circumstances, there is no hesitation in upholding the levy of penalty. [Para 5.3]

Merits of case

• A very heavy onus is placed on the assessee to explain the difference between the assessed income and returned income and the assessee in the instant case did not discharge the said onus. In the instant case, all the material facts and particulars relating to the assessee's computation of income were never disclosed by the assessee, and it is further clear that the assessee did not offer any cogent explanation at all before the Assessing Officer during the assessment proceedings and even during the penalty proceedings, in respect of the aforesaid amount of Rs. 30 lakh credited in the books of the assessee, which amount was later surrendered by the assessee as income of the year under consideration.

• In these circumstances it is opined that the assessee had not been able to discharge the burden that lay upon them by Explanation 1 to section 271(1)(c). Therefore, there is no hesitation in upholding the order of the Commissioner (Appeals) in confirming the penalty imposed by the Assessing Officer under section 271(1)(c). [Para 6]

• In the result, appeal is dismissed. [Para 8]

CASE REVIEW

K.P. Madhusudhanan v. CIT [2001] 251 ITR 99/118 Taxman 324 (SC) (para 5.4); P.C. Joseph & Bros. v. CIT [2000] 108 Taxman 253 (Ker.) (para 5.5) followed.

CASES REFERRED TO

A.M. Shah & Co. v. CIT [1999] 238 ITR 415/[2000] 108 Taxman 137 (Guj.) (para 5.2), B.A. Balasubramaniam & Bros. Co. v. CIT [2001] 116 Taxman 842 (SC) (para 5.3), CIT v. B.A. Balasubramanian & Bros. [1985] 152 ITR 529/20 Taxman 215 (Mad.) (para 5.3), CIT v. Mussadilal Ram Bharose [1987] 165 ITR 14/30 Taxman 546H (SC) (para 5.3), CIT v. K.R. Sadayappan [1990] 185 ITR 49/51 Taxman 304 (SC) (para 5.3), Addl. CIT v. Jeevan Lal Shah [1994] 205 ITR 244/73 Taxman 182 (SC) (para 5.3), K.P. Madhusudhanan v. CIT [2001] 251 ITR 99/118 Taxman 324 (SC) (para 5.3), New Bijli Foundry v. CIT [1982] 135 ITR 593 (Punj. & Har.) (para 5.3), CIT v. K.P. Madhusudhanan [2000] 246 ITR 218/[2002] 125 Taxman 265 (Ker.) (para 5.4), SEBI v. Shriram Mutual Fund [2006] 68 SCL 216 (SC) (para 5.6), Union of India v. Dharamendra Textile Processors [2008] 174 Taxman 571 (SC) (para 5.6), P.C. Joseph & Bros. v. CIT [2000] 108 Taxman 253 (Ker.) (para 5.6), CIT v. Prithipal Singh & Co. [2001] 118 Taxman 330 (para 5.7), CIT v. Gold Coin Health Food (P.) Ltd. [2008] 172 Taxman 386 (SC) (para 5.7), CIT v. Rakesh Suri [2011] 9 taxmann.com 5 (All.) (para 5.7), Jaswant Rai v. CBDT [1982] 133 ITR 19/[1981] 7 Taxman 210 (Delhi) (para 5.8) and Trivium Power Engineers (P.) Ltd. v. ITO [IT Appeal No. 586 (Delhi) of 2010, dated 25-6-2010] (para 5.8).

Vikram Kapoor for the Appellant. Mrs. Anusha Khurana for the Respondent.

ORDER

A.N. Pahuja, Accountant Member - This appeal filed on 18.11.2009 by the assessee against an order dated 31-08-2009 of the ld. CIT(A)-XXII, New Delhi, raises the following grounds :-

1. "Whether in the facts and in the circumstances of the case the Ld. CIT(A) was justified in sustaining the penalty as imposed by the I.T.O u/s 271(1)(c) of the Act.

2. In the facts and in the circumstances of the case, it is most humbly prayed that the order imposing the penalty may kindly be cancelled."

2. Facts, in brief, as per relevant orders are that assessment in this case was completed on a loss of Rs. 22,62,919/- in pursuance to return filed on 31-10-2005,declaring nil income. The additions of Rs. 31,08,400/- made by the Assessing Officer[AO in short] were set off against b/s loss of Rs. 53,71,319/-. Inter alia, an amount of Rs. 30,00,000/-, comprising Rs. 20,00,000/- on account of capital introduced in the name of Sh. Sohan Singh and Rs. 10,00,000/- introduced in the name of Sh. Swarnjit Singh was added to the income, the assessee having failed to explain the source of said amount of Rs. 30,00,000/- introduced in cash in the name of aforesaid two partners. To a query by the AO vide order sheet entry dated 12.3.2007, the assessee did not explain the source of aforesaid cash introduced in the name of partners and instead surrendered the amount to tax on 30-03-2007. Accordingly, the AO added the amount and initiated penalty proceedings u/s 271(1)(c) of the Income-tax Act, 1961 [hereinafter referred to as the 'Act'] for concealment of particulars of income. The assessee did not file any appeal against the findings of the Assessing Officer. Subsequently, in response to a show-cause notice, the assessee replied vide letter dated 20.8.2009 filed on 17-09-2007 as under:-

"3. The most illustrative legal position in such cases is that when the returned and assessed income is NIL, and no tax liability is created despite several additions, penalty u/s 271(1)(c) is not impossible.

4. That as stated above, despite this, the income assessed is at NIL rather, allows brought forward losses to be carried forwarded to next year as stated hereinabove.

5. The notwithstanding stated hereinabove, the Assessing Officer in this case has failed to record its satisfaction and in this connection, kindly refer to section 271(1)(c) of the Act, the extracts of the same are given below:-

"271(1) if the Assessing Officer or the Commissioner (Appeals) is satisfied that any person:-

6. This is the strict requirement of law, as to the recording of satisfaction as to why the penalty proceedings have to be initiated and this is not present in the present case.

7. In this connection, our own, High Court (Delhi) as reported in-

(i) Diwan Enterprises v. CIT (ITR Vol.246 Page 571)

(ii) CIT v. Ram Commercial Enterprises (246 ITR 568), clearly demonstrate the legal position. Copies of the above judgments are enclosed.

8. That in yet another case, Prithpal Singh v. CIT The Hon'ble Supreme Court of India have taken the view that penalty can not be imposed , if the return income and assessed income is nil"

2.1 However, the Assessing Officer did not accept the submissions of the assessee and imposed a penalty of Rs. 10,97,700/- on the tax sought to be evaded on the aforesaid amount of Rs. 30,00,000/- relying, inter alia, on the provisions of Explanation 4 to section 271(1)(c) of the Act.

3. On appeal, the ld. CIT(A) upheld the findings of the Assessing Officer in the following para:-

"I have carefully considered the submissions made on behalf of the appellant and perused facts and circumstances of the case. The main plea of the assessee is that the addition to the capital account is made by the partners, so this cannot be added to the income of the firm and as there is no concealment on the part of the firm. Secondly, the assessed income despite additions is nil (because of carry forward losses) and the tax could not be levied, hence penalty was not leviable. The argument put forth does not hold good because the cash amount is found credited in the books of account of the firm in the name of partners for which no explanation offered and subsequently surrendered as unexplained credit. The ultimate beneficiary of this deposit is the firm hence Assessing Officer had validly treated this as concealed income of the firm u/s 68 of Income-tax Act, 1961 and not of partners. Insofar as resultant nil tax effect was concerned, it did not absolve from levy of penalty u/s 271(1)(c). The submission made on behalf of the assessee is misleading. The explanation 4 of section 271(1)(c) defines the amount sought to be evaded. This included the concealment of income or furnishing inaccurate particulars of income which has the effect of reducing losses. The penalty can be levied for concealing income or furnishing inaccurate particulars of income in loss cases also where there is no tax. I hold that the assessee had concealed the income and he was caught by the Assessing Officer. I uphold the penalty of Rs. 10,97,700/-levied on assessee u/s 271(1)(c) read with section 274."

4. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A) The ld. AR on behalf of the assessee reiterated their submissions before the ld. CIT(A) while referring to Para 11 of the assessment order and further submitted that the assessee was doing the business of transportation and bodybuilding of vehicles and some amount was introduced by way of capital. To a query by the Bench, the ld. AR submitted that no explanation regarding source of cash introduced in the name of partners was submitted and instead the amount was surrendered to tax in the hands of the firm. On the other hand, the ld. DR supported the findings of the ld. CIT(A).

5. We have heard both the parties and gone through the facts of the case. Admittedly, the assessee did not discharge the onus regarding credit of cash in the name of two partners in the books of the firm; instead, in response to a query by the AO, seeking evidence in support of aforesaid cash, the assessee surrendered to tax the amount of Rs. 30 lakh on 30.3.2007. Accordingly, the Assessing Officer completed the assessment and initiated penalty proceedings u/s 271(1)(c) of the Act. Subsequently, in response to a show-cause notice before levy of penalty, the assessee did not explain the source of cash introduced in the name of two partners nor submitted any further explanation, establishing their bona fide. Apparently, the assessee did not improve upon his case in the penalty proceedings. In any case, the Assessing Officer did not accept the submissions of the assessee and imposed a penalty of Rs. 10,97,700/- u/s 271(1)(c) of the Act. Before the ld. CIT(A) or even before us, no attempt was made to establishing the source of aforesaid cash. Before proceeding further, we may have a look at the relevant provisions of section 271(1)(c) of the Act, which read as under:

"271.Failure to furnish returns, comply with notices, concealment of income, etc.

(1) If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person-

(c) has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty,-

(iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income

Explanation 1.-Where in respect of any facts material to the computation of the total income of any person under this Act,-

(A) such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Deputy Commissioner (Appeals) or the Commissioner (Appeals) to be false, or

(B) such 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 and material to the computation of his total income have been disclosed by him, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed.

5.1 As is evident from the aforesaid cl. (c) of s. 271(1) of the Act, the words used are 'has concealed the particulars of his income' or furnished 'inaccurate particulars of such income'. Thus, both in case of concealment and inaccuracy, the phrase 'particulars of income' has been used. The legislature has not used the words 'concealed his income'. From this it would be apparent that penal provision would operate when there is a failure to disclose fully or truly all the particulars. The words 'particulars of income' refer to the facts which lead to the correct computation of income in accordance with the provisions of the Act. So when any fact material to the determination of an item as income or material to the correct computation is not filed or that which is filed is not accurate, then the assessee would be liable to penalty under s. 271(1)(c) of the Act. The expression 'has concealed the particulars of income' and 'has furnished inaccurate particulars of income' have not been defined either in section 271 or elsewhere in the Act. However, notwithstanding the difference in the two circumstances, it is now well established that they lead to the same effect namely, keeping off a certain portion of the income from the return. According to Law Lexicon, the word "conceal" means:

"to hide or keep secret. The word 'conceal' is con+celare which implies to hide. It means to hide or withdraw from observation; to cover or keep from sight; to prevent the discovery of ; to withhold knowledge of. The offence of concealment is, thus, a direct attempt to hide an item of income or a portion thereof from the knowledge of the income-tax authorities."

In Webster's Dictionary, "inaccurate" has been defined as :

"not accurate, not exact or correct; not according to truth; erroneous ; as an inaccurate statement, copy or transcript."

5.2 If the disclosure of facts is incorrect or false to the knowledge of the assessee and it is established, then such disclosure cannot take it out from the purview of the act of concealment of particulars or furnishing inaccurate particulars thereof for the purpose of levy of penalty. The penalty u/s 271(1)(c) of the Act is leviable if the AO is satisfied in the course of any proceedings under this Act that any person has concealed the particulars of his income or furnished inaccurate particulars of such income. In this context, Hon'ble Gujarat High Court in the case of A.M. Shah & Co. v. CIT [1999] 238 ITR 415/[2000] 108 Taxman 137 (Guj) observed that

"there cannot be a straightjacket formula for detection of these defaults of concealment or of furnishing inaccurate particulars of income and indeed concealment of particulars of income and inaccurate particulars of income may at times overlap, as for example when half of the income under a particular head is not at all disclosed, that would be concealed to that extent while the remaining half which is in fact disclosed would, not being his complete disclosure amount to inaccurate particulars of income as regards that constituent item of the return. By the very nature of the assessment proceedings the ITO while ascertaining the total income chargeable to tax would be in a position to detect the specific or definite particulars of income concealed or of which false particulars are furnished. Where in the constituents of income returned, such specific or definite particulars of income are detected as concealed, then even in the total income figure to that extent they reflect, it would amount to concealment to that extent. In the same way where specific and definite particulars of income are detected as inaccurate, then such figure will also make the total income inaccurate in particulars to the extent it does not include such income. Whether it be a case of only concealment or of only inaccuracy or both, the particulars of income so vitiated would be specific and definite and be known in the assessment proceedings by the ITO, who on being satisfied about each concealment or inaccuracy of particulars of income would be in a position to initiate the penalty proceedings on one or both of the grounds of default as may have been specifically and directly detected. The opportunity of hearing given by the notice under section 271(1)(c), obviously is against such concealment and inaccuracy as is detected in the assessment proceedings".

5.3 Indisputably, as a result of enquiries made by the Assessing Officer, the assessee did not furnish any evidence of cash deposited in the books of the firm in the name of aforesaid two partners and instead surrendered the amount as income of the year under consideration. In the course of penalty proceedings, the assessee did not bring any material before the Assessing Officer to rebut the inferences drawn by the AO in the course of assessment proceedings. In terms of provisions of sec. 271(1)(c) of the Act read with explanation 1 thereto and the judicial pronouncements in the case of B.A. Balasubramaniam & Bros. Co. v. CIT [2001] 116 Taxman 842 (SC), CIT v. B.A. Balasubramaniam & Bros. [1985] 152 ITR 529/20 Taxman 215 (Mad.), CIT v. Mussadilal Ram Bharose [1987] 165 ITR 14/30 Txman 546H (SC); CIT v. K.R. Sadayappan [1990] 185 ITR 49/51 Taxman 304 (SC); Addl. CIT v. Jeevan Lal Sah [1994] 205 ITR 244/73 Taxman 182 (SC); and K.P. Madhusudhanan v. CIT [2001] 251 ITR 99/118 Taxman 324 (SC), it is well-established that whenever there is difference between the returned and assessed income, there is inference of concealment. The Explanation 1 to sec. 271(1)(c) of the Act raises a presumption that can be rebutted by the assessee with reference to facts of the case. Thus, the onus is on the assessee to rebut the inference of concealment. The absence of explanation itself would attract penalty. In the case of New Bijli Foundry v. CIT [1982] 135 ITR 593, Hon'ble Punjab and Haryana High Court have held that the findings recorded in the assessment proceedings are certainly relevant in the penalty proceedings. In the absence of any fresh material during the course of penalty proceedings, specially when the assessee failed to establish that the aforesaid findings of the Assessing Officer during the course of assessment proceedings were based on improper facts or wrong appreciation of the facts, we are afraid that in the penalty proceedings we are unable to take a different view. The onus laid down upon the assessee to rebut the presumption raised under explanation 1 would not be discharged by any fantastic or fanciful explanation. It is not the law that any and every explanation has to be accepted. In the absence of any explanation regarding source of cash, apparently the assessee miserably failed to discharge the onus laid down in this explanation. In such circumstances, we have no hesitation in upholding the levy of penalty.

5.4 We find that the legal position is squarely covered by the decision of the Hon'ble Apex Court in K.P. Madhusudhanan (supra), wherein, the Hon'ble Court affirmed the decision of the Kerala High Court in CIT v. K.P. Madhusudhanan [2000] 246 ITR 218/[2002] 125 Taxman 265. Considering the effect of the addition of the Explanation to section 271(1) of the Act and the amendment to section 271(1)(c) of the Act by deletion of the word "deliberately", the Hon'ble Kerala High Court came to the conclusion that penalty was liable to be imposed in a case where the assessee could offer no acceptable explanation for the income not disclosed or the inaccurate particulars he had furnished in his return, had to be examined and if found unacceptable, penalty was liable to be imposed. The Hon'ble Kerala High Court observed as follows:

"Section 271(1)(c) of the Income-tax Act, 1961, is attracted where, in the course of any proceedings under the Act, the Assessing Officer or the first appellate authority is satisfied that: (a) any person has concealed the particulars of his income; or (b) has furnished inaccurate particulars of such income. The expressions 'has concealed' and 'has furnished inaccurate particulars' have not been defined either in the section or elsewhere in the Act. However, notwithstanding differences in the two circumstances, they lead to the same effect, viz., keeping off a certain portion of income. The former is direct while the latter may be indirect in its execution.

A conspectus of the Explanation added by the Finance Act, 1964, and the subsequent substituted Explanations makes it clear that the statute visualized the assessment proceedings and penalty proceedings to be wholly distinct and independent of each other. In essence, the Explanation (both after 1964 and 1976) is a rule of evidence. Presumptions which are rebuttable in nature are available to be drawn. The initial burden of discharging the onus of rebuttal is on the assessee. Explanation 1 automatically comes into operation when, in respect of any facts material to the computation of total income of any person, there is failure to offer an explanation or an explanation is offered which is found to be false by the Assessing Officer or the first appellate authority, or an explanation is offered which is not substantiated. In such a case, the amount added or disallowed in computing the total income is deemed to represent the income in respect of which particulars have been concealed. As per the provision of Explanation 1, the onus to establish that the explanation offered was bona fide and all facts relating to the same and material to the computation of his income have been disclosed by him will be on the person charged with concealment. The Assessing Officer is not obliged to intimate the assessee that Explanation 1 to section 271(1)(c) is proposed to be applied. The scheme of the provisions does not provide for such a requirement either directly or inferentially. In Sir Shadilal's case [1987] 168 ITR 705, what the Supreme Court observed was that there may be several reasons for which the assessee may have offered an amount for addition, but that itself is not sufficient to infer concealment. It has not laid down as a rule of general application that whenever such is the case, penalty cannot be imposed. On the contrary, in such cases also the assessee is required to discharge the burden placed by the Explanation appended to section 271(1)(c). In case an explanation is offered, the Assessing Officer is to examine it and find out whether the assessee has been able to establish that there was no concealment.

Held, that, in the case at hand, no explanation worth the name was offered by the assessee. The statement made by the assessee was to the effect that hand loans were obtained which were intended to be refunded immediately and, therefore, the entries were not made, but, later on, the arrangement did not work out. Therefore, the amount was offered for taxation. There was a clear admission that the entries were not made on the relevant dates. It was not a case where entries were made on the relevant dates and the source of money was omitted. The entries on the contrary were made on dates when there was sufficient cash balance. The intention to hide the actual state of affairs was clear. The explanation offered was fanciful and vague. The imposition of penalty was valid and the Tribunal erred in cancelling it."

5.5 Hon'ble Supreme court in the case of K.P. Madhusudhanan (supra) while affirming the aforesaid view held that

"We find it difficult to accept as correct the two judgments aforementioned. The Explanation to section 271(1)(c) is a part of section 271. When the Income-tax Officer or the Appellate Assistant Commissioner issues to an assessee a notice under section 271, he makes the assessee aware that the provisions thereof are to be used against him. These provisions include the Explanation. By reason of the Explanation, where the total income returned by the assessee is less than 80 per cent. of the total income assessed under section 143 or 144 or 147, reduced to the extent therein provided, the assessee is deemed to have concealed the particulars of his income or furnished inaccurate particulars thereof, unless he proves that the failure to return the correct income did not arise from any fraud or neglect on his part. The assessee is, therefore, by virtue of the notice under section 271 put to notice that if he does not prove, in the circumstances stated in the Explanation, that his failure to return his correct income was not due to fraud or neglect, he shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars thereof and, consequently, be liable to the penalty provided by that section. No express invocation of the Explanation to section 271 in the notice under section 271 is, in our view, necessary before the provisions of the Explanation therein are applied. The High Court at Bombay was, therefore, in error in the view that it took and the Division Bench in the impugned judgment was right."

5.6 Therefore, in view of the facts and circumstances and in the light of above noted authoritative pronouncements, when the assessee failed to discharge the onus laid down upon him in terms of explanation 1 to section 271(1)(c) of the Act and nor even attempted to explain the source of cash credited in the books of the firm in the name of aforesaid two partners even during the penalty proceedings , we have no option but to uphold the findings of the ld. CIT(A), confirming the levy of penalty .Even otherwise the breach of civil obligation which attracts a penalty under the provisions of an Act would immediately attract the levy of penalty irrespective of the fact whether the contravention was made by the defaulter with any guilty intention or not, vide Chairman, SEBI v. Shriram Mutual Fund [2006] 131 Comp Cas 591/68 SCL 216 (SC). This view has been reiterated by the Hon'ble Supreme Court in their decision dated 29.9.2008 in the case of Union of India v. Dharamendra Textile Processors [2008] 174 Taxman 571 (SC). Blameworthiness attached to the assessee with reference to the original return cannot be avoided by accepting the addition proposed by the Assessing Officer after concealment was detected by the assessing authority. Where the surrender of income was not voluntary, but was as a result of detection by the assessing authority, penalty cannot be avoided. The very word 'omission' connotes an intentional act. The factual position is the surrender was a veiled attempt to present a mitigating circumstance. That being the position, the surrender of concealed income does not constitute a mitigating circumstance and penalty has been rightly levied. This view is supported by decision in P.C. Joseph & Bros. v. CIT [2000] 108 Taxman 253 (Ker.).

5.7 In the instant case, the assessee claimed before the Assessing Officer and the ld. CIT(A) that there was no tax liability in their case and therefore, penalty could not be levied and relied upon decision of Hon'ble Apex Court in CIT v. Prithipal Singh & Co. [2001] 118 Taxman 330. This submission of the assessee is contrary to the provisions of Explanation 4 to sec. 271(1)(c) of the Act and the decision of the Hon'ble Apex Court in CIT v. Gold Coin Health Food (P) Ltd [2008] 172 Taxman 386 overruled the decision in Prithipal Singh & Co. (supra). In the absence of any evidence of source of cash, the assessee had no alternative but to surrender the amount introduced in cash in the books of the firm in the name of two partners. Apparently, only when the assessee was cornered , the assessee surrendered the amount .We are of the opinion that the surrender was not at all voluntary. Here ,we may have a look at the meaning of word 'Voluntary.' The meaning of word "Voluntarily" has been deliberated upon by the Hon'ble Allahabad High Court in the case of CIT v. Rakesh Suri [2011] 9 taxmann.com 5 as under:-

"41. A Full Bench of the Allahabad High Court in the case reported in (1998) 230 ITR 855:Bhairav Lal Verma Versus Union of India, while interpreting the word 'voluntarily' given in Section 273(A) of the Act held that voluntarily means out of free will without any compulsion. When the assessee concealed the incriminating material with regard to income so disclosed cannot be held to be voluntarily. It shall be appropriate to reproduce the relevant portion from the judgment of Bhairav Lal Verma (supra) as under:

"The position thus settled is that the word "voluntarily" in section 273A of the Act means out of free will without any compulsion. Disclosure of concealed income after the Department has seized the incriminating material with regard to the income so disclosed, cannot be voluntary disclosure, because it was made under the constraint of exposure to adverse action by the Department. But it cannot be held as a principle of law that the disclosure of income made after the search/raid cannot be voluntary. It is a question which has to be decided by the Department in each case on the basis of the material on the record. If on record there is incriminating material with regard to the disclosed income, the disclosure cannot be voluntary. But if the Department has no incriminating material with regard to the income disclosed, the disclosure is liable to be treated as voluntary having been made without any compulsion or constraint of exposure to adverse action by the Department. In a case where the assessee has disclosed not only the income regarding which the Department has incriminating material, but has also disclosed the income with regard to which no incriminating material was seized by the Department, the disclosure of the income with regard to which the Department has no incriminating material, is liable to be treated as voluntary. For example, if an assessee is having five accounts and the Department has incriminating material with regard to one of those accounts only, the disclosure of income relating to four accounts with regard to which the Department has no incriminating material, is voluntary, because it was made without any constraint or compulsion, even though the disclosure of the income relating to the account regarding which the Department has incriminating material, is liable to be treated as non-voluntary."

5.8 From the said decision it is, thus, clear that voluntarily means out of free will without any compulsion. When the assessee concealed incriminating material in the form of transactions of cash in the name of two partners, surrender cannot held to be voluntarily. Hon'ble jurisdictional High Court in Jaswant Rai v. CBDT [1982] 133 ITR/[1981] 7 Taxman 210 (Delhi) held that the subsequent act of disclosure of an income would not make any difference and it cannot be said that the assessee had not concealed particulars of their income or had not furnished inaccurate particulars of such income. Following the view taken in the aforesaid decision of Hon'ble Allahabad High Court in Rakesh Suri (supra), a coordinate Bench in Trivium Power Engineers (P.) Ltd. v. ITO [It Appeal No. 586 (Delhi) of 2010, dated 25-6-2010] upheld the levy of penalty u/s 271(1)(c) of the Act on the amount surrendered on accounts of unsecured loans in cash from various persons. In the instant case also the assessee's explanation has not been found to be bona fide and it failed to furnish all relevant material particulars relating to the concealed income and to discharge its burden that lay upon it under Explanation 1 to section 271(1)(c) of the Act.

6. A very heavy onus is placed on the assessee to explain the difference between the assessed income and returned income and the assessee in the instant case did not discharge the said onus. In the light of the discussion made above and conduct of the assessee, it is thus clear that all the material facts and particulars relating to the assessee's computation of income were never disclosed by the assessee, and it is further clear that the assessee did not offer any cogent explanation at all before the Assessing Officer during the assessment proceedings and even during the penalty proceedings, in respect of the aforesaid amount of Rs. 30 lakh credited in the books of the assessee, which amount was later surrendered by the assessee as income of the year under consideration. In these circumstances and in the light of decisions of the Hon'ble Supreme Court and jurisdictional High Court referred to above, we are of the opinion that the assessee has not been able to discharge the burden that lay upon them by Explanation 1 to s. 271(1)(c) of the Act. Therefore, we have no hesitation in upholding the order of the ld. CIT(A) in confirming the penalty imposed by the Assessing Officer under s. 271(1)(c) of the Act . Consequently, grounds raised in the appeal are dismissed.

7. No other plea or argument was made before us.

8. In the result, appeal is dismissed.

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Chartered Accountant Finance

Saturday, December 1, 2012

[aaykarbhavan] Judgments,

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