IT : Where returned income filed under section 153A is accepted by Assessing Officer and there is no variation in assessed income and returned income, penalty under section 271(1)(c) cannot be imposed
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[2013] 35 taxmann.com 594 (Nagpur - Trib.)
IN THE ITAT NAGPUR BENCH
Deputy Commissioner of Income-tax
v.
Purti Sakhar Karkhana*
P.K. BANSAL, ACCOUNTANT MEMBER
AND D.T. GARASIA, JUDICIAL MEMBER
AND D.T. GARASIA, JUDICIAL MEMBER
IT APPEAL NOS. 150 TO 155 (NAG.) OF 2010
[ASSESSMENT YEARS 2001-02 TO 2006-07]
[ASSESSMENT YEARS 2001-02 TO 2006-07]
DECEMBER 21, 2012
Section 271(1)(c), read with section 153A, of the Income-tax Act, 1961 - Penalty - For concealment of income [Conditions precedent] - Assessment years 2001-02 to 2006-07 - Whether search assessments made under section 153A cannot be treated as continuance of normal assessment proceedings whether abated or not and, therefore, it will not be justified to refer to returned income under section 139 for purpose of imposition of penalty under section 271(1)(c) - Held, yes - Whether further, where returned income filed under section 153A is accepted by Assessing Officer and there is no variation in assessed income and returned income, penalty under section 271(1)(c) cannot be imposed - Held, yes - Whether where provisions of section 271(1B) is not applicable in case of assessee, Assessing Officer is bound to record his satisfaction in assessment order that assessee had either concealed income or furnished inaccurate particulars of income in his return before proceeding further - Held, yes [Paras 9,13,19 & 25] [In favour of assessee]
FACTS
| ■ | There had been search in the case of the assessee along with Mehta Group under section 132. Accordingly, notices under section 153A were served to the assessee for relevant assessment years. The assessee surrendered certain amount by reducing the capital-work-in-progress under heads, 'plant and machinery', 'power plant' etc. | |
| ■ | The returned income in response to notice under section 153A was accepted by the Assessing Officer and assessment orders under section 153A were passed creating nil demand of tax. | |
| ■ | Thereafter the Assessing Officer imposed penalty under section 271(1)(c) for giving false information in the return of income. | |
| ■ | The Commissioner (Appeals) considering the fact that reduction in capital work-in-progress was offered to buy peace of mind and there was no variation in returned income and assessed income deleted the penalty. | |
| ■ | On second appeal: |
HELD
Where section 271(1B) not applicable, Assessing Officer to record satisfaction regarding concealment of income
| ■ | In the case of the assessee, there is a direction that the penalty proceeding under section 271(1)(c) is separately initiated. Now the question arises whether this direction will tantamount to be the satisfaction recorded by the Assessing Officer for the concealment of the particulars of income or furnishing of inaccurate particulars of income. This is undisputed fact that in the case of the assessee the assessments have been framed by the Assessing Officer at the same income or loss at which the assessee has filed the return in pursuance to the notice issued under section 153A. The Assessing Officer has not made any addition or disallowance while computing the total income or loss of the assessee. Therefore, section 271(1B) will not apply in the case of the assessee and the Assessing Officer is bound to record the satisfaction for the concealment of the particulars of income or furnishing of inaccurate particulars of income. In the assessment order, there is nothing which may designate that the Assessing Officer has satisfied during the course of assessment proceedings that the assessee has concealed the particulars of income or furnished the inaccurate particulars of income. This is a fact that both the charges are different charges and if the penalty has been initiated in respect of one charge, it cannot be levied for the other charge. Since section 271(1B) is not applicable in the case of the assessee, the revenue has to show that the satisfaction of the Assessing Officer to the fact that the assessee has either concealed the particulars of income or furnished inaccurate particulars of income. This is the condition precedent for initiating the penalty. Until and unless the satisfaction is arrived at in the course of any proceedings under the Act, the penalty cannot be levied. [Para 9] | |
| ■ | It is noticed that in each of the assessment years, the Assessing Officer, in the assessment order passed under section 143(3) read with section 153A, has not recorded any satisfaction but has simply mentioned that the penalty proceeding under section 271(1)(c) has been initiated separately. Nowhere the Assessing Officer noted in the assessment order his satisfaction that there was furnishing of inaccurate particulars of income by the assessee and that there is case made out for initiating proceedings under section 271(1)(c). Therefore, initiation of proceedings under section 271(1)(c), against the assessee for assessment years 2001-02 to 2006-07 is not valid in law. [Para 13] | |
| ■ | Even though the assessee has surrendered the amount of capital work-in-progress but it did not have any impact on the income of the assessee so far it relates to assessment years 2001-02 to 2005-06. The Assessing Officer observed, while framing the assessment, that penalty proceeding under section 271(1)(c) is separately initiated but it does not show how it affects the concealment of the particulars of income of the assessee or furnishing of the inaccurate particulars of the income. In fact, neither the returned income nor the assessed income is being affected by the reduction of the amount of the capital work-in-progress as surrendered by the assessee. Concealment of particulars of income or furnishing of inaccurate particulars of such income, both are the different charges. | |
| ■ | Direction for initiation of the penalty proceedings under clause (c) of sub-section (1) for constituting the satisfaction of the Assessing Officer for initiation of the penalty must be related with either of the charges i.e. the concealment of particulars of income or furnishing of inaccurate particulars of such income. The Assessing Officer, no doubt, states that the penalty proceeding under section 271(1)(c) is separately initiated but does not state or what default, whether for the concealment of particulars of income or for furnishing of inaccurate particulars of income is being initiated. [Para 16] | |
| ■ | Even the notice did not specify any specific charge for which the penalty has been initiated and ultimately the Assessing Officer levied the penalty on the assessee for giving false information in the IT return neither for concealment of particulars of income nor for furnishing inaccurate particulars of income. It is incumbent on the Assessing Officer to mention whether the penalty is levied for concealment of income or for furnishing of inaccurate particulars of income. In the absence of specific charge, the order would be bad in law. Section 271(1)(c) does not talk of levy of the penalty for giving false information in the return. The Assessing Officer levied penalty entirely for a different charge. [Para 18] | |
| ■ | Explanation 1 to section 271(1)(c) cannot be applied where charge against the assessee is in furnishing of inaccurate particulars of income since it provides deeming fiction qua concealment of the particulars of income only and cannot be extended to a case where charge on the assessee is furnishing of inaccurate particulars of income. This is not the case of the revenue that the assessee has concealed the particulars of income, therefore, no question of applicability of Explanation 1 arises. The charge in the penalty order against the assessee is for furnishing the false particulars. In the case of furnishing of the inaccurate particulars of income, since the deeming provision given under Explanation 1 is not applicable, the onus is on the revenue to prove that the assessee has filed the false particulars of income in the return filed. In the return filed in response to notice issued under section 153A, this is a fact that there is no filing of inaccurate particulars and no addition/disallowance has been made by the Assessing Officer while making assessment under section 143(3) read with section 153A. Even otherwise, the assessee has surrendered the investment made in capital work-in-progress. Source of the investment is not disputed by the revenue. It is not the case of the revenue that the assessee was not having the sufficient income to invest in the capital work-in-progress or investment shown in capital work-in-progress is made out of undisclosed income. Once source of the investment is not disputed and the assessee has sufficient source to invest in capital work-in-progress, it cannot be said that the assessee was having undisclosed income, which has been invested by the assessee and thereby the assessee has concealed the particulars of income or filed the inaccurate particulars of income. Income is different from investment. Income precedes the investment, not the investment precedes the income. It may be a case of furnishing of the inaccurate particulars of investment but not furnishing of inaccurate particulars of the income. Merely the assessee has surrendered the part of the investment in capital work-in-progress, it will not convert surrender of such investment into an income. During the assessment years 2001-02 to 2005-06, this is a fact that the assessee has not claimed any depreciation as it is only the capital work-in-progress, which was in existence and the capital work-in-progress was not transferred to the respective assets, which are entitled to depreciation. On this basis itself also, no penalty can be imposed on the assessee under section 271(1)(c). [Para 19] | |
| ■ | The assessee has disclosed loss in the return filed for the assessment years 2002-03 to 2006-07. The Assessing Officer has accepted the said loss in the assessment framed by him. The loss declared in the return has not been reduced or loss has not been converted into income due to the investment made in the capital work-in-progress surrendered by the assessee. In view of Explanation 4(a) of section 271(1)(iii), the tax sought to be evaded will be nil and both situations in clause (a) will not apply in the case of the assessee. Clause (b) of this Explanation applied to a case where Explanation 3 applies. Clause (c) is the residuary clause. In such case, it would be main difference between the tax on total income assessed and the tax on total income reduced by the amount in respect of which penalty is sought to be levied. The case of the assessee, at the most for all the assessment years can fall under clause (c) but on the basis of this clause, the tax sought to be evaded, in each of the assessment year, will be nil because the difference between the tax on total income assessed and tax on total income reduced by the amount in respect of which the Assessing Officer tried to impose the penalty is nil. Therefore, even if one agrees with the revenue that the assessee has furnished the inaccurate particulars of income to the extent he surrendered the investment in the capital work-in-progress since the tax sought to be evaded will be nil, the assessee had not to pay any amount by way of penalty as per section 271(1)(iii) read with Explanation 4. On this basis also, the penalty is liable to be deleted. [Para 22] |
Search assessment made under section 153A cannot be treated as continuance of normal assessment proceedings whether abated or not
| ■ | The existence of the words 'all other provisions of this Act shall apply to the assessment made under this section' in Expln. (i) to section 153A makes it clear that in search assessments, amongst others the provisions relating to penalty and prosecution will also be applicable. However, when normal assessment procedure covered by sub sections 139, 147, 148, 149, 151 and 153 has been completely excluded by operation of non obstante clause 'notwithstanding anything contained' the search assessments made under section 153A cannot be treated as continuance of normal assessment proceedings whether abated or not. Thus there is complete detachment of assessment proceedings under section 143 or 147 from search proceedings under section 153A. When scheme of search assessment as designed by the Legislature does not prescribe to take into account the earlier assessment proceedings whether abated or not, it will not be proper or justified to refer to returned income under section 139 for the purpose of imposition of penalty under section 271(1)(c). It follows that the concealment of income has to be seen with reference to additional income brought to tax over and above returned by the assessee in response to notice issued under section 153A. Accordingly for the purpose of imposition of penalty under section 271(1)(c) resulting as a result of search assessments made under section 153A, the original return of income filed under section 139 cannot be considered. Further in case of search initiated after 1-6-2003 a return of income is always filed on issue of notice under section 153A in respect of each assessment year falling within six assessment years immediately preceding the assessment year relevant to the previous year in which the search is conducted or requisition is made in the prescribed form and verified in the prescribed manner. Assessing Officer requires the assessee to set forth such other particulars as may be prescribed in these returns. This section also states that all the provisions of this Act, as are applicable to a return to be furnished under section 139, will apply to this return. In view of this, the Assessing Officer has to frame an assessment on the basis of the return filed under section 153A. As has been held above, the penalty under section 271(1)(c) is imposable when there is variation in assessed and returned income. If there is no variation, there will be no concealment or furnishing of inaccurate particulars of income. When there is no concealment or furnishing of inaccurate particulars of income, question of levy of penalty under section 271(1)(c) will not arise. | |
| ■ | The concept of voluntary return of income may be important in penalty proceedings initiated in course of normal assessment proceedings made under section 143(3) or 147 but not under section 153A. From above discussion it follows that where returned income filed under section 153A is accepted by the Assessing Officer, there will be no concealment of income or furnishing of inaccurate particulars of income and consequently penalty under section 271(1)(c) cannot be imposed. Section 271 does not talk of for the purpose of ascertaining the default whether of concealment of income or furnishing of inaccurate particulars of income, the return filed under section 139 or the return filed by the assessee will be considered not the return filed under section 153A. This satisfaction for concealment of particulars of income or furnishing of inaccurate particulars of income has to come from the assessment order passed in consequence of return filed under section 153A. The assessee in this case, in each of the assessment years, filed the return on 23-12-2008 showing nil income or loss. The returns filed by the assessee were duly accepted by the Assessing Officer in each of the case and assessment under section 143(3) read with section 153A were framed on the returned income. Thus, there is no variation in each of the assessment year in the returned income shown by the assessee. Prior to the filing of the returns by the assessee under section 153A, even though the proceedings under this Act had started prior to that but the Assessing Officer has not brought out any material or evidence, which may state that the assessee has furnished inaccurate particulars of income or concealed the particulars of income. In the return filed on 23-12-2008, the assessee has duly disclosed the investment in capital work-in-progress surrendered by him. Since these particulars, to which the Assessing Officer treated for the purpose of levy of penalty to be false particulars were available with the Assessing Officer in the return filed by the assessee under section 153A, in this case it cannot be said that the assessee has furnished the false particulars. | |
| ■ | Section 271(1)(c) does not authorise the Assessing Officer to compare the return filed under section 139(1) and under section 153A and compare the difference in the particulars of income in both the returns to treat such difference to be the false particulars of income. The fault has to be seen with the return filed by the assessee when an assessment under section 143(3) read with section 153A is made with reference to the return filed under section 153A and when the penalty proceeding is initiated in the order passed under section 143(3) read with section 153A, this will also relate to the satisfaction of the assessee with reference to the return filed under section 153A. Aforesaid view is also strengthened in view of the Explanation 5 given under section 271(1)(c). This Explanation is applicable in the case of the search taken place before 01-06-2007 and the assessee is found to be the owner of any money, billion, jewellery or any other valuable, article or thing. This Explanation is not applicable in the case of the assessee as it is an undisputed fact that no money, billion, jewellery or any other valuable, article or thing has been found in the case of the assessee. Had there been intention of the Legislature to look into the concealment of the particulars of the income or furnishing of inaccurate particulars of income with reference to the return filed under section 139(1), the Legislature would have provided so. On this basis also, no penalty can be imposed under section 271(1)(c) as there is no variation in the income returned in response to notice under section 153A vis-à-vis assessment passed under section 143(3) read with section 153A. [Para 25] |
CASE REVIEW
CIT v. S.V. Angidi Chettiar [1962] 44 ITR 739 (SC) (para 9); CIT v. Atul Mohan Bindal [2009] 183 Taxman 444 (SC) (para 13);Madhushree Gupta v. Union of India [2009] 317 ITR 107/183 Taxman 100 (para 15); Varkey Chacko v. CIT [1993] 203 ITR 885/70 Taxman 152 (SC) (para 16); CIT v. Manu Engg. Works [1980] 122 ITR 306 (Guj.) and New Sonathia Engineering Co. v. CIT [2006] 282 ITR 642/155 Taxman 513 (Guj.); Padma Ram Bharali v. CIT [1977] 110 ITR 54 (Gau.) (para 18) followed.
UOI v. Dharamendra Textiles Processors [2008] 295 ITR 244/166 Taxman 65 (SC) (para 27) and K.P. Madhusudan v. CIT [2001] 251 ITR 99/118 taxman 324 (SC) [Para 29] distinguished.
CASES REFERRED TO
Sir Sadilal Sugar & General Mills Ltd. v. CIT [1987] 168 ITR 705/33 Taxman 460A (SC) (para 4), Union of India v. Dharamendra Textile Processors [2008] 306 ITR 277/174 Taxman 571 (SC) (para 6), K.P. Madhusudhanan v. CIT [2001] 251 ITR 99/118 Taxman 324 (SC) (para 6), Ms. Madhushree Gupta v. Union of India [2009] 183 Taxman 100/317 ITR 107 (Delhi) (para 7), CIT v. N. George & Bros.[1986] 160 ITR 511/[1987] 30 Taxman 368 (Ker.) (para 7), Dilip N. Shroff v. Jt. CIT [2007] 291 ITR 519/161 Taxman 218 (SC) (para 7), Kanbay Software India (P.) Ltd. v. Dy. CIT [2009] 31 SOT 153 (Pune) (para 7), CIT v. Reliance Petroproducts (P) Ltd. [2010] 322 ITR 158/189 Taxman 322 (SC) (para 7), CIT v. S.V. Angidi Chettiar [1962] 44 ITR 739 (SC) (para 9), D.M. Manasvi v. CIT [1972] 86 ITR 557 (SC) (para 9), CIT v. Mohinder Lal [1987] 31 Taxman 450/168 ITR 101 (Punj. & (Har.) (para 9), CIT v. Ram Commercial Enterprises Ltd. [2002] 122 Taxman 620 (Delhi) (para 9), Diwan Enterprises v. CIT [2000] 246 ITR 571 (Delhi) (para 9), CIT v. Vikas Promoters (P) Ltd. [2005] 277 ITR 337/145 Taxman 300 (Delhi) (para 9), CIT v. Super Metal Re-rollers [2004] 135 Taxman 407 (Delhi)(para 9), Shri Bhagwant Finance Co. Ltd. v. CIT [2005] 147 Taxman 53 (Delhi) (para 9), CIT v. Rajan & Co. [2007] 291 ITR 340/[2005] 146 Taxman 271 (Delhi) (para 9), CIT v. Munish Iron Store [2003] 263 ITR 484/[2004] 137 Taxman 391 (Punj. & Har.) (para 9), CIT v.Dajibhai Kanjibhai [1991] 189 ITR 41/57 Taxman 16 (Bom.) (para 9), CIT v. Rampur Engg. Co. Ltd. [2009] 176 Taxman 211 (Delhi)(para 9), V.V. Projects & Investments (P) Ltd. v. Dy. CIT [2008] 300 ITR 40/171 Taxman 62 (AP) (para 9), Chennakesava Pharmaceuticals v. CIT [2013] 214 Taxman 141 (Mag.)/30 taxmann.com 385 (AP) (para 10.1), CIT v. M.K. Sharma [2008] 307 ITR 147 (Delhi) (para 11), CIT v. Atul Mohan Bindal [2009] 183 Taxman 444 (SC) (para 12), Varkey Chocko v. CIT [1993] 203 ITR 885/70 Taxman 152 (SC) (para 16), CIT v. Lakhdhir Lalji [1972] 85 ITR 77 (Guj.) (para 17), CIT v. Manu Engg. Works [1980] 122 ITR 306 (Guj.) (para 18), New Sorathia Engg. Co. v. CIT [2006] 282 ITR 642/155 Taxman 513 (Guj.) (para 18), Padma Ram Bharati v. CIT[1977] 110 ITR 54 (Gau.) (para 18), CIT v. Shaila Agarwal [2011] 16 taxmann.com 232/[2012] 204 Taxman 276 (All.) (para 24) and Dy. CIT v. Chirag Metal Rolling Mills Ltd. [2007] 162 Taxman 317 (MP) (para 36).
Milind Bhusari for the Appellant. Hitesh Shah for the Respondent.
ORDER
P.K. Bansal, Accountant Member - All these appeals filed by the Revenue since involve common issue in all the assessment years, these are being disposed of by this common order for the sake of convenience. All these appeals are against the consolidated order of CIT(A) dt. 28th May, 2010 by which the CIT(A) has deleted the penalty imposed under s. 271(1)(c) of the Act by the AO. In all these appeals, the Revenue has raised common grounds of appeal against the deletion of penalty.
2. The brief facts of the case are that there has been search in the case of the assessee along with Mehta Group under s. 132 of the Act on 23rd Aug., 2006. The assessee is a public limited company, incorporated under the Companies Act, 1956 on 20th April, 2000 for setting up an integrated plant for manufacturing of sugar, power, ethanol etc. at Village Bela, Tah. Umred, Distt. Nagpur. During the previous year relevant to assessment year under consideration, the assessee company was in the process of acquiring land, doing site development, construction of factory buildings, erecting plant and machinery and other related activities. The assessee had placed orders for supply and erection of various plant packages with various agencies including the contractors of national and international repute. Work orders were issued for execution and supply of respective items of plant and advances were paid as per terms of contract. Means of financing the project includes share money received from various individuals and bodies corporate, unsecured loans in the form of inter-corporate deposits from various companies, genuineness of which is not under dispute. The assessee-company raised secured loans from consortium of nineteen co-operative banks, Indian Renewable Energy Development Agency, New Delhi, Bank of Maharashtra and State Bank of Indore etc. The assessee-company had issued work order for executing the supply and erection of plant to various contractors/companies. These companies executed earth work and site development, civil construction etc. jobs and raised bills for these jobs. The assessee-company paid for these bills in the normal course of business and duly deducted tax at source and deposited the same. These bills were duly clubbed under the head 'Capital work-in-progress' for capitalization at a later date when the business is set up. The assessee purchased cement, steel, hardware and other machinery components etc. from various dealers/companies. The bills were duly checked and payments were made for these supplies and were debited to capital work-in-progress. Various expenses were incurred in the normal course of business during the previous years when the work of construction and erection was going on. The expenses included the interest paid by the assessee on secured loans as well as unsecured loans. There was no default of the TDS etc. The assessee has maintained the regular books of account which were duly audited. Few companies of Mehta Group supplied the capital goods and also carried out erection work for setting up the plant and machinery by the assessee. Advances were also made to Mehta Group for the execution of the work. Few companies belonging to Mehta Group made investments in the shares of the assessee-company and had also given inter-corporate deposits. Simultaneous search operation was carried out on the assessee company along with Mehta Group under s. 132 of the IT Act on 23rd Aug., 2006. Notices under s. 153A of the IT Act were received by the assessee company for the asst. yr. 2001-02 to asst. yr. 2006-07 on 23rd March. 2007. The assessee submitted the reply on 23rd April, 2007 and it was submitted that on perusal of the seized material then made available, it was fell that some of the items clubbed under capital work-in-progress were not properly accounted for. The assessee is carrying on the analysis of the capital work-in-progress and is preparing a revised statement of income considering the seized material found from the Mehta Group of companies. The reduction of the capital work-in-progress would result in reduction in claim of depreciation in future year when the business is set up and accordingly the assessee requested more time for filing the return under s. 153A and to continue assessment proceedings on the basis of the available records. It was also mentioned that assessee is facing difficulty as some of the old employees of the assessee have left the service and the information was required to be obtained from outside sources i.e. Mehta Group of companies. Whatever information was obtained from the seized material and Mehta Group of companies was being continuously analysed with its own records. A number of transactions had taken place amongst various Mehta Group of companies and, therefore, it was difficult to trace the ultimate net effect in the books of those companies. The assessee, therefore, took the initiative and revised the capital work-in-progress on lump sum basis. Thus, the assessee volunteered to rework the year-wise impact of these transactions on capital work-in-progress and accordingly intimated the AO. The assessee accordingly for the asst. yrs. 2001-02 to 2006-07 surrendered the following amount in the capital work-in-progress by reducing the amount of the capital work-in-progress amount for each of the assessment years respectively on 23rd Dec., 2008 and filed the revised return for the asst. yr. 2006-07 giving the effect of claiming the lower depreciation. In other assessment years there was no effect on the income/loss returned by the assessee in the original returns.
| Sr. No. | Asst yr. | Amount of capital work-in-progress surrendered by assessee |
| 1. | 2001-02 | 10,00.000 |
| 2. | 2002-03 | 2,73,89,041 |
| 3. | 2003-04 | 2,01,000 |
| 4. | 2004-05 | 1,87,46,067 |
| 5. | 2005-06 | 2,43,26,321 |
| 6. | 2006-07 | 3,25.00,000 |
2.1 The cumulative effect of amount surrendered by the assessee during all assessment years from 2001-02 to 2006-07 by reducing the capital work-in-progress under the various heads is as under :
| (i) Plant & machinery | Rs.9,48,85,108/- |
| (ii) Power plant | Rs.2,31,76,321/- |
| (iii) Admn. Buildings | Rs. 10,00,000/- |
| (iv) Factory Buildings | Rs. 50,00,000/- |
| TOTAL | Rs.12,40,61,429/- |
2.3 In response to notice issued under s. 153A for the asst. yrs. 2001-02 to 2005-06, the assessee stated that the return already filed by the assessee under s. 139(1) may be treated as return filed in response to notice under s. 153A of the Act. The assessment orders under s. 153A r/w s. 143(3) of the Act for all these assessment years were passed on 31st Dec., 2008 creating nil demand of tax. The details of returned income in response to notice under s. 153A as well as income assessed in each of the assessment year are given as under :
| Asst. yr. | Returned income | Assessed income | Tax |
| 2001-02 | Nil | Nil | Nil |
| 2002-03 | (-) 2,81,545 | (-) 2,81,545 | Nil |
| 2003-04 | (-) 2.65,464 | (-) 2,65,464 | Nil |
| 2004-05 | (-) 83,122 | (-) 83,122 | Nil |
| | 1,02,848(under s.115JB) | 1,02,848 | Nil |
| 2005-06 | (-) 2.13,036 | (-) 2,13,036 | Nil |
3. In the asst. yr. 2006-07, originally return was filed showing a loss of Rs. 16,86,25,367 while the return under s. 153A was filed on 23rd Dec., 2008 reducing the loss to Rs. 15,66,37,622 due to less claim of depreciation on the revised figures of capital work-in-progress as capitalized during the year. The assessment has been completed by the AO at a loss of Rs. 15.66,36,622. The assessee reduced the claim for depreciation in the asst. yr. 2006-07 due to reduction in the capitalized value of the capital work-in-progress surrendered in different assessment years. Originally the assessee had claimed depreciation at Rs. 14.5716,287, which was reduced to Rs. 13,42,12,588. There was no effect on the depreciation claimed so far it relates to the asst. yrs. 2001-02 to 2005-06 as the capital work-in-progress was not capitalized to respective asset, except the power plant during the asst. yr. 2006-07. The AO, while completing the assessment for each of the assessment years. mentioned that "penalty proceedings under s. 271(1)(c) of the IT Act, 1961 is initiated separately". (English translation). Accordingly, show-cause notice dt. 31st Dec., 2008 was issued to the assessee for each of the, assessment years to the following terms :
"Sub : Show-cause notice under s. 271(l)(c) of the IT Act. 1961- reg.
Whereas in the course of proceedings before me for the asst. yr. 2001-02, it appears that you have concealed the particulars of your income or furnished inaccurate particulars of such income.
You are requested to appear before me at 11.00 A.M. on 17th Feb., 2009 and show-cause why an order imposing a penalty on you should not be made under s. 271 of the IT Act, 1961. If you do not wish to avail yourself of this opportunity of being heard in person or through an Authorized Representative, you may show-cause in writing on or before the said date, which will be considered before any such order is made under s. 271 of the Act."
4. The assessee agitated the issue of show-cause notice. In reply to the show-cause notice, the assessee stated that notice under s. 153A was received by the assessee on 22nd March, 2007. In the reply dt. 12th April, 2007, the assessee stated that the figures of capital work-in-progress booked during the previous years relevant to asst. yrs. 2001-02 to 2007-08 were likely to go under revision on account of surrender, the assessee was contemplating, whereby the cost of capital work-in-progress would be reduced. The assessee had volunteered to analyze reduction in the cost of capital work-in-progress when the assessee got the opportunity to learn about certain information out of the material seized from premises of Mehta Group. The notice was received by the assessee only on 7th Feb., 2008. The assessee surrendered certain amount of the capital work-in-progress much before the initiation of the assessment proceedings and the surrender is not the outcome of the finding of the AO during the assessment proceedings. No material was found during the course of assessment proceedings or search on which basis the AO could have held that the assessee has concealed the particulars or furnished inaccurate particulars of income. The assessee relied on the decision of Hon'ble Supreme Court in the case of Sir Shadilal Sugar and General Mills Ltd. v. CIT [1987] 168 ITR 705/33 Taxman 460A for the-proposition that the assessee agreeing for the addition does not follow that the amount agreed to be added as income is correct (sic- concealed) income. There may be hundred and one reasons for such additions when the assessee realizes the true position, it does not dispute certain additions but that does not mean that the assessee has filed the inaccurate particulars. Reliance was also placed on certain other decisions. The AO, in each of the assessment year, levied the penalty on the assessee for furnishing false particulars amounting to Rs. 4,10,000 for asst. yr. 2001-02, Rs. 1,10,00,000 in asst. yr. 2002-03, Rs. 75,00,000 in the asst. yr. 2003-04, Rs. 68,00,000 in the asst. yr. 2004-05, Rs. 90,00,000 in the asst. yr. 2005-06 and Rs. 1,10,00.000 in the asst. yr. 2006-07.
5. The assessee went in appeal before the CIT(A). The CIT(A) deleted the penalty in each of the assessment years by passing a consolidated order dt. 28th May, 2010 by holding as under :
"19. 1 have gone through the findings of the AO in his penalty orders, the remand report of the AO as well as the detailed submissions of the appellant. The appellant company was incorporated on 10th April, 2000. During the asst. yrs. 2001-02 to 2005-06, it was in the process of acquiring land, doing site development, construction of factory buildings, erecting plant and machineries and other related activities during the assessment years under consideration. The appellant-company had placed orders for supply and erection of various plant packages with various agencies including the contractors of national and international repute and work orders were issued for execution and supply of respective items of plant and advances were paid as per terms of contract. The means of financing the project included share money received from various individuals and bodies corporate, unsecured loans in the form of Inter Corporate Deposits (ICDs) from various companies. The appellant-company raised secured loans from consortium of nineteen co-operative banks, Indian Renewable Energy Development Agency (IREDA), New Delhi, and Bank of Maharashtra and State Bank of Indore. The assessee-company had issued work order for executing the supply and erection of plant to various contractors/companies. These companies executed earthwork and site development, civil construction etc. jobs and raised bills for these jobs. The appellant-company paid for these bills in the normal course of business and duly deducted tax at source and deposited the same. These bills were duly clubbed under the head capital work-in-progress (CWIP) for capitalisation at a later date. The appellant-company incurred various expenses in the normal course of business throughout the various previous years during which work of construction and erection was going on. The expenses included the interest paid by the appellant on secured loans as well as unsecured Loans while making payment of interest on ICDs tax was deducted at source and deposited into Government treasury. All interest and expenses were clubbed and shown under the head CWIP. The advances paid by the appellant company to various contractors and sub-contractors for executing the work were also clubbed and shown under CWIP, in the balance sheet, with a proper disclosure by way of a statement in notes to accounts. Few companies belonging to Mehta Group also did the work of supply and erection. Advances were paid to the Mehta Group companies for execution of work.
20. The company was incorporated for setting up of an integrated plant for manufacturing sugar, power, ethanol etc. The commercial production of the entire projects were to start from December, 2006 onwards, but crushing of sugarcane started during asst. yr. 2006-07. However, search and seizure action was carried on the appellant-company along with Mehta Group under s. 132 of the IT Act. 1961 on 23rd Aug., 2006. The notices under s. 153A of the Act were received by the appellant-company for the asst. yr. 2001-02 to asst. yr. 2006-07 on 23rd March, 2007. The appellant has filed replies to these notices on 23rd April, 2007 and it was submitted in that letter that on perusal of the seized material then made available it was felt that some of the items clubbed under CWIP may not be fully explainable to the satisfaction of the AO. It was also mentioned that on careful analysis the CWIP appeared to be on higher side and hence the appellant was preparing a revised statement of income considering the seized material, found from Mehta Group of companies, The appellant had stated that reduction in CWIP would result in reduction in claim of depreciation in the future years. These facts were brought to the notice of the AO. prior to the commencement of the assessment proceedings. Subsequent to the search in response to notice under s. 153A of the Act, returns were filed showing reduced figures of CWIP for these years. The AO has accepted the returned loss in these cases in his assessment orders under s. 153A r/w s. 143(3) of the Act, dt. 31st Dec., 2008, but has initiated and levied penalties under s. 271(1)(c) of the Act on the amounts reduced from CWIP, which were surrendered by the appellant.
21. I have perused the orders imposing penalty under s. 271(1)(c) of IT Act, 1961 and it is evident from the same that penalty is imposed only for the reason that in the course of assessment assessee has agreed for reduction in the amount shown in CWIP in the returns of earlier years. The matter was discussed with AO in the course of appellate proceedings. In the case of assessee it is undisputed fact on record that reduction in CWIP is not based on any documents or evidence found in the course of search from assessee. It is on the basis of search at Mehta Group and assessee had verified the value of CWIP and revised and reduced the same to buy peace of mind and avoid vexed litigation. In fact in the case of assessee all advances given to Mehta Group of companies were through proper banking channel and was duly recorded in the books of account of assessee. In the case of Mehta Group of companies in search conducted certain transactions with the assessee company could not be fully reconciled and therefore could not be explained by the assessee. The assessee company has given advances as well as paid interest to Mehta Group of companies and such amounts paid have not been claimed as revenue expenditure in any of the assessment years for which penalty under s. 271(1)(c) of the Act has been levied in the case of assessee. In fact in the case of assessee up to asst. yr. 2005-06 as production of sugar has not commenced and therefore there is no question of computing income from business, to which the various advances/interest payments made to Mehta Group of companies relate. The amount of advances/interest has not been claimed as expenditure in the return of income of assessee and the aforesaid sums not being assessable as business income at the hands of assessee, hence no charge of concealment or furnishing inaccurate particulars of income can be held against assessee. The AO has not disputed the source of giving advance and interest payment made to Mehta Group of companies. The advances as well as interest payment to Mehta Group of companies are through proper banking channel and are duly recorded in regular books of account of the said company much prior to the date of search. The assessee has also made due compliance of deduction of tax at source in respect of interest payments made by assessee-company and also in respect of advances for construction activity of the project. The transactions having been duly disclosed, could not be said to have been hidden by assessees from the Revenue authorities. The transaction of assessee with Mehta Group has no bearing on the taxable income of various years under consideration. It is on account of assessee's non-reconciliation of accounts with Mehta Group the assessee, in order to buy peace of mind and avoid vexed litigation had agreed to revise the value of CWIP in the case of assessee. It has also been the case of AO that assessee has claimed higher loss which stands reduced as a result of assessment. Perusal of assessment orders/penalty orders indicates that CWIP is revised on the basis of offer of the assessee alone and does not refer to any specific seized document. In view of above there is no case for levy of penalty under s. 271(1)(c) of IT Act, 1961. It is also evident from record that amount offered to reduce the value of CWIP was made by the assessee much before the questionnaire issued to assessee and was voluntary. This is evident from the letter dt. 23rd April, 2007 of the assessee to the AO. The perusal of the assessment orders would indicate that income returned and income assessed are same. It is also seen that the reduction of the value of CWIP by the appellant-company has no bearing on the computation of income or loss for the year under consideration inasmuch as the value of CWIP was not at all taken into consideration for computing the income/loss during the year under consideration, On above factual admitted position, no penalty under s. 271(1)(c) of IT Act, 1961 is exigible. In the case of assessee the AO has not established that assessee has concealed income or furnished inaccurate particulars of income in respect of income or loss to be computed for the previous years under consideration. In view of above there is no case for imposition of penalty under s. 271(1)(c) of the Act in the case of assessee. The perusal of orders imposing penalty and assessment orders for all the years clearly indicates that it is a mere offer of assessee to reduce the value of CWIP, which is accepted by the AO. The reduction in CWIP was made in order to buy peace and avoid vexed litigation.
22. The appellant has submitted various case law in his support. The ratio of these citations supports the case of the appellant. In a given case and on consideration of facts and circumstances of the case the penalty may or may not be exigible. In this regard reliance is placed on the ratio of the decision of the Hon'ble Apex Court in the case of Hindustan Steel Ltd. v. State of Orissa (1972) 83 ITR 26 (SC).It was held in CIT v. Shyamlal M. Soni (2005) 276 ITR 156 (MP) that where the disclosure was made to buy peace of mind and to co-operate with the Department and to avoid litigation, no penalty under s. 271(1)(c) of the Act could be levied in case where income returned in the revised return is accepted and assessed in the hands of the assessee, even though revised returns were filed after search and subsequent inquiries made by the Department during the course of assessment proceedings. In the case of CIT v. Suresh Chandra Mittal (2000) 158 CTR (MP) 26/241 ITR 124 (MP)the assessee's returns were originally filed showing meager income. Later on in pursuance of notice under s. 148 of the Act revised returns were filed showing higher income to purchase peace of mind and to avoid litigation. The revised returns were accepted and regularized. On initiation of penalty proceedings and the levy of penalty under s. 271(1)(c) of the Act the Hon'ble Tribunal held that no penalty could be levied. The Hon'ble High Court held that once the revised return was regularized and accepted without any objection, the declaration of income made by the assessee to buy peace and avoid litigation has to be treated as bona fide and the Hon'ble Tribunal was justified in cancelling penalty. The Hon'ble Supreme Court in an appeal against the said order in CIT v. Suresh Chandra Mittal (2001) 170 CTR 182/251 ITR 9held that the assessee had originally filed showing meager income. When after action under s. 132 of IT Act, 1961 a notice under s. 148 of the Act was served on the assessee. he filed revised return showing higher income. Eventually assessment orders were passed and returns submitted under s. 148 of the Act were regularized, in penalty proceedings under s. 271(1)(c) of the Act the assessee claimed that he had offered additional income to buy peace of mind and avoid litigation. Penalty orders were passed and CIT(A) confirmed them. The Hon'ble Tribunal held that the penalty orders had rested simply on the act of voluntary surrender alone by the assessee in good faith and hence no penalty could be levied. The Hon'ble High Court agreed with the Tribunal. The Hon'ble Supreme Court concurred with the view of Hon'ble High Court and Tribunal.
24. Thus, in the facts and circumstances of the present cases it is seen that the reduction in CWTP is offered to buy peace of mind and to avoid vexed litigation. The income as shown in the returns is accepted by the AO without any objection and any variations as are evident from the assessment orders of the AO. The ratio laid down by the Hon'ble Apex Court in the case of CIT v. Suresh Chandra Mittal (supra) fully supports the case of the assessee.
23. Thus, considering the totality of facts and circumstances of the case and considering the ratio laid down by various Courts, I am of the considered opinion that no penalty is exigible under s. 271(1)(c) of the Act for asst. yrs. 2001-02 to 2006-07 and hence, the AO is not justified in levying penalties in this case. Accordingly the penalties levied for asst. yrs. 2001-02 to 2006-07 by the AO are hereby cancelled."
6. The learned Departmental Representative vehemently contended that CIT(A) was not correct in law in deleting the penalty in each of the assessment years. This is a clear-cut case where the assessee has furnished inaccurate particulars of income in respect of the capital work-in-progress. The surrender of the capital work-in-progress by the assessee itself proves that the assessee at the time of filing of the original return has not filed the accurate particulars of income. The assessee surrendered the capital work-in-progress only when there has been search in the Mehta Group of the companies. Mehta Group of companies have not only executed the capital work for installation of the plant and civil construction for the company but it also invested in the shares and provided the inter-corporate deposits to the assessee. Had there been no search, the assessee would have not come forward for the surrender of the capital work-in-progress. The reliance was placed on the decision of Hon'ble Supreme Court in the case of Union of India v. Dharmendra Textile Processors [2008] 306 ITR 277/174 Taxman 571 for the proposition of law that mens rea is not an essential ingredient for the levy of the penalty under s. 271(1)(c). It is a civil liability. The AO need not to prove intention of the assessee and the AO has no discretion except to levy the penalty wherever the assessee has committed the default. Reliance was also placed on the decision of the Supreme Court in the case of K.P. Madhusudan v. CIT [2001] 251 ITR 99/118 Taxman 324.
7. The learned Authorised Representative, on the other hand, relied on the order of C1T(A) and contended that the CIT(A) has rightly deleted the penalty ft was contended that the AO, while initiating the penalty, was not satisfied for which default he is initiating the proceedings for me levy of the penalty. Furnishing of the inaccurate particulars and concealment of income, both are the different defaults. Expln. 1 is applicable only in respect of me concealment of particulars of the income and not for furnishing the inaccurate particulars of income. During the year in which the capita.' work-in-progress has been surrendered, there is no impact on the income of the assessee as it is only the capital work-in-progress which got reduced. Ultimately there is no difference in the income returned and income assessed. Reliance was placed on the decision of Hon'ble Delhi High Court in the case of Ms. Madhushree Gupta v. Union of India [2009] 183 Taxman 100/317 ITR 107 for the proposition of the law that even after insertion of s. 271 (1B), the AO has to arrive at a piima faciesatisfaction during the course of proceedings with regard to assessee having concealed the particulars of income or submitted inaccurate particulars of income. No such satisfaction has been arrived at for initiating the proceedings under s. 271(1)(c) of the Act. Even otherwise also, it is a case where no seized material is available with the AO. The assessee voluntarily filed the reply on 23rd April, 2007 that some of the items clubbed under the capital work-in-progress may not be fully explained to the satisfaction of the AO. The capital work-in-progress appears on higher side considering the seized material found from the Mehta Group of companies. No material proving the undisclosed income was found in the case of the assessee. The assessee accordingly reduced the capital work-in-progress just to buy peace. Even no material found in the case of Mehta Group is brought on record. No proceeding under S.153C was initiated. The source of expenditure being incurred on the capital work-in-progress is not disputed by the AO. The revision/surrender of the portion of the capital work-in-progress does not mean that the amount of the capital work-in-progress submitted earlier was false. The portion of the advance paid to Mehta Group might have been reduced in capital work-in-progress. The assessee has not concealed any income nor has furnished any inaccurate particulars of the income. The assessments for the asst. yrs. 2001-02 to 2006-07 were completed by the AO vide order dt. 31stDec 2008 resulting in nil demand thereby accepting the returned income. This proves that there is neither any concealment nor furnishing of inaccurate particulars of income. No satisfaction has been recorded. Reliance was placed on the decision of Hon'ble Kerala High Court in the case of CIT v. N. George & Bros. [1986] 160 ITR 511/[1987] 30 Taxman 368 for the proposition of law that though the return did not show certain" items of income, but there was simultaneous disclosure by the assessee, then in such a case it would be incorrect to levy penalty. Reliance was also placed on the decision of Hon'ble Supreme Court in the case of Dilip N. Shroff v. Jt. CIT [2007] 291 ITR 519/161 Taxman 218 the penalty under s. 271(1)(c) is not automatic and the factors enumerated in cls. (A) and (B) of Expln. 1 have to be satisfied. Referring to the decision of Dharmendra Textile Processors (supra), it was pointed out that this decision nowhere states that the penalty is automatic. In this regard attention was drawn towards the decision of Tribunal, Pune Bench in the case of Kanbay Software India (P.) Ltd. v. Dy. CIT [2009] 31 SOT 153 and that of CIT v. Reliance Petroproducts (P.) Ltd. [2010] 322 ITR 158/189 Taxman 322 (SC).Explanation 5 was not applicable in the case of the assessee as no assets were found in the case of the assessee. Even that was not the case of the AO. The assessee was not entitled to claim any depreciation of capital work-in-progress in asst. yrs. 2001-02 to 2005-06. Upon capitalization of capital work-in-progress, the assessee claimed depreciation for the first time in asst. yr. 2006-07. There was reduction on the depreciation claimed for the asst. yr. 2006-07, therefore, the assessee filed return in the asst. yr. 2006-07 only although the figures of the surrender were rightly furnished for all the years. The returned income for the asst. yrs. 2001-02 to 2005-06 was not affected even after considering the surrender. Hence in the opinion of the assessee, filing of the return revising the income as originally filed was not warranted for asst. yrs. 2001-02 to 2005-06. Alternatively, by referring to Expln. 4 r/w s. 271(1)(c), it was pointed out that the penalty has been levied on the amount of tax sought to be evaded by reason of concealment of particulars of income or furnishing of inaccurate particulars of the income. Expln. 4 defines the tax sought to be evaded. Neither cl. (A), (B) or (C) of this Explanation is applicable in the case of the assessee. The surrender made by the assessee in reducing the capital work-in-progress in the asst. yrs. 2001-02 to 2005-06 does not reduce the loss declared in the return or convert that loss into income. The loss or income assessed in each of the assessment years, remains the same. Thus, there is no tax which remains evaded and, therefore, there cannot be any penalty on this basis also.
8. We have carefully considered the rival submissions and perused the material available on record along with various case law brought to our knowledge and even cited during the course of hearing at the Bar. It has been a matter of dispute as to whether the AO is required to record his satisfaction before initiating the penalty proceedings under s. 271 of the Act. To settle this issue, the Legislature has inserted sub-s. (1B) in s. 271 by Finance Act, 2008 w.e.f. 1st April, 1989 which is reproduced as under :
"Where any amount is added or disallowed in computing the total income or loss of an assessee in any order of assessment or reassessment and the said order contains a direction for initiation of penalty proceedings under cl. (c) of sub-s. (1), such an order of assessment or reassessment shall be deemed to constitute satisfaction of the AO for initiation of the penalty proceedings under the said cl. (c)."
9. This provision creates a legal fiction by which satisfaction of the AO is deemed to have been recorded in case where an addition or disallowance is made by the AO and a direction for initiation of the penalty proceedings is issued. The said provision is made effective retrospectively w.e.f. 1st April, 1989. Fiction is created for a definite purpose and it is limited to the purpose for which it is created and cannot extend beyond its legitimate field. The legal fiction has to be interpreted strictly as it is intended to enlarge the meaning of a particular word or to include materials which otherwise may or may not fall within the main provision. If we interpret s. 271(1B), it is apparent that a direction for initiation of the penalty proceedings in the order shall be deemed to constitute satisfaction of the AO for initiation of the penalty proceedings under s. 271(1)(c) if any amount is added or disallowed in computing the total income or loss of an assessee in any order of assessment or reassessment. Satisfaction for concealment of the particulars of income or furnishing of inaccurate particulars of income has to be made out in the course of any proceedings under this Act if we look to the main provision of s. 271(1)(c). The satisfaction so made out has a relevancy to the assessment year. Sec. 271(1 B) is an exception for recording of the satisfaction. If the provision of s. 271 (1B) is applicable, recording of the satisfaction during the course of assessment proceeding is not necessary, (in the case of the assessee, we noted that there is a direction that the penalty proceeding under s. 271(l)(c) is separately initiated. Now the question arises whether this direction will tantamount to be the satisfaction recorded by the AO for [the concealment of the particulars of income or furnishing of [inaccurate particulars of income. This is undisputed fact that in the case of the assessee the assessments have been framed by the AO at [the same income or loss at which the assessee has filed the return in 'pursuance to the notice issued under s. 153A. The AO has not made any addition or disallowance while computing the total income or loss of the assessee. In our opinion, s. 271 (1B) will not apply in the case of the assessee and the AO is bound to record the satisfaction for the concealment of the particulars of income or furnishing of inaccurate particulars of income. We have gone through the assessment order for each of the assessment year and we find that in the assessment order, anything which may designate that the AO has satisfied during the course of assessment proceedings that the assessee has concealed the particulars of income or furnished the inaccurate particulars of income. This is a fact that both the charges are different charges and if the penalty has been initiated in respect of one charge, it cannot be levied for the other charge. We are of the firm view that since s. 271(1B) is not applicable in the case of the assessee, then the Revenue has to show that the satisfaction of the AO to the fact that the assessee has either concealed the particulars of income or furnished inaccurate particulars of income. This is the condition precedent for initiating the penalty. Until and unless the satisfaction is arrived at in the course of any proceedings under the Act, the penalty cannot be levied. This view was taken by Hon'ble Supreme Court in the case of CIT v. S. V. Angidi Chettiar [1962] 44 ITR 739 while construing the provision of s. 28(1)(c) of the IT Act, 1922 and reiterated in the case of D.M. Manasvi v. CIT [1972] 86 ITR 557. While constituting (sic- construing) the provision of s. 271(1)(c) of the IT Act, Full Bench of Hon'ble Punjab & Haryana High Court in the case of CIT v. Mohinder Lal [1987] 31 Taxman 450/168 ITR 101, held that it is the satisfaction of the ITO in the course of assessment proceedings regarding the concealment of income which constitutes the basis for levy of penalty. Subsequently, a question arises as to whether such satisfaction must be recorded in the assessment order. Divergent views had been expressed by the High Courts. It has been held in the following cases that recording of the satisfaction by the A.O in the assessment order is sine qua non for initiating penalty proceedings under the above section. Mere observation "penalty proceedings are being initiated separately" is not enough.
| (1) | CIT v. Ram Commercial Enterprises Ltd. [2002] 122 Taxman 620 (Delhi) | |
| (2) | Diwan Enterprises v. CIT [2000] 246 ITR 571 (Delhi) | |
| (3) | CIT v. Vikas Promoters (P.) Ltd. [2005] 277 ITR 337/145 Taxman 300 (Delhi) | |
| (4) | CIT v. Super Metal Re-rollers [2004] 135 Taxman 407 (Delhi) | |
| (5) | Shri Bhagwant Finance Co. Ltd. v. CIT [2005] 147 Taxman 53 (Delhi) | |
| (6) | CIT v. Rajan & Co. [2007] 291 ITR 340/[2005] 146 Taxman 271 (Delhi) | |
| (7) | CIT v. Munish Iron Store [2003] 263 ITR 484/[2004] 137 Taxman 391 (Punj. & Har.) | |
| (8) | CIT v. Dajibhai Kanjibhai [1991] 189 ITR 41/57 Taxman 16 (Bom.) | |
| (9) | CIT v. Rampur Engg. Co. Ltd. [2009] 176 Taxman 211 (Delhi) | |
| (10) | V. V. Projects and Investments (P.) Ltd. v. Dy. CIT [2008] 300 ITR 40/171 Taxman 62 (AP) |
10. Thus, the jurisdictional High Court has also taken the similar view in the case of Dajibhai Kanjibhai (supra) relying on the decision of Hon'ble Supreme Court in the case of S. V. Angidi Chettiar (supra) as under:
"The power to impose penalty under s. 271(1)(c) of the IT Act, 2 961, depends upon the satisfaction of the ITO in the course of the assessment proceedings under the Act. It cannot be exercised if he is not satisfied and has not recorded his satisfaction about the existence of the conditions specified in cls. (a), (b) and (c) of s. 271(1) before the assessment proceedings are concluded."
10.1 The Hon'ble Andhra Pradesh High Court in the case of Chennakesava Pharmaceuticals v. CIT [2013] 214 Taxman 141 (Mag.)/30 taxmann.com 385 observed as under :
"In CIT v. Rampur Engineering Co. Ltd. (2008) 16 DTR-(Del)(FB) 281 (2009) 221 CTR (Del)(FB) 32 : (2009) 309 ITR 143 (Del)(FB), a Full Bench of the Delhi High Court considered the correctness of the decision of the Delhi High Court in CIT v. Ram Commercial Enterprises Ltd. (2001) 167 CTR (Del) 321 : (2000) 246 ITR 568 (Del)and after considering the decision in DM. Manasvi v. CIT 1972 CTR (SC) 437 : (1972) 86 ITR 557 (SC), held as follows (p. 148) :
'In our opinion, the legal position is well-settled in view of the Supreme Court decisions in CIT & Anr. v. S.V. Angidi Chettiar (1962) 44 ITR 739 (SC)and DM. Manasvi v. CIT 1972 CTR (SC) 437 : (1972) 86 ITR 557 (SC),that power to impose penalty under s. 271 of the Act depends upon the satisfaction of the ITO in the course of the proceedings under the Act. It cannot be exercised if he is not satisfied and has not recorded his satisfaction about the existence of the conditions specified in cls. (a), (b) and (c) before the proceedings are concluded. It is true that mere absence of the words 'I am satisfied' may not be fatal but, such a satisfaction must be spelt out from the order of the. assessing authority as to the concealment of income or deliberately furnishing inaccurate particulars. In the absence of a clear finding as to the concealment of income or deliberately furnishing inaccurate particulars, the initiation of penalty proceedings will be without .jurisdiction. In our opinion, the law is correctly laid down in CIT vs. Ram Commercial Enterprises Ltd.(2001) 167 CTR (Del) 321 : (2000) 246 ITR 568 (Del)and we are in respectful agreement with the same. The reference is answered accordingly.'
In V.V. Projects & Investments (P) Ltd. v. Dy. CIT (2008) 216 CTR (AP) 196 : (2008) 6 DTR (AP) 265 : (2008) 300 ITR 40 (AP),a Division Bench of this Court considered the decisions in DM. Manasvi v. CIT 1972 CTR (SC) 437 : (1972) 86 ITR 557 (SC). CIT v.Munish Iron Store (2004) 186 CTR (P&H) 159 : (2003) 263 ITR 484 (P&H), CIT v. Vikas Promoters (P) Ltd. (2005) 194 CTR (Del) 384 : (2005) 277 ITR 337 (Del)and CIT v. Ram Commercial Enterprises Ltd. (2001) 167 CTR (Del) 321 : (2000) 246 ITR 568 (Del)and held :
"From the legal position noticed above, it is clear that the AO has to form his own opinion and record his satisfaction of concealment of income or furnishing of inaccurate particulars of income before initiating penalty proceedings under s. 271(1)(c) of the Act. It is also clear that such satisfaction of the AO must be spelt out in the order of assessment itself but cannot be assumed from the issue of notice under s. 271(1)(c) of the Act. Failure to record such satisfaction amounts to a jurisdictional defect which cannot be cured. It is also relevant to note that whether the assessee has concealed his income or has deliberately furnished inaccurate particulars thereof is essentially a finding of fact which has to be spelt out by way of recording the satisfaction of the AO as required under s. 271(1) of the Act. Therefore, in the absence of such a finding in the assessment order no penalty proceedings can be initiated.'
It rejected the contention of the Revenue that the penalty proceedings are independent and it is sufficient if the satisfaction is recorded in the order levying penalty. It also referred to Dilip N. Shroff v. Jt. CIT (2007) 210 CTR (SC) 228 : (2007) 291 ITR 519 (SC)and noted that the Supreme Court in that case had held that the order imposing penalty under s. 271(1)(c) being penal in nature, the rule of strict construction shall apply."
11. In Dilip N. Shroffs case (supra), the Supreme Court approved the judgment in Ram Commercial Enterprises Ltd.'s case (supra) and also held that s. 271(1)(c) being a penal provision must be strictly construed and that mens rea is necessary ingredient for penalty under s. 271(1)(c) of the Act. But, in Dharmendra Textile Processors (supra), the Supreme Court held that the penalty under s. 271(1)(c) is a civil liability and "wilful" concealment is not an essential ingredient for attracting civil liability. It overruled only that portion of the judgment inDilip N. Shroffs case (supra) wherein the Supreme Court had held that the mens rea was essential ingredient for imposing penalty under s. 271(1)(c) of the Act. This was pointed out in Reliance Petroproducts Pvt. Ltd.'s case (supra).
In Reliance Petroproducts (P) Ltd.'s case (supra), the Supreme Court also held that imposition of penalty is unwarranted when there is no finding in the assessment order that details supplied by the assessee were found to be false. This indicates that the view taken by the Delhi High Court in Ram Commercial Enterprises Ltd.'scase (supra) which has been approved in Dilip N. Shroffs case (supra) continues to be valid and this part of the judgment in Dilip N. Shroffs's case (supra) has not been overruled and continues to be good law. Moreover, the decision of the Delhi High Court in Ram Commercial Enterprises (supra) was also followed by the same High Court in CIT v. M. K. Sharma [2008] 307 ITR 147 (Delhi) and SLP(C) No. 17591 of 2008 filed against the said decision was dismissed by the Supreme Court on 18th July, [2008 (see (2008) 306 ITR (St) 2].
12. Moreover, the decision in Ram Commercial Enterprises (supra) was approved by the Full Bench of the Delhi High Court in Rampar Engineering Co., Ltd.'s case (supra). Even in Reliance Petroproducts (supra) (the undersigned was the author of the judgment before Tribunal) the Supreme Court had held that imposition of penalty is unwarranted when there is no finding in the assessment order that detail supplied by the assessee were found to be false. Even Honble Supreme Court in the case CIT v. Atul Mohan Bindal [2009] 183 Taxman 444 has held that the conditions as stated under s. 271(1)(c) must exist for "imposing the penalty under s. 271(1)(c). In view of this and the decision of the jurisdictional High Court in the case of Dajibhai Kanjibhai (supra), the recording of the satisfaction by the AO during the course of assessment proceedings, i.e. in the assessment order is the foundation and backbone of initiating the penalty proceedings under s. 271(1)(c). To overrule these decisions, s. 271 (1B) was inserted by the Finance Act 2008, but we have already held in the preceding paras that this section is not applicable on the facts and circumstances of the case.
13. Applying the above principle and the fact that the provision of s. 271 (1B) is not applicable in the case of the assessee, the AO in this case should have recorded his satisfaction in the assessment order that the assessee had either concealed the income or furnished the inaccurate particulars of the income in his return before proceeding further. We notice that in each of the assessment years, the AO, in the assessment order passed under s. 143(3) r/w s. 153A, has not recorded any satisfaction but has simply mentioned that the penalty proceeding under s. 271(1)(c) has been initiated separately (English translation). Nowhere the AO noted in the assessment order his satisfaction that there was furnishing of inaccurate particulars of income by the assessee and that there is case made out for initiating proceedings under s. 271(1)(c) of the Act. Therefore, we are of the view that initiation of proceedings under s. 271(1)(c), against the assessee for asst. yrs. 2001-02 to 2006-07 is not valid in law. Accordingly, on this basis itself, we dismiss the ground taken by the Revenue.
14. Even Constitutional validity of s. 271(1B) provision was challenged before Hon'ble Delhi High Court in the case of Ms. Madhushree Gupta (supra). The scope of the amendment was explained at p. 146 as under :
"In our opinion, the impugned provision only provides that an order initiating penalty cannot be declared bad in law because it states that the penalty proceedings are initiated, if otherwise it is discernible from record that the AO has arrived at prima facie satisfaction for initiation of penalty proceedings. The issue is of discernibility of the 'satisfaction' arrived at by the AO during the course of proceeding before him."
"The presence of prima facie satisfaction for initiation of penalty / proceedings was and remains a jurisdictional fact which cannot be (wished away as the provision stands even today, i.e. post amendment." (p. 147)
"If there is no material to initiate penalty proceedings; an assessee will be entitled to recourse to a Court of law." (p. 147).
15. In view of the above judgment, it is clear that the satisfaction of the authority is still a condition precedent, which must be discernible from the order and such satisfaction must be based on some material on record. In this case, we noted that the AO even though completed the assessment in each of the assessment years at the income as has been returned by the assessee. Even no demand, whatsoever, has been created. The returned income as well as the assessed income in each of the assessment year, are given as under :
| Asst. yr. | Returned income | Assessed income |
| 2001-02 | Nil | Nil |
| 2002-03 | (-) 2,81,545 | (-) 2,81,545 |
| 2003-04 | (-) 2,65,464 | (-) 2,65,464 |
| 2004-05 | (-) 83,122 | (-) 83,122 |
| | 1,02,848 (u/s. 115JB) | 1,02,848 |
| 2005-06 | (-) 2,13,036 | (-)2,13,036 |
16. Even though the assessee has surrendered the amount of capital work-in-progress but it did not have any impact on the income of the assessee so far it relates to asst. yrs. 2001-02 to 2005-06. The AO observed, while framing the assessment, that penalty proceeding under s. 271(1)(c) is separately initiated but it does not show how it affects the concealment of the particulars of income of the assessee or furnishing of the inaccurate particulars of the income. In fact, neither the returned income nor the assessed income is being affected by the reduction of the amount of the capital work-in-progress as surrendered by the assessee. Concealment of particulars of income or furnishing of inaccurate particulars of such income, both are the different charges. The preamble of s. 27l(1)(c) clearly states that if the AO, in the course of any proceedings under this Act, is not (sic) satisfied that any person has concealed the particulars of the income or furnished inaccurate particulars of such income, the satisfaction, therefore, in our opinion, must be related either with the concealment of the particulars of income of the assessee or furnishing of inaccurate particulars of such income. Direction for initiation of the penalty proceedings under cl. (c) of sub-s. (1) for constituting the satisfaction of the AO for initiation of the penalty-must be related with either of the charges i.e. the concealment of particulars of income or furnishing of inaccurate particulars of such income. The AO, no doubt, states that the penalty proceeding under s. 271(1)(c) is separately initiated but does not state for what default, whether for the concealment of particulars of income or for furnishing of inaccurate particulars of income is being initiated. Even Hon'ble Supreme Court in Varkey Chacko v. CIT[1993] 203 ITR 885/70 Taxman 152 has held that a penalty for concealment of particulars of income or for furnishing inaccurate particulars of income can be imposed only when the assessing authority is satisfied that there has been such concealment or furnishing of inaccurate particulars. A penalty proceeding, therefore, can be initiated only after an assessment order has been made which finds such concealment or furnishing of inaccurate particulars. Therefore, in our opinion, the penalty proceedings on this basis also are bound to be quashed.
17. Now coining to another argument, we noted that in this case the AO ultimately levied the penalty under s. 271(1)(c) of the Act for furnishing the false particulars in the return by the assessee. Sec. 271(1)(c) stipulates that penalty proceedings can be initiated on two charges : (i) concealment of particulars of income and (ii) furnishing of Inaccurate particulars of income. This is settled law in view of the decision of CIT v. Lakhdhir Lalji [1972] 85 ITR 77 (Guj.)that if the penalty proceedings are initiated on charge of concealment then penalty would be levied on the charge of furnishing of inaccurate particulars of income and vice versa. In this case, as pointed out in earlier para, the AO initiated the penalty proceedings by mentioning in the notice as under :
"Whereas in the course of proceedings before me for the asst. yr. 2001 02, it appears that you have concealed the particulars of your income or furnished inaccurate particulars of such income."
18. Thus even the notice did not specify any specific charge for which the penalty has been initiated and ultimately the AO levied the penalty on the assessee for giving false information in the IT return neither for concealment of particulars of income nor for furnishing inaccurate particulars of income. In our opinion, it is incumbent on the AO to mention whether the penalty is levied for concealment of income or for furnishing of inaccurate particulars of income. In the absence of specific charge, the order would be bad in law. Sec. 271(1)(c) does not talk of levy of the penalty for giving false information in the return. The AO levied penalty entirely for a different charge. Our view that there must be specific charge is duly supported by the decisions of Hon'ble Gujarat High Court in the cases of CIT v. Manu Engg. Works [1980] 122 ITR 306, New Sorathia Engg. Co. v. CIT [2006] 282 ITR 642/155 Taxman 513, Padma Ram Bharali v. CIT [1977] 110 ITR 54 (Guj.) on this basis itself the orders were held to be bad in law. Gujrat High Court in the case of New Sorathia Engineering Co. Ltd. (supra) held as under:
"It is incumbent upon the AO to state whether the penalty was being levied for concealment of particulars of income by the assessee or whether any inaccurate particulars of income had been furnished by the assessee……………………..
Held, that the penalty order and the order of the CIT(A) showed that no clear-cut finding had been reached. The Tribunal had failed to appreciate this legal issue. The ratio in CIT v.Manu Engg. Works (1979) 8 CTR 141 / (1980) 122 ITR 306 (Guj) was applicable and the order of penalty could not be upheld by the Tribunal. The order was invalid."
19. Both the charges are entirely different. The word 'conceal' as per Webster Dictionary means : 'to hide, withdraw or to remove from observation, cover or keep from sight, to keep secret, to avoid disclosing or divulging'. That means particulars of income. On the other hand, where the particulars are disclosed but said disclosure is not correct, true or accurate, any good amount in furnishing of inaccurate particulars of income. Thrust of the Legislature is upon the particulars of income. In the case of Kanbay Software India (P) Ltd. (supra), it was held that the expression 'particular' refers to facts, details or the information about someone or something. Thus, the details or information about the income will deal with actual details of income and cannot be extended to areas which are subjective, such as status of taxability of income, admissibility of deduction and interpretation of the law. Hon'ble Supreme Court accordingly in the case of Reliance Petroproducts (P.) Ltd. (supra) (the undersigned was the author of this judgment before the-Tribunal) held that merely rejection of a legal claim would not amount to furnishing of inaccurate particulars of income. Hon'ble Supreme Court upheld the view of the Tribunal by holding that 'mere making of the claim, which is not sustainable in law, by itself will not amount to furnishing of inaccurate claim or furnishing of inaccurate particulars regarding the income of the assessee'. Expln. 1 to s. 271(1)(c) cannot be applied where charge against the assessee is in furnishing of inaccurate particulars of income since it provides deeming fiction qua concealment of the particulars of income only and cannot be extended to a case where charge on the assessee is furnishing of inaccurate particulars of income. This is not the case of the Revenue that the assessee has concealed the particulars of income, therefore, no question of applicability of Expln. 1 arises. The charge in the penalty order against the assessee is for furnishing the false particulars. In the case of furnishing of the inaccurate particulars of income, in our opinion, since the deeming provision given under Expln. 1 is not applicable, the onus is on the Revenue to prove that the assessee has filed the false particulars of income in the return filed. In the return filed in response to notice issued under s. 153A, this is a fact there is no filing of inaccurate particulars and no addition/disallowance has been made by the AO while making assessment under s. 143(3) r/w s. 153A. Even otherwise, in the case of the assessee, we noted that the assessee has surrendered the investment made in capital work-in-progress. Source of the investment is not disputed by the Revenue, ft is not the case of the Revenue that the assessee was nothaving the sufficient income to invest in the capital work-in-progress or investment shown in capital work-in-progress is made out of undisclosed income. Once source of the investment is not disputed and the assessee has sufficient source to invest in capital work-in-progress, it cannot be said that the assessee was having undisclosed income, which has been invested by the assessee and thereby the assessee has concealed the particulars of income or filed the inaccurate particulars of income. Income is different from investment. Income precedes the investment, not the investment precedes the income. It may be a case of furnishing of the inaccurate particulars of investment but not furnishing of inaccurate particulars of the income. Merely the assessee has surrendered the part of the investment in capital work-in-progress, it will not convert surrender of such investment into an income. During the asst. yrs. 2001-02 to 2005-06, this is a fact that the assessee has not claimed any depreciation as it is only the capital work-in-progress, which was in existence and the capital work-in-progress was not transferred to the respective assets, which are entitled to depreciation. On this basis itself also, we are of the firm view that nopenalty can be imposed on the assessee under s. 271(1)(c) of the Act.
20. Even we noted that in this case, no penalty can be quantified under s. 271(l)(c) even if it is held that the assessee has committed the default liable to penalty under s. 271(1)(c). We have gone through the provisions of s. 271(1)(c) of the Act, which state that if the AO, in the course of any proceedings under this Act, is satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct such person to pay penalty but how the penalty is to be quantified, has been provided under s. 271(1)(iii) of the Act, which reads as under :
"(iii) in the cases referred to in cl. (c) or cl. (d), in addition to tax, if any, 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 fringe benefits or the furnishing of inaccurate particulars of such income or fringe benefits."
21. This clause provides that in addition to the tax payable, penalty shall be leviable under cl. (c) not less than but shall not exceed three times the amount of tax sought to be evaded by reason of concealment of particulars of income or furnishing of inaccurate particulars of income. Expln. 4 defines the expression 'the amount of tax sought to be evaded'. It contains three clauses, which are applicable in different situations. These clauses are reproduced as under :
| "(a) | in any case where the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished has the effect of reducing the loss declared in the return or converting that loss into income, means the tax that would have been chargeable on the income in respect of which particulars have been concealed or inaccurate particulars have been furnished had such income been the total income; | |
| (b) | in any case to which Expln. 3 applies, means the tax on the total income assessed (as reduced by the amount of advance tax, tax deducted at source, tax collected at source and self-assessment tax paid before the issue of notice under s. 148); | |
| (c) | in any other case, means the difference between the tax on the total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished." |
22. Clause (a) is applicable to a case where the returned figure is loss. This clause states two situations : (i) where the effect of amount of the income in respect of which particulars have been concealed or incorrect particulars have been furnished, effect of such amount is reducing the loss declared in the return or the second situation is that such amount converts the loss into income. The tax sought to be evaded shall mean the tax that could have been chargeable on the income in respect of which particulars have been concealed or inaccurate particulars have been furnished. In the case of the assessee, the assessee has disclosed loss in the return filed for the asst. yrs. 2002-03 to 2006-07. The AO has accepted the said loss in the assessment framed by him. The loss declared in the return has not been reduced or loss has not been converted into income due to the investment made in the capital work-in-progress surrendered by the assessee. In view of Expln. 4(a) in our opinion, the tax sought to be evaded will be nil and both situations in cl. (a) will not apply in the case of the assessee. Clause (b) of this Explanation applied to a case where Expln. 3 applies. Clause (c), in our opinion, is the residuary clause. In such case, it would be main difference between the tax on total income assessed and the tax on total income reduced by the amount in respect of which penalty is sought to be levied. The case of the assessee, at the most for all the assessment years can fall under cl. (c) but on the basis of this clause, the tax sought to be evaded, in each of the assessment year, will be nil because the difference between the tax on total income assessed and tax on total income reduced by the amount in respect of which the AO tried to impose the penalty is nil. Therefore, even if we agree with the Revenue that the assessee has furnished the inaccurate particulars of income to the extent he surrendered the investment in the capital work-in-progress since the tax sought to be evaded will be nil, the assessee had not to pay any amount by way of penalty as per s. 271(1)(iii) r/w Expln. 4 of the IT Act. On this basis also, we are of the firm view that the penalty is liable to be deleted.
23. Now the question arises whether AO can impose the penalty under s. 271(1)(c) in a case where the assessee has submitted the return under s. 153A showing a particular income and the assessment has been framed by the AO on the same income as returned without any variation. The preamble of s. 271(1) states that if the AO, in the course of any proceeding under this Act, is satisfied that any person has concealed the particulars of income or furnished inaccurate particulars of such income, he may direct such person to pay the penalty. The concealment of the particulars of income or furnishing of particulars of inaccurate income is always with reference to the return filed by the assessee. Sec. 153A was inserted into statute w.e.f. 1st June, 2003 by the Finance Act, 2003 which reads as under :
"153A.Notwithstanding anything contained in s. 139, s. 147, s. 148, s. 149, s. 151 and s. 153, (in the case of a person where a search is initiated under s. 132 or books of account, other documents or any assets are requisitioned under s. 132A after the 31st May, 2003, the AO shall-
| (a) | issue notice to such person requiring him to furnish within such period, as may be specified in the notice, the return of income in respect of each assessment year falling within six assessment years referred to in cl. (b), in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed and the provisions of this Act shall, so far as may be, apply accordingly as if such return required to be furnished under s. 139; | |
| (b) | assess or reassess the total income of six assessment years immediately preceding the assessment year relevant to the previous year in which such search is conducted or requisition is made : |
Provided that the AO shall assess or reassess the total income in respect of each assessment year falling within such six assessment years :
Provided further that assessment or reassessment, if any, relating to any assessment year falling within the period of six assessment years referred to in this section pending on the date of initiation of the search under s. 132 or making of requisition under s. 132A, as the case may be, shall abate.
Explanation : For the removal of doubts, it is hereby declared that,-
| (i) | save as otherwise provided in this s. 153B and s. 153C, all other provisions of this Act shall apply to the assessment made under this section: | |
| (ii) | in an assessment or reassessment made in respect of an assessment year under this section, the tax shall be chargeable at the rate or rates as applicable to such assessment year." |
24. Sec. 153A deals with the provision of framing the assessment in the case of search or requisition. It is seen that this section starts with anon obstante clause relating to normal assessment procedure covered by ss. 139, 147, 148, 149, 151 and 153 in respect of searches made after 31st May, 2003. The sections, so excluded, relate to filing of return, assessment and reassessment proceedings. Further, s. 153A intends to assess or reassess total income of six assessment years immediately preceding the assessment year relevant to the previous year in which such search is conducted or requisition is made. Thus, the legislative intention is not to assess escaped income as in s. 147 or undisclosed income as was assessed under s. 158BC of the Act. The first proviso to s. 153A makes it clear, that notice under s. 153A will be for each such six assessment years for assessment or reassessment of total income. Second proviso to s. 153A provides that such notice will have the effect of abating all the pending assessment or reassessment proceedings, so as to avoid multiplicity of proceedings, which was a feature of block assessment. Hon'ble Allahabad High Court in the case CIT v. Shaila Agarwal [2011] 16 taxmann.com 232/[2012] 204 Taxman 276 has held that the word 'abatement' is referable to something, which is pending alive, or is subject to deduction. The abatement refers to suspension or termination of the proceedings either of the main action, or the proceedings ancillary or collateral to it. The word is commonly used in the legislations, which provide for abatement of action/suit; abatement of legacies; abatement of nuisance; and all actions for such nature, which have the pendency or continuance. The proceedings, which have already terminated are not liable for abatement unless statute expressly provides for such consequence thereof. The word pending' occurring in the second proviso to s. 153A of the Act, is also significant. It is qualified by the words "on the date of initiation of the search", and makes it abundantly clear that only such assessment or reassessment proceedings are liable to abate. The pendency of an appeal in the Tribunal against the order of assessment against which an appeal has been decided by CIT(A) is not a continuation of the proceedings of assessment.
25. Thus while s. 153A prescribes for assessment or reassessment of total income in search cases, s. 153B prescribes the time-limit for completion of assessment under s. 153A. Sec. 153C relates to the cases where books of account or documents or assets seized under s. 132 or requisition made under s. 132A belong to a person other than a person in whose case search under s. 132 or requisition under s. 132A was made. Thus provisions of ss. 153A, 153B and 153C are completed code for search assessments wherein search has been initiated after 31st May, 2003. (The existence of the words "all other provisions of this Act shall apply to the assessment made under this section" in Expln. (i) to s. 153A makes it clear that in search assessments, amongst others the provisions relating to penalty and prosecution will also be applicable. However, when normal assessment procedure covered by ss. 139, 147, 148, 149, 151 and 153 has been completely excluded by operation of non obstante clause "notwithstanding anything contained" the search assessments made under s. s. 153A of the Act cannot be treated as continuance of normal assessment proceedings whether abated or not. Thus there is complete detachment of assessment proceedings under s. 143 or 147 from search proceedings under s. 153A of the Act. When scheme of search assessment as designed by the Legislature does not prescribe to take into account the earlier assessment proceedings whether abated or not, it will not be proper or justified to refer to returned income under s. 139 for the purpose of imposition of penalty under s. 27l(l)(c) of the Act. It follows that the concealment of income has to be seen with reference to additional income brought to tax over and above returned by the assessee in response to notice issued under s. 153A of the Act. Accordingly in our considered opinion for the purpose of imposition of penalty under s. 271(1)(c) resulting as a result of search assessments made under s 153A, the original return of income filed under s. 139 cannot be considered. Further in case of search initiated after 1st June, 2003 a return of income is always filed on issue of notice under s. 153A in respect of each assessment year falling within six assessment years immediately preceding the assessment year relevant to the previous year in which the search is conducted or requisition is made in the prescribed form and verified in the prescribed manner. AO requires the assessee to set forth such other particulars as may be prescribed in these returns. This section also state* that all the provisions of this Act, as are applicable to a return to be furnished under s. 139, will apply to this return. In view of this, the AO has to frame an assessment on the basis of the return filed under s. 153A. As has been held above, the penalty under s. 271(1)(c) is imposable when there is variation in assessed and returned income. If there is no variation, there will be no concealment or furnishing of inaccurate particulars of income. When there is no concealment or furnishing of inaccurate particulars of income, question of levy of penalty under s. 271(1)(c) of the Act will not arise. This is settled position of law. In view of the decision of Hon'ble Supreme Court in the case of Brij Mohan v. CIT (supra) that the act of concealment of particulars of income or furnishing of the inaccurate particulars of income takes place when the return is filed. (The concept of voluntary return of income may be important in penalty proceedings initiated in course of normal assessment proceedings made under s. 143(3) or 147 but not under s. 153A. From above discussion it follows that where returned income filed under s. 153A is accepted by the AO, there will be no concealment of income or furnishing of inaccurate particulars of income and consequently penalty under s. 271(1)(c) cannot be imposed. Sec. 271 does not talk of for the purpose of ascertaining the default whether of concealment of income or furnishing of inaccurate particulars of income, the return filed under s. 139 or the return filed by the assessee will be considered not the return filed under s. 153A of the Act. This satisfaction for concealment of particulars of income or furnishing of inaccurate particulars of income has to come from the assessment order passed in consequence of return filed under s. 153A. The assessee in this case, in each of the assessment years, filed the return on 23rd Dec., 2008, showing nil income or loss as stated in earlier para. The returns filed by the assessee were duly accepted by the AO in each of the case and assessments under s. 143(3) r/w s. 153A were framed on the returned income. Thus, there is no variation in each of the assessment year in the returned income shown by the assessee. Prior to the filing of the returns by the assessee under s. 153A. even though the proceedings under this Act had started prior to that but the AO has not brought out any material or evidence, which may state that the assessee has furnished inaccurate particulars of income or concealed the particulars of income. In the return filed on 23rd Dec., 2008, the assessee has duly disclosed the investment in capital work-in-progress surrendered by him. Since these particulars, to which the AO treated for the purpose of levy of penalty to be false particulars were available with the AO in the return filed by the assessee under s. 153A, in our opinion, in this case it cannot be said that the assessee has furnished the false particulars. Sec. 271(1)(c) does not authorise the AC to compare the return filed under s. 139(1) and under s. 153A and compare the difference in the particulars of income In both the returns to treat such difference to be the false particulars of income. The fault has to be seen with the return filed by the assessee when an assessment under s. 143(3) r/w s. 153A is made with reference to the return filed under s. 153A and when the penalty proceeding is initiated in the order passed under s. 143(3) r/w s. 153A, this will also relate to the satisfaction of the assessee with reference to the return filed under s. 153A. Our aforesaid view is also strengthened in view of the Expln. 5 given under s. 271(1)(c) of the Act. This Explanation is applicable in the case of the search taken place before 1st June, 2007 and the assessee is found to be the owner of any money, bullion, jewellery or any other valuable, article or thing. This Explanation is not applicable in the case of the assessee as it is an undisputed fact that no money, bullion, jewellery or any other valuable, article or thing has been found in the case of the assessee. Had there been intention of the Legislature to look into the concealment of the particulars of the income or furnishing of inaccurate particulars of income with reference to the return filed under s. 139(1), the Legislature would have provided .so. On this basis also, in our opinion, no penalty can be imposed under s. 271(1)(c) of the Act as there is no variation in the income returned in response to notice under s. 153A vis-a-vis assessment passed under s. 143(3) r/w s. 271(1)(c) (sic-153A) of the Act.
26. Since the learned Departmental Representative has vehemently relied on the decision of Hon'ble Supreme Court in the caseDharamendra Textile Processors (supra) we, therefore, have to refer that "decision also. In the case of Dharmendra Textile Processors(supra), we noted that Hon'ble Supreme Court has held that the penalty under s. 271(1)(c) is civil liability (wilful concealment) and mens rea is not necessary ingredient to tax the civil liability as is the case in the matter of prosecution under s. 276 of the IT Act. It has further been held that in that ease that mens rea is not an essential ingredient for imposing the penalty. Hon'ble Supreme Court in this case nowhere held that if the addition is made, penalty is automatic and has to be imposed. This judgment has not overruled the Explanation appended to s. 271(1)(c) and does not also absolve the parties to discharge their burden to prove. We have already held that in the case of furnishing of inaccurate particulars of income, burden of proof lies on the Revenue while in the case of concealment of particulars of income, initial burden lies on the assessee in view of Expln. 1 appended to s. 271(1)(c) of the Act. Thus, the ratio laid down was confined to treating the wilful concealment is not essential for imposing penalty under s. 271(1)(c) of the Act. Where an assessee genuinely makes a claim for particular deduction or disclosing of the necessary fact relating to the same that cannot be regarded to be concealment if the assessee's claim is rejected. This is the settled law that the penalty proceedings are different from the assessment proceedings and, therefore, if any addition is made, it does not mean that the penalty will automatically be levied. The case of the assessee is even much stronger as in the case of the assessee there is no addition being made by the AO with reference to the return filed under s. 153A and prior to the filing of the return under s. 153A, the AO has not brought out any material on record which may prove that the assessee has filed the false particulars ofincome. Penalty proceeding is initiated separately with the logic that in penalty proceedings the assessee is given an opportunity to explain its case and if he successfully explains his position, the AO has to drop penalty proceeding. In this case, we noted that the AO has imposed the penalty for furnishing the false, particulars by the assessee. Sec. 271(1)(c) deals with two situations for imposing penalty; assessee has concealed the particulars of income or has furnished inaccurate particulars of such income. Expln. 1 is applicable only in case of first situation i.e. the amount added or disallowed in the total income be deemed to represent the income in respect of which the particulars have been concealed.
27. Now the question arises whether under the facts and circumstances, it can be said that the assessee has filed false particulars of income ? The assessee has shown the investment in capital work-in-progress in the return filed under s. 153A at a reduced figure as compared to the figure taken in the return filed prior to the search. Thus, returns were duly supported by the audited P&L a/c as well as the balance sheet, auditors' reports and certificate. The assessee has disclosed all the necessary particulars. The assessee subsequently revised the figures of investment in capital work-in-progress, which does not have any impact on the income assessed just to buy peace in response to notice issued under s. 153A. This fact has not been disputed by the AO. The AO has not brought out any material on record, even though there had been search in the case of the assessee on the basis of which it can be said that the assessee has furnished inaccurate particulars of its income even though the onus to prove that the assessee has furnished the false particulars of income lies on the Department as Expln. 1 is not applicable as has been held by us in the earlier paras. Therefore, in our opinion, the decision of Hon'ble Supreme Court in the case ofDharmendra Textile Processors (supra) will not assist the Revenue and is not applicable to the facts of the case before us. This decision has been discussed by Hon'ble Supreme Court in the case of ReliancePetroproducts (supra) (this decision at the Tribunal was authored by the undersigned) in the following terms :
"It is an admitted position in the present case that no information given in the return was found to be incorrect or inaccurate. It is not as if any statement made or any detail supplied was found to be factually Incorrect hence, at least, prima facie, the assessee cannot be held guilty of furnishing inaccurate particulars. The learned counsel argued that 'submitting an incorrect claim in law for the expenditure on interest would amount to giving inaccurate particulars of such income'. We do not think that such can be the interpretation of the concerned words. The words are plain and simple. In order to expose the assessee to the penalty unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing inaccurate particulars. In Brij Mohan v. CIT [1979] 12 CTR (SC) 198 : (2009) 30 (I) ITCL 339 (SC) : (2009) 317 ITR 1 (SC) : 2009 (9) SCC 589, where this Court was considering the same provision, the Court observed that the AO has to be satisfied that a person has concealed the particulars of his income or furnished inaccurate particulars of such income. This Court referred to another decision of this Court in Union of India & Ors. v. Dharamendra Textile Processors & Ors. [2008] 219 CTR (SC) 617 : (2008) 14 DTR (SC) 114 : 208 (13) SCC 369, as also, the decision in Union of India v. Rajasthan Spg. & Wvg. Mills 2009 (13) SCC 448 and reiterated in para 13 that :
'13. It goes without saying that for applicability of s. 271(1)(c), conditions stated therein must exist.'
8. Therefore, it is obvious that it must be shown that the conditions under s. 271(1)(c) must exist before the penalty is imposed. There can be no dispute that everything would depend upon the return filed because that is the only document, where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. In Dilip N. Shroff v. Jt. CIT & Anr. (2007) 210 CTR (SC) 228 : (2007) 291 1TR 519 (SC) : (2007) 16 (I) ITCL 246 (SC) : 2007 (6) SCC 329,this Court explained the terms 'concealment of income' and 'furnishing inaccurate particulars'. The Court went on to hold therein that in order to attract the penalty under s. 271(1)(c), mens rea was necessary, as according to the Court, the word 'inaccurate' signified a deliberate act or omission on behalf of the assessee. It went on to hold that cl. (iii) of s. 271(1) provided for a discretionary jurisdiction upon the assessing authority, inasmuch as the amount of penalty could not be less than the amount of tax sought to be evaded by reason of such concealment of particulars of income, but it may not exceed three times thereof. It was pointed out that the term 'inaccurate particulars' was not defined anywhere in the Act and, therefore, it was held that furnishing of an assessment of the value of the property may not by itself be furnishing inaccurate particulars. It was further held that the assessee must be found to have failed to prove that his explanation is not only not bona fide but all the facts relating to the same and material to the computation of his income were not disclosed by him. It was then held that the explanation must be preceded by a finding as to how and in what manner, the assessee had furnished the particulars of his income. The Court ultimately went on to hold that the element of mens rea was essential. It was only on the point of mens rea that the judgment in Dilip N. Shroff v. Jt. CIT (supra) was upset. In Union of India vs. Dharamendra Textile Processors (supra), after quoting from s. 271 extensively and also considering s. 271(1)(c), the Court came to the conclusion that since s. 271(1)(c) indicated the element of strict liability on the assessee for the concealment or for giving inaccurate particulars while filing return, there was no necessity of mens rea. The Court went on to hold that the objective behind enactment of s. 271(1)(c) r/w Explanations indicated with the said section was for providing remedy for loss of revenue and such a penalty was a civil liability and, therefore, wilful concealment is not an essential ingredient for attracting civil liability as was the case in the matter of prosecution under s. 276C of the Act. The basic reason why decision in Dilip N. Shrojf v. Jt. CIT (supra) was overruled by this Court in Union of India vs. Dharamendra Textile Processors (supra), was that according to this Court the effect and difference between s. 271(1)(c) and s. 276C of the Act was lost sight of in case of Dilip N. Shroff v. Jt. CIT & Anr. (supra). However, it must be pointed out that in Union of India v. Dharamendra Textile Processors (cited supra), no fault was found with the reasoning in the decision in Dilip N. Shroff v.Jt. CIT (cited supra), where the Court explained the meaning of the terms "conceal and inaccurate". It was only the ultimate inference in Dilip N. Shroff v. Jt. CIT (cited supra) to the effect that mens rea was an essential ingredient for the penalty under s. 271(1)(c) that the decision in Dilip N. Shroff v. Jt. CIT (supra) was overruled."
28. Now coming to the order of the Supreme Court in the case of K.P. Madhusudhanan (supra) as has been relied on by the learned Departmental Representative we find that in this case the Apex Court held as under :
"We find it difficult to accept as correct the two judgments aforementioned. The Expln. to s. 271(1)(c) is apart of s. 271. When the ITO or the AAC issues to an assessee a notice under s. 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 s. 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 s. 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 s 271 in the notice under s. 271 is, in our view, necessary before the provisions 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."
29. In this case, the facts were that the assessee partnership firm filed a return of income at Rs. 6,76,890. The assessment was completed at Rs. 7,90,170 including a sum of Rs. 93,000 as income from other sources. During the course of assessment proceedings the AO noticed that a demand draft and telegraphic transfer were not entered by the assessee in its cash book on the dates on which the same were purchased and made respectively. When this was pointed out to the assessee the assessee submitted a letter dt. 28th Aug., 1989, stating that as sufficient cash balance was not available to it on the date of the transaction, it obtained hand loans from friends as it expected to repay such loans within a short time. No entries were made in the books of account in respect thereof. The assessee since was unable to furnish evidence for such loans, offered the amount of Rs. 93,000 as additional income. Penalty proceedings were initiated by the AO under s. 271(l)(c). The AO did not agree with the explanation of the assessee and noted that it had itself offered the addition of Rs. 93,000. Applying Expln. 1(B) to s. 271(1)(c), the AO imposed upon the assessee penalty of Rs. 37,975. The Tribunal cancelled the penalty for the reason that in the notice initiating penalty proceedings the assessee was not intimated about the proposed action under Expln. 1(B) to s. 271(1)(c) but the High Court cm a reference held that the imposition of penalty was valid. Under these facts when the matter went before the Hon'ble Supreme Court, the Hon'ble Supreme Court held in the above manner. In this judgment we also noted that the Supreme Court has observed that by reason of the addition of Expln, 1(B) to s. 271(1)(c) the view taken by the Apex Court in the case of Sir Shadiial Sugar & General Mills Ltd. (supra) can nolonger be said to be applicable. This clearly shows that the penalty under s. 271(1)(c) was confirmed in the case ofK.P. Madhusudhan (supra) in view of the Explanation to s. 271(1)(c). This case is also concerned with the law prior to 1st April, 1976. We have already held that in the case of the assessee Explanation is not applicable and even there is no evidence on record that the AO has detected the additional income not shown by the assessee and in consequence thereof the assessee has declared the additional income. The assessee surrendered the gift to be taken its income as the assessee expressed his inability to produce the concerned donor although the evidences were produced to discharge his onus entrusted under s. 68 of the IT Act. Therefore, we are of the view that the decision in the case of K.P. Madhusudhan (supra) will not assist the Revenue and will not be applicable to the facts of the case before us.
30. We also noted that in the case of Dharamendra Textile Processors (supra) the Hon'ble Apex Court has held as under :
"We are of the view that there is a conflict of opinions between the judgments of the Division Bench of this Court in the case of Dilip N. Shroff v. Jt. CIT (2007) 210 CTR (SC) 228 : (2007) 8 Scale 304 on the one hand and on the other hand we have another judgment of this Court in the case of Chairman, SEBI v. Shriram Mutual Fund (2006) 5 SCC 361.Secondly, it may be pointed out that the object behind the enactment of s. 271(1)(c) r/w the Explanations quoted above indicates that the said section has been enacted to provide for a remedy for loss of revenue. The penalty under the said section is a civil liability. Wilful concealment is not an essential ingredient for attracting the civil liability as is the case in the matter of prosecution under s. 276C of the Act. While considering an appeal against an order made under s. 271(1)(c) what is required to be examined is the record which the officer imposing the penalty had before him and if that record can sustain the finding that there had been concealment, that would be sufficient to sustain the penalty. Keeping in mind these two circumstances, we are of the view that the judgment of the Division Bench in the case of Dilip N. Shroff v. Jt. C1T (supra) needs consideration. The Explanations added to s. 271(1)(c) in their entirety also indicate the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing returns. The judgment in Dilip N. Shroffs case (supra) has also not considered the provisions of s. 276C of the IT Act. Therefore, in our view, the judgment in the case of Dilip N. Shroff v. Jt. CIT (supra) needs consideration by the Larger Bench of this Court particularly when it has ramifications not only regarding the provisions of the IT Act but also with regard to the provisions of ss. 3A and 11AC of the Central Excise Act and r. 96ZQ(5) of the Central Excise Rules.
For the aforestated reasons, we direct the Registry to place our order in this batch of civil appeals before the Hon'ble Chief Justice of India for appropriate directions.
Before concluding, we may mention that in the present cases, the assessee had challenged the vires of r. 96ZQ(5). By the impugned judgment, the Gujarat High Court has read down the said rule incorporating the mens rea requirement. It is made clear that if /the Larger Bench takes a view to say that the penalty under the said clause is mandatory, then it would still be open to the assessee to challenge the vires of the said r. 96ZQ(5) and, therefore, in that event, the matter has to be kept before the Division Bench for passing appropriate orders."
31. In the aforesaid case also, we also noted that the Hon'ble Apex Court has held that the record before the AO must speak of that the assessee has concealed the income. We have already held that in the case before us there is no material or evidence being brought on recordor before us which may prove that the assessee has concealed the particulars of income and the Revenue has detected the additional income except the allegation sent by ADI that the assessee has received accommodation entry. This judgment also in our opinion will not be applicable to the facts of the case before us.
32. We have also gone through the decision of the Hon'ble Apex Court in the case of Suresh Chandra Mittal (supra), which affirmed the decision of the Hon'ble Madhya Pradesh High Court as Suresh Chandra Mittal (supra), wherein the Hon'ble High Court has held as under :
"In the present case though it is true that the assessee had not surrendered at all and that he had done so on the persistent queries made by the AO but once the revised assessment was regularized by the Revenue and once the assessing authority had failed to take any objection in the matter, the declaration of income made by the assessee in his revised returns and his explanation that he had done so to buy peace with the Department and to come out of vexed litigation could be treated as bona fide in the facts and circumstances of the case. Therefore, the Tribunal was justified in cancelling the penalty levied by the AO and affirmed by the CIT(A) in the facts and circumstances of the case. This reference is accordingly answered in the affirmative holding that the Tribunal was justified in doing so."
33. The facts relating to this case are that the assessee had filed the IT return showing the meager income. Action under s. 132 was taken against the assessee which led to reopening of the assessment. A notice under s. 148 was served on him and pursuant thereto he filed revised returns of income for these assessment years showing higher income. Eventually the assessment orders were passed and the returns submitted were regularized under s. 148. In the penalty proceedings under s. 271(1)(c) the assessee claimed that he had offered additional income to buy place of mind and avoid litigation. Penalty orders were passed and the CIT(A) confirmed the orders. But the Tribunal held that the Revenue had not discharged its burden of proving concealment and had simply rested its conclusion on the acts of voluntary surrender done by the assessee in good faith and that penalty could not be levied. On a reference the Hon'ble High Court held that it is well-settled that under s. 271(1)(c) the initial burden lies on the Revenue to establish that the assessee has concealed the income or had furnished inaccurate particulars of such income. The burden shifts to the assessee only if he fails to offer any explanation for the undisclosed income or offers an explanation which is found to be false by the assessing authority. However, the proviso to Expln. 1 provides for shifting of this burden again where the explanation offered by the assessee is found to be bona fide. It was further held that though it is true that the assessee had not surrendered at all and that he had done so on the persistent queries made by the AO. but once the revised assessment was regularized by the Revenue and once the assessing authority had failed to take any objection in the matter, the declaration of income made by the assessee in his revised returns and his explanation that he had done so to buy peace with the Department and to come out of the vexed litigation could be treated as bona fide in the facts and circumstances of the case. Therefore, the Tribunal was justified in cancelling the penalty levied by the AO and affirmed by the CIT(A) in the facts and circumstances of the case. In our opinion, the case of the assessee is at a better footing than the case of Suresh ChandraMittal (supra). In the case before us the assessee has surrendered the investment in capital work-in-progress by reducing the value of capital work-in-progress which has the effect of lower claim of depreciation in the asst. yr. 2006-07 onwards. This was done by the assessee to be in peace and avoid the litigation. There is no evidence on record that this surrender was made on the persistent queries and evidence being brought on record by the Revenue that the assessee had disclosed capital work-in-progress at a higher figure. This decision differs from the decision of K. P. Madhusudan (supra) mainly due to the fact, that in the case of K.P. Madhusudan (supra) even though assessee has surrendered additional income but the AO was not satisfied with the explanation of the assessee regarding the additional income and hence levied penalty by invoking the Expln. 1(B) to s. 271(1)(c). The Court has also found that the explanation given by the assessee was vague and fanciful which was not the case in the case of Suresh Chandra Mittal (supra). In the case of Suresh Chandra Mittal (supra), we find that when the assessee has surrendered additional income and the returns were regularized by issuing notice under s. 147 as is the case of the assessee, the AO felled to take any objection and accepted the explanation offered by the assessee.
34. The crux of the two decisions given by the Hon'ble Supreme Court appearing in the same ITR was different inasmuch as the MP High Court in Suresh Chandra Mittal (supra) which was subsequently confirmed in Suresh Chandra Mittal (supra) was really concerned with the following :
"From p. 126
We find ourselves in agreement with the view taken by the Tribunal. It is well-settled that under s. 271(1)(c), the initial burden lies on the Revenue to establish that the assessee had concealed the income or had furnished inaccurate particulars of such income. The burden shifts to the assessee only if he fails offer any explanation for the disclosed income or offers an explanation which is found to be false by the assessing authority. However, the proviso to Expln. 1 provides for shifting of this burden again where the explanation offered by the assessee is found to he bona fide."
35. Whereas on the other hand, what the Supreme Court was concerned with Suresh Chandra Mittal (supra) was as to whether, even after the insertion of the Expln. 1below s. 271(1)(c), it was necessary for the Revenue to prove mens rea. It would appear that the two issues as to whether the initial burden even after the insertion of Expln. 1 lay with the Department and as to whether the Department still had to prove mens rea, are different and, therefore, it may not be possible to suggest that the aforesaid two decisions of the Supreme Court conflicted with each other. In the case before us penalty has not been imposed by invoking the Explanation to s. 271(1)(c).
36. In case of Dy. CIT v. Chirag Metal Rolling Mills Ltd. [2007] 162 Taxman 317 (MP) the Hon'ble MP High Court has observed as under after considering aforesaid two decisions of Hon'ble Apex Court :
"So far as Full Bench of Kerala High Court, in the matter of CIT v. India Sea foods (supra) and CIT v. Suresh Chandra Mittal (supra) is concerned, is based on the law laid down by the Hon'ble Apex Court in the matter of Sir Shadilal (supra). So far as K.P. Madhusudhan's case (supra) which was delivered on 21st Aug., 2001, is concerned, in this case the Hon'ble Apex Court has considered the Explanation to s. 271(1)(c) and has held that since in the case of Sir Shadilal (supra) the Revenue was required (to prove) mens rea of quasi-criminal offence, therefore, the Legislature has added the Explanation. That view in the matter of Sir Shadilal(supra) can no longer be said to be applicable.
Explanation 1 to s. 271 has been substituted by the Taxation Laws (Amendment) Act, 1975 w.e.f. 1st April, 1976, according to which if a person fails to offer an explanation or offers an explanation which is found by the AO to be false or offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and all the facts relating to the same 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 purpose of cl. (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed. In the matter of K.P. Madhusudhan (supra) it has also been observed by Hon'ble Apex Court when the ITO issues to an assessee a notice under s. 271, he makes the assessee aware that the provisions thereof are to be used against him. These provisions include 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 s. 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 and did not arise from any fraud or neglect on his part. The assessee is, therefore, by virtue of the notice under s. 271 but 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."
37. The combined reading of Expln. 1 to s. 271(1)(c) of the Act and the verdict of Hon'ble Apex Court in the matters of Sir Shadilal(supra) and K.P. Madhusudhan (supra) it is crystal clear that prior to Expln. 1 the position of law was if assessee agrees for addition of his income to buy peace then it will not follow that agreed amount to be added was concealed income and the Revenue was required to prove the otherwise. Because of this view taken by the Hon'ble Apex Court in the matter of Sir Shadilal (supra) the Expln. 1 to s. 271(1)(c) was added to the IT Act and after taking into consideration the Explanation, Hon'ble Apex Court in the matter of K.P. Madhusudhan (supra) has laid down that no separate enquiry is necessary for- imposing the penalty. However, from plain reading of Explanation, it is evident that some sort of enquiry is necessary, therefore, the proceedings initiated by the Revenue for imposing the penalty under s. 271(1)(c) of the Act shall be treated as proceedings and the assessee is at liberty to show his bona fides in that proceedings. If the assessee fails to show his bona fides, in that case penalty can be imposed by the Revenue.
38. We have already held that the decision of the Hon'ble Supreme Court in the case of K.P. Madhusudhan (supra) will not apply to the facts of the case but the decision in the case of Suresh Chandra Mittal (supra) in our view is applicable to the facts of the case before us and accordingly is binding on us. Therefore, the penalty on the basis of this judgment is also liable to be quashed and accordingly; we cancel the same.
39. In view of aforesaid discussion we confirm the order of the CIT(A) deleting the penalty levied under s. 271(1)(c) in each of the assessment years.
40. In the result, all the appeals of the Revenue stand dismissed.
CIT vs. Intezar Ali (Allahabad High Court)
CBDT directed to inquire into conduct of AO in framing assessment with ill-will/ ulterior motive
The assessee sold agricultural land for Rs. 1.20 crore and deposited the cash proceeds in his bank account. He filed a return in which the transaction was disclosed and claimed to be not chargeable to tax. However, as the sale deed showed the transaction at Rs. 22 lakh and because the purchasers claimed that the sale value was only Rs. 22 lakh, the AO treated the difference of Rs. 97.80 lakhs as income from undisclosed sources. The AO admitted that the evidence produced by the assessee to show that the land was in fact worth Rs. 1.20 crore and that he had in fact received the said sum from the purchasers prima facie supported the version of the assessee though he still made the addition. The CIT(A) upheld the stand of the AO though the Tribunal reversed it on the ground that the evidence on record showed that the assessee had offered the entire sale proceeds and that the purchasers had sought to undervalue the land. On appeal by the department to the High Court HELD dismissing the appeal:CBDT directed to inquire into conduct of AO in framing assessment with ill-will/ ulterior motive
The assessee is an honest citizen who deposited the entire amount in the bank and voluntarily filed return. He also made a complaint to the registering authority that the sale deed has been registered at a value much below the amount actually received. The other evidence produced by the assessee was more than sufficient to discharge the burden which the AO had unreasonably placed on the assessee. The ITO did not act in a bonafide manner. He discarded the overwhelming evidence led by the assessee without giving any reasons at all. The assessment was framed only on the ipse dixit of the AO which gives us reason to believe that he had exceeded his authority with some ill will or with ulterior motive. The CBDT should cause an enquiry into the conduct and motives of the ITO in framing the assessment and raising demand of income tax against the assessee.
IT : Amount deposited by assessee, a car manufacturer, in Excise Personal Ledger Account in terms of rule 173G of Central Excise Rules, 1944, in order to clear goods, could not be disallowed under section 43B
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[2012] 28 taxmann.com 216 (Delhi)
HIGH COURT OF DELHI
Commissioner of Income-tax
v.
Maruti Suzuki India Ltd.*
S. RAVINDRA BHAT AND R.V. EASWAR, JJ.
IT Appeal NOS. 903, 993 & 1029 of 2011
DECEMBER 14, 2012
Section 43B of the Income-tax Act, 1961 - Business disallowance - Certain deductions to be allowed only on actual payment - Excise/duty - Assessment years 1994-95 to 1996-97 - Whether wherein order to clear goods, assessee, a car manufacturer, deposited certain amount on regular basis in Excise Personal Ledger Account in terms of rule 173G of Central Excise Rules, 1944, said amount could not be disallowed under section 43B on ground that it was not paid in respect of manufactured goods - Held, yes [In favour of assessee]
FACTS
Facts
| • | The assessee was a car manufacturer; it had to comply with the requirements of the Central Excise and Salt Act, 1944, in order to clear the goods, by paying duty. The duties were collected in the form of a regular payment into what was called the 'Personal Ledger Account' in terms of rule 173G of the Central Excise Rules. | |
| • | The Assessing Officer disallowed under section 43B the amounts paid into, and remaining outstanding at the end of the financial year in the Personal Ledger Account (PLA). | |
| • | The Tribunal, however, allowed the assessee's contentions. |
Revenue's contentions:
| • | The revenue contended that as per provisions of section 43B, deduction of the prescribed sums would be available to an assessee only on the basis of payment, either in the relevant assessment year or in the subsequent assessment year but no deduction would be available on such payments where the corresponding liability was not incurred by the assessee. | |
| • | It was further submitted that since the amount paid into the 'personal ledger account' was not in respect of manufactured goods, it could not be deducted. |
Assessee's contentions:
| • | The assessee submitted that amounts paid into the PLA were towards excise liability incurred, as a result of manufacture of goods. It was emphasized that the levy of excise was on goods manufactured and what was mandated by rule 173G was the precondition for release, or clearance of goods, from the premises and, in such circumstances, amount credited to PLA could not be disallowed by invoking provisions of section 43B. |
Issue involved
| • | Whether no facts, the Tribunal fell into error in holding that the amounts deposited by the assessee in the Excise Personal Ledge Account (PLA) could not be disallowed under section 43B. |
HELD
Applicability of provisions of section 43B
| • | A plain reading of section 43B clarifies that: |
| (a) | deduction claimed by the assessee must be 'otherwise' allowable under the other provisions of the Act. | |
| (b) | The deduction must relate to any sum payable by way of tax, duty, cess or fee. | |
| (c) | the assessee must have incurred liability in respect of such tax, duty, etc. |
| • | On fulfilling these conditions, the assessee's claim can be allowed in the year in which actual payment is made, notwithstanding the year in which liability is incurred. The term 'liability to pay such sum was incurred by the assessee' together with the words ' a sum for which the assessee incurred liability' in Explanation 2 underline that payment must relate to the incurred liability to be called 'any sum payable'. [Para 14] |
Whether amount credited to 'Personal Ledger Account' could be disallowed under section 43B:
| • | The assessee had no option, but to keep the account, in respect of each excisable product (evident from the mandate in rule 173G that it 'shall keep an account current'). The latter part of the main rule makes it clear beyond any doubt that the assessee had no choice in the obligation, and could not remove the goods manufactured by it, unless sufficient amounts were kept in credit. [Para 15] | |
| • | The revenue's contention that the amounts in credit also relate to goods not manufactured, and therefore, not relatable to any 'liability incurred' is, without any basis. The arrangement prescribed by the rule is both a collection mechanism - dictated by convenience, as well as mandatory. | |
| • | It is convenient, for the reason that if the assessee were to be asked to pay the exact amount, through some other method, by deposit, as a precondition for clearance, that would have been cumbersome to it as well as the revenue; it would also have led to problems of storage of goods, and slow down their supply and the rule makers pragmatically directed that 'sufficient' amount ought to be maintained in the account, to cover the removals. | |
| • | Therefore, at any given point of time, there had to be an excess in the account, if the assessee were to remove the goods. Each clearance mentions the quantum of goods, and the duty amount, which is apparently reconciled at the end of the period, and shortfalls if any are appropriated from the account. The excess credit is likewise adjusted for the next day's clearances. The point to be underlined is that there is no choice, and the amounts relate to the assessee's duty liability, falling within the description under section 43B. [Para 15] | |
| • | In view of above, the Tribunal rightly held that amount deposited by the assessee in the Excise Personal Ledger Account could not be disallowed under section 43B. [Para 17] |
CASES REFERRED TO
Srikakollu Subba Rao & Co. v. UOI [1988] 173 ITR 708/38 Taxman 273 (AP) (para 7), Paharpur Cooling Towers Ltd. v. CIT [2012] 208 Taxman 198 (Cal.) (Mag.)/21 taxmann.com 307 (Cal.) (para 10), CIT v. C.L. Gupta & Sons [2003] 259 ITR 513/126 Taxman 500 (All) (para 10), CIT v. Modipon Ltd. [2011] 334 ITR 106/[2017] 205 Taxman 79 (Delhi)(Mag.)/18 taxmann.com 331 (Delhi) (para 12), Maruti Udyog Ltd. v. Dy. CIT [2005] 142 Taxman 57 (Delhi) (Mag.)/92 ITD 119 (Delhi) (para 13), CIT v. Shri Ram Honda Power Equipment Corpn. [2012] 210 Taxman 577/26 taxman.com 331 (SC) (para 16), Rotork Controls India (P.) Ltd. v. CIT [2009] 314 ITR 62/180 Taxman 422 (SC) (para 17).
N.P. Sahni for the Appellant. Ajay Vohra, Ms. Kavita Jha, Somnath Shukla and Vaibhav Kulkarni for the Respondent.
ORDER
S. Ravindra Bhat, J. - The present judgment will dispose of three appeals, concerning AY 1994-95, 1995-96 and 1996-97; the impugned common order of the Income Tax Appellate Tribunal (ITAT) disposed of the revenue's appeals for the said assessment years. The following common questions arise in these appeals:
| (a) | Did the Tribunal fall into error in holding that the amounts deposited by the assessee/ respondent in the Excise Personal Ledger Account (PLA) could not be disallowed under Section 43-B of the Income Tax Act; | |
| (b) | Did the Tribunal fall into error in not disallowing the provision for warranties made by the assessee, for the assessment year 1996-97; (the question arises only in ITA 993/2011) |
2. The assessee is a car manufacturer; it has to comply with the requirements of the Central Excise and Salt Act, 1944 ("Excise Act"), in order to clear the goods, by paying duty. The duties are collected in the form of a regular payment into what is called the "Personal Ledger Account" in terms of Rule 173-G of the Central Excise Rules, which reads as follows:
3. The AO took the position that the amounts paid into, and remaining outstanding, at the end of the financial year, was to be disallowed by reason of Section 43-B. The matter ultimately reached the ITAT, which accepted the assessee's contentions.
4. The revenue is in appeal, contending that since the amount paid into the account was not in respect of manufactured goods, it could not be deducted. Mr. N.P Sahni argued that Section 43B permits deductions only on actual payment of the corresponding amounts. Section 43B contains a non-obstante clause and states that deduction of the prescribed sums is on actual payment only if those sums are "otherwise allowable under this Act". This condition postulates that an assessee cannot claim by way of expenditure, payments of taxes and duties only for the fact that the assessee has made the payments of those taxes and duties. In addition to the payment of such taxes and duties, it is also necessary that those expenses should be "otherwise allowable" under the provisions of the IT Act, 1961, in computing the business income. Therefore, in the class of cases spelt out in the provision, the deduction of the prescribed sums would be available to an assessee only on the basis of payment, either in the relevant assessment year or in the subsequent assessment year but no deduction would be available on such payments where the corresponding liability was not incurred by the assessee. Adverting to the legal position before introduction of Section 43-B, it was stated that if an assessee maintained the accounts on accrual basis, the deduction of the prescribed sums would be available in computing the business income if those liabilities were accrued during the previous year relevant to the assessment year, without the actual payment thereof. Even now, the rule of accrual of liabilities has not been dispensed with. The accrual of liability remains unchanged. Section 43B imposes a further condition that deductions are permissible additionally to accrual of liability, only on actual payment of the amount.
5. It was next submitted that a deduction "otherwise allowable under this Act", which qualifies to be allowed before considering the question of payment. The item must be permissible as a deduction under any provision; the expenses or liability must be incurred. The restriction brought about by Section 43B that cash must be actually paid, not mean that other conditions provided in law have been dispensed with. All such conditions are applicable.
6. Emphasizing upon the term "any sum payable" it was argued that it is one of the most important limbs of the statute and underlines incurring of a prior liability on the assessee to make such payment. Unless the liability to pay is incurred, it is not possible to say that any sum is payable by the assessee. It was contended that the proviso to Section 43B allows an assessee to claim the deduction even if the designated payment was made after the close of the relevant previous year, but before the due date of filing of the return under s. 139(1). The expression "... in respect of the previous year in which the liability to pay such sum was incurred as aforesaid.." is highlighted. The argument is that what is to be paid and for which evidence has to be furnished is in respect of the payment for which the liability was incurred in the previous year. Therefore incurring of prior liability in a previous year is essential in claiming a deduction governed by the provisions of s. 43B. The additional requirement of making actual payment has not obliterated any other remaining requirements embodied in the law relating to deduction of expenses in computing income from business.
7. Learned counsel also relied on the second Explanation to Section 43B. It provides that, for the purposes of cl. (a), as in force at all material time, "any sum payable means a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law." That the actual liability should be incurred during the previous year has been reiterated in the Explanation which rules out any other interpretation. Counsel relied on the rulings of the Andhra Pradesh High Court in Srikakollu Subba Rao & Co. v. UOI [1988] 173 ITR 708/38 Taxman 272 (AP) where that High Court held that in order to apply the provisions of Section 43B, not only should the liability to pay tax or duty be incurred in the accounting year but the amount also should be statutorily payable in the accounting year.
8. Counsel for the assessee on the other hand, argued that the amounts paid into the PLA were towards excise liability incurred, as a result of manufacture of goods. It was emphasized that the levy of excise is on goods manufactured and what is mandated by Rule 173G is the precondition for release, or clearance of goods, from the premises. It was submitted that the structure of Rule 173G and the scheme of excise duty collection left the asseesee, or any other manufacturer with no option but to pay amounts into PLA, as a precondition for their removal and further sale. Counsel highlighted that the mode chosen by the excise authorities, of requiring the manufacturer to keep certain amounts, was at once a method of collection, as well as a matter of convenience. If the manufacturer were to pay amounts, and then clear the goods, the result would be time consuming; instead, he is obliged to keep, in the PLA a certain amount to cover the clearances of goods manufactured.
9. It was highlighted that the amounts deposited were towards the obligation to pay excise duty, and nothing else. It was submitted that the assessee could not be denied the deduction, once the basic characteristic of the payment actually made was established. Pointing out that the disallowances were a fraction of the total excise duty, in each of the assessment years, learned counsel submitted that these credits were for finished goods, but which had not been cleared at the time of end of the concerned period.
10. Learned counsel relied on the decision of the Calcutta High Court reported as Paharpur Cooling Towers Ltd. v. CIT [2012] 208 Taxman 198 (Cal) (Mag.)/21 taxmann.com 307 (Cal.). It was submitted that the court, in that case, held that there was no intention of the legislature to deprive an Assessee of the benefit of deduction of tax, duty actually paid by him during the previous year, even though in advance, according to the method of accounting followed by him. It was also argued that if the revenue's contentions were to be accepted, the assessee would not also get the benefit of payment of tax, since it was actually paid in the previous period. In support, counsel relied on the ruling of the Allahabad High Court in CIT v. C.L. Gupta & Sons [2003] 259 ITR 513/126 Taxman 500.
11. Section 43-B of the Income Tax Act, reads as follows:
"43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—
| (a) | any sum payable by the assessee by way of tax, duty, cess or fee by whatever name called, under any law for the time being in force, or | |
| (b) | to (f)... |
shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in Section 28 of that previous year in which such sum is actually paid by him :
Provided………..
Provided further………..
Explanation 1………..
Explanation 2 : For the purposes of Clause (a), as in force at all material times, 'any sum payable means a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law."
Rule 173G of the Central Excise Rules, states that:
"173G. Procedure to be followed by the assessee - (1) Every assessee shall keep an account current with the Collector separately for each excisable goods falling under different Chapters of the Schedule to the Central Excise Tariff Act, 1985, in such forms and manner as the Collector may require, of the duties payable on the excisable goods and in particular such account (and also the account in Form R.G. 23, if the assessee is availing of the procedure prescribed in rule 173 K) shall be maintained in triplicate by using indelible pencil and double-sided carbon, and the assessee shall periodically made credit in such account-current, by cash payment into the treasury, so as to keep the balances, in such account-current sufficient to cover the duly due on the goods intended to be removed at any time, and every such assessee shall pay the duty determined by him for consignment by debit to such account-current before removal of the goods".
12. The relevant discussion in Paharpur states that:
"8. After hearing the learned Counsel for the parties and after going through the aforesaid provisions including the Explanation 2 added thereto, we find that the requirement of the provision contained in Section 43B(a) of the Act is that the Assessee must have actually paid the amount as well as incurred liability in the previous year for the payment even though such sum might not have been payable within that year under the relevant law. In the case before us, the Assessee has undoubtedly paid the duty in the previous year and such payment was made consequent upon the liability incurred in that very year but in view of the fact that it follows the mercantile system of accounting, the amount is legally payable in the next year. Thus, the case clearly comes under the purview of Section 43B(a) of the Act read with Explanation 2 added thereto.
9. The position would have been different if the amount was not paid in the previous year and in such a case the Appellant would not have been eligible to get the benefit. The object of the legislature is to give the benefit of deduction of tax, duty, etc. only on payment of such amount liability of which the Assessee had incurred and not otherwise. Thus, even if the tax or duty is payable in the next year in view of the system of accounting followed by the Assessee, if the liability was ascertained in the previous year and the tax was also paid in the said previous year, there is no scope of depriving the Assessee of such benefit.
11. Moreover, in the light of the purposive and objective interpretation of the said provision, and the mischief sought to be remedied through the insertion of the Explanation 2, it becomes abundantly clear that the said claim is allowable only in the year of payment. At this stage, it will be profitable to refer to the following observation of the Supreme Court in the case of K. P. Varghese v. ITO reported in MANU/SC/0300/1981 : AIR 1981 SC 1922 where it has been held:
...where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the legislature, the Court may modify the language used by the legislature or even do some violence to it, so as to achieve the obvious intention of the legislature and produce a rational construction.
12. It was never the intention of the legislature to deprive an Assessee of the benefit of deduction of tax, duty etc. actually paid by him during the previous year, although in advance, according to the method of accounting followed by him. If we accept the reasoning given by the Tribunal, an advance payer of tax, duty etc. payable in accordance with the method of accounting followed by him will not be entitled to get the benefit even in the next year when liability to pay would accrue in accordance with the method of accounting followed by him because the benefit of Section 43B is given on the basis of actual payment made in the previous year."
In CIT v. Modipon Ltd. [2011] 334 ITR 106/[2012] 205 Taxman 79 (Delhi) (Mag.)/18 taxmann.com 331 (Delhi) this Court had occasion to deal with the issue, and held as follows:
"In our considered view, the mischief which is sought to be cured by induction of the provisions of sections 43B of the Income Tax Act is sub-served by the payment of the duty to the Department concerned. The procedure envisaged for payment of excise duty envisages such duty to be deposited in advance with the treasury before the goods are removed from the factory premises. The duty, thus, already stands deposited in the accounts of the assessee maintained with the treasury and the amount, thus, stands paid to the State.
We are, thus, not in agreement with the submission of the learned counsel for the Department that it was only on removal of the goods that the amount credited to the personal ledger account could be claimed as deductible under Section 43B of the Income Tax Act. The question is, thus answered in favour of the assessee. "
13. The Tribunal had, in a previous year, discussed the issue in detail; its conclusion - in the assessee's case for A.Y. 1999-2000 (reported in Maruti Udyog Ltd. v. Dy. CIT [2005] 142 Taxman 57 (Delhi) (Mag.)/92 ITD 119 (Delhi) and A.Y. 2000-01 is as follows:
"28. In view of the above discussion, it is held that advance payment in cash of taxes or duties without incurring liability to pay such taxes or duties without incurring liability to pay such taxes or duties cannot be allowed as deduction under section 43B. Therefore, the lower authorities were justified in disallowing the sum of Rs. 3,19,41,468/- representing PLA balance of excise duty on vehicle in as much as there is clear finding of fact in para 9.5 of the Ld. Commissioner of Income Tax (Appeals) that PLA balance are not relatable to any goods manufactured."
"29. However, we find force in the alternate of assessee's counsel that such amount should be allowed in the year in which it is adjusted against liability to pay excise duty on manufactured goods. Accordingly, it is pleaded that deduction should be allowed of the sum of Rs.1,03,79,919/-representing PLA balances on the last day of the preceding year but adjusted in this year. We have heard both the counsels and perused the records. We are in complete agreement with such contention since such adjustment amounts to actual payment. Even the ld counsel for revenue has no objection to such contention provided such deduction was not allowed in the preceding year since double deduction of the same amount cannot be allowed. Considering the same, the order of ld. CIT(A) is modified and the matter is remitted to the file of Assessing Officer who shall allow the alternate claim of assessee after verification if such deduction was not allowed in the preceding year. Since it has been held that advance payment did not represent the payment of excise duty, the question of including the same in the closing stock does not arise. Therefore, finding of Ld. CIT(A) to that effect is vacated."
14. A plain reading of Section 43-B clarifies that
| (a) | deduction claimed by the assessee must be "otherwise" allowable under the other provisions of the Act. | |
| (b) | The deduction must relate to any sum payable by way of tax, duty, cess or fee. | |
| (c) | the assessee must have incurred liability in respect of such tax, duty, etc. |
On fulfilling these conditions, the assessee's claim can be allowed in the year in which actual payment is made, notwithstanding the year in which liability is incurred. The term "liability to pay such sum was incurred by the assessee" together with the words "a sum for which the assessee incurred liability" in Explanation 2 underline that payment must relate to the incurred liability to be called 'any sum payable'.
15. In the present case, the assessee had no option, but to keep the account, in respect of each excisable product (evident from the mandate in Rule 173G that it "shall keep an account current"). The latter part of the main rule makes it clear beyond any doubt that the assessee has no choice in the obligation, and cannot remove the goods manufactured by it, unless sufficient amounts are kept in credit:
"...and the assessee shall periodically made credit in such account- current, by cash payment into the treasury, so as to keep the balances, in such account-current sufficient to cover the duly due on the goods intended to be removed at any time, and every such assessee shall pay the duty determined by him for consignment by debit to such account-current before removal of the goods"
The revenue's contention that the amounts in credit also relate to goods not manufactured, and therefore not relatable to any "liability incurred" is, in the opinion of this Court, without any basis. The arrangement prescribed by the rule is both a collection mechanism - dictated by convenience, as well as mandatory. It is convenient, for the reason that if the assessee were to be asked to pay the exact amount, through some other method, by deposit, as a precondition for clearance, that would have been cumbersome to it as well as the revenue; it would also have led to problems of storage of goods, and slow down their supply and distribution. The Rule makers pragmatically directed that "sufficient" amounts ought to be maintained in the account, to cover the removals. Therefore, at any given point of time, there had to be an excess in the account, if the assessee were to remove the goods. Each clearance mentions the quantum of goods, and the duty amount, which is apparently reconciled at the end of the period, and shortfalls if any are appropriated from the account. The excess credit is likewise adjusted for the next day's clearances. The point to be underlined is that there is no choice, and the amounts relate to the assessee's duty liability, falling within the description under Section 43-B. The consequence of not allowing the amounts as deductions, are vividly brought out in the decision of the Allahabad High Court in C.L. Gupta & Sons (supra), where it was held that:
"10. In the case in hand, admittedly, the amount of customs duty of Rs. 3,56,451 was paid by the assessee in March, 1987, and, therefore, in terms of Section 43B it is deductible only in the year in which it is actually paid, i.e., for the assessment year 1987-88, irrespective of the year in which the assessee incurred the liability on the basis of the method of accounting regularly adopted by him and, therefore, in view of the clear provisions of law, the deduction cannot be allowed in the assessment year 1988-89. In our view, both the learned Income Tax Appellate Tribunal as well as the Commissioner of Income Tax (Appeals) fell in error in holding that since the assessee-firm debited the cost of goods imported including the duty paid on delivery of goods in the trading account in April, 1987, and before the actual delivery of the goods, the value of the goods and customs duty paid thereon was shown in the balance-sheet as document in hands, therefore, the deduction should be allowed in the assessment year 1988-89, is contrary to the prescription of law. Section 43B in clear terms provides that the deduction claimed by the assessee in respect of any sum paid by way of tax, duty, cess or fee, shall be allowed only in computing the income referred to in Section 28 of that previous year in which it was actually paid, irrespective of the previous year in which the liability was incurred for the payment of such sum as per the method of accounting regularly employed by the assessee. For the purpose of claiming benefit of deduction of the sum paid against the liability of tax, duty, cess, fee, etc., the year of payment is relevant and is only to be taken into account. The year in which the assessee incurred the liability to pay such tax, duty, etc., has no relevance and cannot be linked with the matter of giving benefit of deduction under Section 43B of the Act. In this view of the matter, the appeal deserves to be allowed.
16. This court also notices that the Supreme Court has upheld the view which allows assessee's to claim credits, such as Modvat, etc, falling within the description of liability paid, to escape the mischief of Section 43-B. CIT v. Shri Ram Honda Power Equipment Corpn. [2012] 210 Taxman 577/26 taxmann.com 331 (SC).
As a result of the above discussion, the first question is answered IT : Provision made for leave encashment cannot be disallowed on basis of clause (f) of section 43B
IT : Where own funds of assessee were many times more than amount invested in shares and there was no nexus between investment and interest bearing borrowed funds, no disallowance under section 14A was warranted
IT : Where software in question only increased organizational efficiency of assessee, expenditure incurred for such software should be treated as revenue expenditure
■■■
[2013] 33 taxmann.com 476 (Ahmedabad - Trib.)
IN THE ITAT AHMEDABAD BENCH 'D'
Eimco Elecon (India) Ltd.
v.
Additional Commissioner of Income-tax*
A.K. Garodia, ACCOUNTANT MEMBER
AND Kul Bharat, JUDICIAL MEMBER
AND Kul Bharat, JUDICIAL MEMBER
IT Appeal No. 931 (Ahd.) of 2010
[ASSESSMENT YEAR 2007-08]
[ASSESSMENT YEAR 2007-08]
SEPTEMBER 21, 2012
I. Section 43B, read with section 37(1), of the Income-tax Act, 1961 - Business disallowance - Certain deduction to be allowed only on actual payment [Provision for leave encashment] - Assessment year 2007-08 - Assessing Officer disallowed provision made for leave encashment on basis of clause (f) of section 43B - Calcutta High Court in Exide Industries Ltd. v. Union of India [2007] 292 ITR 470/164 Taxman 1 held that clause (f) of section 43B is arbitrary and de hors of Supreme Court decision -Whether following above decision, disallowance made by Assessing Officer on basis of clause (f) of section 43B could not be sustained - Held, yes [Para 5] [In favour of assessee]
II. Section 14A of the Income-tax Act, 1961 - Expenditure incurred in relation to income not includible in total income [Dividend] - Assessment year 2007-08 - Assessing Officer having found that assessee had made investment in shares and earned dividend therefrom, disallowed part of interest expenditure - Whether no disallowance was called for under section 14A out of interest expenditure because own funds of assessee were many times more than amount invested in shares and no direct nexus was established by Assessing Officer between investment and interest bearing borrowed funds - Held, yes [Para 9] [In favour of assessee]
III. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Software licence fees] - Assessment year 2007-08 - Assessee engaged in manufacturing mining machineries had paid software licences fees for Oracle product licences for finance, purchase order, management and manufacturing - Assessing Officer treated expenditure on license fees as capital expenditure - Whether software in question would help assessee in increasing efficiency but same could not be treated as forming part of profit making apparatus of assessee-company and, therefore, expenditure on this software could not be treated as capital expenditure - Held, yes [Para 14] [In favour of assessee]
CASE REVIEW - I
Exide Industries Ltd. v. Union of India [2007] 292 ITR 470/164 Taxman 1 (para 5) followed.
CASE REVIEW - III
Amway India Enterprises v. Dy. CIT [2008] 111 ITD 112 (Delhi) (SB) (para 14) followed.
CASES REFERRED TO
Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 (SC) (para 4), Exide Industries Ltd. v. Union of India [2007] 292 ITR 470/164 Taxman 1 (para 4), Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (para 9), Amway India Enterprises v. Dy. CIT [2008] 111 ITD 112 (Delhi) (SB) (para 13), Satender Jhunjhunwala [IT Appeal. No. 1088 (Cal.) of 2009, dated 11-11-2011] (para 18), Utility Powertech Ltd. v. Asstt. CIT [IT Appeal No. 2561(Mum.) of 2009, dated 19-4-2010] (para 18) and Om Satya Axim (P.) Ltd. v. ITO [IT Appeal No. 1335 (Ahd.) of 2010, dated 13-5-2011] (para 18).
Sunil Talati for the Appellant. B.L. Yadav for the Respondent.
ORDER
A.K. Garodia, Judicial Member. -This is the assessee's appeal directed against the order of the learned Commissioner of Income-tax (Appeals)-IV, Baroda, dated February 26, 2010.
2. Ground No. 1 is general.
3. Ground No. 2 reads as under :
"2. The hon'ble Commissioner of Income-tax (Appeals) has erred in confirming the disallowance of Rs. 8,58,452 being provision made for leave encashment. It is submitted your appellant is following the mercantile system of accounting and the provision for leave encashment was made on actuarial basis. The same be allowed on actual payment basis paid during the year."
4. It was submitted by the learned authorised representative that the disallowance was made by the Assessing Officer by invoking the provisions of clause (f) of section 43B. He submitted that as per the decision of the hon'ble apex court rendered in the case of Bharat Earth Movers v. CIT [2000] 245 ITR 428/112 Taxman 61 and also as per the judgment of the hon'ble Calcutta High Court rendered in the case of Exide Industries Ltd. v. Union of India [2007] 292 ITR 470/164 Taxman 1, disallowance of leave encashment is not justified. He submitted that in the first case, it was held by the hon'ble apex court that leave encashment is not a contingent liability if the provision is made on some scientific basis. He also submitted that in the second case, the hon'ble Calcutta High Court has duly considered the provisions of clause (f) of section 43B and it was held that the amendment as per which this clause (f) was inserted by the Finance Act, 2001 with effect from April 1, 2002 is held to be as arbitrary by the hon'ble Calcutta High Court and, therefore, the same was struck down by the hon'ble Calcutta High Court being arbitrary, unconscionable and de hors the hon'ble Supreme Court decision. He submitted that in view of this judgment of the hon'ble Calcutta High Court, disallowance made by the Assessing Officer is not justified. The learned Departmental representative supported the orders of the authorities below.
5. We have considered the rival submissions, perused the material on record and have gone through the orders of the authorities below and the judgment of the hon'ble Calcutta High Court rendered in the case of Exide Industries Ltd. (supra). We find that the Assessing Officer has made disallowance by invoking the provisions of clause (f) of section 43B and the same was confirmed by the learned Commissioner of Income-tax (Appeals) also on the basis of section 43B. As per the judgment of the hon'ble Calcutta High Court rendered in the case of Exide Industries Ltd. (supra), it was held that clause (f) of section 43B is arbitrary, unconscionable and de hors of the hon'ble Supreme Court decision and, therefore, not valid. In view of this, clause (f) of section 43B is not valid and, therefore, disallowance made by the Assessing Officer on the basis of clause (f) of section 43B cannot be sustained. We, therefore, delete the same. 2012] 20 taxmann.com 608 (Delhi)
HIGH COURT OF DELHI
Commissioner of Income-tax
v.
Ranbaxy Laboratories Ltd.*
A.K. SIKRI AND M.L. MEHTA, JJ.
ITA NOS. 377 OF 2010
[ASSESSMENT YEAR 2001-02]
MARCH 17, 2011
I. Section 43B of the Income-tax Act, 1961 - Business disallowance - Certain deduction to be allowed only on actual payment - Assessment year 2001-02 - Managerial provision for pension created by assessee-company for its employees by introducing a pension scheme over and above benefits available under superannuation scheme could not be disallowed by invoking provisions of section 43B [In favour of assessee]
In order to retain managerial employees, the assessee-company introduced a pension scheme which was over and above the benefits available under superannuation scheme of the company. This scheme was non-funded and applicable to all management employees. The assessee sought deduction of provision of pension. The Assessing Officer disallowed the same by invoking the provisions of section 43B(b) on the ground that even if it was an ascertained liability, the deduction could not be allowed in the absence of contribution to the pension fund. The Commissioner (Appeals), however, reversed the decision of the Assessing Officer. The Tribunal upheld the order of the Commissioner (Appeals).
Held that clause (b ) of section 43B deals with certain funds available for the benefit of the employees and, therefore, unless the payments are actually made to those employees, the same would not be entitled for deduction. Clause (b) of section 43B mentions about provident fund, superannuation fund, gratuity fund and followed by "any other fund for the welfare of the employees". This last clause, thus, has to take its colour from the previous clauses and has to be read ejusdem generis. The pension scheme of the assessee did not envisage any regular contribution to any fund or trust or any other entity. The pension scheme provided that pension would be paid by the assessee to its employees on their attaining the retirement age or resigning after having rendered services for specified years. Thus, where the liability on this account accrued from year to year, the same was payable on retirement/resignation of the eligible employees. In view thereof, the disallowance was not justified.
II. Section 80-IA of the Income-tax Act, 1961 - Deductions - Profits and gains from infrastructure undertakings - Assessment year 2001-02 - Duty drawback is not to be included while computing deduction under section 80-IA [In favour of assessee]
Duty drawback is not to be included while computing deduction under section 80-IA.
CASE REVIEW
Bharat Earth Movers v. CIT [2000] 245 ITR 428 (SC), Liberty India v. CIT [2009] 317 ITR 218 (SC) and Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC).
Ms. Rashmi Chopra for the Appellant. M.S. Syali, Ms. Mahua Kalra, Ms. Madhavi Swaroop and Ms. Husnal Syali for the Respondent.
JUDGMENT
A.K. Sikri, J. - In this appeal the following questions of law are proposed by the Revenue :
"(a)Whether the learned Income-tax Appellate Tribunal erred in law and on the merits in holding that duty drawback relating to new industrial undertaking is eligible for deduction while computing book profit under section 115JA of the Income-tax Act, 1961 ?
(b)Whether the learned Income-tax Appellate Tribunal erred in law and on the merits in holding that duty drawback is to be included while computing deduction under section 80-IA of the Income-tax Act, 1961 ?
(c)Whether the learned Income-tax Appellate Tribunal erred in law and on the merits in deleting the addition on account of provision for pension ?
(d)Whether the learned Income-tax Appellate Tribunal erred in law and on the merits by holding that disallowance of provision for pension could not be disallowed under section 43B of the Income-tax Act, 1961 ?"
2. Insofar as question No. (a) is concerned, after reading the order of the Commissioner of Income-tax (Appeals) as well as the Income-tax Appellate Tribunal, we found that it does not arise for consideration in this appeal. The Tribunal vide the impugned order has decided the appeals of the respondent-assessee pertaining to the assessment year 1999-2000 and 2001-02. In this appeal we are concerned with the assessment year 2001-02. From the order of the Commissioner of Income-tax (Appeals) as well as the Income-tax Appellate Tribunal, we find that this question of law pertains to the assessment year 1999-2000 and not this year.
3. Insofar as question No. (b) is concerned, Mr. Syali, learned senior counsel appearing for the respondent/assessee fairly concedes that this issue has to be decided in favour of the Revenue in view of the judgment of the Supreme Court in the case of Liberty India v. CIT [2009] 317 ITR 218 (SC).
4. Questions Nos. (c) and (d) relate to the provision for pension made by the assessee. The assessee is following the mercantile system of accounting. It is having superannuation scheme for its employees. As per the assessee, in order to retain managerial employees it also introduced a pension scheme for such managerial employees which is over and above the benefits available under the superannuation scheme of the company. This scheme was non-funded and applicable to all management employees. The liability on this account for the year in question amounting to Rs.3,61,63,024 was provided following AS-15 based on actuarial valuation. For making this provision, the assessee sought deduction thereof. The Assessing Officer disallowed the same by invoking the provisions of section 43B(b) of the Act on the ground that even if it was an ascertained liability, the deduction could not be allowed in the absence of contribution to the pension fund. The Commissioner of Income-tax (Appeals), however, reversed the aforesaid decision of the Assessing Officer. Section 43B(b) of the Act reads as under :
"43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of-. . .
(b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees."
5. Section 43B(b) is inserted with a view not to allow certain deduction unless actual payments are made in that behalf. The question for consideration is as to whether the provisions of clause (b) of section 43B of the Act are applicable in the instant case. As stated above, the assessee had created the provision for pension by introducing a pension scheme over and above the benefits available under the superannuation scheme. Whether such a provision would be covered by any of the funds stipulated in clause (b), would be the causal. Admittedly, the creation of the aforesaid provision for pension can neither be treated as contribution to any provident fund or superannuation fund or gratuity fund.
6. Ms. Rashmi Chopra, learned counsel for the Revenue, however, argued that it would fall within the expression "any other fund for the welfare of employees" which is specifically stipulated in clause (b). We are unable to accept this submission of the learned counsel for the Revenue. It cannot be denied that section 43B(b) was inserted with a view to disallow certain statutory liabilities which were disputed and not discharged for a long period while availing of tax deduction under the garb of the mercantile system of accounting. It was for this reason that section 43B of the Act provides that these deductions would be admissible on actual payment. We are concerned herewith clause (b) of section 43B of the Act. This clause deals with certain funds available for the benefit of the employees and, therefore, unless the payments are actually made to those employees, the same would not be entitled for deduction. Clause (b) of section 43B of the Act mentions about provident fund, superannuation fund, gratuity fund and is followed by "any other fund for the welfare of the employees". This last clause thus has to take its colour from the previous clauses and has to be read ejusdem generis.
7. It is stated at the cost of repetition that the intention of the Legislature behind enacting section 43B(b) of the Act was to disallow the statutory liabilities. The Commissioner of Income-tax (Appeals), under these circumstances, was right in his opinion that the Legislature never intended to disallow a claim for an ascertained liability which is computed scientifically in respect of the retiral benefits of its employees and which is not to be contributed to a fund. The Commissioner of Income-tax (Appeals) has supported its view by referring to clause (f) of section 43B of the Act which was inserted, with effect from April 1, 2002. Thus, by adding this clause, the Legislature made it clear that any such provision for leave encashment would ipso facto not be eligible for deduction unless the actual payment is made. For disqualifying a provision for leave encashment, a specific clause had to be inserted by the Legislature as the Legislature was conscious of the fact that this clause would not be covered by the existing clause (b) of section 43B of the Act.
8. We are in agreement with the view of the Commissioner of Income-tax (Appeals) that the pension scheme of the assessee does not envisage any regular contribution to any fund or trust or any other entity. The pension scheme provides that pension would be paid by the appellant to its employees on their attaining the retirement age or resigning after having rendered services for specified years. Thus, where the liability on this account accrues from year to year, the same is payable on retirement/resignation of the eligible employees. In view thereof, the ratio of the judgment of the Supreme Court in Metal Box Company of India Ltd. v. Their Workmen [1969] 73 ITR 53 (SC) and Bharat Earth Movers v. CIT [2000] 245 ITR 428 (SC) would clearly get attracted.
9. We, thus, decide these questions of law against the Revenue and in favour of the assessee. As a result, this appeal is allowed in respect of question Nos. (c) and (d).
10. This appeal stands disposed of in terms of the above. IT : Making addition merely on basis of seized documents without cogent evidence that excess amount mentioned in seized document had actually passed on to assessee, was not sustainable where books of account of assessee-construction company were duly audited
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[2013] 35 taxmann.com 3 (Madhya Pradesh)
HIGH COURT OF MADHYA PRADESH
Commissioner of Income-tax
v.
Dolphin Builders (P.) Ltd.*
KRISHN KUMAR LAHOTI, ACTG. CJ.
AND M.A. SIDDIQUI, J.
AND M.A. SIDDIQUI, J.
M.A.I.T. NO. 13 OF 2002†
APRIL 30, 2013
Section 69, read with section 44AD, of the Income-tax Act, 1961 - Unexplained investments [Real estate transactions] - Assessee, a construction company entered into agreement with 'G' to sell flats constructed by it - During raid conducted at premises of 'G', a note book was found mentioning some figures in respect of flats constructed by assessee - Assessing Officer on taking view that figures in seized document indicated sale price of flats, recomputed income of assessee - Whether, where there was no material evidence regarding authenticity of seized document and there was no evidence that any excess amount was passed on to assessee, making addition on mere doubt could not be held as correct - Held, yes - Whether, therefore, where books of account maintained by assessee were duly audited and there was no question of disbelieving them in absence of any cogent evidence, benefit under section 44AD could be granted to assessee - Held, yes [Paras 13 & 14] [In favour of assessee]
FACTS
| ■ | The assessee, a construction company constructed 24 flats in two buildings and entered into agreement with 'G', according to which flats were sold through 'G' on an agreed commission. | |
| ■ | A raid was conducted in the premises of 'G' in which a note book was found, where in the column for cost of flats some figures were mentioned in respect of assessee's apartments. The Assessing Officer taking view that the figures indicated the sale price of flats of assessee's apartments, recomputed the income under section 44AD by calculating sale proceeds as per the seized document. | |
| ■ | On first appeal, the assessee's appeal was partly allowed, as Commissioner (Appeals) held that since gross receipts including those not accounted for exceeded Rs. 40 lakh, section 44AD was not applicable. | |
| ■ | On cross appeals before the Tribunal, the appeal of the assessee was allowed that no addition was required. | |
| ■ | On appeal by the revenue, assessee contended that its books of account were duly audited and all the vouchers bill cash memos and other relevant documents were also properly maintained. Also there was nothing to show that any excess payment had passed on from 'G'. |
HELD
| ■ | On perusing the orders of the Assessing Officer, Income-Tax Commissioner, the ITAT it is agreed that the arguments advanced on behalf of assessee that no prima facie evidence of passing any money from 'G' to assessee was proved and for the papers seized from any other place i.e.'G' assessee cannot be held liable, so, the tribunal has committed no error. [Para 12] | |
| ■ | On perusing the material in the matter it is found that there was no evidence in the matter that the excess amount, if any, was collected by 'G' or even if it was collected then it was passed on to the assessee. There was no search, survey or seizure of the premises of the assessee. Apart from this, the department had not examined any purchaser or flat owner to verify the correctness of the aforesaid noting that some higher amount was paid by the said purchaser to 'G' or the fact that actual price was much higher to the price which was recorded in the account books. The Tribunal have also found that if any amount was collected in excess to the agreed price then 'G' could have been liable for that and not the assessee. It is found that reasoning of the Tribunal to be reasonable. Though there may be some doubt about the price of the flats but until and unless it could have been proved by some evidence, aforesaid doubt cannot take place of proof. Until and unless such noting is corroborated by some material evidence, the Assessing Officer erred in making addition in the income. [Para 13] | |
| ■ | So far as the applicability of section 44AD is concerned, when the assessee had maintained accounts books, vouchers and other documents as required under sub-section (2) of section 44AA and got them audited and furnished it along with audit report then such benefit should have been extended to the assessee. In the present case audited accounts books were maintained and there was no question of disbelieving them in absence of any cogent evidence. [Para 14] | |
| ■ | The order passed by the Tribunal is based on proper appreciation of facts and there is no error in the order. [Para 15] | |
| ■ | In view of the aforesaid discussion, no merit and substance is found in the appeal and is, accordingly dismissed. [Para 16] |
Sanjay Lal for the Appellant. G.N. Purohit and Abhishek Oswal for the Respondent.
ORDER
M.A. Siddiqui, J. - The appellant has filed this appeal u/s 260-A of the Income Tax Act, 1961 being aggrieved from the order of appellate Tribunal, Income Tax, Indore dated 18.1.2002 by which the appeal preferred by Department was dismissed.
2. In brief the facts of the case are that that the respondents M/s Dolphin Builder (P) Ltd (hereinafter referred as assessee) constructed 24 flats in two buildings known as "Amardeep Apartments" and "Amarjyoti Apartments" and entered into agreement with Shri BD Agarwal and M/s Goyal Builders, according to which B.D. Agarwal had sold his land/plot to the assessee for a consideration of Rs.1,30,000/-. The assessee had constructed 10 LIG and 2 HIG flats to be sold through Goyal Builders on an agreed commission @2% of the sale proceeds.
3. As per the agreement the LIG flats were to be sold on the cost of 1.25 lakhs each and the HIG flats were to be sold at a cost of Rs.2.5 lakhs each. According to the assessee it received Rs.35,50,000/- on sale of flats, which were duly accounted for in the books of the assessee. Likewise, the assessee had also entered into another agreement with Shri Prakash Agrawal and M/s Goyal Builders wherein by clause No.4 of the agreement, Prakash Agrawal had sold his land/plot to the assessee for a consideration of Rs.1,60,000/-. The assessee was to construct 6 LIG flats to be sold at Rs.1.25 lakhs, 3 Sr. LIG flats to be sold at Rs.1.5 lakhs and 3 MIG flats to be sold at Rs.2.00 lakhs each through M/s Goyal Builders on payment of commission @2% to them. The sale consideration of these flats amounted to 18 lakhs and the net sale proceeds after deducting commission of Rs.71,000/-, @2% payable to M/s Goyal Builders were credited to the profit and loss account.
4. A raid was conducted by Income Tax Department, Bhopal u/s 132 of the Income tax Act, 1961 (in short 'the Act') in the premises of Goyal Builders in which some papers were found and some figures were noted in these papers. The department had taken action under Section 132 of the Act in the case of Shri Ashok Goyal Proprietor of M/s Goyal Builders and a note book marked as Annexure CII containing sketch map of "Amareep Apartment" and "Amar Jyoti Apartments" was found, where in the column for cost of flats i.e. the figures 4.5., 4.25, 3.15, 2.5, 2.35, 2 and 1.95 in respect of "Amardeep" and "Amar Jyoti Apartments" were mentioned. The Assessing Officer (A.O.) was of the view that these figures definitely indicated the sale price of the flats of the above two apartments.
5. The A.O. had come to the conclusion that the total sale proceeds of 12 flats in Amardeep Apartments worked out to be Rs.28,65,000/- as against sale proceeds accounted for in the books at Rs.17,50,000/- and thus the assessee had understated the sale proceeds by Rs.11,15,000/-. Similarly, in "Amar Jyoti Apartments" the total sale proceeds of 12 flats as per the figures given in Annexure C-11, worked out to be Rs.28,50,000/- and against sale proceeds accounted for in the book at Rs.18.00 lacs were corroborated by other seized documents. The total sale proceeds as per the seized documents worked out to be Rs.58,50,000/- as against the sale proceed of Rs.35,50,000/- accounted for in the books of accounts. The A.O. had determined the income at Rs. 2,84,000/- under Section 44 AD of the Act and separately deducted the commission of Rs. 20,19,700/-. Accordingly, he had determined the total income at Rs.25,03,700/-.
6. The matter was challenged before CITA by the assessee and CITA vide Annexure A-2 order dated 26/8/98, by partly allowing the appeal, came to the conclusion that total receipt including those not accounted for in the books, not exceeded Rs.40.00 Lakhs, so provisions of Section 44AD were not applicable and the A.O. was wrong in applying the provisions of Section 44 AD, and was not justified in assessing the assessment. Against the order of Income Tax Commissioner, the department travelled in appeal before the ITAT, Indore and assessee also filed the appeal.
7. The findings of Income Tax Commissioner were challenged by the assessee through ITA No.956/India/98 assessment year 1994-95 and department had also filed appeal through ITA 131/India/99 assessment year 94-95. The appeal of assessee was allowed and appeal of Department was dismissed against which this appeal has been filed. This appeal was admitted on 30/10/2002 on the following substantial questions of law:-
| (i) | On the facts and in the circumstances of the case, the learned CIT(A) erred in granting relief of Rs.4,68,750 in respect of assessee's income in the case for the year under consideration. | |
| (ii) | On the facts and circumstances of the case, the learned CIT(A) erred in holding that the provisions of Section 44AD were not applicable on the facts of the case and in the allowing relief to the assessee by combining the amount of receipts shown and the amounts of undisclosed income. |
8. (a) Learned counsel for the appellant has submitted that as the transaction was above Rs.40.00 lacs the A.O. had rightly applied the provisions of Section 44AD of the Act and supported the order of assessment passed by the Assessing Officer. His further submission was that ITAT had wrongly came to the conclusion that Section 44AD was not attracted and wrongly upheld the finding of IT Commissioner's Order. That M/s Goyal builders had given the authority to sell the plot and commission was to be paid on the sale. As per Section 132 of the Act of 1961 in the case of Shri Ahsok Goyal, Proprietor of M/s Goyal Builders a note book marked as Annexure C-II containing sketch map of "Amardeep Apartment" and "Amar Jyoti Apartments" was found, wherein the column for cost of flats i.e. the figures 4.5., 4.25, 3.15, 2.5, 2.35, 2 and 1.95 in respect of "Amardeep" and "Amar Jyoti Apartments" were mentioned. The Assessing Officer (A.O.) was of the view that these figures definitely indicate the sale price of the flats of the two apartments. The A.O. At page 6 of his order had discussed that the cost of flats indicated in Annexure C-II, had tallied with the receipts of amounts from different purchasers mentioned in another seized document marked as Annexure C-15.
(b) The Assessing Officer, came to the conclusion that total sale proceed of 12 flats in Amardeep Apartments worked out to Rs.28,65,000/- as against the sale proceeds accounted for in the books at Rs.17,50,000/- thus the assessee had understated the sale proceeds by Rs.11,15,000/- Likewise in Amar Jyoti Apartments the total sale proceeds of 12 flats as per the figures given in C-11 were worked out to be Rs.28,50,000/- against sale proceeds accounted for in the books at Rs.18,000,00/- which were corroborated by other seized document Annexure C-15. The total sale proceed as per the seized document Annexure C-11 were worked out to be Rs.58,50,000/- against the sale proceeds of Rs.35,50,000/- accounted for in the books of accounts. The Assessing Officer had rightly determined the income at Rs.2,84,000/- under Section 44 AD and made additions of the unrecorded net receipts after deducting commission of Rs.22,19,700/-., while the CITA held that the estimation of net income @ 8% of the gross receipts was not proper.
9. Learned counsel for the respondent submitted that provisions of section 44 AD are not applicable. The books of Accounts were duly audited and assessee was maintaining the vouchers, bills cash memos and other relevant documents so the case of the assessee is not covered under clause-1 of Section 44. The ITAT have rightly determined the net profit rate at 8% on the receipt shown by the assessee. The total receipts shown by the assessee are of Rs. 34,79,000/- which were received from M/s Goyal Builders who was to sale all these flats. The receipts were shown after deducting the Commission of Rs.71,000/- paid to Goyal Builders at the rate of 2% on the total receipt of Rs.35,50,000/-. Therefore, the purpose of the computation of the total income the total receipts will be taken at Rs. 35,50,000/- applying the net profit rate at 8% of the total income of the assessee come to Rs.2,84,000/-.
10. Learned counsel for the appellant has submitted that undisputedly M/s Goyal Builders was engaged for the sale of the plots and flats were sold out through him and figures which were given in C-II are the correct figures of the Sales proceeds which were made by Goyal Builders.
11. Learned counsel for the appellant has vehemently opposed the prayer made by the respondent and has submitted that there is no evidence that excess amount if any collected by Goyal Builders was passed on to the assessee. There is nothing on record to show that any enquiry in this regard was conducted by the Department to prove the prevailing prices of the plots. It is also been submitted that if any material was found that there was excess payment then Goyal Builders could have been held liable and not the assessee and so the Tribunal has rightly deleted the additions by allowing the appeal.
12. We have perused the record, orders of the Assessing Officer, Income Tax Commissioner, the ITAT and we are in full agreement with the arguments advanced on behalf of respondent assessee that no prima facie evidence of passing any money from Goyal Builders to assessee was proved and for the papers seized from any other place i.e. Goyal Builders, assessee cannot be held liable, so, the tribunal has committed no error.
13. We have also perused the material in the matter and find that there was no evidence in the matter that the excess amount, if any, was collected by M/s Goyal Builders or even if it was collected then it was passed on to the respondent. There was no search, survey or seizure of the premises of the assessee. Apart from this, the department had not examined any purchaser or flat owner to verify the correctness of the aforesaid noting that some higher amount was paid by the said purchaser to M/s Goyal Builders or the fact that actual price was much higher to the price which was recorded in the account books. The Tribunal have also found that if any amount was collected in excess to the agreed price then M/s Goyal Builders could have been liable for that and not the assessee. We find the aforesaid reasoning of the Tribunal to be reasonable. Though there may be some doubt about the price of the flats but until and unless it could have been proved by some evidence, aforesaid doubt cannot take place of proof. Until and unless such noting is corroborated by some material evidence, the Assessing Officer erred in making addition in the income.
14. So far as the applicability of Clause 5 of Section 44 AD of the Income Tax Act is concerned, when the assessee had maintained accounts books, vouchers and other documents as required under Section 2 Sub Section 44 AA of the Income Tax Act and got them audited and furnished it alongwith audit report then such benefit should have been extended to the assessee. In the present case audited accounts books were maintained and there was no question of disbelieving them in absence of any cogent evidence.
15. The order passed by the tribunal is based on proper appreciation of facts and there is no error in the order.
16. In view of the aforesaid discussion, we find no merit and substance in the appeal and is accordingly dismissed.
ESHA IT: Where assessee failed to prove any close relation with donor and her creditworthiness to make gift to assessee, said gift could be added as unexplained cash credit in hands of assessee
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[2013] 35 taxmann.com 640 (Gujarat)
HIGH COURT OF GUJARAT
Shatishkumar Kantilal Shah (HUF)
v.
Income-tax Officer*
V.M. SAHAI AND N.V. ANJARIA, JJ.
TAX APPEAL NO. 856 OF 2011†
AUGUST 22, 2012
Section 68 of the Income-tax Act, 1961 - Cash credit [Gift] - Assessment year 2004-05 - Assessing Officer made addition under section 68 to assessee's income on ground that assessee had not submitted any proof in respect of amount received as gift - Tribunal upheld said addition on ground that though assessee had furnished gift deed, bank certificate, copy of passport as well as copy of return of income filed by donor but he failed to prove any close relation with donor and her creditworthiness to make gift - Whether Tribunal was justified in its decision - Held, yes [Para 3.1] [In favour of revenue]
Tushar P. Hemani for the Appellant.
JUDGMENT
N.V. Anjaria, J. - The present appeal by the assessee arises out of order dated 23.12.2010 of the Income Tax Appellate Tribunal, Ahmedabad Bench 'A', passed in ITA No. 1710 of 2008 for the Assessment Years 2004-2005
1.1 Following questions are raised by the appellant proposing them as substantial questions of law.
| "(i) | Whether, in the facts and circumstances of the case, the Income Tax Appellate Tribunal is right in law in holding that gift of Rs. 9, 51,257/- received by the appellant is unexplained cash credit within the provisions of S. 68 of the Act? | |
| (ii) | Whether, in the facts and under the circumstances of the case, the Income Tax Appellate Tribunal was right in not appreciating that the appellant has fully discharged the burden of proving the gift under the provisions of S. 68 of the Act? | |
| (iii) | Whether, in the facts and circumstances of the case, the order of the Income Tax Appellate Tribunal was perverse in as much as it has not properly appreciated the evidences already placed on record; has passed the order in breach of principles of natural justice without giving proper opportunity to the appellant and has not given any reasons or material findings to reverse the findings of CIT(A)? | |
| (iv) | Whether in the facts and circumstances of the case the Income Tax Appellate Tribunal was right in law in concluding without discussing the findings reached by the other authorities and finding the same to be erroneous as "it was a duty of the Tribunal to ascertain the reasons which were given by the Commissioner (Appeals) in whose order, the order of the Assessing Officer had merged" before reversing the same [257 ITR 297]?" |
2. We heard Mr. Tushar P. Hemani, learned advocate for the appellant.
3. Upon the appellant assessee filing his return of income for the assessment year 2004-2005, the case was taken up for scrutiny by issuing notice under section 143(2) of the Income Tax Act, 1961 (hereafter referred to as 'the Act' for sake of brevity). In course of the proceedings, the assessing officer noticed that the assessee had not submitted any proof in respect of amount shown as a gift of Rs. 9,51,257/- from one Smt. Bhanumati J. Doshi of USA. Therefore, the officer called upon the assessee vide letter dated 13.11.2006 to produce the bank pass book, salary certificate, return of income etc. in support of identity and creditworthiness of the donor. The assessee having failed to produce any such document, the amount of gift was treated as unexplained cash credit under section 68 of the Act and was added to the income for the purpose of tax.
3.1 The assessee preferred appeal before the Commissioner of Income Tax (Appeals). The CIT(A), however, deleted the addition and accordingly allowed the appeal of the assessee holding that the assessee had produced the documents proving the genuineness of the gift. Against the order of CIT(A), the department went in appeal before the Income Tax Appellate Tribunal. The Tribunal allowed the appeal of the department by observing as under :
"....it is clear that the assessee failed to prove any close relation with donor and her creditworthiness to make the gift. No sufficient evidence or material is filed on record to prove the genuineness of the gift in the matter. Merely showing the gift was made through banking channel is not sufficient to prove the genuineness of the gift in the matter. The Hon'ble Supreme Court in the case of Durga Prasad More 82 ITR 540 and in the case of Sumati Dayal 214 ITR 801 held that "Courts and the Tribunals have to judge the evidence before them by applying the test of human probabilities".... It is clearly established that the assessee has failed to prove creditworthiness of the donor and genuineness of the gifts in the matter....."
4. From the facts it was disclosed that the assessee had furnished the gift deed, bank certificate, copy of passport as well as copy of return of income filed by the donor. These documents would sufficiently establish the identity and creditworthiness of the said named party. The Assessing Officer simply brushed them aside.
4.1 The confirming findings recorded by the Tribunal were based upon the facts and material relevant to the issue before it. They were findings of facts and in the realm of appreciation. When the findings are of factual in nature and properly arrived at, and when they are in no way perverse, as they are in the impugned order, no interference is called for in the present appeal. No substantial question of law arises for consideration.
5. Accordingly, the appeal is dismissed.
The concerned Assessing Officer should see that interest u/s 220(2) in recovered from the assessee as his addition was deleted by the CIT(A). In all probablity , he must not have paid the demand. The penalty order if issued should also contain the findings given by the ITAT and its confirmation by Hon'ble High court. Bright chances of penalty being confirmed.
-- ST/ECJ: Department may require production of original invoice in order to establish right to deduct input tax; and if a taxable person no longer holds original copy, department may admit other evidence to establish that transaction in respect of which deduction is claimed actually took place
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[2013] 36 taxmann.com 98 (ECJ)
EUROPEAN COURT OF JUSTICE
John Reisdorf
v.
Finanzamt Köln-West*
J.C. MOITINHO DE ALMEIDA (RAPPORTEUR), PRESIDENT OF THE CHAMBER
C. GULMANN, D.A.O. EDWARD, J.-P. PUISSOCHET, AND P. JANN, JJ.
C. GULMANN, D.A.O. EDWARD, J.-P. PUISSOCHET, AND P. JANN, JJ.
CASE C-85/95
DECEMBER 5, 1996
Rule 9 of the Cenvat Credit Rules, 2004 - CENVAT Credit - Documents on which credit may be taken - Rule 9 of CENVAT Credit Rules, 2004 empowers Department to regard as an invoice not only original but also any other document serving as an invoice that fulfils purpose of an invoice - It also empowers Department to require production of original invoice in order to establish right to deduct input tax, as well as power, where a taxable person no longer holds original, to admit other evidence that transaction in respect of which deduction is claimed actually took place [Para 31] [In favour of revenue]
FACTS
Facts
| ■ | The assessee Mr Reisdorf constructed, in a building owned by him, commercial premises, which he let from November 1988 to a supermarket operator. | |
| ■ | The assessee claimed input VAT credit of construction cost. | |
| ■ | The assessee presented copies of various invoices, in particular intermediate invoices from the head contractor, but not the originals. | |
| ■ | As a result, the department denied the amount of input tax on ground that assessee had not produced the original invoices, which still existed and which he himself indicated he could obtain. |
Statutory Provisions
| ■ | Sixth Council Directive 77/388/EEC of 17 May, 1977, Article 17 : |
| '(1) | The right to deduct shall arise at the time when the deductible tax becomes chargeable. | |
| (2) | Insofar as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay: (a) value added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person.' |
| ■ | Sixth Council Directive 77/388/EEC of 17 May, 1977, Article 18 : | |
| | '(1) To exercise his right to deduct, the taxable person must: (a) in respect of deductions under Article 17(2)(a), hold an invoice, drawn up in accordance with Article 22(3); ... | |
| | (3) Member States shall determine the conditions and procedures whereby a taxable person may be authorized to make a deduction which he has not made in accordance with the provisions of paragraphs 1 and 2.' |
| ■ | Sixth Council Directive 77/388/EEC of 17 May, 1977, Article 22 : | |
| | '(2) Every taxable person shall keep accounts in sufficient detail to permit application of the value added tax and inspection by the tax authority. | |
| | (3) (a) Every taxable person shall issue an invoice, or other document serving as invoice in respect of all goods and services supplied by him to another taxable person, and shall keep a copy thereof. | |
| Every taxable person shall likewise issue an invoice in respect of payments on account made to him by another taxable person before the supply of goods or services is effected or completed. | ||
| (b) The invoice shall state clearly the price exclusive of tax and the corresponding tax at each rate as well as any exemptions. | ||
| (c) The Member States shall determine the criteria for considering whether a document serves as an invoice. ... | ||
| (8) Without prejudice to the provisions to be adopted pursuant to Article 17(4), Member States may impose other obligations which they deem necessary for the correct levying and collection of the tax and for the prevention of fraud.' | ||
| ■ | German VAT law, Paragraph 14(4) : An 'invoice' means any document by which a trader or a third party on his behalf charges the recipient of goods or services for a supply or other service, irrespective of how that document is described in business dealings. | |
| ■ | German VAT law, Paragraph 15(1)(1) : A trader may, subject to certain other requirements which are not relevant to this case, deduct as input tax the tax which is shown separately on invoices, within the meaning of Paragraph 14 of the UStG, in respect of supplies and other services provided for his undertaking by other traders. |
Issue Involved
| ■ | Was the assessee entitled to input tax credit based on carbon copies, duplicates or photocopies of invoice ? |
HELD
Law may regard duplicate/carbon copies, etc. as 'invoice' :
| ■ | It is necessary to distinguish the provisions of the directive relating to exercise of the right to deduct input tax from those concerning proof of that right after a taxable person has exercised it. The distinction between exercise of the right and proof of it on subsequent inspections is inherent in the operation of the VAT system. [Para 19] | |
| ■ | As regards, first, exercising the right to deduct input tax, Article 18(1)(a) of the Sixth Directive requires the taxable person to `hold an invoice, drawn up in accordance with Article 22(3)'. The term `invoice' must therefore be interpreted by reference to Article 18(1)(a) in conjunction with Article 22(3). [Para 20] | |
| ■ | Article 22(3) contains mandatory rules for the drawing up of invoices and subparagraph (a) imposes an obligation on every taxable person, in respect of all goods and services supplied by him to another taxable person, to `issue an invoice or other document serving as invoice'. In addition, Article 22(3)(c) allows the Member States to lay down the criteria determining whether a document `serves as an invoice'. [Para 21] | |
| ■ | It is apparent from Article 18(1)(a), read in conjunction with Article 22(3), that exercise of the right to deduct input tax is normally dependent on possession of the original of the invoice or of the document which, under the criteria determined by the Member State in question, may be considered to serve as an invoice. [Para 22] | |
| ■ | The power conferred on the Member States by Article 22(3)(c) to lay down the criteria determining whether documents other than the original invoice may serve as an invoice includes the power to decide that a document cannot serve as an invoice if an original has been drawn up and is in the possession of the recipient. [Para 23] | |
| ■ | That power of the Member States is consistent with one of the aims of the Sixth Directive, that of ensuring that VAT is levied and collected, under the supervision of the tax authorities. The Member States may require invoices to contain additional information to ensure the correct levying of VAT and permit supervision by the authorities, insofar as such particulars do not, by reason of their number or technical nature, render the exercise of the right to deduct input tax practically impossible or excessively difficult. [Para 24] | |
| ■ | Article 18(1)(a) and Article 22(3) of the Sixth Directive permit the Member States to regard as an invoice not only the original but also any other document serving as an invoice that fulfils the criteria determined by the Member States themselves. [Para 25] |
Proof for taking credit - Law may require production of original invoice :
| ■ | As regards, secondly, the provisions of the Sixth Directive relating to proof of the right to deduct input tax after it has been exercised by a taxable person, it should be noted that Article 18, in accordance with its heading, deals only with exercise of the right of deduction and does not govern proof of that right after it has been exercised by a taxable person. [Para 26] | |
| ■ | The obligations owed by taxable persons after they have exercised the right to deduct input tax derive from other provisions of the Sixth Directive. Article 22(2) thus requires every taxable person to keep accounts in sufficient detail to permit application of VAT and inspection by the tax authorities. Article 22(8) adds that Member States may impose other obligations which they deem necessary for the correct levying and collection of the tax and for the prevention of fraud. [Para 27] | |
| ■ | Admittedly, Article 22 contains no provision specifically governing proof by the taxable person of the right to deduct input tax. [Para 28] | |
| ■ | However, it follows from the provisions mentioned above, conferring on the Member States the power to require additional information as regards invoices and to impose any other obligation necessary for the correct levying and collection of the tax and for the prevention of fraud, that the Sixth Directive gives Member States the power to determine the rules relating to supervision of the exercise of the right to deduct input tax, in particular the manner in which taxable persons are to establish that right. That power includes the power to require production of the original invoice when tax inspections are carried out and also, where a taxable person no longer holds it, to allow him to produce other cogent evidence that the transaction in respect of which the deduction is claimed actually took place. [Para 29] | |
| ■ | Accordingly, in the absence of specific rules governing proof of the right to deduct input tax, Member States have the power to require production of the original invoice in order to establish that right, as well as the power, where a taxable person no longer holds the original, to admit other evidence that the transaction in respect of which the deduction is claimed actually took place. [Para 30] |
Conclusion :
| ■ | Therefore, Article 18(1)(a) and Article 22(3) of the Sixth Directive permit the Member States to regard as an invoice not only the original but also any other document serving as an invoice that fulfils the criteria determined by the Member States themselves, and confer on them the power to require production of the original invoice in order to establish the right to deduct input tax, as well as the power, where a taxable person no longer holds the original, to admit other evidence that the transaction in respect of which the deduction is claimed actually took place. [Para 31] |
EDITOR'S NOTE
On merits, the Indian law doesn't allow credit of goods/services used in construction work except where the assessee is engaged in providing construction services.
Moreover, in case of loss of original copy of invoice, credit may be taken based on duplicate copy of invoice issued under the Central Excise Rules, 2002. Under service tax law, there is no case provision for issuance of duplicate copy; probably, a copy of invoice certified by Range Superintendent would work, as held in majority of the Indian case laws.
CASES REFERRED TO
Direccion General de Defensa de la Competencia v. Asociación Española de Banca Privada [Case C-67/91] (para 15), BP Soupergaz Anonimos Etairia Geniki Emporiki-Viomichaniki Kai Antiprossopeion v. Greek State [Case C-62/93] (para 15) and Léa Jorion, née Jeunehomme v. Belgian State [Cases 123/87 & 330/87] (para 24).
Hans-Peter Taplick, Rainer Olschewski and Rechtsanwalt for the Appellant. Ernst Roeder and Bernd Kloke for the Respondent.
JUDGMENT
1. By order of 12 October 1994, received at the Court on 20 March 1995, the Bundesfinanzhof (Federal Finance Court) referred to the Court for a preliminary ruling under Article 177 of the EC Treaty three questions on the interpretation of Article 18(1)(a) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes - Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1, 'the Sixth Directive').
2. Those questions were raised in proceedings between Mr Reisdorf and the Finanzamt (Tax Office) Koeln-West ('the Finanzamt') concerning whether Mr Reisdorf can be absolved from the requirement to produce the original invoices in respect of value added tax ('VAT') which he seeks to deduct.
3. Article 17(1) and (2)(a) of the Sixth Directive, which governs the right to deduct input tax, states:
'(1) The right to deduct shall arise at the time when the deductible tax becomes chargeable.
(2) Insofar as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:
(a) value added tax due or paid in respect of goods or services supplied or to be supplied to him by another taxable person.'
4. Article 18(1)(a) and (3) adds:
'(1) To exercise his right to deduct, the taxable person must:
(a) in respect of deductions under Article 17(2)(a), hold an invoice, drawn up in accordance with Article 22(3);
...
(3) Member States shall determine the conditions and procedures whereby a taxable person may be authorized to make a deduction which he has not made in accordance with the provisions of paragraphs 1 and 2.'
5. Finally, Article 22(2), (3) and (8) states:
'(2) Every taxable person shall keep accounts in sufficient detail to permit application of the value added tax and inspection by the tax authority.
(3) (a) Every taxable person shall issue an invoice, or other document serving as invoice in respect of all goods and services supplied by him to another taxable person, and shall keep a copy thereof.
Every taxable person shall likewise issue an invoice in respect of payments on account made to him by another taxable person before the supply of goods or services is effected or completed.
(b) The invoice shall state clearly the price exclusive of tax and the corresponding tax at each rate as well as any exemptions.
(c) The Member States shall determine the criteria for considering whether a document serves as an invoice.
...
(8) Without prejudice to the provisions to be adopted pursuant to Article 17(4), Member States may impose other obligations which they deem necessary for the correct levying and collection of the tax and for the prevention of fraud.'
6. According to the file on the main proceedings, in 1988 Mr Reisdorf constructed, in a building owned by him, commercial premises, which he let from November 1988 to a supermarket operator. Having waived exemption from VAT under Paragraph 4(12)(a) of the Umsatzsteuergesetz (Law on Turnover Tax, 'UStG'), he sought deduction of sums corresponding to the input tax on the construction of the premises.
7. During a special VAT inspection carried out by the Finanzamt, Mr Reisdorf was asked to produce the original invoices relating to the amounts claimed as deductions.
8. Under Paragraph 15(1)(1) of the UStG, a trader may, subject to certain other requirements which are not relevant to this case, deduct as input tax the tax which is shown separately on invoices, within the meaning of Paragraph 14 of the UStG, in respect of supplies and other services provided for his undertaking by other traders. Paragraph 14(4) provides that an 'invoice' means any document by which a trader or a third party on his behalf charges the recipient of goods or services for a supply or other service, irrespective of how that document is described in business dealings.
9. Mr Reisdorf presented copies of various invoices, in particular intermediate invoices from the head contractor, but not the originals. As a result, the Finanzamt reduced the amount of input tax.
10. After an unsuccessful objection against that reduction, Mr Reisdorf brought an action before the Finanzgericht (Finance Court), which was dismissed. The court held that he had failed to prove, despite having been called upon to do so, that the conditions establishing the right to deduct input tax due or paid laid down by Paragraph 15(1)(1) of the UStG were satisfied, since he had not produced the original invoices, which still existed and which he himself indicated he could obtain.
11. Basing its decision on Paragraphs 14 and 15 of the UStG, the Finanzgericht took the view that only the original invoice drawn up and given or sent to the recipient of goods or services for the purposes of settlement with the supplier could be regarded as capable of proving the right to deduct input tax. The original invoice could be distinguished by its uniqueness, inasmuch as it was identifiable and could not be confused with multiple, duplicate or copy invoices. The original invoice had to be produced unless it had been lost or could not be obtained within a certain period, in which case the necessary evidence could be adduced in some other way, using all the means of evidence permitted under national law, including copies of invoices and analogous documents. The plaintiff in the case before it had not pleaded that the original invoices had been lost. He therefore had to bear the adverse consequences in law, since it was for him to prove that he had the right to deduct input tax.
12. Mr Reisdorf applied to the Bundesfinanzhof for review of that judgment on the ground that Paragraphs 14 and 15 of the UStG had been infringed.
13. In the order for reference, the Bundesfinanzhof found that national law did not determine how the right to deduct input tax was to be proved and that Article 18(1)(a) of the Sixth Directive provided that, in order to be able to deduct the tax which he was liable to pay, a taxable person had to 'hold an invoice, drawn up in accordance with Article 22(3)'. Being uncertain as to what should be regarded as an 'invoice' within the meaning of Article 18(1)(a), the Bundesfinanzhof ruled that the proceedings should be stayed and the following questions referred to the Court of Justice for a preliminary ruling:
| '(1) | Is an "invoice" within the meaning of Article 18(1)(a) of the Sixth Directive 77/388/EEC only the original, that is to say, the original copy of the statement of account, or are carbon copies, duplicates or photocopies also to be regarded as invoices in that sense? | |
| (2) | Does the term "hold" within the meaning of Article 18(1)(a) of the Sixth Directive 77/388/EEC signify that the taxable person must at all times be in a position to present the invoice to the tax authorities? | |
| (3) | Is the exercise of the right to deduct input tax precluded by virtue of Article 18(1)(a) of the Sixth Directive 77/388/EEC where the taxable person no longer "holds" an invoice?' |
Admissibility
14. Mr Reisdorf considers that this case turns on the definition of an 'invoice' conferring entitlement to a deduction. Article 22(3)(c) of the Sixth Directive allows the Member States to determine the criteria for regarding a document as an invoice. Therefore, if the Bundesfinanzhof took the view that the Federal Republic of Germany had failed to comply, or comply in full, with its obligation to legislate under Article 22(3)(c), it should remedy the omission itself without referring the matter to the Court.
15. That objection must be dismissed. It is clear from the actual wording of the order for reference that the national court is seeking an interpretation by the Court of Article 18(1)(a) of the Sixth Directive. Provided that the questions submitted concern the interpretation of a provision of Community law, the Court gives its ruling without, in principle, having to look into the circumstances in which a national court was prompted to submit the questions and envisages applying the provision of Community law which it has asked the Court to interpret (see to that effect Case C-67/91 Dirección General de Defensa de la Competencia v Asociación Española de Banca Privada, paragraphs 25 and 26, and Case C-62/93 BP Soupergaz Anonimos Etairia Geniki Emporiki - Viomichaniki Kai Antiprossopeion v. Greek State, paragraph 10).
16. The matter would be different only if it were apparent either that the procedure provided for in Article 177 had been diverted from its true purpose and was being used in fact to lead the Court to give a ruling by means of a contrived dispute, or that the provision of Community law referred to the Court for interpretation was manifestly incapable of applying (see to that effect Case C-67/91, paragraph 26, and Case C-62/93, paragraph 10, both cited above). That is not so in this case.
17. An answer must therefore be given to the questions referred.
Substance
18. The three questions, which should be considered together, seek essentially to ascertain whether Article 18(1)(a) of the Sixth Directive permits the Member States to regard as an 'invoice' not only the original, that is to say the original copy of the statement of account, but also other documents such as carbon copies, duplicates or photocopies, and whether a taxable person who no longer holds the original invoice may be allowed to prove the right to deduct input tax by other means.
19. In order to answer those questions, it is necessary to distinguish the provisions of the directive relating to exercise of the right to deduct input tax from those concerning proof of that right after a taxable person has exercised it. The distinction between exercise of the right and proof of it on subsequent inspections is inherent in the operation of the VAT system.
20. As regards, first, exercising the right to deduct input tax, Article 18(1)(a) of the Sixth Directive requires the taxable person to 'hold an invoice, drawn up in accordance with Article 22(3)'. The term 'invoice' must therefore be interpreted by reference to Article 18(1)(a) in conjunction with Article 22(3).
21. Article 22(3) contains mandatory rules for the drawing up of invoices and subparagraph (a) imposes an obligation on every taxable person, in respect of all goods and services supplied by him to another taxable person, to 'issue an invoice or other document serving as invoice'. In addition, Article 22(3)(c) allows the Member States to lay down the criteria determining whether a document 'serves as an invoice'.
22. It is apparent from Article 18(1)(a), read in conjunction with Article 22(3), that exercise of the right to deduct input tax is normally dependent on possession of the original of the invoice or of the document which, under the criteria determined by the Member State in question, may be considered to serve as an invoice. As pointed out by the Advocate General in paragraph 17 of his Opinion, the different language versions of those provisions which were authentic at the time of adoption of the Sixth Directive confirm that interpretation, even though the wording of Article 22(3)(c) in the German text does not indicate as clearly that the task of the Member States is to lay down the criteria determining whether another document may serve as an invoice.
23. The power conferred on the Member States by Article 22(3)(c) to lay down the criteria determining whether documents other than the original invoice may serve as an invoice includes the power to decide that a document cannot serve as an invoice if an original has been drawn up and is in the possession of the recipient.
24. That power of the Member States is consistent with one of the aims of the Sixth Directive, that of ensuring that VAT is levied and collected, under the supervision of the tax authorities (see the seventeenth recital in the preamble and Article 22(2) and (8)). In that regard, the Court held in Joined Cases 123/87 and 330/87 Léa Jorion, née Jeunehomme v. Belgian State, at paragraphs 16 and 17, that the Member States may require invoices to contain additional information to ensure the correct levying of VAT and permit supervision by the authorities, in so far as such particulars do not, by reason of their number or technical nature, render the exercise of the right to deduct input tax practically impossible or excessively difficult.
25. It must therefore be concluded that Article 18(1)(a) and Article 22(3) of the Sixth Directive permit the Member States to regard as an invoice not only the original but also any other document serving as an invoice that fulfils the criteria determined by the Member States themselves.
26. As regards, secondly, the provisions of the Sixth Directive relating to proof of the right to deduct input tax after it has been exercised by a taxable person, it should be noted that, as the German Government has rightly pointed out, Article 18, in accordance with its heading, deals only with exercise of the right of deduction and does not govern proof of that right after it has been exercised by a taxable person.
27. The obligations owed by taxable persons after they have exercised the right to deduct input tax derive from other provisions of the Sixth Directive. Article 22(2) thus requires every taxable person to keep accounts in sufficient detail to permit application of VAT and inspection by the tax authorities. Article 22(8) adds that Member States may impose other obligations which they deem necessary for the correct levying and collection of the tax and for the prevention of fraud.
28. Admittedly, Article 22 contains no provision specifically governing proof by the taxable person of the right to deduct input tax.
29. However, it follows from the provisions mentioned above, conferring on the Member States the power to require additional information as regards invoices and to impose any other obligation necessary for the correct levying and collection of the tax and for the prevention of fraud, that the Sixth Directive gives Member States the power to determine the rules relating to supervision of the exercise of the right to deduct input tax, in particular the manner in which taxable persons are to establish that right. As indicated by the Advocate General in paragraphs 26 and 27 of his Opinion, that power includes the power to require production of the original invoice when tax inspections are carried out and also, where a taxable person no longer holds it, to allow him to produce other cogent evidence that the transaction in respect of which the deduction is claimed actually took place.
30. Accordingly, in the absence of specific rules governing proof of the right to deduct input tax, Member States have the power to require production of the original invoice in order to establish that right, as well as the power, where a taxable person no longer holds the original, to admit other evidence that the transaction in respect of which the deduction is claimed actually took place.
31. The answer to the national court's questions must therefore be that Article 18(1)(a) and Article 22(3) of the Sixth Directive permit the Member States to regard as an invoice not only the original but also any other document serving as an invoice that fulfils the criteria determined by the Member States themselves, and confer on them the power to require production of the original invoice in order to establish the right to deduct input tax, as well as the power, where a taxable person no longer holds the original, to admit other evidence that the transaction in respect of which the deduction is claimed actually took place.
Costs
32. The costs incurred by the German, Greek, French and United Kingdom Governments and the Commission of the European Communities, which have submitted observations to the Court, are not recoverable. Since these proceedings are, for the parties to the main proceedings, a step in the action pending before the national court, the decision on costs is a matter for that court.
OPERATIVE PART
On those grounds, THE COURT (Fifth Chamber), in answer to the questions referred to it by the Bundesfinanzhof, by order of 12 October 1994, hereby rules:
Article 18(1)(a) and Article 22(3) of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes - Common system of value added tax: uniform basis of assessment permit the Member States to regard as an invoice not only the original but also any other document serving as an invoice that fulfils the criteria determined by the Member States themselves, and confer on them the power to require production of the original invoice in order to establish the right to deduct input tax, as well as the power, where a taxable person no longer holds the original, to admit other evidence that the transaction in respect of which the deduction is claimed actually took place.
VINEETRegards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
__._,_.___
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