No Penalty on claim of Provision for Doubtful Debts
Decision of Income tax Appellate Tribunal Indore Bench in case of DCIT v. NEPA Limited (ITA 683/Ind/2013)
In this case the Assessee was a Public Sector undertaking and had omitted to add back Provision for Bad and Doubtful Debts. During the Assessment the mistake was noticed and the claim was conceded and disallowance of provision was made. However the learned AO levied penalty u/s 271(1)(c) of the Act on the ground that if the case would not have selected for scrutiny the Assessee would have succeeded in claiming such Provision. Against such order the Assessee went into appeal and the learned CIT(A) deleted the penalty holding that
- It is a case of clear cut mistake and the Assessing Officer could have pointed out and dealt with this mistake u/s 143(1) of the Act while processing the return.
- there is no motive to claim excess deduction, it cannot be considered as concealment or furnishing of inaccurate particulars of income, especially when there were carried forward business losses
Against such order the Department preferred appeal before ITAT where the ITAT dismissed the appeal on considering following contentions:
Assessee's contentions
- On merits the Provision for Doubtful debts is allowable in case of Companies based on decision of Supreme Court in case of Vijaya Bank vs. CIT, 323 ITR 166 ( S.C.) wherein it was categorically held that in the case of companies the provisions for doubtful debts can be allowed as a deduction u/s 36(1)(vii) of the Act.
- In view of the carried forward losses, there was not motive of excess claim.
- No penalty can be levied on when the mistake/erroneous claim
- No penalty can be levied, once the mistake is noticed and the assessee has agreed to withdraw the claim during Assessment itself.
- Explanation 1 to Section 271(1)(c) cannot be invoked when the charge is 'furnishing inaccurate particulars of income'
Department's contentions
It is not a case where the assessee has voluntarily withdrawn the claim. The claim has been withdrawn once it has been brought to the knowledge of the assessee by the Assessing Officer.
Tribunal Held dismissing the Appeal
"Explanation (1) is a deeming provision and it is applicable when an amount is added or disallowed in computation of total income is deemed to represent the income in respect of which particulars have been concealed. Explanation (1) is not applicable in this case of furnishing inaccurate particulars of income. In this case, we noted that the Assessing Officer has initiated penalty proceedings u/s 271(1)(c) without pointing out whether the assessee has concealed the particulars of income. The penalty ultimately was levied on the assessee for furnishing inaccurate particulars by observing that the case of the assessee is covered by the Explanation to Section 271(1)(c). We may observe that in the case of furnishing inaccurate particulars of income, the onus is on the Revenue to, prove that the assessee had furnished the inaccurate particulars, while in the case of concealment of particulars of income, where the Explanation (1) is applicable, the onus is on the assessee to prove that he has not concealed the particulars of income. As is apparent from the Explanation, this explanation clearly states where in respect of any facts material to the computation of total income of any person such person fails to offer an explanation or offers explanation which is found by the Assessing Officer to be false or such person offers an explanation, which he is not able to substantiate or fails to prove that such explanation is bona fide and with all the facts relating to the same and material to the computation of his total income have been disclosed by him. This is not denied that the particulars of provisions of doubtful debts have duly been shown by the assessee and debited in the audited profit and loss account. It is also not denied that the assessee has submitted the explanation in reply to show cause notice issued by the Assessing Officer. Even though the Assessing Officer, in our opinion, failed to discharge his onus as he was not sure at the initiation of penalty u/s 271(1)(c) for which specific charge penalty has been initiated by the Assessing Officer. Even while levying the penalty also, the Assessing Officer simply relied on the explanation to Section 271(1)(c) even though he levied the penalty for furnishing the inaccurate particulars of income. This is apparent from the provisions of Section 271(1)(c) that explanation of Section 271(1)(c) is not applicable in case inaccurate particulars are furnished. Therefore, in our opinion, the basis of levy of penalty itself is not correct. In this regard, we rely on the decision of Hon'ble Gujarat High Court in the case of CIT vs. New Sorathia Engineering Co. vs. CIT, (2006) 282 ITR 642". (Para8)
Editor's Note : (Contrast to Delhi High Court CIT v. Zoom Communication (P.) Ltd. [2010] 327 ITR 510/191 Taxman 179)
Allowance Interest Cost from Capital Gains
Points to be noted
In Balan alias Shanmugam Balkrishnan Chettiar v. Dy. CIT (2009) 120 TTJ 397 (Pune) the Tribunal referred to the decision of the Karnataka High Court CIT v. Maithreyi Pai, (1984) 43 CTR 88 (Kar.)/ (1985) 152 ITR 247 (Kar.) in which the ITO has disallowed the claim on the ground that the interest had already been allowed as a deduction U/s. 57 while computing income from dividend, so the revenue has contended that such a deduction, if allowed, would amount to double deduction. Since there was no finding by the Tribunal whether the deduction would amount to double deduction, the matter was remanded back as the question referred could not be answered by the Hon'ble Court.
The Pune Tribunal then based on the above decision of the Karnataka High Court, held in Balan alias Shanmugam Balakrishnan Chettiar case as under:
"If the revenue has not contended that the interest had ever been claimed as a deduction and also the revenue has not contended that the interest was wrongly capitalized, then in the light of the said accepted position, the interest ought to be held as part of the cost of the asset in question. Thus, our view gets fortified by the legal proposition laid down by the Hon'ble Court. In the light of this discussion, we arrive at the conclusion that the appellant is entitled to take into account the interest liability towards cost of the capital asset for the purpose of computation of the capital gain as prescribed U/s. 48(ii) of l.T. Act."
Reference may also be made to Addl. CIT v. K. S. Gupta, (1979) 119 ITR 372 (AP High Court) and CIT v. Mithilesh Kumari, (1973) 92 ITR 9 (Del.) holding that Interest payment can be capitalized and claimed as deduction fro Capital gains but whether there was "Double Deduction" in these cases is not clear.
There is ofcourse the decision of the Chennai Bench of ITAT in Assistant Commissioner of Income-tax, Business Circle – IV vs. C. Ramabrahmam [2012] 27 taxmann.com 104 (Chennai - Trib.) wherein the Tribunal held that even if the assessee had already claimed the interest once under a particular head of income he can nevertheless claim the same again as a cost and deduct it from Income from capital gains. The ITAT held as follows:
"After perusing the above said provisions, we are of the opinion that deduction under section 24(b) and computation of capital gains under section 48 of the "Act" are altogether covered by different heads of income i.e., income from 'house property' and 'capital gains'. Further, a perusal of both the provisions makes it unambiguous that none of them excludes operative of the other. In other words, a deduction under section 24(b) is claimed when concerned assessee declares income from 'house property', whereas, the cost of the same asset is taken into consideration when it is sold and capital gains are computed under section 48. We do not have even a slightest doubt that the interest in question is indeed an expenditure in acquiring the asset. Since both provisions are altogether different, the assessee in the instant case is certainly entitled to include the interest amount at the time of computing capital gains under section 48 of the "Act".
Therefore, the CIT(A) has rightly accepted the assessee's contention and deleted the addition made by the Assessing officer. Hence, qua this ground, we uphold the order of the CIT(A)".
We have therefore a Karnataka High Court judgement which mandates that before allowing Interest Cost as a deduction from capital Gains we have to see if the same was already claimed as a deduction earlier and a Tribunal Order which permits deduction of Interest as Cost even if it was already claimed earlier thereby amounting to "Double Deduction". The High Court decision appears to be the correct interpretation of the law.
The Pune Tribunal then based on the above decision of the Karnataka High Court, held in Balan alias Shanmugam Balakrishnan Chettiar case as under:
"If the revenue has not contended that the interest had ever been claimed as a deduction and also the revenue has not contended that the interest was wrongly capitalized, then in the light of the said accepted position, the interest ought to be held as part of the cost of the asset in question. Thus, our view gets fortified by the legal proposition laid down by the Hon'ble Court. In the light of this discussion, we arrive at the conclusion that the appellant is entitled to take into account the interest liability towards cost of the capital asset for the purpose of computation of the capital gain as prescribed U/s. 48(ii) of l.T. Act."
Reference may also be made to Addl. CIT v. K. S. Gupta, (1979) 119 ITR 372 (AP High Court) and CIT v. Mithilesh Kumari, (1973) 92 ITR 9 (Del.) holding that Interest payment can be capitalized and claimed as deduction fro Capital gains but whether there was "Double Deduction" in these cases is not clear.
There is ofcourse the decision of the Chennai Bench of ITAT in Assistant Commissioner of Income-tax, Business Circle – IV vs. C. Ramabrahmam [2012] 27 taxmann.com 104 (Chennai - Trib.) wherein the Tribunal held that even if the assessee had already claimed the interest once under a particular head of income he can nevertheless claim the same again as a cost and deduct it from Income from capital gains. The ITAT held as follows:
"After perusing the above said provisions, we are of the opinion that deduction under section 24(b) and computation of capital gains under section 48 of the "Act" are altogether covered by different heads of income i.e., income from 'house property' and 'capital gains'. Further, a perusal of both the provisions makes it unambiguous that none of them excludes operative of the other. In other words, a deduction under section 24(b) is claimed when concerned assessee declares income from 'house property', whereas, the cost of the same asset is taken into consideration when it is sold and capital gains are computed under section 48. We do not have even a slightest doubt that the interest in question is indeed an expenditure in acquiring the asset. Since both provisions are altogether different, the assessee in the instant case is certainly entitled to include the interest amount at the time of computing capital gains under section 48 of the "Act".
Therefore, the CIT(A) has rightly accepted the assessee's contention and deleted the addition made by the Assessing officer. Hence, qua this ground, we uphold the order of the CIT(A)".
We have therefore a Karnataka High Court judgement which mandates that before allowing Interest Cost as a deduction from capital Gains we have to see if the same was already claimed as a deduction earlier and a Tribunal Order which permits deduction of Interest as Cost even if it was already claimed earlier thereby amounting to "Double Deduction". The High Court decision appears to be the correct interpretation of the law.
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