Madras H.C :The Tribunal had probably exercised its discretion and was right in deleting the penalty imposed under section 271(1)(c)

High Court Of Madras

CIT vs. Cholamandalam Investment & Finance Co. Ltd.

Assessment Year : 1996-97

Section : 271(1)(c), 43(1)

Mrs. Chitra Venkataraman And T.S. Sivagnanam, JJ.

Tax Case (Appeal) No. 246 Of 2007

March 5, 2014

JUDGMENT

T. S. Sivagnanam, J. – The appeal by the Revenue is directed against the order passed by the Income-tax Appellate Tribunal (“the Tribunal”) in I.T.A. No. 1537/Mds/2002 for the assessment year 1996-97 and the appeal has been admitted on the following substantial questions of law :

“(i) Whether, in the facts and in the circumstances of the case, the Tribunal had probably exercised its discretion and was right in deleting the penalty imposed under section 271(1)(c) ?

(ii) Whether, in the facts and in the circumstances of the case, the Tribunal was right in deleting the penalty on the ground that Explanation 4 to section 43(1) is not applicable to the assessee’s case, when the Assessing Officer had invoked Explanation 3 ?”

2. The assessee is a company engaged in the business of leasing and finance. The assessment for the year 1996-97, was completed under section 143(3) of the Income-tax Act, (“the Act”), and the total income was determined by an order of assessment, dated March 30, 1999. In respect of sale and lease back transactions with four companies, the Assessing Officer accepted the case of sale and lease back in respect of one company. In respect of other three transactions, the Assessing Officer opined that there was an element of “claiming higher depreciation at an enhanced cost” by the assessee, in terms of the provisions of Explanation 3 to section 43(1) of the Act. The Assessing Officer further stated that the assessee purchased the said assets at a much higher cost than the written down value (WDV) in the books of the lessee, which was culled out from the details given by the assessee. Based on the said findings, penalty proceedings under section 271(1)(c) of the Act was initiated and show-cause notice was issued to the assessee calling upon them to explain as to why the penalty should not be imposed for the said sale-cum-lease back transactions. The assessee by their reply dated April 10, 2000, stated that all the relevant documents, namely, invoices, lease agreement, invoices issued by the original supplier, certificate from the lessee, etc., have been furnished in the assessment proceedings and the parties connected with the transactions have confirmed the transactions and the cost of assets and in view of the said documents, the fact that the sale returns highlighting the transactions were produced in the course of assessment, it cannot be construed that the assessee has either failed to offer an explanation or has offered an explanation, which is found to be false. Further, it was pointed out that the total income assessed under section 143(3) of the Act and the consequent tax thereon happens to be lower than the income returned and the tax computed on the same. Further, the assessee stated that though on the merits, the addition is not accepted to it, yet the assessee has not filed an appeal against the addition to avoid time consuming litigation and after considering the cost benefit for the company as the restriction of depreciation would result in tax savings in the subsequent years. The Assessing Officer held that the mere fact that the assessee furnished the invoices supporting the claim towards the cost of acquisition shown is not enough explanation for dropping the penalty proceedings. The Assessing Officer relied upon the reasons assigned in the order of assessment dated March 30, 1999, and observed that it is established beyond doubt by the Assessing Officer that the assessee has actually shown the cost of acquisition on the assets at an enhanced rate to claim higher depreciation and this is precisely to reason for invoking Explanation 3 to section 43(1) of the Act. On the above reasoning, the Assessing Officer imposed maximum penalty at 300 per cent. on the tax sought to be evaded.

3. Aggrieved by the same, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). The first appellate authority by order dated June 24, 2002, allowed the appeal holding that the assessee has furnished full details of the transaction to the Assessing Officer and it has also given an explanation that the market value of the machinery need not be equivalent to the written down value of the machineries in the books of the seller. The first appellate authority further held that the Assessing Officer has not found that the particulars given by the assessee was false or inaccurate. Further, it was held that the assessee had a valid explanation that the written down value need not always be equivalent to the market value, if the entire transaction is considered to the assessee’s liability to tax would be less than what it claimed in the return. Thus, considering the facts and circumstances, the penalty was vacated by the first appellate authority.

4. Aggrieved by the same, the Revenue preferred an appeal before the Tribunal. The Tribunal by order dated September 15, 2006, while rejecting the appeal filed by the Revenue held that there is no mala fide intention on part of the company and the first appellate authority found that the assessee had furnished all details of lease transaction and had also explained why the market value of the plant and machineries need not be equivalent to the written down value of the machineries. In so far as the contention raised regarding section 43(1), the Tribunal pointed out that Explanation 4(1) is not applicable to the assessment year 1996-97, as held in the case of Om Sindhoori Capital Investments Ltd. v. Jt. CIT [2005] 274 ITR 427 (Mad) and in any case, when the explanation is offered and the same is not false, penal provision is not attracted. Aggrieved by such order, the present tax case (appeal) has been filed by the Revenue.

5. Mr. Arun Kurian Joseph, learned standing counsel appearing for the Revenue, after referring to the observations made by the Assessing Officer in the penalty order dated April 26, 2000, submitted that it was clearly made out that the assessee has furnished inaccurate particulars in respect of the lease transaction and they failed completely to prove the authenticity of the lease transaction. Further, it is submitted that Explanation 4 to section 43(1) was never applied to the assessee’s case and only Explanation 3 was applied and, therefore, the order passed by the Tribunal is erroneous. Further, the learned counsel submitted that when the Assessing Officer clearly held that the claim for depreciation is more than what is the entitlement of the assessee, the provisions of section 271(1)(c) of the Act could be invoked.

6. Mr. R. Vijayaraghavan, learned counsel appearing for the assessee submitted that the order passed by the Tribunal confirming the order passed by the first appellate authority, is just and proper and the Assessing Officer in the penalty order dated April 26, 2000, has not given any specific finding that the assessee deliberately furnished inaccurate particulars or recorded a finding that the particulars furnished on the explanation offered was false. Further, the learned counsel submitted that the assessee adopted the price given in the valuation report and those records were placed before the Assessing Officer apart from the fact that the proof for payment of sales tax and such other details were placed before the Assessing Officer, nevertheless the Assessing Officer fixed the price of the assets on the written down value. Though the assessee has not preferred any appeal as against the said findings, the case would not fall within the scope of section 271(1)(c) of the Act, so as to bring it within the scope of concealment or furnishing of inaccurate particulars. Therefore, the learned counsel submitted that the Tribunal rightly rejected the appeal filed by the Revenue.

7. Heard the learned counsels appearing on either side and perused the materials available on record.

8. In order to invoke the penalty proceedings under section 271(1)(c) of the Act, the Revenue should prove that the claim made was not sustainable in law and if the assessee had made a concealment of the particular income. The hon’ble Supreme Court in the case of CIT v. Reliance Petroproducts (P.) Ltd. [2010] 322 ITR 158/189 Taxman 322, pointed out that in order to expose the assessee to penalty, the Revenue should show that there was contumacious conduct on the part of the assessee in suppressing the income in the return. Further, it was pointed out that in order to expose the assessee to penalty, unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By referring to the decisions in the case of Dilip N. Shroff v. Jt. CIT [2007] 291 ITR 519/161 Taxman 218 (SC), and in the case of Union of India v. Dharamendra Textile Processors [2008] 306 ITR 277/174 Taxman 571 (SC), the hon’ble Supreme Court pointed out 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 and to impose penalty, element of mens rea was essential. Explaining the term “conceal” and “inaccurate”, the said decision overruled the decision in the case of Dilip N. Shroff (supra), as regards the mens rea to be an essential ingredient in the levy of penalty. The hon’ble Supreme Court held, the words “inaccurate particulars” mean “not accurate”, “not exact or correct”, “not according to truth” and “erroneous”, that the mere making of a claim, which is not sustainable in law, by itself, would not amount to furnishing inaccurate particulars regarding the income of the assessee and that such a claim made in the return cannot amount to furnishing inaccurate particulars. Further, the hon’ble Supreme Court held as follows (page 166 of 322 ITR) :

“Merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the Revenue, that by itself would not, in our opinion, attract the penalty under section 271(1)(c). If we accept the contention of the Revenue then in case of every return where the claim made is not accepted by the Assessing Officer for any reason, the assessee will invite penalty under section 271(1)(c). That is clearly not the intendment of the Legislature.”

9. The above referred decisions have been relied on by this court in the case of CIT v. T. M. Abdul Azeez & Co., in T. C. (A.) No. 1128 of 2006, dated July 19, 2012.

10. The facts of the case as narrated in the preceding paragraphs would clearly disclose that the contention raised by the assessee was not held to be not according to truth or an inaccurate particulars furnished or with a view to conceal the actual income. In fact, the Assessing Officer in the penalty order dated April 26, 2000, has not given any independent finding in support of his conclusion that there was a deliberate design on the part of the assessee to inflate the cost of acquisition.

11. As pointed out by the first appellate authority all the details of the transactions were placed before the Assessing Officer and an explanation was given as to why the market value of the property need not be equivalent to the written down value. The Assessing Officer while completing the assessment proceedings, chose to adopt the written down value. Therefore, that by itself would not amount to furnishing inaccurate particulars or with a view to conceal the actual income. Therefore, the order passed by the Tribunal calls for no interference. Accordingly, the Tax Case (Appeal) fails and it is dismissed. No costs.

[Citation : 364 ITR 680]