Commissioner of Income Tax vs Escorts Finance Ltd.

A.K. Sikri, J.—This appeal preferred by the Income Tax Department (hereinafter referred to as the ''revenue'') was heard on the following questions of law:

(1) Whether ITAT was correct in law in deleting the penalty on the ground that no satisfaction was recorded by the Assessing Officer in assessment order despite the fact that the satisfaction was discernible from the assessment order as after satisfying himself, Assessing Officer had initiated penalty proceedings?

(2) Whether ITAT was correct in law in deleting the penalty with regard to disallowance of public issue expenses despite the fact that the assessee had knowingly claimed 1/10th of the expenses?

The revenue questions the validity of the orders dated 12-8-2005 passed by the Income Tax Appellate Tribunal (for short, the ''Tribunal'') whereby penalty imposed upon the respondent/assessee under the provisions of Section 271(1)(c) of the Income Tax Act, 1961 (hereinafter referred to as the ''Act'') has been deleted by the Tribunal. Penalty of Rs. 1,28,19,836 was imposed by the Assessing Officer (AO) vide his orders dated 27-2-2004 under the following circumstances:

For the assessment year 1995-96, the assessee had filed the return declaring ''Nil'' Income. During the assessment proceedings, the Assessing Officer found that the assessee had incurred expenditure in renovating the leasehold premises and claimed depreciation at the rate of 50 per cent thereon. The Assessing Officer held that the expenditure was of capital nature. The assessee himself had capitalized the same and depreciation at the rate of 10 per cent was available. Accordingly, he disallowed the amount of Rs. 22,86,485 representing 40 per cent of the expenses. The Assessing Officer further found that the assessee had claimed 1/10th of public issue expenses u/s 35D of the Act. The Assessing Officer disallowed the same on the ground that the assessee was not an ''industrial undertaking'' which is pre-condition for awarding the claim u/s 35D of the Act. He also disallowed excess claim of depreciation on leased cars/lorries and machineries leased back. Thus, he disallowed the aforesaid three claims in the following manner:

-------------------------------------------------------------------- 1. Excess claim of depreciation on leased cars/ Rs. 4,46,21,378 lorries and machineries leased back -------------------------------------------------------------------- 2. Public issue expenses treated as capital Rs. 2,10,22,279 -------------------------------------------------------------------- 3. Restriction of depreciation on temporary Rs. 22,86,485 furniture and erection work from 50% to 10% --------------------------------------------------------------------

On this basis, the income was determined at Rs. 4,91,91,140 as against return income of Rs. Nil

On the addition of the aforesaid amounts under these two heads, the Assessing Officer also initiated penalty proceedings separately u/s 271(1)(c) of the Act inasmuch as he was of the opinion that the assessee had made frivolous claims and, thus, show-cause notice was served upon the assessee for concealing/furnishing inaccurate particulars of income. After the issuance of show-cause notice, the Assessing Officer kept the penalty proceedings in abeyance for sometime because of the reason that against the assessment order the assessee had preferred the appeal before the Commissioner of Income Tax (Appeals). The CIT(A) dismissed the appeal of the assessee in respect of quantum proceedings on 21-12-1998. The assessee challenged that order before the Tribunal and the Tribunal partly allowed the appeal thereby deleting the disallowance in respect of Sl. No. 1 above, i.e., claim of depreciation on leased cars/lorries and machineries leased back and maintained the disallowance under the other two heads. The Assessing Officer thereafter reopened the penalty proceedings. He passed orders dated 27-2-2004 observing that the assessee had deliberately concealed/furnished inaccurate particulars of income by claiming expenses/deductions which were not actually allowable under the provisions of the Act. He, thus, imposed penalty of Rs. 1,28,19,836, which were calculated as under:

-------------------------------------------------------------------- Amount of concealed income Rs. 2,33,08,764 -------------------------------------------------------------------- Tax on concealed income, i.e., the tax sought Rs. 1,07,22,031 to be evaded -------------------------------------------------------------------- Minimum penalty imposable @ 100% Rs. 1,07,22,031 -------------------------------------------------------------------- Maximum penalty imposable @ 300% Rs. 3,21,66,094 -------------------------------------------------------------------- Penalty imposed @ 100% Rs. 1,07,22,031 --------------------------------------------------------------------

In appeal preferred by the assessee before the CIT(A), the CIT(A) deleted the penalty in respect of public issue expenses, which was claimed by the assessee as revenue expenditure, but treated as capital expenditure by the Assessing Officer. While doing so, the CIT(A) took note of the fact that the Tribunal in quantum appeal had restored this issue back to the file of the Assessing Officer to find out as to whether the said claim was allowable under any other head in the light of Circular No. 56, dated 19-3-1997 issued by the CBDT. According to the CIT(A), no doubt, on remand also when the case was reconsidered by the Assessing Officer, he opined that this claim cannot be allowed and maintained the addition, but this showed that the claim was not bogus, but bona fide. In this behalf, the CIT(A) observed as under:

It is observed that the appellant has not claimed the full amount as a deduction in the return filed and has only claimed l/10th of the same. The Tribunal has given the direction to consider the claim of the assessee if allowable under any other head. The direction given by the Tribunal of considering the allowability under any other head in the light of the Circular No. 56, dated 19-3-1997 issued by the CBDT and if disallowed by the Assessing Officer cannot under any stretch of imagination can be said to be concealment of income by the appellant. Therefore, the levy of penalty on the full amount by the Assessing Officer is not correct. The appellant explained that the 1/10th u/s 35D of the Act to the amount of Rs. 21,02,280 was claimed as per the advice of their Auditors. To prove that the explanation is bona fide, the appellant has submitted a copy of Memorandum of Association when the issue was made public. It has been specifically mentioned on page No. 13, the company will be entitled to amortize over a period of 10 years under the provisions of Section 35D of the Act of all expenditure in connection with the public issue of the shares such as underwriting commission, brokerage, other charges, etc. From the above, it is clear that though the expenditure cannot be allowed as per the Act but at the same time, the appellant was under the bona fide belief that the expenditure is allowable u/s 35D of the Act.

Regarding penalty qua claim of depreciation at 50 per cent, which was reduced to 10 per cent, the CIT(A) maintained that part of the penalty holding that the said claim preferred by the assessee was not at all admissible u/s 32 of the Act and was claimed fraudulently. For this purpose, he referred to the judgment of the Kerala High Court, as is clear from the following discussion:

5.3.1 Reliance is also placed on decision of Hon''ble Kerala High Court in the case of Commissioner of Income Tax Vs. India Sea Foods, The relevant portion is reproduced below:

Falsehood in accounts can take only two forms : either an item may be suppressed dishonestly or an item may be claimed fraudulently, and in penalizing concealment of the particulars of one''s income as well as deliberate furnishing of inaccurate particulars, Section 28 penalizes both forms of falsehood. In the case before us it has been found as a fact that the assessee deliberately claimed a false deduction and in the light of the remarks made above, we are disposed to hold that the case of the assessee fell within the ambit of Section 28. We accordingly dismiss this petition with costs.

5.3.2 The case of the appellant is same and it is clear from Explanation to Section 32 that only depreciation was allowable to the appellant on the expenditure incurred by it as per the Income Tax Rules. The excess depreciation claimed is definitely concealed income of the appellant as per the deeming provisions. For claiming excess depreciation, the appellant has not been able to give any bona fide explanation. Therefore, the penalty levied by the Assessing Officer on the above amount, i.e., Rs. 22,86,485 is confirmed.

Both the revenue as well as the assessee preferred appeals against the aforesaid judgment of the CIT(A). The revenue was aggrieved by the deletion of the penalty which was imposed on disallowing the claim u/s 35D of the Act, whereas the assessee preferred the appeal on the penalty maintained in respect of the claim of depreciation. The Tribunal-dismissed the appeal of the revenue and allowed the appeal of the assessee thereby deleting the entire penalty. Insofar as the appeal of the revenue is concerned, the Tribunal accepted the reasoning contained in the order of the CIT(A). As far as the appeal of the assessee is concerned, the Tribunal has observed that the provisions of Section 271(1)(c) of the Act were attracted and penalty was imposable on imports. However, on the ground that the Assessing Officer had not recorded satisfaction of concealment in the assessment order, which is a necessary condition for assuming jurisdiction for imposition of penalty, the penalty was deleted following the judgments of this Court in Commissioner of Income Tax Vs. Ram Commercial Enterprises Ltd., and Commissioner of Income Tax Vs. Super Metal Re-Rollers (P) Ltd., . As far as penalty in respect of claim pertaining to depreciation is concerned, the same is upheld on merits by all the authorities below.

Before discussing the necessity of recording satisfaction, we deal with the penalty in respect of other claim.

As is clear from the facts narrated above, this claim was in respect of public issue expenses, deduction in respect of which was preferred u/s 35D of the Act by the assessee in its return. The assessee is a finance company and it was already in business when public issue was raised. Therefore, the claim could not be made in Clause (i) of Sub-section (1) of Section 35D of the Act as pre-commencement of business claim. For an existing business, such a claim could be made if it was in connection with the extension of assessee''s ''industrial undertaking'' or in connection with the setting up of a new ''industrial unit''. Ex facie, the assessee being a finance company, it would not be covered by the expression ''industrial undertaking'' or ''Industrial unit''. Still the claim is treated as bona fide only because the insertion in this behalf was made in the prospectus purportedly on the basis of legal opinion. This cannot be countenanced. We dealt with identical issue in the case of Commissioner of Income Tax Delhi-IV Vs. Escorts Finance Limited, Vand repelled this explanation in the following words:

A sum of Rs. 21,02,228 u/s 35D of the Act was disallowed by the Assessing Officer. This, according to the assessee, was made on the basis of the opinion given by the Chartered Accountants, which is clear from the prospectus for public issue of shares in which it was clearly mentioned that the assessee-company would be entitled to relief u/s 35D of the Act. Expenses were incurred in connection with the public issue of shares such as underwriting commission, brokerage and other charges etc., which, as per the opinion of the Chartered Accountants, qualify for amortization over a period of 10 years u/s 35D of the Act. Submission of the learned Counsel for the revenue was that merely because information in this behalf was made available in the tax audit report, would not absolve the assessee of the penalty proceedings when such a claim was ex facie bogus. She submitted that hardly 5 per cent returns are taken up for scrutiny u/s 143(2) of the Act and assessment is made under Sub-section (3) of Section 143 of the Act. Therefore, with the hope that his/her return may not come under scrutiny and may be assessed on the basis of ''self-assessment'', an assessee can venture to give wrong information. Therefore, merely because information was available in the tax audit report would not absolve the assessee. What was to be seen was that whether the claim made was bogus.

We are inclined to agree with the aforesaid submission of learned Counsel for the revenue. Even if there is no concealment of income or furnishing of inaccurate particulars, but on the basis thereof the claim which is made is ex facie bogus, it may still attract penalty provision. Cases of bogus hundi loans or bogus sales or purchases have been treated as that of concealment or inaccuracy in particulars of income by the judicial pronouncements (See Krishna Kumari Chamanlal and another Vs. Commissioner of Income Tax and another, , Rajaram and Co. Vs. Commissioner of Income Tax, and Beena Metals Vs. Commissioner of Income Tax,

In the present case, we have to examine as to whether the claim made u/s 35D of the Act was bogus or it was a bona fide claim. The assessee pleaded bona fide, as according to it, it was based on the opinion of the Chartered Accountant. Learned Counsel for the revenue, however, submitted that a bare reading of Section 35D would reveal even to a layman that there was no scope for getting benefit of those provisions in respect of expenses incurred in connection with the public issue of shares such as underwriting commission, brokerage and other charges etc., inasmuch as certain expenses are allowable only when they are incurred with the expansion of assessee''s industrial undertakings or in connection with his setting up of a new industrial undertaking or industrial unit whereas the assessee is a finance company.

We are in agreement with the aforesaid submission of learned Counsel for the revenue. We fail to understand as to how the Chartered Accountants who are supposed to be expert in tax laws, could give such an opinion having regard to the plain language of Section 35D of the Act. It would be important to note that assessee has nowhere pleaded that return was filed claiming benefit of Section 35D of the Act on the basis of the said opinion. What was stated was that in the prospectus it was mentioned that as per the opinion given by the Chartered Accountants, the company would be entitled for relief u/s 35D of the Act. Therefore, it is not the case of the assessee that while filing the return it got assistance from the Chartered Accountants who opined that the aforesaid expenses qualify for amortization over a period of 10 years u/s 35D of the Act. That apart, when we find that it is not a case where two opinions about the applicability of Section 35D were possible. Therefore, it cannot be a case of a bona fide error on the part of the assessee. As has been pointed out above, the relief available u/s 35D of the Act to a finance company is ex facie inadmissible as that is confined only to the existing industrial undertaking for their extension or for setting up a new industrial unit. It was, thus, not a ''wrong claim'' preferred by the assessee, but is a clear case of ''false claim''. In CIT v. Vidyagauri Natverlal [1991] 238 ITR 91. Gujarat High Court made a distinction between wrong claim as opposed to false claim and held that if the claim is found to be false, the same would attract penalty. We may also take note of the following observations of the Supreme Court in the case of Union of India (UOI) and Others Vs. Dharamendra Textile Processors and Others, . In such a case it is difficult to accept the plea that error was bona fide.

[Emphasis supplied]

We, thus, are of the opinion that the view of the CIT(A) or the Tribunal on this aspect is not correct and is liable to be set aside. We, thus, answer second question in favour of the Revenue and against the assessee.

Insofar as the first question is concerned, we may note that by the amendment vide Finance Act, 2008, there is an amendment to the provisions of Section 271 of the Act whereby Sub-section (1B) is inserted with effect from 1-4-1989. Relying upon this provision, contention of Ms. Bansal, learned Counsel for the revenue, was that the substitution is to be deemed and penalty order could not have been set aside on this ground. The validity of this amendment was challenged before this Court in the case of Ms. Madhushree Gupta v. Union of India [2009] 183 Taxman 100. While deleting the provision, the Court has read down the rigours of the provisions by giving specific interpretation. Therefore, answer to question No. 2 would depend upon Sub-section (1B) to Section 271, as interpreted in the aforesaid case. Since the Tribunal had no occasion to consider this aspect, as amendment came subsequently, though retrospectively, the appropriate course would be to remit the case back to the Tribunal, to decide as to whether satisfaction of Assessing Officer can be discerned in the present case from the order of the Assessing Officer on the principles laid down in Ms. Madhushree Gupta''s case (supra).

The effect of answering the aforesaid two questions would be as under:

(i) Orders of the CIT(A) and the Tribunal in respect of deletion of penalty on account of Section 35D are set aside and it is held that penalty on both these accounts was rightly imposed by the Assessing Officer.

(ii) For determining the question of satisfaction to be recorded by the Assessing Officer, the matter is remitted back to the Tribunal.