Vildirect: IncomeTax-caselaws-1993-VIL-169-ITAT-AHM

1993-VIL-169-ITAT-AHM

Equivalent Citation: ITD 045, 571, TTJ 047, 146,

Income Tax Appellate Tribunal AHMEDABAD

Date: 10.02.1993

HT. POWER STRUCTURES (PRIVATE) LIMITED.

ASSISTANT COMMISSIONER OF INCOME-TAX.

BENCH

Member(s) : R. N. SINGHAL., K. P. T. THANGAL.

JUDGMENT

Per Shri R.N. Singhal, Accountant Member ------ The assessee's this appeal is directed against the levy of penalty under section 271(1)(c) in a sum of Rs. 1 lakh.

2. The assessee-company had the business of fabrication and galvanising of transmission towers, etc. It generally entered into contracts with its customers for supply of the same. For the year ending 30-5-1984 relevant to assessment year 1985-86 return was filed showing a total loss of Rs. 13,01,641 and assessment was completed on 25-3-1988 on a total loss (including depreciation etc.) of Rs. 9,80,397. The adjustments made in the assessment included one of Rs. 1,70,360 and penalty proceedings under section 271(1)(c) were initiated. Ultimately, the penalty order dated 30-3-1989 was passed levying a penalty of Rs. 1 lakh and the appeal was dismissed by the CIT (Appeals) vide his order dated 9-7-1991.

3. Before us, the learned Advocate for the assessee first of all submitted that since assessment even after the adjustment of the impugned addition resulted in a huge loss of Rs. 9,80,397, concealment penalty of section 271(1)(c) was not leviable in the eye of law. Reliance was placed primarily on the Hon'ble Punjab and Haryana High Court decision in CIT v. Prithipal Singh & Co. [1990] 183 ITR 69. It was further submitted that there were other High Court decisions in favour of the assessee and Ahmedabad Benches of the Tribunal had almost consistently held that section 271(1)(c) penalty was not leviable when the assessment itself resulted in a loss. Copy of Tribunal's decision in the case of SIF Steels Ltd. [IT Appeal Nos. 3151 and 3152 (Ahd.) of 1988, dated 10-4-1992] for assessment years 1975-76 and 1979-80 is furnished and other decisions cited in this behalf are as follows :

1. Mutual Plastics v. Twelfth ITO [1989] 80 CTR (Trib.)(Bom.) 45

2. Indo-German Electricals v. ITO [1992] 41 ITD 455 (Jp.)

3. Shri Khedut Sahakari Khand Udyog Mandli Ltd. v. ITO [1990] 36 TTJ (Ahd.) 81

4. On facts, he proceeded to attack the penalty order by saying that it talks of "lease expenses" of Rs. 1,70,360 and it is not understood how the item is so described. He then proceeded to say that the said sum of Rs. 1,70,360 actually represented provision made in the accounts for the contingency of the customers claiming some amounts for non-fulfilment of contract of supply in time, etc. and it was the practice followed by the assessee since many years. He submitted that the Institute of Chartered Accountants had approved that system of accounting for this type of business and the Hon'ble Calcutta High Court also had accorded its approval in the case of CIT v. Simplex Concrete Piles (India) (P.) Ltd. [1989] 179 ITR 8. He submitted that in reality it was thus retention money kept back by the assessee for meeting the contingency of the claims which could have been made by the customers and he further submitted that the departmental authorities were wrong in mentioning that the said sum of Rs. 1,70,360 came to be accepted for disallowance by the assessee after detection by the Assessing Officer. He took us through the papers to claim that actually this question was not raised by the Assessing Officer and the assessee had its own decided to seek this adjustment without the Assessing Officer pointing out this item. He submitted that at any rate all the entries were incorporated in the accounts and hence there was no concealment at all.

5. The learned Departmental Representative took us through the relevant parts of the order of the CIT (Appeals) and submitted that in the accounts relevant for assessment year 1986-87 there was Note No. 8 to the Schedule 'O' which indicated that the assessee-company had changed the system of accounting to the extent that it has not charged for that year (viz., for the previous year relevant to assessment year 1986-87) the retention money for contingencies and even the sum of Rs. 1,70,360 stood written back to the profit and loss account relevant to assessment year 1986-87 and even then the said sum was not offered for taxation in the return for assessment year 1986-87. He emphasised that the system of accounting and the notes etc. of the assessee were such that there was no occasion for the Assessing Officer to ask any questions about the admissibility of this amount from the perusal of the profit and loss account as noted in para 4 on page 4 of the appellate order. Proceeding in this fashion, he submitted that the CIT (Appeals) had noted a number of points which were against the assessee and he was justified in confirming the penalty. On the law point he submitted that the Hon'ble Calcutta High Court in Simplex Concrete Piles (India) (P.) Ltd.'s case was distinguishable in so far as in the case before the Calcutta High Court it was a change in the system of accounting which was not accepted by the ITO while in this case the assessee itself changed the system of accounting. He further referred to the commentary of Chaturvedi and Pithisaria, Volume 5, Third Edition of 1986 on pages 4793 onwards to say that in accordance with the Board's Circular penalty was leviable for and from assessment year 1976-77 even when the assessment resulted in a loss. He cited a number of decisions to claim that if after the filing of original return some amounts are surrendered the penalty is leviable with reference to the surrendered amounts. He also relied on the Kerala High Court decision in the case of CIT v. India Sea Foods [1976] 105 ITR 708 and CIT v. Gates Foam & Rubber Co. [1973] 91 ITR 467 to say that it did not make a difference when the concealed income got adjusted against other items of deficiency or loss meaning thereby that the penalty under section 271(1)(c) was leviable. He relied on the Delhi High Court decision in CIT v. La-Medica [1992] 198 ITR 327 and Tribunal Bombay Bench Third Member decision in the case of Dhiraj A. Sharma v. ITO [1992] 198 ITR (AT) 236 which was earlier reported in 43 ITD 1.

6. In reply, the learned Advocate for the assessee emphasised that in this case the assessee followed a system of accounting which was approved by the Institute of Chartered Accountants and the provisions for retention money was made on the basis of clauses in the agreements with the customers. He further submitted that this item was not mentioned or raised by the ITO in the course of assessment proceedings and the assessee had by itself agreed for this adjustment. He emphasised that the real tax effect would arise in assessee's case only in assessment year 1989-90 though for assessment year 1988-89 there might be a case for payment of tax under section 115J but certainly upto assessment year 1987-88 there were losses and depreciation etc. to be adjusted against the income. On the legality aspect he emphasised that department's reliance is on Explanation 4 below section 271(1) and the Hon'ble Punjab and Haryana High Court has considered the same in Prithipal Singh & Co.'s case.

7. We have very carefully considered the rival submissions. The learned Advocate for the assessee is right that even after adjustment of this item assessment is made on a huge loss of Rs. 9,80,397. There are High Court and Tribunal decisions according to which penalty under section 271(1)(c) cannot be levied when the assessment has resulted in a loss. Of course, the Hon'ble Punjab & Haryana High Court decision in Prithipal Singh & Co.'s case is directly on the point and there are Tribunal's decisions also cited by the learned Advocate as noted above. Therefore, preponderance of judicial pronouncements is on this point in favour of the assessee. The Hon'ble Kerala High Court decision in Gates Foam & Rubber Co.'s case cited by the learned D.R. is not helpful for resolving this issue. The other decision of the Hon'ble Kerala High Court in India Sea Foods's case is also not directly on the issue because in that case the assessed income was Rs. 18,460 (ie., a positive figure) against a returned loss of Rs. 3,29,304 and the adjustment made by the concealed income was Rs. 2,84,727. The Hon'ble Kerala High Court held that in spite of the assessed income being only Rs. 18,460 the penalty under section 271(1)(c) was leviable with reference to the whole of the concealed income of Rs. 2,84,727 in spite of a major part of that concealed income having been absorbed by the loss due to other items. Therefore, this decision also is not directly on the point in the sense that the law point of exigibility of section 271(1)(c) penalty when assessment has resulted in a loss was not involved in that case.

8. Actually, most of the decisions in favour of the assessee on this point have been rendered on the basis of the phraseology of sub-clause (iii) of section 271(1). It may be recalled that sub-clauses (a), (b) and (c) of sub-section (1) of section 271 describe the offences (so to say) and sub-clauses (i), (ii) and (iii) thereof prescribe the respective quantums of penalty. For section 271(1)(c) the quantum came to be prescribed in clause (iii) whose last part went on changing from time to time as the quantums and basis of penalty went on changing but the opening part was as follows:----

" 271 (1) ..............

(iii) in the cases referred to in clause (c), in addition to any tax payable by him"............ [Emphasis supplied]

Most of the courts have held that this phraseology envisaged that some tax was payable by the assessee and proceeding on that premise the penalty was leviable in addition to that tax payable. The Department's argument appears to be that in the phraseology extracted above the words used are "any tax payable" which should be construed as conveying the meaning of "tax, if any, payable" rather than the "tax payable". The Department's view is that the use of the word 'any' conveys this meaning.

9. On careful consideration, we find that in spite of this argument of the Departmental penalty in a loss assessed case cannot be levied even by invoking Explanation 4 below section 271(1). On this point it is sub-clause (a) of that Explanation which is relevant and may be extracted as follows :-----

" Explanation 4 : For the purposes of clause (iii) of this sub-section, the expression "the amount of tax sought to be evaded",-----

(a) in any case where the amount of income in respect of which particulars have been concealed or inaccurate particulars have been furnished exceeds the total income assessed, 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;" (Emphasis supplied)

This phraseology of Explanation 4 also envisages 'total income assessed'. In Income-tax Act 'total income' is defined in clause (45) of section 2 and does not throw any light as to whether it would always include loss. Of course, there are judicial pronouncements to the effect that for some purposes words 'total income' would include loss. Then word 'assessed' also has been construed in different ways according to the context. However, it is important to note that in common parlance for a loss case one generally describes as loss computed rather than loss assessed. It means that the words "total income assessed" do not necessarily include a case of loss computed or assessment resulting in loss. Now, the point is that in this particular context that we are considering we must hold that these words "total income assessed" would not take into their ambit a case which has resulted in computation of loss even as per the assessment order. The reason is that we are considering the statutory provisions for levy of penalty and it has been held repeatedly that penalty provisions should be construed rather strictly. Further, even in the penalty provisions Explanation 4 is a sort of deeming provision and such a provision has to be construed even more strictly. Even further, Explanation 4 seeks to prescribe what is the "amount of tax sought to be evaded" which means that it seeks to put an artificial meaning on these words viz., "the amount of tax sought to be evaded". In common parlance amount of tax means amount of tax and it cannot take into its ambit a case where no tax is leviable at all. This constitutes yet another reason for a very strict construction being placed on this provision of Explanation 4. Viewed in this light it would be very difficult to accept the Department's contention that in clause (a) of Explanation 4 below section 271(1) the 'total income assessed' should take into its ambit a case where assessment has resulted in a loss. Here, we are not concerned with a case in which part of the concealed income gets adjusted against other items of loss or deficiency and the assessment results in computation of a positive figure of total income albeit much smaller than the concealed income as was the case before the Hon'ble Kerala High Court in India Sea Foods' case.

10. In this view of the matter, we are of the considered opinion that when assessment has resulted in a loss penalty under section 271(1)(c) would not be leviable even on the basis of Explanation 4 below section 271(1) as inserted with effect from 1-4-1976.

11. In this view of the matter, penalty order cannot be sustained. It deserves to be quashed. We do so.

12. The assessee's appeal is allowed

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