1993-VIL-174-ITAT-AHM

Equivalent Citation: TTJ 047, 170,

Income Tax Appellate Tribunal AHMEDABAD

Date: 09.02.1993

ZAVERI PAPER & BOARD MILL.

Vs

INCOME TAX OFFICER.

BENCH

Member(s)  : B. M. KOTHARI., K. P. T. THANGAL.

JUDGMENT

This appeal is directed against the order of the CIT(A) confirming the penalty of Rs. 42,423 levied under s. 271(1)(c) of the IT Act, 1961.

2. The assessee-firm started a new business of manufacture of paper. The production commenced in the middle of the accounting year under consideration. The assessee submitted a return of income on 19th Sept., 1984, declaring loss of Rs. 3,88,000. The assessment was completed under s. 143(3) in which the loss was determined at Rs. 2,48,267. In the assessment order it has been mentioned that assessee has furnished inaccurate particulars by claiming expenses of earlier years and also which are not admissible under the law. A penalty notice under s. 274 r/w s. 271(1)(c) for furnishing inaccurate particulars of income was issued. The assessee submitted reply dt. 26th April, 1986 in response to the show cause notice under s. 271(1)(c). The ITO, after taking into consideration the said reply, levied penalty of Rs. 42,423 in respect of the incorrect claim of expenditure amounting to Rs. 96,674 made by the assessee.

3. The CIT(A) held that claiming deduction in respect of expenses of a revenue nature pertaining to earlier year clearly amounts to furnishing of inaccurate particulars with the idea of concealing the income of the subsequent years. He also came to the conclusion that in view of Expln. 4 to s. 271, the penalty is validly imposable in a case where the returned and the assessed figure is a loss.

4. The learned counsel for the assessee submitted that total expenses aggregating to Rs. 2,87,016 were incurred under different heads. Out of this sum, a sum of Rs. 2,07,906 was capitalised and was transferred to respective assets account leaving a balance of Rs. 79,110, which was debited separately in the P&L A/c under the head 'miscellaneous expenses'. These expenses were of revenue nature and were debited to P&L A/c in this year on account of the fact that the manufacturing work started in the year under consideration. The ITO was of the view that since the expenses in question pertained to earlier year, they cannot be allowed as deduction in the year under consideration. The assessee orally agreed to the said addition as has been mentioned in the reply dt. 26th April, 1986 with a view to put an end to litigation. Such disallowance cannot result in levy of penalty under s. 271(1)(c). He also submitted that in a case where the income is assessed at a figure of loss, even after taking into consideration the amount of disallowance of the said expenditure, no penalty can be validly levied. It was submitted by him that upto asst. yr. 1990-91 the assessee-firm suffered losses. The existence of such huge amount of losses in any case proves the absence of any guilty intention on the part of the assessee. The learned counsel relied on the judgments reported in CIT vs. Prithipal Singh & Co. (1990) 85 CTR (P&H) 26 : (1990) 183 ITR 69 (P&H), Modi Cements Ltd. vs. Union of India & Ors. (1991) 100 CTR (Del) 48 : (1992) 193 ITR 91 (Del), Hotel Sabar Pvt. Ltd. vs. ITO (1986) 26 TTJ (Ahd) 89, ITO vs. Shyam Sunder (1989) 80 CTR (Trib) (Jp) 84 and the decision of the Tribunal in the case of M/s Shri Hari Enterprises in ITA No. 2140/Ahd/87 dt. 16th Jan., 1991. He, therefore, submitted that the penalty levied on the assessee should be cancelled.

5. The learned Senior Departmental Representative submitted that it is a case where an excessive deduction was claimed by the assessee with a view to claim the benefit of carry forward of assessed loss of a higher amount. Such excessive claim of deduction amounts to furnishing of inaccurate particulars of income and is liable for penalty under s. 271(1)(c). It was also submitted by him that the assessee had agreed to the disallowance of such miscellaneous expenses. Such agreed addition in the income also justifies the levy of penalty in view of the judgments reported in H.V. Venu Gopal Chettiar vs. CIT (1985) 153 ITR 376 (Mad) and CIT vs. P.B. Shah & Co. Pvt. Ltd. (1978) 113 ITR 587 (Cal). He further submitted that in view of Expln. 4 to s. 271 a penalty can be validly imposed. Such a view, according to the Senior Departmental Representative, is fortified by the decisions reported in Omrao Industrial Corpn. Pvt. Ltd. vs. ITO (1990) 35 ITD 42 (All) and Basti Sugar Mills Co. Ltd. vs. ITO (1987) 63 CTR (Trib) (Del) 28. He also relied on the circulars issued by the Board which have been referred in the Commentary on Income-tax Laws by Chaturvedi & Pithisaria, Vol. 5, 3rd Edition, 1986 at pages 4818, 4819 and 4831. He also invited our attention towards the said commentary at page 4739 to support his submission that penalty under s. 271(1)(c) is leviable in a case where the ultimate assessed figure is a loss. He supported the orders of the CIT(A) as well as ITO.

6. We have carefully considered the submissions made by the learned representatives and have also carefully gone through all the decisions which were cited by them. The penalty in the present case has been levied for alleged furnishing of inaccurate particulars of income by claiming expenditure of Rs. 96,674 which have been disallowed in the assessment. In order to examine the correctness or otherwise of the levy of the said penalty we will have to consider the state of mind of the concerned persons at the time when the return of income was furnished. It is an undisputed fact that the assessee incurred substantial expenditure aggregating to Rs. 2,87,016 under various heads prior to commencement of production including the expenses incurred in the prior years in relation to setting up of the said production unit. Out of that amount a sum of Rs. 2,07,906 was capitalised and allocated to various assets accounts on which the assessee has been held to be entitled to grant of depreciation. The balance amount of Rs. 79,110 was debited in the P&L A/c as a separate item. The aggregate amount of disallowed expenditure of Rs. 96,674 in respect of which penalty under s. 271(1)(c) has been imposed perhaps consists of the following items:

It is also an admitted fact that this was the first year when the production in the manufacturing unit of the assessee was commenced. The assessee declared a loss of Rs. 3,88,000 and the same has been assessed at a figure of loss of Rs. 2,48,267. The contention of the learned counsel for the assessee that the firm suffered losses upto asst. yr. 1990-91 has also not been controverted by the learned Senior Departmental Representative. The reality of the expenditure disallowed has not been doubted but the disallowance was made only on account of the fact that these expenses were incurred in earlier years. Expenses incurred in earlier years or expenses incurred prior to commencement of production, may either be capitalised and the same may be added to the cost of the respective assets or the same will be an expenditure of revenue nature. The position as to whether it is of a capital or revenue nature will depend on the facts relating to each item of such an expenditure. If it is regarded as capital expenditure in the case of a manufacturing concern, the assessee would be entitled to depreciation, investment allowance, etc. If it is of a revenue nature, the same would be allowable as deduction of the year under consideration. There may be a dispute about the year of allowability of such revenue expenditure incurred in the earlier year during the period when the building and plant and machinery of the industrial unit were under the process of construction, erection and installation, etc. The treatment given by the assessee to such revenue expenditure incurred in earlier year by claiming it as a deduction a later year in which the production started may also be a probable one. It may be worthwhile to make a useful reference to the judgment of Hon'ble Delhi High Court in the case of Shriram Refrigeration Industries Ltd. vs. CIT (1981) 127 ITR 746 (Del). In that case the assessee paid certain amount to Westinghouse, foreign collaborator, in three instalments in May, 1962, June, 1963 and May 1964. The commercial production started in October, 1964 and the business was set up in the accounting period ending 30th Sept., 1965, relevant to asst. yr. 1966-67. The High Court confirmed the view taken by the Tribunal that assuming that the expenditure in question could be of the nature of revenue, the said sum would be allowable as a deduction in asst. yr. 1966-67. This has been referred only with a view to indicate that such a claim for deduction may be a debatable point. Such a claim made in the first year of production, in the facts and circumstances of the present case, cannot be regarded as an act of furnishing inaccurate particulars of income so as to justify the levy of penalty under s. 271(1)(c). In our view there was no guilty intention or no blameworthy mental action on the part of the assessee at the time when such expenses were debited in the P&L A/c of the first year of its production or at the time when it filed the return of income for the said year.

7. We will now consider the legal point as to whether penalty under s. 271(1)(c) can be levied in a case where the ultimate assessed figure is not a figure of positive income but is a figure of assessed loss. The learned Senior Departmental Representative had relied on Expln. 4 to s. 271 which defines the expression "the amount of tax sought to be evaded" for the purpose of cl. (iii) of s. 271(1). On the strength of Board circulars, issued with a view to explain the scope and effect of the amendments made in s. 271(1) from time to time, the Senior Departmental Representative had argued that Expln. 4 was specifically introduced with a view to enable the Department to levy penalty in a case where on setting off the concealed income against any loss incurred by the assessee, the total income is reduced to a figure lower than the concealed or even a minus figure. The tax sought to be evaded in such a case will mean the tax chargeable on the concealed income as if it was the total income. The learned Senior Departmental Representative had also relied on the decision of ITAT, Allahabad Bench in the case of Omrao Industrial Corporation Pvt. Ltd. vs. ITO in which penalty levied under s. 271(1)(c) in a case where the income was assessed at a loss was confirmed in relation to asst. yr. 1972-73. The Tribunal in that case was dealing with penalty for asst. yr. 1972-73 when the law had been amended by the Finance Act, 1968 and the legislature delinked the quantification of penalty from the tax, if any, which would have been avoided if the income as returned by such person was accepted as correct income and instead penalty was linked with the quantum of concealed income. The said decision of the Tribunal in substance supports the submissions made by the learned Senior Departmental Representative. Another decision which was relied upon by the Senior Departmental Representative is that of ITAT, Delhi Bench in the case of Basti Sugar Mills Co. Ltd. vs. ITO. This case also pertained to asst. yr. 1974-75. In that case the Expln. 4 to s. 271(1)(c) was also considered and it was held, by relying on the judgment of Kerala High Court in the case of CIT vs. Rowther Bros. (1979) 9 CTR (Ker) 68 : (1979) 119 ITR 353 (Ker), that the amount of income in respect of which particulars have been concealed is a positive figure though the total income determined is a figure of loss as a result of carry forward of earlier years' losses. In such a situation the law presumes that the concealed income be treated as the total income and the tax would work out on that and it would be that tax which would be sought to be evaded for the purpose of quantification of penalty under s. 271(1)(c). The only High Court which supports the view canvassed by the Senior Departmental Representative is the Hon'ble Kerala High Court on the strength of which the Delhi Tribunal had taken the said view.

8. Let us how examine the various decisions relied upon by the learned counsel for the assessee. The Hon'ble Punjab & Haryana High Court in the case of CIT vs. Prithipal Singh and Co. held that where the income was finally assessed at a loss figure it cannot be said that the assessee had suppressed any income which would have attracted liability to tax. The Hon'ble Court held that Explns. 3 and 4 annexed to the said provision presupposes taxable income with regard to the assessment year in question. The language of s. 271(1)(c) r/w sub-cl. (iii) clearly shows that a penalty of a further sum would be payable by a person in addition to any tax payable by him. Unless some amount of tax is found to be payable no penalty can be levied under this provision.

8.1 The Hon'ble Delhi High Court in the case of Modi Cements Ltd. vs. Union of India was considering the question as to whether additional tax under s. 143(1A) can be levied in a case where even after making the prima facie adjustments, the final figure is a figure of loss. The provisions of s. 143(1A) are similar to the provisions relating to imposition of penalty under s. 271(1)(c) as well as Expln. 4 to that section. It was held by the Delhi High Court that what is important is that, as a result of the adjustments carried out under s. 143(1), the assessee should become liable to pay some tax. Where the assessee files a return declaring a loss and after adjustments under s. 143(1) are carried out the resultant figure is still a loss, the question of levying additional tax under s. 143(1A) does not arise.

8.2 The ITAT, Jaipur Bench in the case of Indo German Electricals vs. ITO (1992) 41 ITD 455 (JP), following the decision of Chandigarh Bench, reported in ITO vs. Sudha Pharmaceuticals (1983) 17 TTJ (Chd) 518, of Ahmedabad Bench in the case of Shri Khedut Sahakari Khand Udyog Mandli Ltd. vs. ITO, BCAJ 1032, of Bombay Bench in the case of Mutual Plastics vs. 12th ITO (1989) 80 CTR (Trib) (Bom) 45 and the judgments of Madhya Pradesh and Punjab & Haryana High Courts reported in CIT vs. Jaora Oil Mills (1981) 129 ITR 423 (MP) and (1990) 183 ITR 69 (P&H) respectively, held that since penalty under s. 271(1)(c) can be levied in addition to any tax payable by the assessee, no penalty under s. 271(1)(c) is leviable in a case where total income is assessed at a loss, as there would be no question of tax payable in such a case.

9. It will also be worthwhile to reproduce the relevant provisions of s. 271(1)(c) and s. 143(1A):

"271(1) If the Assessing Officer or the Dy. Commissioner(A) or the Commissioner(A) in the course of any proceedings under the Act, is satisfied that any person—

(c) has concealed the particulars of his income or furnished inaccurate particulars of such income,

(iii) in the cases referred to in cl. (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed twice the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income:

Explanation 4.—For the purposes of cl. (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."

"143(1A)(a). Where, in the case of any person, the total income, as a result of the adjustments made under the first proviso to cl. (a) of sub-s. (1), exceeds the total income declared in the return by any amount, the Assessing Officer shall,—

(i) further increase the amount of tax payable under sub-s. (1) by an additional income-tax calculated at the rate of twenty per cent of the tax payable on such excess amount and specify the additional income-tax in the intimation to be sent under sub-cl. (i) of cl. (a) of sub-s. (1);

A perusal of the aforesaid provisions no where clearly provides that it would be applicable in a case where there still remains losses after the additions are made. The definition of income although is an inclusive definition but that also does not specifically include loss. It would also be significant to note that wherever the legislature considered it necessary to treat the term "loss" as included in the expression "income", the Act specifically provided so, as can be seen from Expln. 2 to s. 64. Expln. 2 to s. 64 clearly provides that for the purposes of this section (s. 64), "income includes loss". On the other hand, in ss. 271(1)(c) and 271(1)(iii) no where it is stated that income includes loss.

9.1 The provisions of s. 271(1)(iii) also clearly provide that a person found guilty of concealing the particulars of income or furnishing inaccurate particulars of his income shall pay by way of penalty, as prescribed, in addition to any tax payable by him. This provision as well as Expln. 4 to s. 271(1) clearly rules out cases relating to no income or where even after the additions there still remains loss. The circulars issued by the CBDT explaining the scope and object of inserting Expln. 4 do not in any manner support the Revenue's case as the circulars so issued cannot override provisions of law. It will be worthwhile to refer to a similar Circular No. 549 dt. 31st Oct., 1989 issued by the CBDT in relation to levy of additional tax under s. 143(1A). This circular was subject matter of consideration by the Hon'ble Allahabad High Court in a recent case of Indo Gulf Fertilizers and Chemicals Corporation Ltd. vs. Union of India (1992) 103 CTR (All) 25 in which the Hon'ble Court held that the said Circular No. 549 is on the same lines for the purpose of imposition of penalty as that of s. 271(1)(c) for concealment of income in case of loss returns. It was held by the Hon'ble Court that for imposition of additional tax under s. 143(1A) or for levy of penalty for concealment of income or for furnishing inaccurate particulars of income to evade income-tax there should be some concealment of the positive income. The Hon'ble Allahabad High Court had followed the judgment of Punjab & Haryana High Court in the case of Prithvipal Singh & Co.

9.2 In view of the aforesaid discussions we are of the considered opinion that the view taken by the Hon'ble Punjab & Haryana, Delhi and Allahabad High Courts supporting the contention of the assessee should be preferred over the view taken by the Hon'ble Kerala High Court. Such a view will also be consistent with the view earlier taken by the Ahmedabad Bench in the case of Shri Khedut Sahakari Khand Udyog Mandli Ltd. in which one of us (the A.M.) was a party. Even if it is assumed that the aforesaid provisions are capable of two reasonable constructions, the construction which favours the assessee must be adopted. The Hon'ble Supreme Court in the case of CIT vs. Vegetable Products Ltd. 1973 CTR (SC) 177 : (1973) 88 ITR 192 (SC) has clearly held that where the language of a provision is capable of more meanings than one, then we have to adopt that interpretation which favours the assessee, more particularly so because the provision relates to imposition of penalty. We are, therefore, of the considered opinion that no penalty under s. 271(1)(c) can be levied in a case where the total income is assessed at a figure of loss.

10. In the result the penalty levied by the ITO and confirmed by the CIT(A) is cancelled and the appeal is allowed.

 

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