Vildirect: IncomeTax-caselaws-1993-VIL-179-ITAT-DEL

1993-VIL-179-ITAT-DEL

Equivalent Citation: ITD 049, 441,

Income Tax Appellate Tribunal DELHI

Date: 30.09.1993

NUCHEM LIMITED.

DEPUTY COMMISSIONER OF INCOME TAX.

BENCH

Member(s) : A. KALYANASUNDHARAM., J. P. BENGRA.

JUDGMENT

Per J.P. Bengra, Judicial Member---This is an appeal by the assessee against confirmation of penalty under section 271(1)(c) of the Income-tax Act, 1961, passed by the Commissioner of Income-tax (Appeals),Faridabad, pertaining to the assessment year 1986-87.

2. The assessment of the assessee in this assessment year was completed under section 143(3) at an income of Rs. 1,17,53,940 as against the returned loss of Rs. 83,13,789 vide order dated 31-3-1989. In the assessment various additions/disallowances were made at the assessment stage. The assessee went in appeal against these additions/disallowances made by the Assessing Officer and finally as a result of the Tribunal's order, the following disallowances/additions were confirmed:---

(1) Disallowance of expenditure amounting to Rs. 1,12,48,100 on purchase of plant & machinery.

(2) Interest on FDRs amounting to Rs. 31,86,320.

(3) Addition/disallowance of Rs. 1,59,750 under section 40A(7) being provision for payment of contribution towards approved gratuity fund to LIC.

(4) Disallowance of share issue expenses and survey expenses amounting to Rs. 6,92,805 (Rs. 6,02,805 + Rs. 90,000).

(5) Expenses relating to earlier years amounting to Rs. 4,38,912. On the basis of Appellate Tribunal's order wherein the above additions/disallowances were confirmed, the Assessing Officer initiated penalty proceedings under section 271(1)(c). In reply to show-cause notice, the assessee submitted various letters, finally letter dated20-11-1992wherein it was pleaded that imposition of penalty under section 271(1)(c) would be unjustified. Pointwise additions/disallowances considered by the Assessing Officer are as under:---

(1) The assessee incurred an expenditure of Rs. 1,12,48,100 on the purchase of following plant & machinery:---

         (a) Horizontal Boring Drilling

          & Milling machine.                                       Rs. 78,40,263

         (b) CNC Zig Boring machine                             Rs. 25,73,718

         (c) Pannwalt Super D. Centre

         Horizontal Centrifuge                                     Rs. 8,40,889.

The expenditure was claimed as revenue expenditure on the basis that the expenditure has been incurred on replacement of very old and obsolete machinery and plant by modern machine and plant, thus updated the technology and economising the cost of manufacturing for earning more profit. Thus the expenditure is revenue in nature. However, the Assessing Officer found that the assessee was not having this item of machinery as part of its fixed assets and this item of plant and machinery was purchased by the assessee for expanding the business. All these items of machinery are independent plant and machinery capable of being used as such. The Tribunal has held that all these items are independent machinery and plant capable of being used as such for not only to increase its production capacity but also its ability to manufacture new machines with higher tunnage load by acquiring horizontal boring, drilling and milling machines. Similarly, the capacity increased from 1500 to 2400 with the addition of Pannwalt (horizontal centrifuge) and by acquiring C.N.C. jigs boring machines. Therefore, the Tribunal held that the expenditure incurred was of capital in nature for acquiring new machines and assets. Therefore, it gave direction that the assessee would be entitled to depreciation and investment allowance on these machines. In reply to show-cause notice the assessee had stated that the assessee has claimed the expenditure on purchase of these machinery as a revenue in nature. However, the authorities below have held it as capital in nature. The issue whether the expenditure incurred is capital or revenue in nature is a legal issue. However, the assessee had disclosed full particulars relating to this expenditure. The Assessing Officer was of the view that the assessee has furnished inaccurate particulars of its income in its return. So far as the claim of expenditure on purchase of this plant & machinery is concerned, he has claimed the expenditure as revenue in nature whereas it is capital in nature.

(2) The assessee claimed deduction in respect of interest accrued on FDRs amounting to Rs. 31,86,320. The claim of the assessee was that this amount should not be taxed as original amount on which this interest has accrued, is still a matter subjudice before the Hon'ble Delhi High Court and in view of the contingency that if the matter is decided against it, the assessee had to pay the entire amount along with interest, this amount does not belong to the assessee. The assessee is manufacturing UF/MF moulding, UF Prescol Glues, Formaldehyde and Hexamine. A dispute arose between the assessee and the Central Excise authority about the payment of excise duty on certain articles manufactured by the assessee. The assessee filed writ petition before the Hon'ble High Court of Delhi to restrain the Excise Department from enforcing the demand of excise duty. The Hon'ble High Court ordered the clearance of goods by Excise Department on the assessee furnishing bank guarantee for the amounts in dispute. Pursuant to the orders passed by the Hon'ble Delhi High Court the assessee paid full amount to the bank covering the differential amount of duty, obtained a bank guarantee and on furnishing the bank guarantee to the excise authorities obtained a clearance of the goods. In order to issue a bank guarantee in favour of the Government as directed by the Hon'ble Delhi High Court the assessee's bank required the assessee to deposit the amount equal to the amount of disputed excise duty in fixed deposit. In the guarantee furnished by the bank to the Excise Department the Bank had unequivocally and unconditionally agreed to pay the sum mentioned in the guarantee only to the Excise authorities on the matter being decided by the Delhi High Court. It has undertaken to pay the money on demand to the Central Excise authorities without a demur of the said amount. When the High Court decides the matter against the assessee, all that the Central Excise authorities have to do is to request the Bank to make the payment. On these facts the Assessing Officer was of the view that the amount accrued on the FDRs remained the property of the assessee and it was crediting the interest received on the FDRs in its accounts and for the interest amount, the assessee was getting either FDRs made with the bank or was availing the same in its C/Coverdraft and other hypothecation accounts. Thus, he held that the interest belonged to the assessee as do the FDRs. When the matter came before the Appellate Tribunal, the Appellate Tribunal following its order for assessment year 1985-86, held that the interest accrued on FDRs is income of the assessee. On this basis the Assessing Officer was of the view that provision of Explanation 1 to section 271(1)(c)(iii) is attracted and this amount is a concealed income of the assessee in respect of which inaccurate particulars have been furnished by the assessee.

(3) The Assessing Officer disallowed the provision for payment of gratuity under section 40A(7) on the basis of Tax Audit Report. This was confirmed by the CIT (Appeals). Similarly the Appellate Tribunal following its order for assessment year 1985-86 wherein it was held that after the inception of section 40A(7) disallowance cannot be allowed, upheld the disallowance. The Assessing Officer was of the view that the assessee has furnished inaccurate particulars in respect of this issue and the amount is treated as assessee's concealed income in respect of which inaccurate particulars have been furnished by the assessee.

(4) The assessee had claimed expenses on issue of shares Rs. 6,02,805 and market survey expenses of Rs. 90,000 as revenue expenditure. While the Assessing Officer held it capital in nature relying on the decision of Andhra Pradesh High Court in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT [1988] 174 ITR 689 in which decision of Hon'ble Supreme Court in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52 has been considered. On similar ground survey expenses have been disallowed as they were stated to have been incurred for the purpose of raising capital structure of the company. The Appellate Tribunal held that the expenditure incurred was in regard to raising further fresh capital thereby resulting in augmenting the base of the company. Therefore, it held the expenditure as capital in nature and did not allow any deduction. The Assessing Officer was of the view that the assessee was aware of the fact that this is not a revenue expenditure and as such was not allowable against the current year's income. Initially the assessee has claimed expenses as deferred revenue expenditure and 1/10th of the same was written off. Therefore, the assessee has made a wrong claim and as such furnished inaccurate particulars of its income in respect of this amount.

(5) The Assessing Officer also initiated penalty proceedings in respect of disallowance relating to earlier year and legal and professional charges paid to Shri D.D. Verma and consultancy charges paid to Vital Management Services Pvt. Ltd. However, in appeal, the CIT (Appeals) accepted the assessee's contention and this item was not considered for the purpose of levy of penalty. Therefore, this is not a subject matter of penalty in appeal before us. Penalty levied under section 271(1)(c) by the Assessing Officer was confirmed by the CIT (Appeals) except for an expenditure incurred in earlier years. Aggrieved by that order, the assessee filed appeal before us.

3. The learned counsel for the assessee Shri M.P. Mehrotra pointed out that in respect of items 1 to 3 in our order the facts are identical as they were involved in assessment years 1984-85 and 1985-86 in assessee's own case and the Tribunal was considered the facts and evidence identical to the present one and deleted the penalty in respect of these items. Therefore, so far as penalty concerning to these items is concerned, finding given by the Appellate Tribunal for assessment years 1984-85 and 1985-86 squarely applies to the present assessment year. Therefore, no penalty can be levied on these items for either concealing particulars of income or for furnishing inaccurate particulars of income. In respect of item No. 4 relating to share issue expenses and market survey expenses is concerned, penalty cannot be levied under section 271(1)(c). It was submitted that section 271(1)(c) can be invoked in such a situation where it is proved that there was concealment of particulars of income or inaccurate particulars of income are furnished. But there is no finding by any authority that the assessee had either concealed the particulars of income or furnished inaccurate particulars of income, so as to attract penalty under section 271(1)(c).The Assessing Officer has applied Explanation 1 to section 271(1)(c) which is inapplicable in the present case. Since it was a case where the assessee has claimed expenditure as revenue in nature. However, the authorities have taken a view that the expenditure incurred was capital in nature, the question to be considered is whether such explanation was false or whether it was a case where the assessee though held to be not substantiated the explanation, also failed to prove that such explanation was bona fide and that all the facts relating to the same and material to the computation of his total income had not been disclosed by him? The Assessing Officer applied Explanation 1 to section 271(1)(c) in respect of this addition/disallowance. By this he is trying to establish that Explanation 1 to section 271(1)(c) is attracted because all the additions/disallowances are attributed to suppression of material facts. It was submitted that none of the appellate authority has held that the material facts relating to the computation of income have been suppressed by the assessee. Neither they have held that the explanation given by the assessee is false nor there is a finding that the explanation remained unsubstantiated. It is pertinent to mention here that the Tribunal has discussed the facts and law applicable on this item of addition/disallowance. There is no finding that the assessee has suppressed material relating to this disallowance. Therefore, it cannot be said that the assessee is guilty of suppressing material facts relating to its income. There is also no finding in any authority that full material facts have not been disclosed by the assessee. It only mentioned that the authorities have not accepted the explanation of the assessee for certain reasons. Fact that the assessee's explanation has been duly considered by the Assessing Officer without holding the explanation of assessee false, fraudulent or mala fide, itself proves that the explanation given by the assessee is bona fide. The onus is on the department to show that the explanations offered were not substantiated. It is a different matter that on account of difference of opinion which is also possible amongst various authorities, the plea of the assessee has not been accepted. Under the deeming provision if the explanation is bona fide and material to the computation of total income are disclosed by the assessee, Explanation 1 will not apply.

4. The learned counsel for the assessee invited our attention to the Article by Shri A.K. Bhattacharyya reported in issue No. 35, Part VI of (1993) 113 CTR (Article 264) wherein it is mentioned that the allowability of the expenditure on issue of shares and debentures under the Income-tax Act was always a point of controversy and a number of High Courts of the country have ventured to clarify the position. And different High Courts have clarified the same point in different manners and reached different conclusions. The Supreme Court has never considered this question. Reliance was placed on the decision of Supreme Court in the case of India Cements Ltd. wherein the Hon'ble Supreme Court has held that the amount spent towards stamps, registration fees, lawyer's fees, etc. for obtaining a loan from the Industrial Finance Corporation of India was not in the nature of capital expenditure and was laid out or expended wholly and exclusively for the purpose of assessee's business and was therefore allowable as a deduction. Reliance was also placed on the decision of Delhi High Court in the case of Qammar-ud-din & Sons v. CIT [1981] 129 ITR 703 for the proposition that where failure to return the correct income was not on account of gross or wilful neglect, the assessee should not be penalised. Reliance was also placed on the decision of Calcutta High Court in the case of Burmah-Shell Oil Storage & Distributing Co. of India Ltd. v. ITO [1978] 112 ITR 592 for the proposition that where the assessee has disclosed full and detailed particulars with all relevant materials and after furnishing all necessary particulars of income, the assessee raised the legal contentions before the Income-tax Officer and it was not accepted, it cannot be assumed that the petitioner has concealed the particulars of income or furnished inaccurate particulars of income. Reliance was also placed on the following orders of the Appellate Tribunal for similar proposition:---

(1) Maharaj Prithviraj (Indl.) v. Dy. CIT [1993] 115 Taxation 26 (Delhi)(Trib.); where one of us was a party;

(2) Harshvardhan Chemicals & Minerals Ltd. v. Dy. CIT [1991] 39 TTJ (JP) 212. It was pointed out that while disallowing the claim of the assessee as revenue expenditure, the Hon'ble Bench has relied on the observations of the Hon'ble Supreme Court in the case of India Cements Ltd. and of the Andhra Pradesh High Court in the case of Vazir Sultan Tobacco Co. Ltd. In fact the Supreme Court in India Cements Ltd.'s case was not concerned with a case of raising fresh capital and in the case of Vazir Sultan Tobacco Co. Ltd. the issue arose whether the Hon'ble Andhra Pradesh High Court taking support from the decision of India Cements Ltd.'s case. The view was taken against the assessee. However, there is a divergent view in favour of the assessee by some High Courts in the case of Warner Hindustan Ltd. v. CIT [1988] 171 ITR 224 (AP) and CIT v. Kisenchand Chellaram (India) (P.) Ltd. [1981] 130 ITR 385 (Mad.). The Hon'ble Madras High Court has also placed reliance on the decision of the Hon'ble Supreme Court in the case of India Cements Ltd. It was pointed out that in such a situation where the matter has not been considered by the Hon'ble Supreme Court directly and different High Courts have clarified the same point in different manners, the observation of the Hon'ble Calcutta High Court in the case of BurmahShell Oil Storage & Distributing Co. of India Ltd. is material which says that in such a situation where the legal contention bona fide raised, whether it is ultimately accepted or rejected, will not generally be an act of fraud or gross or wilful negligence. Therefore, no penalty can be attracted.

5. As against this, the learned Departmental Representative Shri Sandeep Tandon very vehemently argued that penalty is leviable though on item Nos. 1 to 3 the Appellate Tribunal has taken a view that no penalty is leviable under section 271(1)(c). However, in respect of 4th item of share issue expenses and survey expenses, law on this point is very clear. Expenses incurred in connection with raising of capital are expenditure of capital in nature. For this proposition reliance was placed on the following decisions: (1) Vazir Sultan TobaccoCo.Ltd.'s case; and

(2) Nagin Chand Shiv Sahai v. CIT [1938] 6 ITR 534 (Lahore). It was further pointed out that the auditors had suggested to claim 1/10th of the expenditure as revenue in nature under section 35D. However, the company has taken a conscious decision and claimed it as a revenue expenditure. So, the penalty is exigible.

6. We have considered the rival submissions and have gone through the material available on record. Explanation 1 to section 271(1)(c) makes it clear that where the persons offered an explanation with respect to computation of income and if it is found false then it shall be presumed that the assessee has concealed the particulars of his income. In the present case we find that in respect of item Nos. 1 to 3, the facts, circumstances and arguments are same/identical as they were taken before the Bench of the Appellate Tribunal in assessee's own case for assessment years 1984-85 and 1985-86. Therefore, the reasoning given by the Appellate Tribunal in the said assessment years pertaining to item Nos. 1 to 3 is squarely applicable to the facts of the present case. Therefore, our conclusion is that where certain additions/disallowances which were confirmed upto the stage of Appellate Tribunal are concerned, unless there is a finding that the explanation of the assessee is false, the claim of the assessee cannot be treated as mala fide. The assessee has disclosed all material particulars pertaining to the computation of income and they were not found false by any authority, it cannot be said that in the given facts and circumstances, the assessee's claim was not bona fide. Further, it cannot be concluded that the assessee had concealed either particulars of income or furnished inaccurate particulars of income.

7. With regard to 4th item, where the assessee has claimed the expenditure incurred on share issue and survey expenses as revenue in nature whereas the authorities have held it as a capital in nature, we find that allowability of this expenditure on issue of shares and survey expenses under the Income-tax Act, was always a point of controversy and number of High Courts of the country have ventured to clarify the position and different High Courts have clarified the same point in different manners and reached different conclusions. The Hon'ble Supreme Court has never considered this question though some observations of the Supreme Court in the case of India Cements Ltd. are relied on by the various High Courts in support of their view point. The ratio of judgment of the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 was considered by the Andhra Pradesh High Court in the case of Warner Hindustan Ltd. and held that the legal and consultation fees paid in connection with the issue of bonus share and increasing the capital of the company was revenue expenditure allowable under section 37. In doing so, the Court has followed the decision of Madras High Court in the case of Kisenchand Chellaram (India) (P.) Ltd. where fee for obtaining permission to raise the capital of the company from the Registrar of Companies was allowed as revenue expenditure. In support of that the Madras High Court has placed reliance on the decision of the Supreme Court in the case of India Cements Ltd. On the other hand the case of Vazir Sultan Tobacco Co. Ltd. is also on this point. In this case, the Hon'ble Andhra Pradesh High Court has taken a contrary view from that of earlier decisions of Andhra Pradesh High Court and view taken by Hon'ble Madras High Court. The Supreme Court in the case of Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 laid emphasis on the facts that the expression "asset or advantage of enduring nature" emphasise the element of a sufficient degree of durability appropriate to the context. The Bombay High Court in the case of CIT v. Glaxo Laboratories (India) Ltd. [1990] 181 ITR 59 has applied the ratio of judgment of the Hon'ble Supreme Court in the case of Bombay Steam Navigation Co. (1953) (P.) Ltd. v. CIT [1965] 56 ITR 52 and held that the expenditure for raising fresh capital for running business is revenue in nature. From all these facts, it is clear that there is divergent view of different High Courts on this point. In such a situation where the assessee has raised a legal contention bona fide and this issue was not settled by the Hon'ble Supreme Court, whether it is ultimately accepted or rejected, will not generally be an act of concealment of particulars of income, fraud or gross or wilful negligence on the part of the assessee or furnishing of inaccurate particulars of income. Therefore, provision contained in Explanation to section 271(1)(c) cannot be attracted even if it can be said that the said Explanation applies because of the discrepancy between the income returned by the petitioner and the income assessed by the Income-tax Officer. In the case of Burmah-Shell Oil Storage & Distributing Co. of India Ltd., the Hon'ble Calcutta High Court has taken this view.

8. Explanation 1 to section 271(1)(c) envisages a number of situations. We have to analyse whether that situation existed in this case or not. In this case the assessee had offered an explanation for claiming higher deduction. The question to be considered is whether such explanation was false or whether it was a case where the assessee though held to be not able to substantiate the explanation had also failed to prove that such explanation was bona fide and that all the facts relating to the same and material to the computation of his total income had been disclosed by him. In both the situations, the deduction disallowed in computing the total income was to be deemed, for the purposes of section 271(1)(c) to represent the income in respect of which the particulars had been concealed. If an assessee interprets the law in a particular way disclosing all the relevant facts in the returns so that if the legal position taken by him is not accepted, full tax can be imposed but it cannot be said that the assessee had filed false return. This is what has been held by the Hon'ble Madhya Pradesh High Court in the case of Agrl. Implements Dealers Syndicate v. CST [1971] 27 STC 227. Unless the amounts disallowed were deemed to represent the income in respect of which particulars have not been furnished, no conclusion of concealment of income can be reached. This was what was clearly provided for in the Explanation 1 added to section 271(1)(c). The very same Explanation also provided that nothing contained in that Explanation would apply to a case where the amount added or disallowed as a result of the rejection of any explanation offered by such person, if such explanation is bona fide and all the facts relating to the same and the material to the computation of his total income have been disclosed by him. Thus the safety valve provided to a honest assessee making a bona fide claim is contained in this exclusion provision. This also places a burden on the revenue authority to establish as a matter of fact before a penalty is imposed treating the amount added or disallowed as concealment of income, that the explanation offered was not bona fide and all the material facts were not disclosed. All the facts relating to the assessee's contentions along with supporting material was furnished to the Assessing Officer and only alternative claims were raised interpreting the concerned sections of the Income-tax Act in favour of the assessee. No where it was said at any stage that the concerned particulars or materials necessary for the computation of total income were not disclosed by the assessee. Placing a different interpretation to put it otherwise, interpreting a section of an Act in favour of the assessee by placing the necessary facts cannot be said to be a mala fide exercise of the right to interpret the Act. The facts of this case demonstrate that the assessee had with very great care, caution and good faith submitted an explanation, which is bona fide, made alternative claims disclosing at all times all the necessary materials. There was neither negligence nor deliberateness in the claims made. Disregarding this important aspect it is not proper and fair to still hold that the assessee was guilty of concealment of income all because the explanation offered by the assessee was not found to be acceptable. Such a situation does not warrant the levy of penalty for concealment of income besides the legal authorities we have mentioned in assessee's own case for assessment years 1984-85 and 1985-86 in support of our conclusion.

9. In view of our above discussion, we are of the opinion that penalty levied in the given facts and circumstances is illegal and invalid. We, therefore, cancel the same.

10. In the result, the appeal is allowed.

DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that VATinfoline Multimedia is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.