No Penalty is imposable if addition is on account of disallowance of section 40A(2)(b).

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No Penalty is imposable if addition is on account of disallowance of section 40A(2)(b).
Dis-allowance under s. 40A(2)(b) cannot be considered as concealment of income or furnishing inaccurate particulars. Concealment and furnishing inaccurate particulars refer to deliberate act on the part of the assessee. No Penalty is imposable if addition is on account of disallowance of section 40A(2)(b).
 

JHAVAR PROPERTIES (P) LTD. vs. ASSISTANT COMMISSIONER OF INCOME TAX

BOMBAY TRIBUNAL

N.V. Vasudevan, J.M. & B. Ramakotaiah, A.M.

ITA No. 3136/Mum/2006; Asst. yr. 2001-02

Sep 10, 2008

(2008) 27 CCH 0679 MumTrib

(2009) 28 DTR 0026, (2010) 123 ITD 0429, (2009) 124 TTJ 0858

Legislation Referred to

Section 271(1)(c)

Case pertains to

Asst. Year 2001-02

 

Penalty under s. 271(1)(c)—Concealment—Disallowance under s. 40A(2)—No form of disclosure is contemplated vis-a-vis s. 40A(2) and therefore an assessee cannot be held guilty of non-disclosure of income which is determined by applying provisions of s. 40A(2)—Further, assessee having furnished all the details which were also correct, there would not be charge of furnishing inaccurate particulars—Therefore, provisions of s. 271(1)(c) were not attracted where income was assessed by making disallowance under s. 40A(2)(b)

Held

The provisions of s. 40A(2) by its very nature are something which the AO has to determine by using his discretion, subject to the limitations laid down in this behalf in the provisions. It is not possible for an assessee to anticipate whether an AO would invoke his discretion and make a disallowance under the provisions of the s. 40A(2)(b). Therefore there cannot be disclosure of income resulting from disallowance made under s. 40A(2)(b). The form in which return of income is to be filed by a corporate assessee does not contemplate any disclosure of income earned by the assessee which could be subject to scrutiny under s. 40A(2)(b). In the form of tax audit report to be given under s. 44AB, the auditors are obliged to point out transactions ‘if any’ which are covered under the provisions of s. 40A(2)(b). Wherever legislature deems a disclosure necessary in the return of income with reference to a particular situation it has made such provision. For example, the provisions of s. 64 there is an obligation on the part of the parents of minor children to club the income of minors in their hands and a disclosure in the return of income in this behalf. No such provision is available vis-a-vis the provisions of s. 40A(2)(b) in the return of income. Since no specific form of disclosure is contemplated by the Act as well as the Rules and the form of return prescribed, an assessee can never be held to be guilty of non-disclosure of income which is determined by applying the provisions of s. 40A(2)(b). Therefore in the absence of any provision of particular disclosure of the transaction in question, the disclosure of the same in its books of account as done by the assessee was sufficient in law.—V.D.M. RM. M. RM. Muthiah Chettiar vs. CIT (1969) 74 ITR 183 (SC) and CIT vs. Smt. P.K. Kochammu Amma Peroke (1980) 19 CTR (SC) 196 : (1980) 125 ITR 624 (SC) relied on.

(Para 5)

There cannot be any charge of furnishing inaccurate particulars as well. This is because, the assessee had furnished all the details and the details admittedly were correct. By applying deeming provisions of law the disallowance has been made by the AO. But for these deeming provisions the AO could not have made any disallowance, as admittedly the genuineness as well as the incurring of the expenditure, have not been doubted or disputed by the AO. The disallowance under s. 40A(2)(b) therefore, cannot be considered as concealment of income or furnishing inaccurate particulars. Consequently the facts of the case does not warrant penalty under s. 271(1)(c).—Dilip N. Shroff vs. Jt. CIT (2007) 210 CTR (SC) 228 : (2007) 291 ITR 519 (SC) relied on.

(Paras 6 & 8)

Conclusion

Disallowance under s. 40A(2)(b) cannot be considered as concealment of income or furnishing of inaccurate particulars so as to attract penalty under s. 271(1)(c).

Cases Referred to

CIT vs. Shankar Ghosh (1995) 214 ITR 349 (Cal) 
ITO vs. Kumar Metal Industries (1991) 39 TTJ (Bom) 7 : (1991) 36 ITD 261 (Bom)
Voltamp Transformers (P) Ltd. vs. CIT (1981) 23 CTR (Guj) 312 : (1981) 129 ITR 105 (Guj)

Counsel appeared:

Shubhash Shetty, for the Assessee : S.K. Mahapatra, for the Revenue

B. Ramakotaiah, A.M.

ORDER

This appeal by the assessee is against the order of the CIT(A), Central-V, Mumbai, dt. 3rd March, 2006 confirming the penalty of Rs. 14,94,718 under s. 271(1)(c) of the IT Act.

2. The brief facts leading to the present appeal are that the assessee company is engaged in the business of real estate development and construction. In course of assessment, AO found that the assessee had claimed a sum of Rs. 63 lakhs as deduction on account of payment made for job work done. It was further found that this payment was made to a sister concern, namely, Morya Properties & Investment (P) Ltd. (MPIC). The AO examined the records of the said sister concern MPIC and it was found that against the gross receipt of Rs. 99,81,100 shown by the said sister concern on account of interior decoration and job work which included the impugned receipt of Rs. 63 lakhs from the assessee, expenditure debited in the books was only Rs. 25,03,060. It was therefore, held that the payment of Rs. 63 lakhs was far in excess of the actual expenditure incurred by the sister concern for the job work done for the assessee. After examination of the details, the AO found that the value of the job which was entrusted to the sister concern was of only Rs. 32,09,974 for which the appellant had made a payment of Rs. 63,00,000. As the MPIC filed a loss return it was held by the AO that the assessee made excessive payment with a view to reduce its own tax liability. He therefore, disallowed an amount of Rs. 30,82,026 as excessive payment under s. 40A(2)(b) of the IT Act. The assessee filed appeal against the order of the AO. The CIT(A) after examining all aspects has confirmed the disallowance made by the AO. Penalty proceedings under s. 271(1)(c) was initiated during the course of assessment proceedings. After the dismissal of the appeal, the AO issued show-cause notice to the assessee asking it to explain why penalty under s. 271(1)(c) should not be imposed. In response, it was submitted that the assessee had not concealed any income. The disallowance made only because the AO was of the opinion that the payment made to the sister concern was excess and unreasonable. Therefore it was contended that no penalty should be imposed. The AO however, rejected the submission and imposed a penalty of Rs. 14,94,718 in terms of Expln. 1 to s. 271(1)(c) of the IT Act. The CIT(A) has confirmed the penalty as the quantum was confirmed by the predecessor CIT(A) and also held that the explanation of the assessee is not bona fide and hence penalty has been rightly imposed in terms of Explanation to s. 271(1)(c).

3. The learned counsel submitted that there cannot be any penalty when the amount was disallowed invoking provisions of s. 40A(2)(b). In this case the genuineness of the amount was not doubted. Only the quantum of the amount paid was restricted by the AO invoking the provisions of s. 40A(2)(b). He referred to the order of the AO as well as the order of the CIT(A) to say that the assessee has indeed obtained quotations from the parties and considering the nature of the work and the expertise required the work was assigned to the sister concern for Rs. 63,00,000. It was submitted that the fact that the work was done was not in dispute and the AO restricted the amount on estimation but there was no concealment of any income nor furnishing of any inaccurate particulars. The counsel relied on the decisions in the case of Voltamp Transformers (P) Ltd. vs. CIT (1981) 23 CTR (Guj) 312 : (1981) 129 ITR 105 (Guj), ITO vs. Kumar Metal Industries (1991) 39 TTJ (Bom) 7 : (1991) 36 ITD 261 (Bom) and CIT vs. Shankar Ghosh (1995) 214 ITR 349 (Cal) for the proposition that there is always an estimation involved in invoking the provisions of s. 40A(2)(b) but it does not call for penalty under s. 271(1)(c).

4. The learned Departmental Representative, however, relied on the orders of the AO and the CIT(A) and submitted that the payment was not a bona fide payment and as can be seen from the order of the CIT(A) the assessee has obtained quotations for less than the amount paid to the sister concern and therefore the authorities were correct in levying penalty under s. 271(1)(c).

5. We have considered the issue and examined the record. As seen from the record there is no doubt that the assessee has paid an amount of Rs. 63,00,000 and work was undertaken. The AO has not doubted the work undertaken by the sister concern. Only to the extent of reasonableness of the payment the AO invoked provisions of s. 40A(2)(b). Had he considered the expenditure under the provisions of s. 37(1) and proved that the assessee has spent more than required, then the issue can be different. However, he disallowed the amount under the provisions of s. 40A(2) which is as under :

“40A(2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in cl. (b) of this sub-section, and the AO is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.

(b) The persons referred to in cl. (a) are the following, namely :

(i) where the assessee is an individual

any relative of the assessee;

(ii) where the assessee is a company, firm, AOP or HUF

any director of the company, partner of the firm, or member of the association or family, or any relative of such director, partner or member;

(iii) any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual;

(iv) a company, firm, AOP or HUF having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member;

(v) a company, firm, AOP or HUF of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member;

(vi) any person who carries on a business or profession,—

(A) where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or

(B) where the assessee being a company, firm, AOP or HUF, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner or member, has a substantial interest in the business or profession of that person.

Explanation : For the purposes of this sub-section, a person shall be deemed to have a substantial interest in a business or profession, if,—

(a) in a case where the business or profession is carried on by a company, such person is, at any time during the previous year, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) carrying not less than twenty per cent of the voting power; and

(b) in any other case, such person is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the profits of such business or profession.”

The provisions of s. 40A(2) of the Act by its very nature is something which the AO has to determine by using his discretion, subject to the limitations laid down in this behalf in the aforesaid provisions. It is not possible for an assessee to anticipate whether an AO would invoke his discretion and make a disallowance under the provisions of the s. 40A(2)(b) of the Act. Therefore there cannot be disclosure of income resulting from disallowance made under s. 40A(2)(b). The form in which return of income is to be filed by a corporate assessee does not contemplate any disclosure of income earned by the assessee which could be subject to scrutiny under s. 40A(2)(b) of the Act. In the form of tax audit report to be given under s. 44AB of the Act, the auditors are obliged to point out transactions if any which are covered under the provisions of s. 40A(2)(b) of the Act. Wherever legislature deems a disclosure necessary in the return of income with reference to a particular situation it has made such provision. For example, the provisions of s. 64 of the Act, there is an obligation on the part of the parents of minor children to club the income of minors in their hands and a disclosure in the return of income in this behalf. No such provision is available vis-a-vis the provisions of s. 40A(2)(b) of the Act, in the return of income. The Hon’ble Supreme Court in the case of V.D.M. RM. M. RM. Muthiah Chettiar vs. CIT (1969) 74 ITR 183 (SC) was dealing with a question as to when an assessee could be said to have failed to disclose material facts in the context of reassessment proceedings under the 1922 Act. It held that where in the form of return prescribed under the IT Rules, there was no clause which required a particular disclosure of income, then it cannot be said that an assessee by not showing that income failed or omitted to disclose fully and truly all material facts necessary for his assessment. In the case of CIT vs. Smt. P.K. Kochammu Amma Peroke (1980) 19 CTR (SC) 196 : (1980) 125 ITR 624 (SC) this principle was reiterated and it was held therein that a note in the form of return requiring a particular disclosure was held to be sufficient to hold that there was a duty on the part of the assessee to disclose income of others which is includible in his income. In the aforesaid case, the principle laid down in the case of V.D.M. RM. M. RM. Muthiah Chettiar (supra) has been only reiterated but distinguished on the ground that the note in the form of return of income had been overlooked. Since no specific form of disclosure is contemplated by the Act as well as the Rules and the form of return prescribed, an assessee can never be held to be guilty of non-disclosure of income which is determined by applying the provisions of s. 40A(2)(b). We therefore hold that in the absence of any provision of particular disclosure of the transaction in question, the disclosure of the same in its books of account as done by the assessee was sufficient in law.

6. There cannot be any charge of furnishing inaccurate particulars as well. This is because, the assessee had furnished all the details and the details admittedly were correct. By applying deeming provisions of law the disallowance has been made by the AO. But for these deeming provisions the AO could not have made any disallowance, as admittedly the genuineness as well as the incurring of the expenditure, have not been doubted or disputed by the AO.

7. In view of the peculiar facts of the case it cannot be stated that the assessee has either furnished inaccurate particulars or concealed incomes. The provisions of s. 271(1)(c) of the Act were not attracted to the cases where income of an assessee is assessed on estimate basis and additions are made therein. It was held that when the additions has been made on the basis of estimate and not on account of any concrete evidence of concealment, penalty was not leviable. In the case of Dilip N. Shroff vs. Jt. CIT (2007) 210 CTR (SC) 228 : (2007) 291 ITR 519 (SC) the apex Court considered the scope of levying penalty under s. 271(1)(c) wherein it was held as follows :

“The legal history of s. 271(1)(c) of the Act traced from the 1922 Act prima facie shows that the Explanation were applicable to both the parts. However, each case must be considered on its own facts. The role of the Explanation having regard to the principle of statutory interpretation must be borne in mind before interpreting the aforementioned provisions. Clause (c) of sub-s. (1) of s. 271 categorically states that the penalty would be leviable, if the assessee conceals the particulars of his income or furnished inaccurate particulars thereof. By reason of such concealment or furnishing of inaccurate particulars alone, the assessee does not ispo facto become liable for penalty. Imposition of penalty is not automatic. Levy of penalty is not only discretionary in nature but also automatic. Levy of penalty be exercised on the part of the AO keeping the relevant factors in mind. Some of those factors apart from being inherent in the nature of penalty proceedings as has been noticed in some of the decisions of this Court, inheres on the face of the statutory provisions. Penalty proceedings are not to be initiated, as has been noticed by the Wanchoo Committee, only to harass the assessee. The approach of the AO in this behalf must be fair and objective.”

“The term ‘inaccurate particulars’ is not defined. Furnishing of an assessment of value of the property may not by itself be furnishing of inaccurate particulars. Even if the Explanations are taken recourse to, a finding has to be arrived at having regard to cl. (A) of Expln. 1 that the AO is required to arrive at a finding that the explanation offered by an assessee, in the event he offers one, was false. He must be found to have failed to prove that such explanation is not only not bona fide but all the facts relating to the same and material to the income were not disclosed by him. Thus, apart from his explanation being not bona fide, it should have been found as of fact that he has not disclosed all the facts which was material to the computation of his income.”

“Concealment of ‘income’ and ‘furnishing of inaccurate particulars’ are different. Both concealment and furnishing inaccurate particulars refer to deliberate act on the part of the assessee. A mere omission or negligence would not constitute a deliberate act of supressio veri or suggestio falsi. Although it may not be very accurate or apt but suppressio veri would amount to the concealment, suggestio falsi would amount to furnishing of inaccurate particulars.”

8. In the present case the disallowance under s. 40A(2)(b) cannot be considered as concealment of income or furnishing inaccurate particulars. Consequently we are of the opinion that the facts of the case does not warrant penalty under s. 271(1)(c). Therefore, the order of the CIT(A) is set aside. Penalty cancelled.

9. In the result, appeal of the assessee is allowed.

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