Disallowance of an expense per se cannot mean that the assessee has furnished incorrect particulars of its income

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Disallowance of an expense per se cannot mean that the assessee has furnished incorrect particulars of its income 
Karnataka High Court

Balaji Vegetable Products P. Ltd. vs Commissioner Of Income-Tax on 15 February, 2005

Equivalent citations: (2007) 211 CTR Kar 38, 2007 290 ITR 172 KAR, 2007 290 ITR 172 Karn

Author: H N Das

Bench: H Dattu, H N Das

JUDGMENT H.N. Nagamohan Das, J.

1. The Income-tax Appellate Tribunal, Bangalore Bench, at the instance of the assessee referred the following three questions of law for our opinion:

I. Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the provisions of Section 271(1)(c) of the Act are attracted in the instant case and thus the penalty levied is liable to be upheld ?

II. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the claim for deduction made by the applicant was a false claim so as to attract the provisions of Section 271(1)(c) of the Act ?

III. Whether, on the facts, the Tribunal was justified in holding that there was no evidence of payment made by the applicant company to the other company to justify the claim, when adequate materials were furnished in the course of the appellate proceedings ?

2. The assessee-company filed a return of income on January 13, 1981, for the assessment year 1980-81 declaring an income of Rs. 700. The assessee claimed deduction of Rs. 12 lakhs being the lease rent paid to its licensor among other deductions. It is the claim of lease rent of Rs. 12 lakhs which is in controversy in this lis. The Income-tax Officer by his order dated March 14, 1983, passed a draft assessment order disallowing the claim of Rs. 12 lakhs under the head Lease rent as the same is not taxable. Following the direction of the Assistant Commissioner of Income-tax under Section 144B of the Income-tax Act, 1961 (“the Act”, for short), the Income-tax Officer passed an order of assessment on September 16, 1983. The Commissioner of Income-tax (Appeals) confirmed the assessment order of the Income-tax Officer and the same has become final.

3. The Income-tax Officer while completing the assessment, issued a notice under Section 271(1)(c) of the Act to levy penalty on the ground that the assessee has filed a false return of income. The assessee submitted its objections on May 13, 1987, inter alia, contending that they have no mala fide motive in avoiding the payment of legitimate tax dues and therefore requested to drop the penalty proceedings. The Income-tax Officer by rejecting the explanation of the assessee passed an order of penalty under Section 271(1)(c) of the Act vide order dated August 10, 1987. Aggrieved by this order of penalty by the Income-tax Officer, the assessee filed an appeal before the Commissioner of Income-tax (Appeals) and the same came to be rejected in so far as levying penalty in the disallowance of Rs. 12 lakhs under the head Lease rent, vide order dated February 27, 1989. Aggrieved by this order of the Commissioner of Income-tax (Appeals), the assessee filed a second appeal before the Income-tax Appellate Tribunal (the “Tribunal” for short) in I. T. A. Nos. 968, 969 and 970 of 1989 and the same came to be rejected. Hence, the reference at the instance of the assessee.

4. Sri Parthasarthi, learned Counsel for the assessee, contends that the assessee in its return has neither concealed the particulars of the income nor furnished inaccurate particulars. There is no mala fide motive on the part of the assessee in avoiding the payment of legitimate tax dues. Merely because the Income-tax Officer disallowed a claim of the assessee shall not result in levy of penalty under Section 271 of the Act. Reliance is placed on the following decisions:

(1) Shiv Lal Tak v. CIT [2001] 251 ITR 373 (Raj); and (2) National Textiles v. CIT [2001] 249 ITR 125 (Guj).

5. Per contra, Sri M.V. Seshachala, learned standing counsel for the Revenue, contends that the failure of the assessee in not justifying the claim of Rs. 12 lakhs as lease rent amounts to a false claim and therefore the levy of penalty is just and proper. There is deemed furnishing of inaccurate particulars and consequently the assessee is liable to pay penalty under Section 271 of the Act. Reliance is placed on the following decision:

K.P. Madhusudhanan v. CIT .

6. During the course of arguments, the assessee filed a paper book containing the copies of documents relied on by the assessee before the Revenue authorities. Learned Counsel for the assessee filed an affidavit to this effect. Learned Counsel for the Revenue has no objection to production of the paper book by the assessee. Accordingly, the paper book filed by the assessee is placed on record.

7. Heard the arguments on both the sides. Perused the entire reference papers and the paper book.

8. The assessee entered into an agreement of lease and licence on December 29, 1979, with one M/s. Chabirani Agro Industrial Enterprises Ltd., (for short “the licensor”) under which the assessee was permitted to utilise the plant and machinery of the licensor for processing vanaspathi for a period of 11 months on some terms and conditions. The assessee invested some money and ran the factory of the licensor for a period of 10 days only, i.e., between January 1, 1980 to January 10, 1980. The licensor was heavily indebted to the bank. The bank brought an action and got a receiver appointed through the court. The receiver took possession of all the assets including the factory premises in question on January 10/11 1980. Consequently, the assessee cannot make use of the plant and machinery. The assessee contends that under these circumstances, they settled the issue with the licensor and cancelled the entire agreement dated December 29, 1979, by paying a sum of Rs. 12 lakhs to the licensor as lease rent in full and final settlement on March 30, 1980. The assessee in their returns claimed allowance of Rs. 12 lakhs as payment towards lease rent to the licensor. The Income-tax Officer disallowed this claim of the assessee on the ground there is no obligation on the part of the assessee to pay lease rent under the agreement dated December 29, 1979 and therefore the same was brought to tax and the assessee has paid the tax on the disallowance of Rs. 12 lakhs.

9. The Revenue has not disputed the payment of Rs. 12 lakhs by the assessee to the licensor. The Revenue refused to accept this payment of Rs. 12 lakhs as lease rent and therefore the same was brought to tax. Whether this addition by the Income-tax Officer amounts to furnishing inaccurate particulars of income under Section 271(1)(c) of the Act. In order to justify the levy of penalty, the circumstances must show that there was animus on the part of the assessee. In the instant case, the assessment year is 1980-81. Section 271(1)(c) and Explanation 1 appended thereto as was in force in the relevant assessment year 1980-81 reads thus:

271. (1) If the Income-tax Officer or the Appellate Assistant Commissioner or the Commissioner (Appeals) in the course of any proceedings under this Act, is satisfied that any person…

(c) has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty,…

Explanation 1.-Where in respect of any facts material to the computation of the total income of any person under this Act,-

(A) such person fails to offer an explanation or offers an explanation which is found by the Income-tax Officer or the Appellate Assistant Commissioner or the Commissioner (Appeals) to be false, or (B) such person offers an explanation which he is not able to substantiate, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of Clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed:

Provided that nothing contained in this Explanation shall apply to a case referred to in Clause (B) in respect of any 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 material to the computation of his total income have been disclosed by him….

10 In National Textiles v. CIT [2001] 249 ITR 125 (Guj), it is held as follows (page 135):

In order to justify the levy of penalty, two factors must co-exist, (i) there must be some material or circumstances leading to the reasonable conclusion that the amount does represent the assessee’s income. It is not enough for the purpose of penalty that the amount has been assessed as income and (ii) the circumstances must show that there was animus, i.e., conscious concealment or act of furnishing of inaccurate particulars on the part of the assessee. The Explanation has no bearing on factor No. 1 but it has a bearing only on factor No. 2. The Explanation does not make the assessment order conclusive evidence that the amount assessed was in fact the income of the assessee. No penalty can be imposed if the facts and circumstances are equally consistent with the hypothesis that the amount does not represent concealed income as with the hypothesis that it does. If the assessee gives an explanation which is unproved but not disproved, i.e., it is not accepted but circumstances do not lead to the reasonable and positive inference that the assessee’s case is false, the Explanation cannot help the Department because there will be no material to show that the amount in question was the income of the assessee.

Alternatively treating the Explanation as dealing with both the ingredients (i) and (ii) above, where the circumstances do not lead to the reasonable and positive inference that the assessee’s explanation is false, the assessee must be held to have proved that there was no mens rea or guilty mind on his part. Even in this view of the matter, the Explanation alone cannot justify levy of penalty. Absence of proof acceptable to the Department cannot be equated with fraud or wilful default. As we find no material difference between the original Explanation 1 and Explanation 1 as substituted, in our opinion, it has to be so construed as to harmonise it with the basic principles of justice and fairness as in the case of the original Explanation. We are guided by the commentaries of the learned authors Kanga and Palkhiwala, Law and Practice of Income-tax, volume 1, pages 1637, 1639 and 1640.

11. In CIT v. Santhosh Financiers , it is held as hereunder (page 746):

Whether there is concealment to make the penalty exigible is normally a question of fact and also as to whether the burden of proof in a given case had been discharged on a set of facts is also a question of fact. The Appellate Tribunal, on the facts, found that the assessees have not concealed any particulars of income or furnishing of inaccurate particulars of income. The assessees took up the contention that the interest over and above what is allowable under the Kerala Money Lenders Act cannot be treated as income. This is only an explanation not to treat a particular amount as income. It cannot be said that the income has been concealed.

12. We are in respectful agreement with the view expressed in National Textiles v. CIT [2001] 249 ITR 125 (Guj) and CIT v. Santhosh Financiers . In the instant case, the assessee in their return claimed deduction of Rs. 12 lakhs under the head “Lease rent” paid to the licensor. The Revenue has not disputed the payment of Rs. 12 lakhs by the assessee to the licensor. The only contention of the Revenue is that there is no obligation for the assessee to pay the lease rent to the licensor under the agreement dated December 29, 1979, and therefore the assessee is not entitled for deduction and the Revenue brought the same to tax. Merely because the Revenue refuses to accept the claim of the assessee and treated the same as income it cannot be said that the assessee has concealed the income. In order to justify the levy of penalty the circumstances must show that the assessee is having an intention to conceal the income and to evade the payment of tax. In this case the assessee showed the payment of Rs. 12 lakhs to the licensor in the return filed by the assessee and the same is not disputed by the Revenue. Though the Revenue refuses to accept the claim of the assessee and added the same for tax it will not automatically lead to a circumstance to levy the penalty.

13. The law laid down by the apex court in K.P. Madhusudhanan v. CIT , has no application to the facts of this case. This decision of the apex court is subsequent to the amendment of Section 271(1)(c) Explanation 1(B). In the case on hand, the assessment year is 1980-81. The amendment to Section 271(1)(c) was in the year 1986. The judgment of the apex court has no application to the facts of this case.

14. For the reasons stated above, the questions of law referred to us are answered in the negative and in favour of the assessee.

15. Ordered accordingly. 

 

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