Short Overview : Merely for the reason that disallowance of bone fide claim had not been assailed by assessee in its quantum appeal before Tribunal, penalty under section 271(1)(c) could not be imposed.

Assessee in its revised return of income claimed coal cost freight issue–Bhusaval of Rs. 16 crores expenditure pertaining to the year under consideration. AO disallowed deduction and accordingly levied penalty under section 271(1)(c).

it is held that Assessee claimed expenditure in question on the basis of remarks and report of its statutory auditors. Though assessee specifically raised the claim in its revised return of income, however, AO did not record any observation to dislodge veracity of the claim of expense so raised. Merely for the reason that disallowance of bona fide claim had not been assailed by assessee in its quantum appeal before Tribunal, penalty under section 271(1)(c) could not be imposed.

Decision:In asses see’s favor.

 

IN THE ITAT, MUMBAI BENCH

RAVISH SOOD, J.M. & N.K. PRADHAN, A.M.

DCIT v. Maharashtra State Power Generation Co. Ltd.

ITA No. 4720/Mum/2012

7 August, 2019

Appellant by: M anjunath Swami, Departmental Representative

Respondent by: Niraj Seth, Authorized Representative

Ravish Sood, J.M.

The present appeal filed by the revenue is directed against the order passed by the Commissioner (Appeals)-21, Mumbai, dated 24-4-2012, which in turn arises from the order passed by the assessing officer under section 271(1)(c) of the Income Tax Act, 1961 (for short ‘Act’), dated 31-3-2011 for assessment year 2006-07. The revenue has assailed the impugned order on the following grounds of appeal :–

‘1. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in cancelling the penalty imposed under sections 271(1)(c) of the Income Tax Act, 1961, ignoring the facts on record which go to establish that the assessee had understated the income and thereby furnished inaccurate particulars of income.

2. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in deleting the penalty imposed under sections 271(l)(c) of the Income Tax Act, 1961, ignoring the facts that the quantum addition was confirmed in appeal.

3. The appellant prays that the order of the Commissioner (Appeals) on the above grounds be set aside and that of the assessing officer be restored.

4. The appellant craves leave to amend, or alter any grounds or add a new ground, which may be necessary.’

2. Briefly stated, the assessee company is engaged in the business of generation of electricity and had started functioning from 6-6-2005 after the erstwhile Maharashtra State Electricity Board was bifurcated into three companies viz. (i) Maharashtra State Electricity Distribution Company Ltd.; (ii) Maharashtra State Power Generation Company Ltd.; and (iii) Maharashtra State Electricity Transmission Company Ltd. Each of the aforesaid companies were to look after one of the three aspects of the erstwhile electricity board i.e. generation, transmission and distribution of electricity. Accordingly, the year under consideration i.e. period relevant to assessment year 2006-07 was the first year of operation of the assessee company. The assessee company had e-filed its return of income for assessment year 2006-07 on 30-11-2006, declaring Nil income after claiming ‘set off’ of brought forward losses and absorbed depreciation amounting to Rs. 623,47,43,689. Subsequently, the assessee filed a revised return of income declaring Nil income after claiming ‘set off’ of brought forward losses amounting to Rs. 288,90,26,701. The return of income filed by the assessee was processed as such under section 143(1) of the Act. Thereafter, the case of the assessee was selected for scrutiny assessment under section 143(2).

3. During the course of the assessment proceedings it was observed by the assessing officer that in the revised return of income of the assessee company a ‘note’ had been posted below the statement of computation of income, which read as under :–

‘Reason for revising the return: The return of income is being revised as the original return of income for the assessment year 2006-07 was filed on the basis of un-audited accounts as the accounts were not audited till the due date of filing of the return of income. This is as per the Letter, dated 14-2-2007 bearing reference No. GM/CA/Rev. Return/MSPGCL/2007.’

On a perusal of the tax audit report and the statement of computation of income forming part of the revised return, it was noticed by the assessing officer that the tax audit of the assessee company was completed only on 12-2-2007 when the report under section 44AB of the Act was signed and issued by the auditors in Form Nos. 3CA/3CD. It was noticed by the assessing officer that it was the claim of the assessee that the ‘Original’ return of income was based on un-audited accounts, while for the revised return was as per the audited accounts. The assessing officer declined to accept the revised return of income filed by the assessee. As per the assessing officer a return of income could be revised under section 139(5) only on discovery of any omission or wrong statement in the ‘original’ return.

Accordingly, the assessing officer was of the view that as in the present case the return was revised on the ground that the ‘original’ return of income was filed on the basis of un-audited accounts, which could never be a criteria for revising a return under section 139(5), therefore, he declined to accept the same. The assessing officer while framing the assessment made an addition of the amount of Rs. 334,57,16,988 i.e. the difference in the total income as per the ‘original’ and the revised return of income of the assessee. The assessing officer while framing the assessment also initiated penalty proceedings under section 271(1)(c) of the Act.

4. Aggrieved, the assessee assailed the assessment framed by the assessing officer in appeal before the Commissioner (Appeals). The claim of the assessee that it had validly filed a revised return of income since there was sufficient omission and discovery of wrong statement in its ‘original’ return of income found favor with the Commissioner (Appeals), who therein concluded that the assessee had validly filed the revised return of income. A perusal of the details of difference of an amount of Rs. 334,57,16,988 as per the total income in the ‘original’ and the revised return of income revealed that the same was comprised of three items viz. (i) reduction on account of reversal of excess billing as per MERC order : Rs. 320.72 crores; (ii) provision for difference in oil stock on account of physical inventory taken by the assessee in the month of September and October : Rs. 20.04 lacs; and (iii) coal cost freight issue-Bhusaval : Rs. 1631.85 lacs. It was observed by the Commissioner (Appeals) that the assessing officer in the course of the assessment proceedings while declining to accept the revised return, had observed, that in the absence of any material evidence or details the reduction in the total income in the assesses revised return of income could not be accepted. It was observed by the Commissioner (Appeals) that the assessing officer while framing the assessment had not looked into and examined the details/constituent forming part of the difference of Rs. 334.57 crores, and the addition of the said amount was made only on account of non-acceptance of the revised return of income filed by the assessee. Further, the Commissioner (Appeals) called for a ‘remand report’ from the assessing officer on various items including the abovementioned three items/issues. After necessary deliberations on the ‘remand report’ filed by the assessing officer and the counter comments of the assessee, the Commissioner (Appeals) concluded that the provision of difference in oil stock of Rs. 20.04 lac was allowable since the physical inventory of oil stock was carried out in month of September and October, 2005. In respect of items of coal cost freight issue-Bhusaval of Rs. 1631.85 lacs the disallowance was upheld by the Commissioner (Appeals), for the reason, that the assessee had not commented upon the said issue in its written submissions filed before him. As regards the assesses claim of reversal of excess billing of Rs. 320.72 crores the Commissioner (Appeals) did not find favour with the contentions advanced by the assessee and confirmed the said addition.

5. The assessing officer after receiving the order of the Commissioner (Appeals) called upon the assessee to show cause as to why penalty under section 271(1)(c) may not be imposed on it in respect of the aforesaid three additions/disallowances made by the assessing officer, viz. (i) the reduction on account of reversal of excess billing : Rs. 320.72 crore; (ii) the disallowance of coal cost freight issue-Bhusaval : Rs. 1631.85 lacs; and (iii) addition of the provision of difference in oil stock : Rs. 20.04 lacs. The explanation of the assessee that no penalty under section 271(1)(c) in context of the aforesaid additions/disallowances was called for in its case, however, did not find favour with the assessing officer who imposed a penalty of Rs. 113,51,46,137 under section 271(1)(c) of the Act.

6. Aggrieved, the assessee carried the matter in appeal before the Commissioner (Appeals). It was observed by the Commissioner (Appeals) that as the addition made by the assessing officer in respect of provision for difference in oil stock of Rs. 20.04 lacs was deleted in the course of the quantum appeal of the assessee, therefore, penalty under section 271(1)(c) on the said count was liable to be vacated. As regards the claim of reversal of excess billing of Rs. 320.72 crores raised by the assessee in its revised return of income, it was observed by the Commissioner (Appeals), that as the tariff (rate of electricity) to be charged by the assessee from its clients was regulated by Maharashtra Electricity Regulatory Commission (for short ‘MERC’), therefore, the assessee was obligated to charge the rate of tariff from its clients strictly as per the order of MERC. It was observed by the Commissioner (Appeals) that as at the time of finalisation of the accounts of the assessee company for the year under consideration the MERC order was not there, therefore, the bill to be raised by the assessee on its sole client viz. MSE Distribution Company Ltd. was accounted for and charged as per the mutual agreement between the Managing Directors of both the companies. It was noticed by the Commissioner (Appeals) that the accounts of the assessee company were initially prepared on the basis of un-audited accounts. However, as the statutory auditors at the time of audit of the accounts of the assessee company had reported that the tariff of electricity was to be charged/accounted for as per the tariff prescribed by the regulator i.e. MERC vide its Order, dated 7-9-2006, therefore, it was at this stage that it was realised by the assessee that it had accounted for excess sales of electricity in its accounts. Accordingly, in the backdrop of the aforesaid facts the assessee had filed a revised return of income wherein the excess billing of Rs. 320.72 crores was reversed by it. It was observed by the Commissioner (Appeals) that the reversal of the excess billing was carried out by the assessee as per the audited accounts which were based on the order of MERC. On the basis of his aforesaid deliberations, it was observed by the Commissioner (Appeals) that as the assessee company had reversed the excess billing of Rs. 320.72 crores in conformity with the MERC order which was binding on it, therefore, it could safely be concluded that no inaccurate particulars of income in respect of the said issue were furnished by the assessee. In fact, it was noticed by the Commissioner (Appeals) that the assessee had made adequate disclosure in its revised return, remand proceedings and the subsequent proceedings. Apart there from, it was observed by the Commissioner (Appeals) that the issue pertaining to the date of applicability of MERC order was also debatable. In order to fortify his aforesaid view, it was observed by him, that though his predecessor in the course of the quantum appeal had observed that the MERC order was effective prospectively from the month of September, 2006 for all billing purposes and was thus not relevant for the year under consideration, however, the assessee had thereafter obtained a Letter, dated 16-7-2009 wherein MERC had clarified that its order was applicable during the year under consideration. Accordingly, in the backdrop of his aforesaid observations the Commissioner (Appeals) was of the considered view that as the issue which had led to reversal of excess billing of Rs. 320.72 crores was in itself not free from doubts and debate, therefore, on the said count also the assessee could not have been visited with levy of penalty under section 271(1)(c). On the basis of his aforesaid observations, it was concluded by the Commissioner (Appeals), that as the assessee had neither furnished any inaccurate particulars and/or concealed particulars of income insofar the reversal of excess billing of Rs. 320.72 crores was concerned, therefore, in the backdrop of its explanation which was found to be bona fide/reasonable no penalty under section 271(1)(c) was liable to be imposed on the assessee. As regards the penalty imposed by the assessing officer on the issue of provision for difference in oil stock of Rs. 20.04 lac, it was observed by the Commissioner (Appeals) that as the said addition/disallowance had been deleted in the course of the quantum appeal by his predecessor, therefore, no penalty on the said count thereafter survived. Further, the Commissioner (Appeals) adverted to the penalty imposed by the assessing officer on the issue of coal cost freight issue-Bhusawal of Rs. 16,31,85,000. It was observed by the Commissioner (Appeals) that unlike in the course of the assessment proceedings the assessee had in the course of the penalty proceedings and also in the course of the appellate proceedings emanating therefrom before him, had satisfactorily explained that the coal cost freight at Bhusaval amounting to Rs. 16,31,85,000 was an expenditure pertaining to the year under consideration. It was noticed by the Commissioner (Appeals) that the assessee in its revised return of income had on the basis of the remarks and report of its statutory auditors claimed the aforesaid amount as an expenditure.

The Commissioner (Appeals) being of the view that as the explanation advanced by the assessee in respect of the aforesaid claim of expenditure was bona fide and justified being based on the auditors report, therefore, the penalty levied of the said aspect under section 271(1)(c) deserved to be deleted. On the basis of his aforesaid observations the Commissioner (Appeals) finding merit in the appeal of the assessee deleted the penalty imposed by the assessing officer under section 271(1)(c) and allowed the appeal.

7. The revenue being aggrieved with the order of the Commissioner (Appeals) has carried the matter in appeal before us. The learned Authorised Representative (for short ‘A.R’) for the assessee, at the very outset of the hearing of the appeal submitted, that as the disallowance of the excess provision for purchase of power amounting to Rs. 320,72,82,510 in the hands of the assessee company had been deleted by a coordinate bench of the Tribunal viz. ITAT ‘B’ bench, Mumbai, while disposing off the appeal of the assessee for the year under consideration i.e. ITA No. 320/Mum/2010, vide its Order, dated 3-3-2017, therefore, the issue pertaining to levy of penalty under section 271(1)(c) on te said aspect did not survive any more. It was submitted by the learned Authorized Representative that the only issue that survived in context of the penalty imposed by the assessing officer under section 271(1)(c) was the addition of Rs. 16,31,85,000 that was made by the assessing officer in respect of coal cost freight issue-Bhusaval. It was submitted by the learned Authorized Representative that as the quantum of the aforesaid addition was comparatively small as against the major issues involving substantial stakes, therefore, the assessee had not made any submissions in the course of the quantum appeal before the Commissioner (Appeals). Also, it was submitted by the learned Authorized Representative that the assessee had inadvertently omitted to assail the aforesaid addition that was confirmed by the Commissioner (Appeals) in its quantum appeal before the Tribunal. The learned Authorized Representative submitted that that penalty imposed by the assessing officer under section 271(1)(c) in respect of the aforesaid addition was after necessary deliberations vacated by the Commissioner (Appeals). The learned Authorized Representative took us through the genesis of the issue under consideration and submitted that as the liability on account of unconnected wagons for coal received by the assessee amounting to Rs. 16,31,85,467 was not initially provided for, therefore, when the said fact was pointed out by the statutory auditors during the course of the audit, the assessee accounted for the same and raised a claim in respect of the said expenditure in its revised return of income. Accordingly, it was submitted by the learned Authorized Representative that as the aforesaid expenditure was incurred by the assessee, therefore, a claim for deduction for the same was validly raised by it in its revised return of income. It was fairly admitted by the learned Authorized Representative that as in the course of the quantum appeal the assessee had focused primarily on the other issues which involved substantial stakes, therefore, inadvertently, the aforesaid issue which was comparatively a minor item was not given much attention and on account of a bona fide omission was not assailed before the Tribunal in the quantum appeal filed by the assessee. Further, it was averred by the learned Authorized Representative that as the assessee had came forth with a complete disclosure vis-a-vis the aforesaid addition in its statement of accounts, therefore, no penalty under section 271(1)(c) was liable to be imposed in its case. As regards the reliance placed by the assessing officer on the judgment of the Hon’ble Supreme court in the case of UOI v. Dharmendra Textiles Processors (2007) 212 CTR 432 (SC) : 2007 TaxPub(DT) 1387 (SC), it was submitted by the learned Authorised Representative, that as the same was distinguishable on facts, therefore, the same would not assist the case of the revenue. In fact, it was submitted by the learned Authorised Representative that the assessing officer while relying on the aforesaid judicial pronouncement had misconceived the factual position prevalent in the case of the assessee in context of the issue under consideration.

Lastly, it was submitted by the learned Authorised Representative that as the assessee was a fully owned government company, therefore, it was preposterous to allege that it had concealed its income.

8. Per contra, the learned Departmental Representative (for short ‘D.R’) relied on the orders of the lower authorities. It was submitted by the learned Departmental Representative that as the assessee had admitted the addition of Rs. 16,31,85,000 in context of its claim of expenditure pertaining to ‘Coal Cost Freight Issue-Bhusaval’ and had not assailed the same in appeal before the Tribunal, therefore, the assessing officer had rightly imposed penalty under section 271(1)(c) of the Act. The learned Departmental Representative relied on the order passed by the assessing officer under section 271(1)(c) and submitted that the Commissioner (Appeals) had erroneously dislodged the same in context of the aforesaid issue under consideration. It was submitted by the learned Departmental Representative that the order of the Commissioner (Appeals) be set aside and that of the assessing officer be restored.

9. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements relied upon by them. Admittedly, the penalty under section 271(1)(c) was imposed by the assessing officer, vide his Order, dated 31-3-2011 in respect of three additions/disallowances which had emanated from the difference of Rs. 334.57 crores between the ‘original’ return of income and the revised return of income filed by the assessee company viz. (i) the reversal of excess billing as per MERC order : Rs. 320.72 crores; (ii) the provision for difference in oil stock : Rs. 20.04 lac; and (iii) the coal cost freight issue-Bhusaval : Rs. 1631.85 lacs. As the aforesaid addition made by the assessing officer on account of provision for difference in oil stock of R.20.04 lac had been vacated by the Commissioner (Appeals) while disposing off the quantum appeal of the assessee, vide its Order, dated 13-11-2009, therefore, the Commissioner (Appeals) had rightly observed that the issue as regards the levy of penalty under section 271(1)(c) in respect of the said addition does not survive any more. Insofar the addition on account of reversal of excess billing as per MERC order of Rs. 320.72 crore is concerned, we find that as the same had been deleted by the Tribunal while disposing off the quantum appeal of the assessee for the year under consideration viz. Maharashtra State Power Generation Company Ltd. v. ACIT, Central-10(1), Mumbai (ITA No. 302/Mum/2010, dated 3-3-2017), therefore, the penalty imposed by the assessing officer on the said count will have to meet the same fate and thus stands vacated.

Accordingly, in the backdrop of the aforesaid facts the only issue which survives as regards the penalty levied by the assessing officer under section 271(1)(c) is the addition/disallowance made by the assessing officer in respect of coal cost freight issue-Bhusaval of Rs. of Rs. 1631.85 lacs. As is discernible from the orders of the lower authorities and admitted by the learned Authorised Representative before us, the aforesaid addition had not been assailed by the assessee in its quantum appeal before the Tribunal. Resultantly, the disallowance of the assesses claim of coal cost freight issue-Bhusaval of Rs. 1631.85 lac has attained finality. It is the claim of the learned Authorised Representative, that as the assessee company in the course of the first appellate proceedings had focused on the other issue wherein high stakes of Rs. 200 crores of tax demand was involved, therefore, by way of an inadvertent omission the aforesaid addition/disallowance sustained by the Commissioner (Appeals) was not carried any further in appeal before the Tribunal.

10. We shall in the backdrop of the aforesaid factual matrix now deliberate on the merits of the contentions advanced by the learned Authorised Representative, wherein he had tried to impress upon us that the Commissioner (Appeals) had rightly observed that no penalty under section 271(1)(c) was sustainable in respect of the addition/disallowance made by the assessing officer in respect of coal cost freight issue-Bhusaval amounting to Rs. 1631.85 lacs. It is the claim of the learned Authorised Representative that the assessee which is generating power through thermal, hydro and gas based power stations is in receipt of coal through railway wagon from various coal companies. At times all the racks (set of 58 wagons) meant for the assessee would not be received by it. On a similar footing, some racks not meant for the assessee would be received by it. Accordingly, the aforesaid wagons were termed as ‘missing’ and ‘unconnected wagons’, respectively, by the assessee. It is claimed by the learned Authorised Representative that as a matter of consistent practice the assessee in respect of the ‘missing wagons’ would lodge a claim for the cost of the coal on the railways. Similarly, the assessee would create a liability for the coal received in respect of ‘unconnected wagons’. It is submitted by the learned Authorised Representative that initially the assessee would raise a claim/create a liability prevalent on the basis of available declared grade rates of collieries, but thereafter, on receipt of the invoices of ‘missing wagons’ the valuation would be corrected and necessary rectification entry was passed in the ‘books of accounts’.

Similarly, for the ‘unconnected wagons’ liability for the cost of coal was initially created on the basis of the average rate of coal received by the respective power station. It was submitted by the learned Authorised Representative that during the reconciliation of the coal wagons with the railways the origin of the ‘unconnected wagons’ would be traced and the valuation of the coal received in respect of the said unconnected wagons was revised and necessary accounting effect would be given in its ‘books of accounts’. In the backdrop of the aforesaid prevalent practice, it is the claim of the learned Authorised Representative that it was in the course of its audit that it was pointed out by the statutory auditors that a liability on account of ‘unconnected wagons’ amounting to Rs. 16,31,58,467 was not provided for and accounted for by the assessee. Accordingly, it is the claim of the learned Authorised Representative that as the aforesaid expenditure that was incurred was not claimed as a deduction, therefore, the assessee on learning about its said mistake, had thereafter accounted for and raised the claim for the same in its revised return of income.

11. We have given a thoughtful consideration to the issue before us in the backdrop of the contentions advanced by the authorized representatives for both the parties. As is discernible from the records, the disallowance of the coal cost freight issue-Bhusaval of Rs,16,31,85,000 forms part of Rs. 334.57 crores i.e. the difference in the total income as per the ‘original’ and the revised return of income filed by the assessee. As observed by us hereinabove, no discussion as regards the disallowance of the aforesaid coal cost freight issue-Bhusaval of Rs. 16,31,85,000 is available in the assessment order.

In fact, it was only in the course of the quantum appellate proceedings that when the assessee had filed the complete details in respect of the difference of Rs. 334.57 crores, that the assessing officer had thereafter in his ‘remand report’ submitted that the reduction to the said extent should not be allowed. We find that the aforesaid disallowance of Rs. 16,31,85,000 was upheld by the Commissioner (Appeals) while disposing off the quantum appeal, for the reason, that the assessee had failed to submit its counter comments on the assessing officer’s remand report on the issue under consideration. Be that as it may, we find that in the course of the penalty proceedings as well as the appellate proceedings emanating therefrom before the Commissioner (Appeals), the assessee had satisfactorily explained that the coal cost freight issue–Bhusaval of Rs. 16,31,85,000 was an expenditure pertaining to the year under consideration. As a matter of fact, the assessee had in its revised return of income claimed the said amount as an expenditure on the basis of the remarks and report of its statutory auditors. In the backdrop of the aforesaid facts, we are of a strong conviction that the aforesaid claim of expenditure raised by the assessee was based on a bona fide and justified grounds.

Apart there from, we find that though the assessee had specifically raised the aforesaid claim in its revised return of income, however, the assessing officer had not carried out any inquiry/investigation as regards the veracity of the said claim of the assessee. Apart there from, we are also of a strong conviction that as the issue pertaining to coal cost rate– Bhusaval of Rs. 16,31,85,000 was never discussed in the assessment order, therefore, the said fact also supports the claim of the assessee that no penalty under section 271(1)(c) could have been validly levied in its hands in respect of the said issue. Also, we find that the assessee in the course of the penalty proceedings before the assessing officer, and also in the course of the appellate proceedings before the Commissioner (Appeals) had satisfactorily explained that the coal cost freight issue-Bhusaval of Rs. 16,31,85,000 was an expense allowable under section 37(1) of the Act, which for the said reason was claimed as a deduction in its revised return of income on the basis of the audit report. We find that the lower authorities had not recorded any observation which could dislodge the veracity of the aforesaid claim of expense so raised by the assessee in its revised return of income. Apart there from, we are also of a strong conviction that now when the assessee had came forth with the full disclosure of all the particulars in respect of its aforesaid claim of expense, which as observed by us hereinabove had not been proved to be incorrect by the lower authorities, therefore, merely for the reason that the addition/disallowance on the said count had not been assailed by the assessee in its quantum appeal before the Tribunal would not justify imposition of penalty under section 271(1)(c) on the assessee on the said standalone basis. Our aforesaid view is fortified from the fact that the penalty proceedings are separate and distinct from the assessment proceedings, and merely for the reason that an addition/disallowance had been made in the hands of the assessee would not justify imposition of penalty under section 271(1)(c). We have given a thoughtful consideration to the observations of the Commissioner (Appeals) that as the assessee had raised a bona fide claim of expense as regards the coal cost freight issue-Bhusaval amounting to Rs. 16,31,85,000 in its revised return of income, therefore, no penalty under section 271(1)(c) could have been levied on it, and in the backdrop of our aforesaid deliberations find ourselves to be in agreement with the view taken by him. Accordingly, finding no infirmity in the order of the Commissioner (Appeals) wherein he had rightly vacated the penalty imposed by the assessing officer under section 271(1)(c), we uphold the same.

12. The appeal of the revenue is dismissed.