R.S.Syal, Member (A) -
(1.) THIS appeal by the assessee arises out of the order dated 21.1.2010 passed by the CIT(A) upholding the penalty of Rs. 6,00,820/ - imposed by the Assessing Officer u/s. 271(1)(c) of the Income -tax Act, 1961 (hereinafter also called 'the Act') in relation to the assessment year 2004 -05.
(2.) IT can be seen from the grounds of appeal that the assessee has challenged the confirmation of penalty in respect of two additions, viz., Rs. 16,19,062/ - on account of taxation of trial run receipts and Rs. 55,694/ - towards disallowance of write off of debit balance. The facts apropos the first addition are that the assessee is a limited company engaged in the business of scientific research and informatics services for drug discovery units based upon Insilco solutions and software's. A return declaring loss of Rs. 4.47 crore was filed. During the course of assessment proceedings, it was observed by the AO that the assessee accounted for income of Rs. 2.83 crore on account of research and development activities in its Profit and loss account against the actual receipt of Rs. 2.99 crore towards sale of services. The remaining amount of Rs. 16,19,062/ - representing trial run receipts was reduced from total sales and credited to work -in -progress capitalized in the balance sheet. On being called upon to explain as to why such amount of Rs. 16.19 lakh was not offered for taxation, the assessee stated that the projects in respect of such trial run receipts were incomplete. The Assessing Officer treated such receipts during trial run period as a regular activity and included the amount in total sales. The action of the A.O. was echoed in the first appeal. The tribunal was pleased to uphold the view taken by the authorities below by observing that since the receipts were after the business had been set up, the same was rightly chargeable to tax. The tribunal also accepted the assessee's alternative contention that if such amount was to be considered as income, then the corresponding enhancement should be made to closing balance of work in progress capitalized in the balance sheet. Thereafter, the Assessing Officer imposed penalty qua the income of Rs. 16.19 lakh, which has been approved in the first appeal. The assessee is aggrieved against such confirmation of penalty.
3.2. We have heard the rival submissions and perused the relevant material on record. In so far as the trial run receipt are concerned, it can be seen from the assessee's Annual accounts, attached with the return of income, that the assessee capitalized pre -operative expenses incurred on such projects during the year which were incomplete, thereafter added the brought forward balance of pre -operative expenses pending allocation and then reduced trial run receipts of Rs. 16.19 lakh for working out the amount of work -in -progress capitalized in the balance sheet at Rs. 4.32 crore. This entire working of the computation of work -in -progress by reducing the amount of trial run receipts is part of Schedule E forming part of balance sheet, a copy of which is available on page 25 of the paper book. From such Schedule, it can be seen that the assessee promptly and categorically declared reduction of trial run receipts from the work -in -progress capitalized. The stand of the assessee in reducing the trial run receipts from work -in -progress for capitalization is consistent with the one taken in the precedent year. In the preceding year also, there were trial run receipts of Rs. 27.85 lakh which were reduced from the capital work in progress before taking it to the balance sheet. It was fairly stated by the ld. AR that the treatment so given by the assessee to the trial run receipts in the preceding year was accepted by the Revenue albeit without regular assessment. Thus, it is apparent that the assessee was following such method of recording trial run receipts on a consistent basis from year to year. It is in view of such consistent practice that the receipts on account of trial run were not offered for taxation but reduced from the pre -operative expenses capitalized.
3.3. There is absolutely no doubt that the Tribunal has upheld the inclusion of such trial run receipts in the total income for the year under consideration. Now the question arises as to whether the ipso facto confirmation of addition by the tribunal would per se lead to the confirmation of penalty as well. In our considered opinion, the answer to this question has to be in negative. The Act has kept assessment proceedings distinct from the penalty proceedings and not made the penalty automatic and consequential on the making of addition. The logic is that if the assessee succeeds in proving in penalty proceedings that there was a bona fide belief for the claim of non -taxability of the receipt or the deductibility of any expenditure, then notwithstanding the fact that the finality to the taxability of such a receipt in the quantum proceedings is assigned or the deduction has been finally denied, the penalty can still be deleted if the facts and circumstances of the case so warrant.
3.4. It is relevant to note the prescription of Explanation 1 to section 271(1) as under: -
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 Assessing Officer or the Commissioner (Appeals) or the Commissioner to be false, or
(B) such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, 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.
3.5. A bare perusal of the clause (A) of the Explanation indicates that the amount added or disallowed in computing the total income of the assessee shall be deemed to represent the income in respect of which penalty will be leviable, if the assessee fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the Commissioner to be false. Adverting to the facts of the extant case, we find that the assessee did offer an explanation for treating the trial run receipts as not chargeable to tax, being the consistently followed and not rejected practice of reducing it from the capital work -in -progress for the earlier years and such view was not found to be false. This stand of the assessee is substantiated from the annual accounts of the company, a copy of which is available on record. Thus it is palpable that clause (A) fails in the present case because the assessee not only offered an explanation for treating the amount of trial run receipts as not chargeable to tax for the year but such explanation was equally not found by the Assessing Officer to be false.
3.6. Clause (B) of the Explanation provides that the amount added or disallowed in computing the total income of the assessee shall be deemed to represent the income in respect of which penalty is leviable, if the assessee offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him. Coming back to the facts of the case under consideration, we observe that the assessee offered an explanation for not offering this amount for taxation which it substantiated by showing that the same was in conformity with the consistent practice of reducing the trial run receipts from the work -in -progress capitalized as having not been disturbed by the Revenue in the past and further by appropriately disclosing complete details in the annual accounts accompanying the return of income itself. Thus, it is evident that even clause (B) of Explanation 1 to section 271(1) is also not attracted in the facts of the present case.
3.7. The case of the assessee is not covered even within the main provision of section 271(1)(c) of the Act which is attracted only if the assessee has concealed the particulars of his income or furnished inaccurate particulars of such income. Obviously, there is no concealment of the particulars of the income inasmuch as the assessee made complete disclosure in this regard on the face of its balance sheet accompanying the return of income. Further, it cannot be a case of furnishing inaccurate particulars of income because the assessee entertained a bona fide view that the amount of trial run receipts is not chargeable to tax in the year of receipt on the strength of similar practice followed and not disturbed in the past. The sheer fact that in the final assessment, such bona fide view taken by the assessee was jettisoned by the Revenue cannot mean that the assessee either concealed the particulars of his income or furnished inaccurate particulars of such income. The Hon'ble Supreme Court in the case of CIT Vs. Reliance Petro Products Pvt. Ltd. : (2010) 322 ITR 158 (SC) has held that a mere making of a claim which is not sustainable in law by itself will not attract penalty under the section when the assessee furnishes all the necessary particulars in his return of income. In view of the foregoing discussion and respectfully following the judgment of the Hon'ble Summit Court, we hold that no penalty is sustainable in respect of the addition of Rs. 16,19,062/ -.
(3.) 1. The second addition on which penalty has been confirmed is a sum of Rs. 55,693/ -. Briefly stated the factual matrix of this issue is that the assessee claimed deduction of Rs. 55,693/ - by writing off some debit balance. On being called upon to justify the deduction, the assessee admitted that it was an advance given to a person which had no relation with sales. In the absence of any justification for the deduction, the A.O. made addition for the said sum. The ld. CIT(A) upheld the addition. The assessee did not press this issue before the Tribunal. Thereafter, penalty was imposed u/s. 271(1)(c) of the Act and confirmed in the first appeal. Now the assessee is before us against the upholding of penalty on this amount.
4.2. We have heard the rival submissions on this issue and perused the relevant material on record. It is crystal clear from the factual scenario of this issue that the assessee claimed to have advanced this sum to one Mr. Parveen Kumar Singh in 2001 -02. A deduction was claimed for this amount in the accounts for the year after write off, by contending that the advance was given in the ordinary course of business and the company had followed adequate procedure to recover the advance. On a specific query from the bench about the nature of such advance, more specifically when the assessee accepted before the A.O. that it had no relation with the sales, the ld. AR could not through any further light on the same. It is here that clause (B) of the Explanation to section 271(1) is attracted because the assessee offered an explanation which he was not able to substantiate and further 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 were disclosed by him. The assessee claimed that this amount was given as advance to Mr. Parveen Kumar Singh in the ordinary course of business, which fact turned out to be incorrect even before the AO because the assessee admitted that it had no relation with sales. Further no material worth the name has been placed on record to demonstrate as to how the said advance claimed to be given in the ordinary course of business was deductible. Besides, there is no evidence to indicate that the amount became irrecoverable and was hence eligible for deduction. These facts point out that the assessee knowingly claimed a wrong deduction for this sum to which it was not lawfully entitled to. This deduction in our considered opinion was rightly denied and the disallowance of such amount is fully covered within the mischief of sec. 271(1)(c) of the Act. Ergo, the view of the ld. CIT(A) in sustaining the penalty on this issue is upheld.;