SOFT POINT TECHNOLOGIES PRIVATE LIMITED (FORMERLY KNOWN AS COLOR CHIPS ANIMATION PARK LIMITED),HYDERABAD vs. INCOME TAX OFFICER, WARD-3(4) , HYDERABAD

Relevant facts in brief are that in the return of income for the assessment year 2005-06, the assessee debited an amount of Rs. 50 lakhs to the profit and loss account towards decrease in value of inventories. In the order passed under section 143(3) of the Act on 28/12/2007, learned Assessing Officer treated such amount of Rs. 50 lakhs shown under the head ‘decrease in value of investment’ as ‘capital loss’, declined to allow the same and added it back to the income of the assessee.

Assessee preferred appeal before the learned CIT(A), but without any success. Learned Assessing Officer initiated proceedings under section 271(1)(c) of the Act. By way of order dated 29/03/2018, learned Assessing Officer held that in terms of explanation 1 to section 271(1) of the Act, the amount added or disallowed in computing the total income of a person as a result of such person, offering an explanation which he is not able to substantiate and failing to prove that such explanation is bona fide and that all the facts relating to the same material to the computation of his total income have been disclosed by him, then such amount added or disallowed in computing the total income of such person as a result thereof shall be deemed to represent the income in respect of which particulars have been concealed. On this premise, learned Assessing Officer proceeded to levy penalty of Rs. 18,29,625/-.

Aggrieved by levy of penalty, assessee preferred an appeal before the learned CIT(A) and submitted that the learned Assessing Officer levied the penalty on the ground that the assessee furnished inaccurate particulars of income; that such view of the learned Assessing Officer is totally contrary to the ration laid down by the Hon’ble Apex Court in the CIT vs Reliance Petroproducts Pvt Ltd [2010] 322 ITR 158; that the claim that the loss is speculation loss under the provisions of section 73 of the Act and thus the revaluation of closing stock and claim of Rs. 50 lakhs on account of that is to be allowed; that the claim is disallowed, but the learned Assessing Officer nowhere held that the revaluation does not result in reduction of Rs. 50 lakhs; and that the claim to treat the loss as ‘speculation loss’ was denied and thus the claim of Rs. 50 lakhs was not allowed.

Learned CIT(A) after referring to the material and contentions of the parties, observed that various aspects of the claim of the assessee were dealt with by the learned Assessing Officer aptly by referring to the observations of the learned CIT(A) in the quantum appeal and, therefore, there was no need to interfere with the findings of the learned Assessing Officer in the penalty appeal. Consequently, he dismissed the appeal.

Assessee, therefore, filed this appeal contending that the authorities below failed to consider the case of the assessee in the light of the decision of the Hon’ble Apex Court in the case of Reliance Petro Products (supra), and disallowance of a claim on the difference of opinion cannot be equated to furnishing inaccurate particulars or concealment of income. He also placed reliance of the Hon’ble Delhi High Court in the case of CIT vs. DCM Limited (2013) 359 ITR 0101 (Delhi). Further argument of the learned AR is that there is no finding of the learned Assessing Officer to the effect that the assessee had furnished any inaccurate particulars or concealed any income, but the finding is only that making a claim which is not allowable under law amounts to furnishing of wrong particulars and,

therefore, penalty was liable to be levied. He submitted that the twin conditions under section 271(1)(c) of the Act are not satisfied and the penalty cannot be sustained. Reliance is placed on the decision of the Hon’ble Apex Court in the case of CIT vs Reliance Petroproducts Pvt Ltd (supra) and the decision of the Hon’ble Delhi High Court in the case of CIT vs. DCM Limited (supra).

Per contra, it is the submission of the learned DR that the claim which is not tenable in the eyes of law and still claimed by the assessee is clearly a form of tax evasion attempt and falls under the term ‘furnishing of wrong particulars of income’ and, therefore, the authorities below are justified in levying and sustaining the penalty. Reliance is placed on the addition reported in CIT vs. Zoom Communications Private Limited, 327 ITR 510.

We have gone through the record in the light of the submissions made on either side. As could be seen from the assessment order, during the course of the assessment proceedings, the assessee company produced the books of accounts which were examined by the learned Assessing Officer. It is only on perusing the profit and loss account, the learned Assessing Officer noticed the debit entry to the tune of Rs. 50 lakhs towards decrease in value of inventories. Observations of the learned Assessing Officer was that since the assessee’s main business activity is consultancy, know-how in setting Animation Park Studios, Entertainment Parks etc., and to undertake port-folio services, the amount of Rs. 50 lakhs shown under the head ‘decrease in value of investments’ was treated as ‘capital loss’. Nowhere it is the finding of the learned Assessing Officer that the assessee falsified the accounts or claimed any bogus expenditure. To treat a particular entry as capital loss or revenue expenditure is a matter of debate and difference of opinion.

Before the learned CIT(A), assessee contended that the learned Assessing Officer levied the penalty on the ground that the assessee furnished inaccurate particulars of income; that such view of the learned Assessing Officer is totally contrary to the ration laid down by the Hon’ble Apex Court in the case of CIT vs Reliance Petroproducts Pvt Ltd (supra); that the claim that the loss is a speculation loss under the provisions of section 73 of the Act and thus the revaluation of closing stock and claim of Rs. 50 lakhs on account of that is to be allowed; that the claim is disallowed, but the learned Assessing Officer nowhere held that the revaluation does not result in reduction of Rs. 50 lakhs; and that the claim to treat the loss as speculation loss was denied and thus the claim of Rs. 50 lakhs was not allowed.

In this context we would like to refer to the decision of the Hon'ble Delhi High Court in the case of CIT vs. DCM Limited (supra), wherein the Hon’ble High Court of Delhi held that law does not bar or prohibit an assessee for making a claim, which he believes may be accepted or is plausible; that when such a claim is made during the course of regular or scrutiny assessment, liberal view is required to be taken as necessarily the claim is bound to be carefully scrutinized both on facts and in law; that full probe and appraisal is natural and normal; that threat of penalty cannot become a gag and/or haunt an assessee for making a claim which may be erroneous or wrong, when it is made during the course of the assessment

In the case of CIT vs Reliance Petroproducts Pvt Ltd (supra), the Hon’ble Apex Court held that when the assessee preferred a claim, it was up to the authorities to accept its claim in the Return or not, but merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the Revenue, that by itself would not attract the penalty under Section 271(1)(c) of the Act. It was further held that if the contention of the Revenue is accepted, then in case of every return where the claim made is not accepted by the learned Assessing Officer for any reason, the assessee will invite penalty under section 271(1)(c) of the Act and that is clearly not the intendment of the Legislature.

On a consideration of the material before us, we are of the considered opinion that the above decisions are applicable to the facts of the case on hand. Merely because the assessee preferred a claim which was not acceptable to the Revenue, the assessee cannot be visited with the proceedings under section 271(1)(c) of the Act, unless and until the twin requirements under section 271(1)(c) of the Act are satisfied. We, therefore, while accepting the plea of the assessee hold that the penalty

In the result, appeal of the assessee is allowed.