CAPACITE INFRAPROJECTS LIMITED ,MUMBAI vs. ACIT/DCIT CENTRAL CIRCLE 1(2) MUMBAI , MUMBAI

& 6309/Mum/2024 CapaciteInfraprojects Limited; A.Y. 2017-18 & 2018-19 3. On summarizing the ground raised in the appeal and taking into consideration the fact delineated above, thefollowing points of determination arises before us on the basis of two grounds of appeal taken by the appellant/assessee as under:

I. whether addition on account of deemed rent u/s. 23(1) r.w.s. 23(4) of the Act shall automatically tantamount to underreporting of the income due to misreporting of the income by the assessee with a consequence of imposing the penalty of 200% u/s 270A of the Act? II. Whether addition on account of disallowance of employee contribution towards PF/ESIC u/s 36(1)(VA) r.w.s. 2(24)(x) of the Act before pronouncement of the checkmate Judgment by the Hon’ble Apex Court shall amount to misreporting of the income by the assessee/appellant with a consequence of imposing of 200% penalty u/s 270A of the Act?

7. The submission of the assessee/appellate with regard to penalty imposed due to underreporting consequence of misreporting of deemed rent of income is dealt by Ld. CIT(A) in the impugned order in paragraph No. 6.1 to 6.1.5 extracted below as under: “6.1 Decision on Ground No. 1: This ground is related to the issue of levying penalty on addition of deemed rent u/s. 23(1) r.w.s. 23(4) of the Act. 6.1.1 I have carefully perused the assessment order, penalty order passed by theAO and submissions filed by the appellant in respect of this ground of appeal

. In the instant case, it is observed that the appellant is the owner of the 10 house flats in & 6309/Mum/2024 CapaciteInfraprojects Limited; A.Y. 2017-18 & 2018

19. Smondoville and 1 flat in Shobha Classic 2 which have not used for business or profession of the appellant during the year under consideration and considering the same, the AO computed the gross annual rental value at Rs. 21,32,500/- and after applying the standard deduction u/s 24(a) of the Act, determined the amount of Rs. 14,92,750/- as total rent received from the aforesaid properties and added the same to the total income of the appellant on account of income from house property. 6.1.2 In the appellate proceedings, the Ld. CIT(A), while perusing the assessment order found that no basis was given by the AO in arriving at the gross annual rental value of Rs. 21,32,500/- and therefore he re-computed the gross annual rental value at Rs. 14,73,165/- and after applying the standard deduction, determined the amount of total rent received from the aforementioned properties at Rs. 10,31,215/- and thereby giving partial relief to the appellant on this ground. During the penalty proceedings, the AO did not accept the submission of appellant as no substantive reason had been submitted and accordingly levied penalty u/s. 270A. 6.1.3 Before me, the appellant has submitted that since levy of penalty on amount of deemed rent is purely on estimate basis and all the facts had been disclosed, penalty cannot be levied. As per the records, the following facts emerge:  Out of 11 flats, only 3 flats have been let out on rent & that too for a short period.  The rental value of flats is different ranging from 15,000 to 35,000/-. Further, during the appellate proceedings, the appellant submitted as under: "The issue of levy of penalty on account of deemed rent is purely on the basis of estimates and the accounts of the assessee are correct and complete as this fact has not been disputed by the Ld. Assessing officer in his order. Therefore, addition on the basis of estimate does not mean there is any under reporting of income by the assessee and is not liable to any penalty u/s. 270A"

& 6309/Mum/2024 CapaciteInfraprojects Limited; A.Y. 2017-18 & 2018-19 Appellant is a company which is into infrastructure & Construction related activity. As per the I.T. Act, provisions relating to Annual Value of property are very clear and there is no question of ambiguity or confusion. Only issue which can be debated is the methodology to be adopted either by appellant itself or the AO or Ld. CIT(A) for calculation of the annual value of property. Since the appellant has not reported the same on its own, the same has correctly been done by Ld. CIT(A). But there is no ambiguity about the provision as per which annual value has to be calculated in case of vacant premises which has been reasonably calculated by the Ld. CIT(A). 6.1.4 Further, section 270A of the Act deals with penalty for under-reporting and misreporting of income. As per section 270A of the Act, the AO may, during the course of assessment proceedings, initiate penalty proceedings for under-reporting of income and the assesse shall be liable to pay a penalty in addition to tax, if any, on the under-reported income. From the penalty order it is noted that the AO has levied penalty u/s. 270A for under-reporting of income consequence to mis-reporting. Section 270A(8) states that: "Notwithstanding anything contained in sub-section (6) or sub- section (7), where under-reported income is in consequence of any misreporting thereof by any person, the penalty referred to in sub- section (1) shall be equal to two hundred per cent of the amount of tax payable on under-reported income." While section 270A(9) states that: "The cases of misreporting of income referred to in sub-section (8) shall be the following, namely: (a) misrepresentation or suppression of facts; (b) failure to record investments in the books of account; (c) claim of expenditure not substantiated by any evidence; (d) recording of any false entry in the books of account, (e) failure to record any receipt in books of account having a bearing on total income; and (1) failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply."

& 6309/Mum/2024 CapaciteInfraprojects Limited; A.Y. 2017-18 & 2018-19 From the facts of the case, it can clearly be derived that the case of the appellant falls u/s. 270A(1) r.w. 270A(9)(a). The appellant is not an individual but a well-established construction company and even though the assessee was well aware of the law as on date it has misrepresented and suppressed correct facts. 6.1.5 Thus, from the discussion in the preceding paragraphs, it is well established that the failure on the part of appellant is deliberate and the penalty levied by AO u/s. 270A is justified. Hence, the ground of appeal no. 1 is dismissed.”

8. Thus it is evident from the extract of the impugned order that lower authorities has considered the non disclosure of deemed rental income on account of 11 flats of the assessee remaining vacant as having not been rented during the relevant year,as misreporting of income attracting section270A(9)(a) of the Act. The question arises whether there was a misrepresentation orsuppression of facts with respect to deemed rental income u/s 23(1) r.w.s. 23(4) of the Act by the assessee so as to attract section 270A(9)(a) of the Act. It was submitted before the Ld. CIT(A) by the assessee that the assessee has disclosed all the facts to the assessing officer and thus there was no misrepresentation orsuppression of facts by the assessee. Ld. CIT(A) has considered the act of the assessee as misreporting of the income on the ground that “Appellant is not an individual but a well established construction company and even though the assessee was well aware of the law as on dated, it has misrepresented and suppressed correct facts.” The basis of belief of Ld. CIT(A) for making it a case of misreporting of income just because the Page | 11 & 6309/Mum/2024 CapaciteInfraprojects Limited; A.Y. 2017-18 & 2018-19 assessee is a well established company and not an individual and suppose to know the law on date, doesnot appeal to the consigned of this tribunal.For misrepresentation orsuppression of facts, there has to be some act or omission on the part of the assessee and mere misunderstanding of provision of law doesnot amount to misrepresentation or suppression of facts necessitating imposing of the penalty u/s 270A of the Act. Since the assessee has disclosed all the facts with respect to non-reporting of deemed rental income from the flats remaining vacant in the concerned year,it can be a case of misunderstanding of provision of law but cannot amount to misrepresentation or suppression of facts so as to attract section270A(9)(a) of the Act.The above facts will become clear from para 15.3 and 15.4 of the assessment order dated 27.07.2021 with respect to quantum proceedings extracted below as under:

“15.3. On perusal of details of the property, it is seen that for the 10 flats in Smondoville possession of the same was received by CIL on 01.01.2016 and the possession of 1 flat in Shobha Classic 2 was receivedon 05.11.2015. The assessee was asked to explain as to why 'Income from House Property should not be computed u/s 23(1) r.w.s. 23(4) of the Act in respect of above-mentioned properties. 15.4. In response to the same, the assessee vide letter dated 17.05.2021 has replied as under: "The Assessee Company owns certain immovable properties being Commercial Offices in Shrikant Chambers, Chembur Mumbai and certain residential Premises at Bangalore being 10 flats in Smondoville for which the possession was received on 01.01.2016 1 flat in Sobha Classic 2 for which the possession was received on 05.11.2015. The Company has been using the office premises for its own business purposes and has its office at Shrikant Chambers, Chembur, Mumbai. As regards the flats at & 6309/Mum/2024 CapaciteInfraprojects Limited; A.Y. 2017-18 & 2018-19 Bangalore are concerned the possession of the same were received in January 2016 and November 2015. The flats were under a newly constructed building and were unfurnished. During the FY 2015-2016 these flats were used by the company for the storage of files related to accounting and other data for projects in the southern state. In the meantime the assessee was looking for tenants to give the premises on rent. However these flats took some amount of time to fetch rent since they were unfurnished. Wherever possible the assessee has let out these flats. The Fact that some of the flats were actually rented out from period FY 16- 17 amply proves that the company has made sincere efforts in letting out the properties. Further it was never the intention of the assessee to acquire house property and earn rental income. These flats were received merely on account of incapacity of the debtors to pay. The main business of the assessee is civil construction and not property acquisition and earning of rental income. Also the main place of business administration of the assessee is in Mumbai, Maharashtra and these flats are located in Bangalore thereby creating logistic difficulties in absence of appropriate staff in Bangalore for this specific purpose. The assessee has however attempted to let out these flats from time to time. Thus it may be seen from the Financials for the FY 2016-2017 to FY 2019-2020, that the assessee company has let out the flats over the period of time. However, the process of finding a tenant and giving on rent takes some time and hence the flats have been given on rent either for the whole year or have remained vacant for some period of time during the various financial years. However, the fact that the flats have been rented at relevant periods proves that the assessee has been trying to rent out the flats but was unable to get the tenants for the full period. The assessee further contends that as per section 23(1)(c) of the Income Tax Act, 1961 which provides for calculation of Annual Value, where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the rent the property might reasonably be expected to be let out for, then the amount so received or receivable by the assessee shall be deemed to be the annual value. Section 23(1)(c) of the Income Tax Act 1961 reads as under:

& 6309/Mum/2024 CapaciteInfraprojects Limited; A.Y. 2017-18 & 2018-19 23. (1) For the purposes of section 22, the annual value of any property shall be deemed to be- (c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable: Now reading the words "property or any party of the property is let and was vacant during the whole or any part of the Previous year" the assessee has interpreted that in cases where assessee was unable to let out the property for the whole of the year then the rent received or receivable by the assessee will be deemed as the annual value. Further where the flats have been let out for part of the year as well the rent received or receivable by the assessee will be deemed as the annual value as the assessee is eligible for Vacancy period allowance. As a result, the assessee contends that the rent actually received by the assessee shall be the annual value for the Flats and hence no deemed rental can be added to the income of the assessee.”

Point No. II II. Whether addition on account of disallowance of employee contribution towards PF/ESIC u/s 36(1)(VA) r.w.s. 2(24)(x) of the Act before pronouncement of the Checkmate Service P Ltd. Judgment by the Hon’ble Apex Court shall amount to misreporting of the income by the assessee/appellant with a consequence of imposing of 200% penalty u/s 270A of the Act?

& 6309/Mum/2024 CapaciteInfraprojects Limited; A.Y. 2017-18 & 2018-19 Income sought to be evaded by Rs. 4,46,04,003/- the assessee Tax on the income sought to be Rs. 1,54,36,553/- evaded (Incl. Surcharge & E.C.) Penalty @ 5 Rs. 77,18,276/- Penalty @ 20 Rs. 3,08,73,106/- 6.2. Accordingly, a penalty of Rs. 3,08,73,106/- of the tax sought to be evaded is, therefore, hereby imposed u/s. 270A of the Income-tax Act, 1961. Issue demand notice and challan accordingly.

. It is observed that for the year under consideration, the AO made disallowance on account of employees contribution towards PF and ESIC u/s. 36(1)(va) r.w.s. 2(24)(x) and against the said disallowance, the appeal was filed which was dismissed by the Ld. CIT(A) following the judgement of Hon'ble apex court in the case of Checkmate Services (P.) Ltd. vs CIT [2022] 143 taxmann.com 178 (SC) dated 12.10.2022 wherein it has been concluded that there is a marked distinction between the nature and character of the employer's contribution under section 36(1)(iv) of the IT Act and the employee's contribution under section 36(1)(va) of the & 6309/Mum/2024 CapaciteInfraprojects Limited; A.Y. 2017-18 & 2018

19. IT Act. In the case of section 36(1) (iv) of the IT Act, the employer's liability is to be paid out of its income whereas the second is deemed to be an income, by definition, since it is the deduction from the employee's income and held in trust by the employer. This distinction has to be considered while interpreting the obligation of the taxpayer under section 43B of the IT Act. If the same is not deposited as per the mandate of section 36(1)(va) of the IT Act, a deduction would not be available to the taxpayer. 6.2.2 Moreover, while passing assessment order u/s. 153A r.w.s. 143(3) dated 27.07.2021, the AO also initiated penalty on disallowance made of employees contribution towards PF and ESIC. Further, in view of the decision of CIT(A)-47, Mumbai on this issue, the AO, vide order u/s. 270A dated 20.02.2024, levied penalty for under-reporting of income consequent to mis-reporting. During the assessment procedure, it was noted by the AO that the appellant deposited the employees' contribution of Rs 3,82,11,962/- towards provident fund and of Rs 53,60,826/-towards ESIC in the government treasury beyond the due date as provided by the respective Act and therefore the same was added to the total income of the appellant u/s. 36(1)(va) r.w.s.2(24)(x) of the Act. Further, during the appellate proceedings, the appellant submitted as under: "It is settled issue that where the disallowance or addition is a legal and debatable issue no penalty is leviable. Disallowance u/s 36(1) (va) r.w.s. 2(24)(x) is purely a debatable issue and the same qualifies for non-levy of any penalty” The judgement of Hon'ble Apex Court in the case of Checkmate Services (P.) Ltd. vs CIT [2022] dated 12.10.2022, squarely covers the issue raised by the appellant vide this ground and it is well established that the issue related to disallowance u/s 36(1)(va) r.w.s. 2(24)(x) is not a debatable issue and subsequently confirms the failure on the part of the appellant, which is not an individual but a well-established construction company not following the provisions applicable to it. Therefore, since the provisions were very clear and explicit as per the Act and the same have now been fortified by the judgement of Hon'ble Supreme Court, I am of the opinion that the appellant has deliberately underreported its income and misrepresented and suppressed correct facts. Accordingly, I hold that the AO has appropriately levied penalty u/s. 270A and therefore, the action of AO is upheld. Hence, the ground of appeal no. 2 is dismissed.” Page | 17 & 6309/Mum/2024 CapaciteInfraprojects Limited; A.Y. 2017-18 & 2018-19

12. It thus evident from the above extract that the Ld. CIT(A) has dismissed the appeal observing that “the appellant is not an individual but a well-established construction company not following the provision applicable to it.”The Ld. CIT(A) further observed that since the provision very clear and explicit as per the act and the same has now been fortified by the Judgment of Hon’ble Supreme Court in Checkmate Services Private Limited case, therefore the appellant had deliberately underreported its income consequent to misreporting of income and as thus misrepresented and suppressed the facts. The said reasons does not appeal to us because the penalty order pertains to the assessment year 2017-18 whereas the Hon’ble Apex Court Judgment in the case of Checkmate Service Private Limited V/S CIT (Supra)is dated 12.10.2022. It was argued before us by the Ld.AR on behalf of the assessee/appellant that the Hon’ble Jurisdiction High Court at the time of relevant year of assessment has permitted the condonation of delay for late deposit of employee contribution of PF/ESIC after specified due date under the relevant Act but paid before due date of filing return of income for the relevant assessment year. The Ld.AR has referred the case of Jurisdictional High Court in CITv/s Ghatge Patil Transport Limited 2015(53) taxmann.com 141. The Ld.AR also brought to our notice the judgment of Mumbai Tribunal order in Geekay Facility Management Private Ltd Vs Deputy Commissioner Of Income Tax [2022] 144 taxmann.com 65 Page | 18 & 6309/Mum/2024 CapaciteInfraprojects Limited; A.Y. 2017-18 & 2018-19 (Mumbai Tribunal) wherein it was held that the contribution to PF/ESIC and the welfare fund paid after the specified due dates under the relevant act, nevertheless paid before the due date of filing return of income is allowable. The assessing officer was directed to allow the deduction as claimed. The Ld.DR on the other hand submitted that the Hon’ble Kerala High Court, Hon’ble Gujarat High Court and Hon’ble Madras High Court had taken a contrary view to the view taken by the Hon’ble Bombay High Court.

13. We have considered the rival submission made on behalf of the parties.It is evident from the impugned order that Ld. CIT(A) has justified the imposing of the penalty by the Ld.AO on the grounds that the law on the issue has been finally settled by the Hon’ble Apex Court in the case of Checkmate Service Pvt. Ltd (supra) and because of that reason the delayed payment of employees contribution towards PF/ESICfrom the date mentioned in the statue, would amount to have been deposited inviolation of provision of sec. 36A(va) of the Act as well as ofthe order of the Hon’ble Apex Court and for that reason the imposing of the penalty for underreporting of the income consequent to the misreporting of the income was justified.

14. We should not be oblivious of the fact that the present appealspertains to the A.Y. 2017-18 and 2018-19 and at that time judgment of the Hon’ble Apex Court which was delivered on 12.10.2022 was not pronounced. It is to be noticed that at that time Page | 19 & 6309/Mum/2024 CapaciteInfraprojects Limited; A.Y. 2017-18 & 2018-19 the judgment of the Jurisdictional High Court in CIT v/s Ghatge Patil Transport Limited (Supra) was in favour of the assessee/appellant whereas other Hon’ble High Courts i.e.High Court of Kerala, Gujrat and Madras had taken a contrary view. The ultimate conclusion is that at the relevant assessment years, permissibility of deposit of employee contribution towards PF/ESIC beyond the due date mentioned in the statues but before the due of filing of return was a debatable issue. The said debatable issue was finally settled by the Hon’ble Apex Court on 12.10.2022 when the Checkmate Service Pvt. Ltd (Supra) was pronounced. In these fact and circumstance, we are of the considered view that the imposing of the penalty on account of a debatable issue is neither justified nor warranted because the appellate as per the prevailing law of the Jurisdiction High Court, has deposited the employee contribution towards PF/ESIC beyond the due date as the same was permissible because of the judgment of the Hon’ble Jurisdiction High Court. So, it cannot be stated to be a case of underreporting of the income consequent to the misreporting of the income by the assessee/appellant. Therefore we are not able to convince ourselves by the reasoning of the Ld. CIT(A) wherein he has observed that the appellant has deliberately underreported its income and misrepresented and suppressed the facts. For the above reasons we are of the considered view that imposing of the penalty u/s 270A(1) r.w.s 270A(9)(a) of the Act is neither warranted nor justified. The & 6309/Mum/2024 CapaciteInfraprojects Limited; A.Y. 2017-18 & 2018-19 point No. II is accordingly decided in negative and in favour of assessee.

15. Since both the pointsenumerated by us has been decided in favour of the assessee and because of the aforesaid reasons the imposing of the penalty u/s. 270A of the Act on account of alleged underreporting of income consequent upon misreporting of the income is neither justified nor warranted and need to be deleted.The impugned order is accordingly setaside. The grounds in the appeal of the assessee are allowed in above terms. The Ld.AO is directed to delete the penalty imposed u/s 270A of the Act. The appeal of the assessee is accordingly allowed in above terms.

16. Since the grounds raised in the A.Y. 2018-19 are the same and identical which were raised by the appellant in A.Y. 2017-18, therefore the finding recorded by us in for A.Y. 2017-18 shall mutandis mutatis applyto the grounds raised in the appeal for A.Y. 2018-19. This appeal is accordingly allowed and the impugned order confirming the penalty imposed by the assessing officer u/s 270A of the Act for this year is also setaside. The Ld.AO is directed to delete the penalty upon the assessee/appellant.This appeal ofthe assessee is allowed in above terms.

& 6309/Mum/2024 CapaciteInfraprojects Limited; A.Y. 2017-18 & 2018-19 17. The ground raised in both the appeals are allowed. Both the appeals of the assessee are accordingly decided in above terms in favour of the assessee.