THE COMMISSIONER OF INCOME TAX vs. M/S P RAM CHAND

Income Tax Appeal No.109 of 1999 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. Income Tax Appeal No.109 of 1999 Date of Decision: 28.10.2013 The Commissioner of Income-tax, Jalandhar ..Appellant versus P. Ram Chand & Co., Basti Nau, Jalandhar ..Respondent CORAM: HON'BLE MR. JUSTICE RAJIVE BHALLA HON'BLE MR. JUSTICE DR. BHARAT BHUSHAN PARSOON Present: Mr. Vivek Sethi, Advocate, for the appellant. Mr. Alok Mittal, Advocate, for the respondent.

RAJIVE BHALLA, J. (ORAL) The revenue is, before us, by way of an appeal impugning the correctness of order dated 26.3.1999, passed by the Income Tax Appellate Tribunal, Amritsar, setting aside order dated 22.1.1993 passed by the Commissioner of Income Tax (Appeals) and order dated 31.1.1990 passed under Section 271(1)(c) of the Income Tax Act, 1961 (hereinafter referred to as the “Act”), imposing penalty upon the assessee. Counsel for the appellant submits that, as the assessee furnished inaccurate particulars with intent to evade tax, the Tribunal has erred in setting aside the penalty. The assessee firm having accepted that fixed deposits in the name of its partners and ex- partners, may be assessed as income of the firm, the return was clearly incorrect. The penalty was, therefore, a necessary Varinder Kumar 2013.11.25 17:06 I attest to the accuracy and integrity of this document High Court Chandigarh

Income Tax Appeal No.109 of 1999 2 consequence of furnishing incorrect particulars with mens rea to evade tax. Counsel for the appellant submits that the following question of law arises for adjudication:- “ Whether, on the facts and the circumstances of the case, the ITAT was justified in law in allowing the appeal of the assessee whereby deleting the penalty imposed by the A.O u/s 271(1)(c) of the Act and sustained by the CIT (A), holding that no such penalty was attracted because neither inaccurate particulars were furnished nor any income concealed because the income on due basis was duly shown in the hands of the partners?” Counsel for the assessee submits that it is not every infraction of the Income Tax Act or every rejected claim for exemption or deduction, that would attract a penalty. A penalty can only be levied if the assessee furnishes incorrect particulars with mens rea to evade tax. The Income Tax Appellate Tribunal has, therefore, rightly set aside the penalty. We have heard counsel for the parties. Admittedly, the quantum appeal filed by the assessee, has been dismissed by affirming addition of income on account of interest received from deposits standing in the name of partners and ex-partners. Notices for levy of penalty, served under Section 271(1) (c) of the Act, were decided against the assessee and penalty was imposed. The order passed by the Assessing Officer was affirmed by the Commissioner of Income Tax (Appeals), Jalandhar. The Income Tax Appellate Authority has set aside the penalty by holding Varinder Kumar 2013.11.25 17:06 I attest to the accuracy and integrity of this document High Court Chandigarh

Income Tax Appeal No.109 of 1999 3 as follows:- “ We are of the opinion that this is not a fit case where explanation of the appellant would have been rejected and penalty under section 271(1)(c) either for filing of inaccurate particulars or concealment of income would have been imposed. The appellant has shown the asset under consideration regularly in the books of account and also shown the interest income accrued on the FDRs. The only difference is the understanding of the appellant regarding the passing of an entry relatable to interest. One argument put forth by the Auditors for passing of the entry is that if FDRs are purchased in the name of the firm proper entry should be made by debiting the capital account and each and every partner in whose name the FDRs is made. Under the circumstances the capital account of the partner will get reduced and the FDR will not appear in the balance sheet of the firm. Second advice and argument of the Chartered Accountant to the appellant is not to pass entry in the capital account, by that the FDR will remain in the balance sheet. The purpose of doing so is mainly to take advantage of such FDRs in obtaining credit facilities in the bank. The taxability in case of the firm is also a matter of interpretation where one view has been held by the I.T.A.T. That FDRs are purchased from the funds of the firm in which individual capital account gets merged with the total capital available with Varinder Kumar 2013.11.25 17:06 I attest to the accuracy and integrity of this document High Court Chandigarh

Income Tax Appeal No.109 of 1999 4 the firm, therefore the interest should be credited in the profit and loss account of the firm. The reason for making above discussion is that it is the question of entry of interest which is reflected in the books of account and shown to the Income-tax Department. The Ld. Counsel has pleaded that in the past they were crediting the interest income in case of the firm whereas during the year under consideration, on the legal advice, they were advised to credit directly the interest income in the hands of the partners which they did and the advise was found not to be correct in case of the appellant by the I.T.A.T. There is logic in the Explanation as pleaded by the Ld. Counsel and we do not find any reason that penalty u/s 271(1)(c) is attracted because neither inaccurate particulars have been filed nor any income has been concealed because the income on due basis have duly been shown in case of individual partners. The penalty imposed by the Ld. CIT(A) is, therefore, deleted. In the result the appeal of the appellant is accepted.” A perusal of the order passed by the Tribunal reveals that the respondent had disclosed the assets under consideration, and the interest income accruing on fixed deposit receipts, in its books of accounts. The Tribunal has held that explanation proferred by the assessee that they were advised to directly credit interest in the name of the partners, which was later found to be legally impermissible, is logical and, therefore, does not attract penalty Varinder Kumar 2013.11.25 17:06 I attest to the accuracy and integrity of this document High Court Chandigarh

Income Tax Appeal No.109 of 1999 5 under Section 271(1)(c) of the Act or fall within the mischief of furnishing incorrect particulars or concealment of income, so as to invite a penalty. Even otherwise as, held by the Hon'ble Supreme Court in CIT versus Reliance Petro Products Pvt. Ltd. 322 ITR 158, it is not every infraction or denial of claim for deduction or exemption that invites penalty. A penalty would follow only where inaccurate particulars have been furnished with mens rea to evade tax. An assessee is entitled, by provisions of the Act, to claim deductions or exemptions and to present his income in such a manner as he may deem beneficial to his business/interest. Thus where an assessee has exercised a bona fide right but the deductions or exemptions so claimed are found to be incorrect, penalty would follow only if the claim is raised with intent to furnish incorrect particulars and to evade tax. The discretion exercised by the Tribunal is neither arbitrary or perverse and does not suffer from any error of jurisdiction or of law. We find no reason to differ with the opinion recorded by the learned Tribunal. The question of law is answered accordingly and the appeal is dismissed. ( RAJIVE BHALLA )

JUDGE ( DR. BHARAT BHUSHAN PARSOON) 28.10.2013 JUDGE VK

Varinder Kumar 2013.11.25 17:06 I attest to the accuracy and integrity of this document High Court Chandigarh