COMMISSIONER OF INCOME TAX-I CHANDIGARH vs. M/S PUNJAB STATE WAREHOUSING CORP. LTD

ITA No.60 of 2014 (O&M) 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No.60 of 2014 (O&M) Date of decision: May 06, 2014 The Commissioner of Income Tax-I, Chandigarh ……Appellant Vs. M/s Punjab State Warehousing Corporation Limited …..Respondent CORAM: HON’BLE MR. JUSTICE AJAY KUMAR MITTAL HON’BLE MR. JUSTICE JASPAL SINGH Present: Ms. Urvashi Dhugga, Advocate for the appellant. Ajay Kumar Mittal,J. 1. This appeal has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 21.6.2013, Annexure A.6 passed by the Income Tax Appellate Tribunal, Chandigarh Bench 'A' (in short, “the Tribunal”) in ITA No.122/Chd/2010 for the assessment year 2004- 05, proposing to raise following substantial question of law:- “Whether in the facts and circumstances of the case, the Hon'ble Tribunal is correct in accepting the contention of the assessee, setting aside the order of the CIT(A) and deleting the penalty imposed under Section 271(1) (c) whereas the Hon'ble Tribunal itself, while deciding the appeal on quantum, had accepted the observations of the AO as well as the CIT(A) and sustained the addition on which penalty has been imposed? 2. Briefly, the facts necessary for adjudication of the controversy Singh Gurbax 2014.05.28 11:07 I attest to the accuracy and integrity of this document High Court Chandigarh

ITA No.60 of 2014 (O&M) 2 involved, as narrated in the appeal, may be noticed. The assessee is a Public Sector Undertaking of the Government of Punjab. It is engaged in procurement and storage of food grains on behalf of the Central agencies and the State Government. Return declaring an income of ` 7,52,18,530/- for the assessment year 2004-05 was filed by the assessee on 1.11.2004. The case was selected for scrutiny as per CBDT guidelines and notice under section 143(2) of the Act was issued on 9.3.2005. The assessee filed a revised return on 28.3.2006 declaring loss of ` 22,37,96,121/-. During the course of assessment proceedings, the Assessing Officer noticed that the assessee had debited Rs.3.50 crores in profit and loss account as provision for interest on loan to Punjab Government and CONWARE. On enquiry, the assessee replied that the provision for interest to Punjab Government and CONWARE amounting to ` 3.50 crores was contra entries passed for memorandum purposes as the same amount was shown as income as interest on loan to Punjab Government and CONWARE. Hence the provision was shown on both sides of P&L account making no impact on the same. The Assessing officer observed from the auditors report that the assessee was reportedly following mercantile system of accounting and therefore the interest due from Punjab Government and CONWARE ought to have been declared as income. However, by making a contra entry of the provision for interest of Punjab Government and CONWARE, the assessee had negated the interest income in the P&L account. The Assessing Officer vide order dated 28.12.2006, Annexure A.1 made addition of ` 350 lacs being interest on loans to Punjab Government and CONWARE on Mercantile system of accounting. Aggrieved by then order, the assessee filed appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. Vide order dated 6.2.2008, Annexure A.2, the CIT(A) observed that each and every debt cannot be written off even after the amendment of Section 36(1) (vii) and 36(2) of the Act. The CIT(A) confirmed the addition. The assessee filed appeal before the Singh Gurbax 2014.05.28 11:07 I attest to the accuracy and integrity of this document High Court Chandigarh

ITA No.60 of 2014 (O&M) 3 Tribunal. Vide order dated 23.9.2009, Anenxure A.3, the Tribunal dismissed the appeal holding that there was no material to show that the Government had refused to pay any amount to the assessee. After the addition was confirmed by the CIT (A), the Assessing Officer issued show cause notice to the assessee for imposition of penalty under section 271(1) (c) of the Act on 17.3.2009 amounting to `1,25,56,250/-. Vide order dated 31.3.2009, Annexure A.4, the Assessing Officer imposed penalty of ` 1,25,56,250/- under section 271(1) (c) of the Act. The assessee filed appeal before the CIT(A), which was dismissed vide order dated 17.11.2009, Annexure A.5. Thereafter, the assessee filed appeal before the Tribunal. Vide order dated 21.6.2013, Annexure A.6, the Tribunal allowed the appeal and deleted the penalty holding that the claim of the assessee seemed to be bonafide as the principal amount itself was written off in the subsequent years. Hence the present appeal by the revenue. 3. We have heard learned counsel for the appellant and perused the record. 4. The solitary point that arises for consideration in this appeal is whether the Tribunal was justified in deleting the penalty imposed by the Assessing Officer under Section 271(1) (c) of the Act which was upheld by the CIT(A). 5. The Tribunal while deleting the penalty had noticed vide order dated 21.6.2013, Annexure A.6 as under:- “7. We have considered the rival submissions carefully and find that assessee has credited a sum of ` 3.5 crores towards interest on advances given to Government of Punjab and CONWARE. It seems that amounts were not recoverable and infact the amounts have been written off in the next year. Against the entry of interest, the assessee made a provision of such interest and debited the same amount to the Profit and loss account. The addition was confirmed by the Tribunal by following the decision of the Singh Gurbax 2014.05.28 11:07 I attest to the accuracy and integrity of this document High Court Chandigarh

ITA No.60 of 2014 (O&M) 4 Hon'ble Madras High Court in the case of South India Surgical Co. Limited 287 ITR 62. However, the undisputed fact remains that principal amount due from Punjab Government as well as from CONWARE was written off in the next year i.e. Assessment year 2005-06. This fact has been noted even by the Tribunal in assessee's own case vide para 21 in ITA No.204, 311 and 292, 459 and 427/Chandi/2008 relating to assessment years 2004-05 and 2005-06 order dated 23.9.2009. This clearly shows that assessee was not hoping to recover the interest and entry of interest was made only for memorandum purposes i.e. why corresponding debit entry was also made. It is settled law that penalty proceedings are not automatic in the sense that once addition is made, the same will not be followed by penalty. Further, the assessee has furnished the explanation which seems to be bonafide before the Assessing Officer for making this entry for provision towards interest. The penalty 'cannot be levied unless and until there is concealment or when the explanation which has been filed before the Assessing authority and which is found not bonafide. The Hon'ble Supreme Court in the case of Cement Marketing Co. of India Limited vs. ACIT, 124 ITR 16 had observed as under:- 'If the view canvassed on behalf of the revenue were accepted, the result would be that even if the assessee raises a bonafide contention that a particular item is not liable to be included in the taxable turnover, he would have to show it as forming part of the taxable turnover in his return and pay tax upon it on pain of being held liable for penalty in case his contention is ultimately found by the court to be not acceptable. That surely could, ever have been intended by the legislature.' 8. The above clearly shows that wherever assessee might have made a claim on bonafide basis and that claims is ultimately found to be incorrect, the same will not lead to the penal consequence. Further, in the case of CIT Reliance Petro Products (P) Limited (supra) it was observed as under:- 'A glance at the provisions of section 271(1) (c) of Singh Gurbax 2014.05.28 11:07 I attest to the accuracy and integrity of this document High Court Chandigarh

ITA No.60 of 2014 (O&M) 5 the Income Tax Act, 1961 suggests that in order to be covered by it, there has to be concealment of the particulars of the income of the assessee. Secondly, the assessee must have furnished inaccurate particulars of his income. The meaning of the word 'particulars' used in section 271(1) (c) would embrace the details of the claim made. Where no information given in the return is found to be incorrect or inaccurate, the assessee cannot be held guilty of furnishing inaccurate particulars. In order to expose the assessee to penalty, unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By no stretch of imagination can making an incorrect claim tantamount to furnishing inaccurate particulars. There can be no dispute that everything would depend upon the return filed by the assessee, because that is the only document where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. To attract penalty, the details supplied in the return must not be accurate, not exact or correct, not according to the truth or erroneous.' 9. In the case before us, there is no finding that details provided by the assessee are incorrect. As observed earlier, the claim of the assessee seems to be bonafide because principle amount itself was written off and therefore, perhaps there was no claim against the interest. The assessee provided the interest on the accrual basis but simultaneously made a debit entry against such interest. This is purely a bonafide claim based on bonafide belief. In our opinion, the penal provision cannot be attracted in such a situation and accordingly we set aside the order of learned CIT(A) and delete the penalty.” 6. The Tribunal noticed that the entry with regard to ` 3.5 crores towards interest on advances given to Government of Punjab and CONWARE was made by the assessee. It was not disputed that principal amount due from Punjab Government as well as CONWARE was written off in the next subsequent year i.e. Assessment year 2005-06. The assessee was not hoping to recover the interest and entry of interest was made only for memorandum purposes. It was further observed Singh Gurbax 2014.05.28 11:07 I attest to the accuracy and integrity of this document High Court Chandigarh

ITA No.60 of 2014 (O&M) 6 that the explanation furnished by the assessee appeared to be bonafide in making entry for provision towards interest. The assessee provided the interest on accrual basis but simultaneously made a debit entry against such interest which was accepted to be purely bonafide. In such circumstances, the order passed by the Tribunal cannot be faulted. 7. Adverting to judgment of the Madras High Court in South India Surgical Co. Limited v. Assistant Commissioner of Income Tax, (2006) 287 ITR 62 (Mad) relied upon by the learned counsel for the revenue, the same is of no assistance as that was a case on individual facts involved therein and was not relating to penalty under Section 271(1)(c) of the Act. Therefore, the said judgment does not come to the rescue of the revenue. 8. No substantial question of law arises in this appeal. Consequently, finding no merit in the appeal, the same is hereby dismissed. (Ajay Kumar Mittal) Judge May 06, 2014

(Jaspal Singh) 'gs' Judge Singh Gurbax 2014.05.28 11:07 I attest to the accuracy and integrity of this document High Court Chandigarh