DCIT 10 (2)(2), MUMBAI vs. M/S MAHARASHTRA ELECTRONIC CORPORATION LTD, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL (VIRTUAL COURT) “F” BENCH, MUMBAI BEFORE SHRI LALIET KUMAR, HON'BLE JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER ITA NO. 8051/MUM/2019 (AY: 2011-12) DCIT – 10(2)(2) v. M/s. Maharashtra Electronics Room No. 216-A Corporation Limited Aayakar Bhavan, M.K. Road Plot No. AM-3, MIDC Cross Road “A” Marol Industrial Area, Andheri (E) Mumbai - 400020 Mumbai - 400093 PAN: AAACM4980A (Appellant) (Respondent) Shri R.C. Jain Assessee by : Department by : Shri Achal Sharma

Date of Hearing : 13.12.2021 Date of Pronouncement : 21.02.2022 O R D E R PER S. RIFAUR RAHMAN (AM)

2 ITA NO. 8051/MUM/2019 (AY: 2011-12) M/s. Maharashtra Electronics Corporation Limited The return of income was processed under section 143(1) of Income-tax Act, 1961 (in short “Act”). The assessment was made u/s.143(3) of the Act on 12.12.2013 determining the total income of ₹.Nil. In the assessment so made, the loss claimed by the assessee was disallowed which was mainly on account of disallowance of various expenditure debited to the Profit & Loss Account as the assessee was not engaged in any business activity during the year under consideration. Also, the depreciation claimed by the assessee was also disallowed since no asset was put to use during the year for the purpose of carrying out business activity of the assessee. The assessee’s alternative claim u/s.57(iii) of the Act was also rejected for the reasons discussed in detail in the assessment order. Simultaneously, penalty proceedings were initiated by issue and service of notice u/s. 274 r.w.s 271(1)(c) dated 12.12.2013 for furnishing inaccurate particulars of income. However, there was no compliance from the assessee’s end in this regard. Against the assessment order, assessee filed appeal before the CIT(A). The Ld. CIT(A) dismissed the assessee’s appeal. Subsequently, Assessing Officer levied penalty of ₹.6,64,76,192/- u/s. 271(1)(c) of the Act.

3 ITA NO. 8051/MUM/2019 (AY: 2011-12) M/s. Maharashtra Electronics Corporation Limited 3. Aggrieved assessee preferred an appeal before the Ld.CIT(A) and before him assessee made the detailed submissions which are reproduced below: “Maharashtra Electronics Corporation Limited (MELTRON) was incorporated in the year 1978 as a fully owned corporation of Government of Maharashtra (GOM). Further the Government of Maharashtra vide its order dated 30.10.2003, has directed MELTRON to wind up its operations. MELTRON has stopped the operations and productions from 1st April 2005. Financial statements of MELTRON have been prepared on “going concern” principle. The net worth of the corporation as on 31.03.2011 has been completely eroded.

Based on the order of the Board for Industrial and Financial Reconstruction (BIFR) dated 04.04.2007, GOM has confirmed vide its letter dated 27.04.2007 that it is in active consideration of converting the unsecured loan into equity. The corporation on 28.05.2008 had applied to BIFR for de registration. Vide BIFR letter dated 29.05.2009, MELTRON has been de registered from BIFR.

Based on the instructions received from the GOM, all assets of MELTRON located at Telemetric Division Aurangabad, Radio Communication Division Nagpur, Meltron Audio Visual Division Mumbai, strategic Development division Pune, residential Flats situated at Mumbai and plot situated at thane were handed over to Maharashtra Industrial corporation Limited (MIDC) to look after the said assets.

The Appellant being corporate entity, has to continue the activities such as maintenance of Office, staff for carrying the legal compliance of Ministry of Company affairs, Income Tax, and other Government Department. To carry out these activities the Directors of the company are taking care. The Board of Directors are appointed by GOM. Shri V. Giriraj ( Sr. IAS Officer) is over all in charge and looking after the business affairs as Director of Company. We respectfully submit that no individual is personally interested in the affairs of the Company.

The Accounts of the Appellant Company was audited and singed on 06/02/2012 and ITR was filed on 03/09/2012. The appellant is Government Company and therefore the accounts has to filed with

4 ITA NO. 8051/MUM/2019 (AY: 2011-12) M/s. Maharashtra Electronics Corporation Limited CAG and after resolution of the objection the CAG the accounts are treated as finalized. The appellant has filed return of income declaring loss of Rs. 17,79,28,792/as against the learned A. O. has disallowed the entire business expenses treating them as a non business, depreciation on assets and assessed the income at Nil.

The Appellant is at the verge of liquidation and there is no permanent employee, therefore the filing of ITR was delayed. The Appellant has voluntarily filed the ITR and the delay was because of the above circumstances and there was no intentional delay in filing the ITR.

Appellant has filled the returns for earlier assessment years claiming business loss as well as depreciation, which A. O. as per para 8.2.2 of Assessment order has denied to Appellant for carried forward. The claiming of loss are as per the ITR filed for the earlier years and the facts were also brought to the notice of AO and with no intention to file inaccurate particulars as stated by AO.

The Appellant has incurred General Administrative Expenditure of Rs.17.97 Lacs. The company is maintaining office premises and vehicles and has claimed deprecation of Rs. 2,21,95,218/including the deprecation on the Building which is still in use and will also be in use fill the Company has been winded. Apart from this there are borrowings by the Appellant from State Government and Financial Institution and as per loan agreement the Appellant has provided interest on the borrowing at Rs.1770 Lacs. To meet the normal expenditure the Appellant is maintaining certain balances in FDR with banks and has earned interest of Rs.4,32,283/. Since the net worth of the Company is negative and the funds were kept in FDR are from the borrowed funds, therefore the appellant has not considered interest as a income from other sources because the amount in FDR kept out of borrowed fund and net interest is expenses.

The A O has considered and allowed the set off the claim of interest income towards interest payment in the Assessment year 2014-15 in para no 6.5 on page no 6 of the assessment order passed u/s 143(3) dated 28/11/2016. Copy of the order is enclosed.

Expenses of company in liquidation - The actual expenditure incurred towards salary and wages of the staff and rent for office premises would be deductible in the case of a company in liquidation as expenditure incurred wholly and exclusively for purpose of earning the income assessable under ‘other sources’ CIT v. Benares Electric Light & Power Co. Ltd. [1993] 204 ITR 804 (Cal.).

5 ITA NO. 8051/MUM/2019 (AY: 2011-12) M/s. Maharashtra Electronics Corporation Limited 3.2 Before Hon. Supreme Court the question arose whether penalty u/s 271(1)(c) for making a Wrong claim was imposable and the dept relied on Dharmendra Textiles Processors 306 ITR 277 (SC) to argue that penalty was automatic for a wrong claim, HELD:

(i) The mere fact that an addition is confirmed cannot per se fead to the confirmation of the penalty because quantum and penalty proceedings are independent of each other;

(ii) In order for the deeming provision of Explanation 1 to s. 271(1)(c) to apply it must be show either that (a) the assessee fails to offer an explanation, or (b) he offers an explanation which is found to be false, or (c) he offers an explanation which cannot be substantiated or shown to be bona fide.

(iii) The judgement of the Supreme Court in Dharmendra extile Processor which holds that penalty u/s.271(1)(c) is a civil liability and that “willful concealment” and “mens rea” are not essential ingredients for imposing penalty cannot be read to mean that in all cases where addition is confirmed, penalty shall mechanically follow. In order to attract s. 271 (1) (c), there must be “concealment” — the fact that the same is willful or unintentional is irrelevant;

(iv) But where an assessee genuinely claims a deduction after disclosing necessary facts, there is no “concealment” even if the claim is rejected. If penalty is imposed under such circumstances also there will remain no course open to an assessee to raise disputed claims and such proposition is beyond recognized canons of law.

In the Appellant has genuinely claimed filed the ITR after disclosing necessary facts, there is no “concealment” of facts. All the facts are fully disclosed on the face of the audited accounts. The Appellant has not failed to offer explanation and the explanation offered has not found false and all relevant details asked by AO has been filed before AO from time to time.

As stated above, being a Government Company no one in person in interested in “concealment” to committing the willful default.”

6 ITA NO. 8051/MUM/2019 (AY: 2011-12) M/s. Maharashtra Electronics Corporation Limited 4. After considering detailed submissions of the assessee Ld.CIT(A) allowed the appeal filed by the assessee and deleted the penalty levied by the Assessing Officer with the following observation: - “4.6 Bonafide in Appellants case: Adverting to the facts of the case, it appears that the AO has laid much stress on the fact that the loss declared in the return of income has been disallowed and, therefore, he has considered the appellant to be in default u/s 271(1)(c) of the Act. In doing so he has not appreciated that: a) The appellant is wholly owned by the Government of Maharashtra and in view of continued losses it had become a Slick Company under BIFR and no proceedings under any law could be Instituted under provisions of other Acts, including Income Tax Act, 1961, b) The Government of Maharashtra has already taken a decision of winding up as its revival was not feasible, procedure for winding up is in progress which is proceeding at snail's pace, c) The administrative expenditure is required to be incurred to maintain corporate structure till it is ordered to be wound up. d) Interest on borrowing from state Government Financial Institutions was of course required to be incurred and the appellant being a company incorporated under the Companies Act, 2013 is required to be accounted. e) Depreciation (Including unabsorbed depreciation) for earlier years is an allowable deduction forming part of block of asset as there is user or passive user and interest received has to be considered as business income as the same is being earned to take care of expenses to the extent possible and this has been so set off against the interest income for Asst Year 2013-14 in the appeal which is a matter of record. f) The losses so claimed would never be set off and the Government has no intention to claim the same as it has no personal interest in other cases.

7 ITA NO. 8051/MUM/2019 (AY: 2011-12) M/s. Maharashtra Electronics Corporation Limited g) Hon'ble Supreme Court in case of CIT vs. Reliance Petro products (P) Ltd. (2010) 322 ITR 158 (SC), has held that merely because the assessee has made a claim of deduction which is otherwise not admissible penalty can not be automatically levied claimed. In view of this claim of deduction of interest expenditure which has not been accepted by the Revenue, penalty under s. 271(1)(c) is not attracted. Mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing in accurate particulars regarding the income of the assessee. Here there is no concealment on part on the appellant. The assessment proceeding and penalty proceeding are two diffident proceedings. If a particular claim made legitimately in the return of Income, and not allowed because of provision, the mere disallowance of legitimate claim where the factual matrix has not been suppressed, penalty cannot be leaviable. No relevant facts have been concealed and claim has been made bonafidely, thus explanation to section 271(1)(c) is not attracted. In the totality of facts and circumstances I am of the opinion that the appellant cannot be considered to be in default u/s 271(1)(c) of the Act concealment or for furnishing inaccurate particulars and cannot be visited with penalty. - Accordingly the penalty of 6,64,76,192/- levied u/s. 271(1)(c) is directed to be deleted.”

8 ITA NO. 8051/MUM/2019 (AY: 2011-12) M/s. Maharashtra Electronics Corporation Limited 6. At the time of hearing, Ld. DR brought to our notice Para No 4 of the Assessment Order and submitted that Assessing Officer has deleted the expenditure claimed by the assessee in its Profit and Loss Account with the finding that the assessee has not carried out any business activity. Therefore, assessee cannot claim any expenditure in the absence of business activities during the year and subsequently assessee filed appeal before the Ld.CIT(A) and Ld.CIT(A) has dismissed the quantum appeal filed by the assessee and assessee has not challenged the above order. He brought to our notice Para No 3.2 of the Ld.CIT(A) order and submitted that Ld.CIT(A) deleted the penalty without considering the fact that assessee had no business receipts assessable u/s. 28 of the Act still assessee claimed various expenses related thereto from it and further he submitted that the case law relied by Ld.CIT(A) i.e. CIT v. Reliance Petroproducts (P) Ltd (2010) 322 ITR 158 (SC) is distinguishable to the facts of the present case. He relied on the decision of the Hon'ble Supreme Court in the case of CIT v. S.V. Angidi Chettiar [44 ITR 739].

9 ITA NO. 8051/MUM/2019 (AY: 2011-12) M/s. Maharashtra Electronics Corporation Limited 8. Considered the rival submissions and material placed on record, we observe from the record that assessee has wholly owned by the Government of Maharashtra and in view of continues losses and it became sick company under BIFR. The Government of Maharashtra has already taken a decision of winding up as its revival was not feasible. It is fact on record that this company is not wound up and administrative expenditure is to be incurred in order to maintain corporate structure till it is wind up. It is also a fact on record that assessee has borrowed from state Government financial institutions and it has to incur interest expenditure and assessee has huge unabsorbed depreciation as well as depreciation which is legally allowable deductions whether assessee uses or not, the above depreciation is allowable expenditure. We also observed that Ld.CIT(A) has observed in his report that assessee would never be able to set off the losses incurred due to the fact that Government of Maharashtra has no intention to continue the business.

10 ITA NO. 8051/MUM/2019 (AY: 2011-12) M/s. Maharashtra Electronics Corporation Limited other income and not earned business income from receipts. Further, we observe that the assessment proceedings and penalty proceedings are two different proceedings we are in agreement with the finding of the Ld.CIT(A) that a particular claim made legitimately in the return of income and not allowed because of provision, the mere disallowance of legitimate claim where the factual matrix has not been suppressed, penalty cannot be leviable. In the given case assessee has brought on record all the relevant information that assessee has not carried out any business activity however it has incurred certain expenditure and claimed the same as allowable under the head “business expenditure”. However, the tax authorities thought it differently and disallowed the same. Merely because tax authorities has not allowed the expenditure claimed by the assessee it is certainly falls within the category of particulars declared by the assessee and the fact are same to the facts of CIT v. Reliance Petro Products (P) Ltd., (supra). Therefore, we are in agreement with the finding of the Ld.CIT(A), accordingly, we do not see any infirmity with the decision of the Ld.CIT(A). Accordingly, ground raised by the revenue is dismissed.

11 ITA NO. 8051/MUM/2019 (AY: 2011-12) M/s. Maharashtra Electronics Corporation Limited of the Act relating to the firm, wherein the issue in the above case was, whether Income Tax Officer can exercise the power u/s. 28(1) after the event the firm stood dissolved and impose penalty. Since the facts are different we cannot apply this decision.

Order pronounced on 21.02.2022 as per Rule 34(4) of ITAT Rules by placing the pronouncement list in the notice board.

Sd/- Sd/- (LALIET KUMAR) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai / Dated 21/02/2022 Giridhar, Sr.PS

Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT(A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file.

//True Copy// BY ORDER

(Asstt. Registrar) ITAT, Mum