ASSET MOTORS PRIVATE LIMITED ,MUMBAI vs. DCIT 15 (1)(1), MUMBAI

ORDER PER S. RIFAUR RAHMAN, A.M. The present appeal is filed by the assessee against the order of the Commissioner of Income Tax (Appeals)-24, Mumbai [in short ‘CIT(A)’] for the assessment year 2011-12 dated 10.12.2018 and arises out of assessment completed u/s 143(3) of the Income Tax Act, 1961 (in short the Act) 2. Brief facts of the case are the assessment u/s 143(3) for the assessment year 2011-12 was completed on 19.03.2014 determining the total income of (-

Asset Motors Pvt. Ltd. 2 ITA No. 1463/M/2019 )Rs.35,30,360/-. During the course of assessment, the Assessing Officer observed that : (a) The assessee claimed an amount of Rs.27,400/- as preliminary expenses u/s 35D. Since, the assessee has not brought anything on record to prove that increase in share capital is for the extension of its existing industrial undertaking or in connecting with setting up of a new industrial undertaking the above said amount was disallowed. (b) The assessee had debited total interest expenditure of Rs.1,33,78,834/- on interest of borrowed capital. Since the assessee could not prove to the satisfaction of the Assessing Officer that the borrowed funds were not utilized for non-business purposes. The Assessing Officer observed that the assessee has diverted the interest bearing funds to sister’s concern. Accordingly, the Assessing Officer disallowed proportionate interest amount of Rs.21,02,649/- u/s 36(1)(iii) of the Act.

Asset Motors Pvt. Ltd. 3 ITA No. 1463/M/2019 “Our client further invite your attention to the decision of the Kerla High Court (FB) in the case of CIT vs. India Sea Foods (218 ITR 629) wherein it has been held as under: Penalty proceeding are penal in nature. The elementary principles of criminal apply, a is a quasi-criminal proceeding there should be conscious concealment. The provision should be construed strictly. Even after the addition of the Explanation to section 271(1)(c) of the Income-tax Act, 1961. conscious is necessary and the presumption tinder Explanation to section 271(1)(c) can be displaced by the assessee proving that failure to return the correct income did not arise from any fraud or gross or willful neglect ant the quantum of proof necessary would be that required in a civil case, namely preponderance of probabilities. f) Further, it is a settled proposition in law that penalty under section 271(l)(c) is not leviable merely because disallowance of a particular claim made by the assesses is upheld. g) In this connection, your attention is invited to the following decision: Delhi Cloth and Genefral Mills Co. Ltd. v. CIT (157 ITR 822) (Del): "Penalty far concealment of income can be imposed only if there is conscious and deliberate concealment on the part of the assesses. The mere fact that a claim for expenditure stands disallowed does not by itself lead to the inference that the assessee had in accurate particulars in regard to that item. h) Our client further invite your attention to the following observation made by the by the Supreme Court in the case of Hindustan Steel Ltd. vs. State of Orissa (83 ITR 26). An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceedings and penalty will not ordinarily be imposed unless the party obliged, either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest or acted in conscious disregard its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on consideration of all the relevant circumstances. In view of the submissions, our clients request you kindly drop the penalty proceedings initiation u/s 271(1)(c) of the Act.”

Asset Motors Pvt. Ltd. 4 ITA No. 1463/M/2019 Textiles Processors & Others (2008) reported in 306 ITR 277 (SC) and MAK Data P. Ltd. v. CIT (Supreme Court) levied penalty at 100% of the said tax sought to be evaded to the extent of Rs.70,54,549/-.

“A. Levy of penalty under section 271(1)(c) in respect of disallowance of ROC fees paid eligible for deduction under section 35D amounting to Rs.27,400/- :

1. 1. On the facts and in the circumstances of the case and in law, the Commissioner of Income tax (Appeal) erred in upholding the action of assessing officer in levying penalty under section 271(1)(c) read with explanation 1 thereto.

2. In doing so Commissioner of Income-tax (Appeals)further erred in the following respects:- a. In not appreciating the fact that the appellant had made full disclosure of the claim for deduction of ROC fees paid Rs.27,400/-under section 35D of the Income Tax Act, 1961 in the return of income. b. In not appreciating the fact that the issue as to whether ROC fees paid is allowable for deduction or not is a debatable issue and accordingly, the same cannot be treated a false claim. c. In not appreciating the fact that penalty under section 271(1)(c) is not leviable merely because disallowance of particular claim made by the appellant has been upheld, d. in not appreciating the fact even after insertion of explanation 1 to section 271(1)(c) there has to be conscious concealment on the part of the appellant. e. In not appreciating the fact that the failure to return the correct income did not arise from any fraud or gross or willful neglect on the part of the appellant.

Asset Motors Pvt. Ltd. 5 ITA No. 1463/M/2019 f. In view of the above grounds of appeal

, the appellant prays that the assessing officer has to be directed to delete the penalty levied under section 271(1)(c) amounting to Rs.9102/-. B. Levy of penalty under section 271(1)(c) in respect of disallowance of interest expenditure of Rs.21,02,649/- under section 36(1)(iii) by treating it as not incurred for business purpose:-

1. On the facts and in the circumstances of the case and in Jaw, the Deputy Commissioner of Income tax (appeals) erred in upholding the action of the assessing officer in levying penalty under section 271(1)(c) read with explanation 1 thereto.

2. The Commissioner of Income-tax (Appeals) further erred in the following respects:- a. In not appreciating the fact that the appellant had made full disclosure during the course of assessment proceedings in respect of interest expenditure of Rs.21,02,649/- eligible for deduction under section 36(1)(iii) of the Income Tax Act 1961. b. In not appreciating the fact that whether interest bearing borrowed amounts were used for granting interest free advances or whether the interest free advances were given out of commercial expediency or not, was a debatable issue and accordingly, the same cannot be treated as a false claim. c. In not appreciating the fact that penalty under section 271(1)(c) is not leviable merely because disallowance of particular claim made by the appellant has been upheld. d. In not appreciating the fact even after insertion of explanation 1 to section 271(1)(c), there has to be conscious concealment on the part of the appellant e. In not appreciating the fact that the failure to return the correct income did not arise from any fraud or gross or willful neglect on the part of the appellant.

3. In view of the above grounds of appeal, the appellant prays that the assessing officer has to be directed to delete the penalty levied under section 271(1)(c) amounting to Rs.6,98,447/-. The appellant hereby reserves the right to add to, alter or amplify the above grounds of appeal.”

7. Before us, the Ld. AR brought to our notice para 4.3 of the assessment order and submitted that the assessee has increased the share capital and incurred preliminary expenses relating to registration fees paid to registrar of the company in increasing various share capital for the purpose of expansion of business the amount claimed was eligible deduction u/s 35D.

Asset Motors Pvt. Ltd. 6 ITA No. 1463/M/2019 The above amount was disallowed by the Assessing Officer on the ground that the expenses should have been incurred before the commencement of the business or after the commencement of business for the expansion of its industrial undertaking or for setting up of the business for expansion of new industrial unit. He submitted that the AO recorded the reason that the assessee has not shown anything on record that there was expansion of industrial undertaking. He submitted that aggrieved with the above order, the assessee preferred an appeal before Ld. CIT(A) and Ld. CIT(A) sustained the addition made by the AO. The assessee did not prefer further appeal. The Ld. AR submitted that the issue under consideration is debatable, expenses claimed by the assessee is bona fide expenditure and above disallowance of expenditure will not come under penalty. He submitted that Finance Act, 2008 made the amendment to the provisions of section 35D and extended the amortization of preliminary expenses to all the undertakings and relevant extract of the Finance Act is placed on page 49 of the Paper Book and he brought to our notice that the section was amended to provide the benefit of amortization to all assessees. For the purpose, he relied on the case of CIT v. Reliance Petro Products Pvt. Ltd. (supra) and submitted that the assessee had claimed expenditure and the Assessing Officer did not accept the above expenditure that itself will not attract penalty provisions.

Asset Motors Pvt. Ltd. 7 ITA No. 1463/M/2019 “The appellant explained that it was engaged in the business of dealing in motor vehicles and servicing of vehicles. Its holding company Assets Auto India Private Limited was also engaged in the business of dealing in motor vehicles and servicing of motor vehicles. The appellant had advanced Rs.2.20 crores to its holding company for expanding the business operation and to strengthen the business activity. It was also submitted that during the year additional amount of Rs. 22 lacs was given and the opening balance was Rs.1.98 crores. The aforesaid amount was advanced out the free funds viz. the share capital of the company which amounted to Rs. 2.51 crores. As the amount given to the holding company viz. Rs.2.20 crores was less than the free funds available with the appellant company. In the submission made it was further submitted that the term loans obtained by the appellant from banks were for specific purposes and the terms governing the same it could not be used for any other purpose. As the amount advance to holding company was for the furtherance of business activity of the appellant company and the fact it was given out of interest free funds the interest expenditure was fully allowable as deduction, it was also submitted that as all the test laid down under section 36(1)(iii) were satisfied the entire interest expenses ought to be allowed as deduction. e. The appellant further submitted that total interest debited to the profit and loss account was paid m respect of capital borrowed for the purpose of business. Further, the appellant advanced money to the holding company out of commercial expediency as the said holding company was in the same line of business. f. In the assessment order passed under section 143(3), the appellant's contention that the advance was given out of commercial expediency and out of interest free funds has been rejected on the grounds that the appellant had not submitted any explanation or submission in respect thereof. Accordingly, an amount of Rs.21,02,649/- has been disallowed. g. Against the aforesaid assessment order, the appellant preferred an appeal before CIT(A).

Asset Motors Pvt. Ltd. 8 ITA No. 1463/M/2019 h. During the course of appellate hearing, the appellant submitted that- - It had interest free fund out of which the interest free advance was given to the holding company. - The said advance given out of commercial expediency and for the furtherance of business activity of the company. - During the year only an amount of Rs. 22 lac was given to the holding company and the balance amount of Rs. 1.98 crores was the opening balance. - The amounts borrowed from banks and other was for specific purpose and were governed by the terms and conditions stipulated by the banks. i. The CIT(A)'s has confirmed the addition made by the Assessing Officer in respect of disallowance of interest expenditure. j. Against the appellate order passed by the CIT(A), the appellant has not preferred an appeal before the Income Tax Appellate Tribunal.” Since the assessee diverted its own funds to holding company and assessee was having sufficient own funds and advancing to its sister’s concern/holding company are only for business expediency and disallowance of such interest is a debatable issue and such disallowance of interest will not fall under penalty provisions. He relied on the case of Reliance Petro Products Pvt. Ltd. (supra) and prayed that penalty may be deleted.

Considered the rival submissions and perused the material on record. We noticed that the assessee has claimed RoC charges and interest expenditure. The Assessing Officer disallowed the same with the observation that the assessee has not explained and not brought on record any material to his satisfaction. On appeal before the Ld. CIT(A), the Ld. CIT(A) sustained the additions made by the Assessing Officer and the assessee did not prefer any further appeal. Subsequently, the Assessing Officer initiated the proceedings u/s 271(1)(c) of the Act and levied the penalty. We observed that the expenditure claimed by the assessee are debatable and merely because these expenditures were disallowed and as well as assessee preferred not to appeal before second appellate authority. The Assessing Officer levied the penalty. We noticed that in the similar situations, the Hon’ble High Court in the case of Reliance Petro Products Pvt. Ltd. (supra) held as under :

“A glance of provision of section 271(1)(c) would suggest that in order to be covered, 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 instant case was not the case of concealment of the income. That was not the case of the revenue either. It was an admitted position in the instant case that no information given in the return was found to be incorrect or inaccurate. It was not as if any statement made or any detail supplied was found to be factually incorrect. Hence, at least, prima facie, the assessee could not be held guilty of furnishing inaccurate particulars. The revenue argued that submitting an incorrect claim in law for the expenditure on interest would amount to giving inaccurate particulars of such income. Such cannot be the interpretation of the concerned words. The words are plain and simple. In order to expose the assessee to the penalty

Asset Motors Pvt. Ltd. 10 ITA No. 1463/M/2019 unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing of inaccurate particulars. [Para 7] Therefore, it must be shown that the conditions under section 271(1)(c) exist before the penalty is imposed. There can be no dispute that everything would depend upon the return filed, 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. [Para 8] The word 'particulars' must mean the details supplied in the return, which are not accurate, not exact or correct, not according to truth or erroneous. In the instant case, there was no finding that any details supplied by the assessee in its return were found to be incorrect or erroneous or false. Such not being the case, there would be no question of inviting the penalty under section 271(1)(c). A mere making of the claim, which is not sustainable in law by itself will not amount to furnishing of inaccurate particulars regarding the income of the assessee. Such claim made in the return cannot amount to the inaccurate particulars. [Para 9] The revenue contended that since the assessee had claimed excessive deductions knowing that they were incorrect, it amounted to concealment of income. It was argued that the falsehood in accounts can take either of the two forms: (i) an item of receipt may be suppressed fraudulently; (ii) an item of expenditure may be falsely (or in an exaggerated amount) claimed, and both types attempt to reduce the taxable income and, therefore, both types amount to concealment of particulars of one's income as well as furnishing of inaccurate particulars of income. Such contention could not be accepted as the assessee had furnished all the details of its expenditure as well as income in its return, which details, in themselves, were not found to be inaccurate nor could be viewed as the concealment of income on its part. It was up to the authorities to accept its claim in the return or not. 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). If the contention of the revenue was accepted, then in case of every return where the claim made was not accepted by the Assessing Officer for any reason, the Asset Motors Pvt. Ltd. 11 ITA No. 1463/M/2019