M/S. VIGNETTE INDIA PVT. LTD.,NEW DELHI vs. DCIT, NEW DELHI

ORDER

Per Dr. B. R. R. Kumar, Accountant Member:

2. That the Ld. CIT(A) has erred in sustaining the disallowance of Rs 1,63,76,759 being expenditure incurred after set up of business without giving proper justifications for the same. The Ld. CIT(A) erred in failing to pass a speaking order without giving proper reasoning for upholding the disallowance and summarily rejecting the contentions of the Appellant.

3. That the Ld. CIT(A) has erred both on facts and in law in wrongly placing reliance on the decision of the Hon'ble Delhi Tribunal in the case of Akzo Nobel Refinishes India (P) Ltd. (2008) 25 SOT 226 while sustaining the disallowance on account of pre-commencement expenditure.

4. That the Ld. CIT(A) has erred on facts and in law in sustaining the disallowance of an ad-hoc amount of Rs 41,00,000 out of salaries paid to employees. The Ld. CITA) has erred in ignoring the relevant evidence filed by the Appellant in support of the genuineness of the expenditure.

5. The Ld. CIT(A) has erred on facts and in law in upholding the disallowance of Rs 3,09,565 on account of the appellant's contribution to Provident Fund Trust even though the said Trust was approved by Commissioner of Income Tax.

6. That the Ld. CIT(A) has erred on facts and in law in upholding the disallowance of Rs 93,92,243 on account of various expenses incurred by the Appellant without appreciating the fact that the same were incurred for the purpose of business of the Appellant. The Ld. CITA) has erred in failing to take cognizance of the fact that the expenses were duly vouched and verified by the statutory auditors and there was no adverse comment thereon.

7. That the Ld. CIT (A) has erred in upholding the disallowance of Rs 75,41,892, being rent incurred as 'business loss', on account of the same being related to the period beyond the close of the financial year under consideration. The Ld. CIT(A) has erred in failing to take cognizance of the fact that the liability for the same had accrued and arisen during the year under consideration.

8. The Ld. CIT(A) has erred both on facts of the case and in law in upholding the disallowance of Rs 1,42,14,540 being deposits written off and Rs ITA No. 388/Del/2009 Vignette India Pvt. Ltd. 1,45,40,956 for assets written off incurred as ‘business loss' against without appreciating the fact that the liability on account of termination of the rent agreement had accrued and arisen during the year under consideration.

9. That the Ld. CIT(A) has erred both on facts and in law in upholding the disallowance of Rs 2,26,435 out of communication expenses even though the liability to pay this amount has accrued in the year under consideration and had been duly accounted for in the books in accordance with the accepted accounting principles.

10. That the Ld. CIT(A) has erred on facts and in law in upholding the disallowance of Rs 4,92,660 out of legal & professional expenses even though the same had been incurred by the appellant during the relevant year in the course of the carrying on of the business.

11. That the order of the Ld. CT(A) is contrary to the facts, law and the principles of natural justice.”

ITA No. 388/Del/2009 Vignette India Pvt. Ltd. Hence, it can be conveniently held that the expenditure not incurred wholly for the purpose of the business can be disallowed. We also find that the relevant bills & vouchers for the expenses have not been produced before the Assessing Officer in order to prove that the genuineness and allowability of the expenses. Thus, the expenditure incurred before commencement of business have been rightly segregated by the ld. CIT (A) under the head salaries, recruitment & relocation, common services, travelling & conveyance, legal & professional charges as pre-commencement expenditure which are hereby confirmed. Further, regarding the expenses of business promotion, sales commission, communication, travel & conveyance, repair & maintenance, legal & professional fee, contribution to PF, the assessee could not submit any voucher before the assessing authorities. It is the primary duty of the assessee to produce the basic evidences in relation to the expenses claimed, so as to allow the expenses u/s 37 of the Income Tax Act. Since, no details could be produced as to the expenses claimed, no allowance can be given by the revenue. Reliance is placed on the judgment of the Hon’ble Bombay High Court in the case of ALD Automotives Pvt. Ltd. 91 taxmann.com 475 wherein it was held that where assessee failed to produce necessary evidence to prove that business was set up and it was ready to commence, expenditure incurred by assessee prior to setting up of business could not be allowed. Hence, we decline to interfere with the decision of the ld. CIT (A) on this issue. Regarding the disallowance out of the salary, we find that the assessee could provide the PAN number of only three employees correctly out of the 28 employees on the list. The Vignette India Pvt. Ltd. assessee could not furnish the details of salary payment even through the bank statement or by any documentary evidence regarding the rendering of the services by the employees to support the claim. Hence, based on the judgment of Hon’ble Apex Court in the case of Swadeshi Cotton Mills 63 ITR 57, in the absence of any other evidence produced by the assessee, we decline to interfere in the order of the ld. CIT (A).

2. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in holding that sufficient opportunity of being heard was provided by the learned AO before levy of penalty without considering the submission of the Appellant and without making any enquiry in this regard.

3. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in failing to pass a speaking order without giving proper reasoning for upholding the levy of penalty and summarily rejecting the contentions of the Appellant.”

13. The relevant part of the submission of the assessee before the ld. CIT (A) and the reasoning of the ld. CIT (A) in confirming the penalty u/s 271(1)(c) of the Act is as under: “7. The appellant has argued that this is a case of their claims not being found acceptable and there was no concealment as there was full disclosure of facts in their return. In the penalty order, the A.O. has pointed out that the onus lies on the assessee to prove the genuineness and allowability of the claims made by it on which amount the penalty proceedings had been initiated. However, the assessee failed to give any reasons or substantiate its claim during the course of the assessment as well as the appellate proceedings. Not only the assessee has furnished inaccurate particulars of its income but also has failed to give any evidence that the same were based on any bonafide belief on its part. The A.O. has further observed that the assessee has failed to give any satisfactory answer to prove the genuineness and allowability of its claim. The A.O. has held that there are sufficient facts/evidences on record to establish that the assessee had concealed its income and also furnished inaccurate particulars of its income to the extent confirmed by the Vignette India Pvt. Ltd. ld. CIT (A). In his order, the ld. CIT (A) has given detailed and valid reasons for confirming the additions. Even in the penalty appeal, the appellant has failed to furnish any explanation in respect of the additions made, on which penalty has been imposed. He has failed to show how the penalty order is erroneous.

8. Considering the facts pointed out by the A.O. in the asstt. and penalty order and the ld. CITA) in the quantum appeal, the arguments of the appellant are not acceptable. The discussion in these orders shows that this is not a case where the explanation given was bona-fide and there was full disclosure of facts. The provisions of Explanation 1 to section 271(1)(c) are applicable because the assessee has offered an explanation before the A.O.,which he is not able to substantiate and has also failed to prove that such explanation is bona fide, and that all the facts relating to the same and material to the computation of his total income have been disclosed by him.

9. The imposition of penalty is supported by the following judicial decisions: CIT v. Zoom Communications (P) Ltd. (2010)) 327 ITR 510 (DEL.) It is true that mere submitting a claim which is incorrect, in law, would not amount to giving inaccurate particulars of the income of the assessee, but it cannot be disputed that the claim made by the assessee needs to be bona fide. If the claim besides being incorrect, in law, is mala fide the Explanation 1 to section 271(1) would come into play and work to the disadvantage of the assessee. The Court cannot overlook the fact that only a small percentage of the income-tax returns are picked up for scrutiny. If the assessee makes a claim which is not only incorrect in law, but is also wholly without any basis and the explanation furnished by him for making such a claim is not found to be bona fide, it would be difficult to say that he would still not be liable to penalty under section 271(1)(c). If one takes the view that a claim which is wholly untenable in law and has absolutely no foundation on which it could be made, the Vignette India Pvt. Ltd. assessee would not be liable to imposition of penalty, even if he was not acting bona fide while making a Claim of this nature, that would give a licence to the unscrupulous assessees to make wholly untenable and unsustainable claims without there being any basis for making them, in the hope that their return would not be picked up for scrutiny and they Would be assessed on the basis or self-assessment under section 143(1) and even if their case is selected for Scrutiny, they can get away merely by paying the tax, which, in any case, was payable by them. The consequence could be that the persons, who make claims of this nature, actuated by a mala fide intention to evade tax otherwise payable by them, would get away without paying the tax legally payable by them, if their cases are not picked up for scrutiny. This would take away the deterrent effect, which these penalty provisions in the Act have. (ii) CIT v Harparshad & Co Ltd [2010] 328 ITR 53 (DELHI) A claim, which is ex facie bogus, may attract penalty under section 271(1)(c). The findings given in the assessment proceedings are relevant and have probative value. Where the assessee produces no fresh evidence or presents any additional or fresh circumstance in the penalty proceedings, he would be deemed to have failed to discharge the onus placed on him and the levy of penalty could be justified. Explanation 1 below section 271(1)(c) suggests that the assessee would be deemed to have failed to furnish full and accurate particulars of income, if it failed to offer an explanation, or offers an explanation, which is found by the Income-tax Officer to be false or it has not been able to substantiate it in respect of any facts material to the computation to the total income of that person under the Act. The law has developed to the extent that even if there is no concealment of income or furnishing of inaccurate particulars, but on the basis thereof the claim which is made is ex facie bogus, it may still attract penalty provision. Cases of bogus hundi loans or bogus sales or purchases have been treated as that of concealment or inaccuracy in particulars of income by the judicial pronouncements. Vignette India Pvt. Ltd.

Where during assessment proceeding, Assessing Officer disallowed assessee's claim of payment of commission to its director on the ground that it was a bogus claim inasmuch as said director had not provided any services to the assessee and during penalty proceedings initiated on the basis of that addition, assessee had failed to offer any explanation in respect of that addition, it was held that Assessing Officer was justified in levying penalty under section 271(1)(c). (iii) CIT v. Escorts Finance Ltd. (2010) 328 ITR 44 (DEL.) Even if there is no concealment of income or furnishing of inaccurate particulars, but on the basis thereof the claim which is made is ex facie bogus, it may still attract penalty provision.”