D.C.I.T. - 12(3)(2), MUMBAI vs. MOVIDA INDIA PVT. LTD., MUMBAI

The present appeal filed by the revenue is directed against the order passed by the CIT(A)-20, Mumbai, dated 16.10.2017, which in turn arises from the order passed by the A.O under Sec. 271(1)(c) of the Income Tax Act, 1961 (for short „Act‟), dated 27.09.2016 for A.Y 2012-13. The revenue has assailed the impugned order on the following grounds of appeal before us:

The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary.”

Briefly stated, the assessee company had filed its return of income for A.Y 2012-13 on 30.09.2012, declaring its total loss at Rs.(-)7,02,47,028/-. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act.

After the culmination of the assessment proceedings, the A.O called upon the assessee to „show cause‟ as to why penalty under Sec. 271(1)(c) may not be imposed on it for furnishing of inaccurate particulars of income. In its reply, it was submitted by the assessee that the aforesaid claim of depreciation had occasioned on account of an inadvertent mistake on its part. In order to impress upon the A.O that the claim of depreciation was backed by a bonafide mistake, the assessee tried to take support of certain facts, viz. (i) that, there was no incentive for the assessee company to furnish any inaccurate particulars as it had not even commenced its business during the year; (ii) that, the assessee which was incorporated in the year 2008 was in its nascent stage and had outsourced its tax related work to a consultant who had erroneously failed to disallow the claim of depreciation in the return of income; (iii) that, the assessee company had learnt about the aforesaid mistake committed by its tax consultant only when the same was brought to its notice in the immediately succeeding year when a new tax consultant was engaged; (iv) that, the fact that the assessee had not „carried forward‟ the loss arising from its aforesaid claim of depreciation in A.Y. 2013-14 and onwards in itself P a g e | DCIT-12(3)(2) Vs. M/s Movida India Private Limited substantiated the bonafides of the assessee; (v) that, the assessee after realising its aforesaid mistake had in the course of the assessment proceedings filed a „revised‟ computation, wherein the aforesaid claim for depreciation was withdrawn; (vi) that, as the assessee had disallowed all the other expenses, therefore, it could safely be concluded that the failure on its part to disallow its claim for depreciation was clearly an error and not a wilful default; (vii) that, the aforesaid claim for depreciation had no bearing on the tax liability of the assessee for the year under consideration; (viii) that, the assessee had no intention of carrying forward the said depreciation claim, which fact could safely be gathered from a perusal of the „original‟ computation of income; (ix) that, loss arising from the claim of depreciation was automatically carried forward in the electronically filed return of income over which the assessee had no control; (x) that, the aforesaid loss was not „carried forward‟ in the assesses subsequent return of income, which in itself proved that the assessee had no intention of either claiming the said loss or carrying forward the same to the subsequent years; and (xi) that, a mere disallowance of depreciation in itself could not be construed as a justifiable basis for levying penalty under Sec.271(1)(c). However, the aforesaid explanation of the assessee did not find favour with the A.O. Observing, that the assessee had intentionally raised a wrong claim of depreciation in its return of income for the year under consideration, the A.O imposed a penalty of Rs.2,27,91,648/- under Sec.271(1)(c) of the Act.

Aggrieved, the assessee assailed the order of the A.O imposing penalty under Sec. 271(1)(c) before the CIT(A). After deliberating on the contentions advanced by the assessee and perusing the orders of the lower authorities, the CIT(A) held a conviction that there was neither any actual „concealment‟ nor „furnishing of any inaccurate particulars‟ of income by the assessee. On a perusal of the facts, the CIT(A) held a conviction that the A.O had as a matter of fact imposed penalty by invoking the provisions of “Explanation 1” to Sec.271(1)(c) of the Act. The CIT(A) was of the view that „Explanation 1‟ to Sec.271(1)(c) was in the nature of a „deeming provision‟ which had expanded the scope of the cases where penalty could be imposed. On the basis of his aforesaid observations, the CIT(A) held a conviction, that as neither any actual „concealment‟ nor any „furnishing an inaccurate particulars‟ of income had occasioned in the present case, therefore, the A.O was in error in imposing penalty under Sec.271(1)(c) without invoking the „deeming provision‟ of „Explanation 1‟. Accordingly, on the P a g e | DCIT-12(3)(2) Vs. M/s Movida India Private Limited basis of his aforesaid deliberations the CIT(A) vacated the penalty imposed by the A.O under Sec. 271(1)(c). Insofar the contentions advanced by the assessee as regards the validity of the jurisdiction assumed by the A.O for imposing penalty under Sec. 271(1)(c) de hors any mention of the specific default in the „Show cause‟ notice issued under Sec.274 r.w.s 271(1)(c) was concerned, the same did not find favour with the CIT(A).

The revenue being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. Ld. Departmental Representative (for short „D.R‟) relied on the order of the A.O. Ld. D.R taking us through the facts of the case submitted, that as the assessee despite the fact that its business operations had yet not commenced during the year had intentionally raised a wrong claim for depreciation, therefore, the A.O had rightly imposed penalty under Sec. 271(1)(c). As regards the claim of the assessee that it being in its nascent stage in India was not having the services of a professional at its disposal, it was averred by the ld. D.R, that the said claim of the assessee had no basis and was just an attempt to wriggle out from the repercussions of raising a wrong claim in its return of income. It was submitted by the ld. D.R, that now when Sec. 32 clearly envisages a pre-condition that the asset inter alia must have been used by the assessee for the purpose of its business or profession during the year, therefore, the assessee despite being well conversant of the said statutory requirement had purposively raised a wrong claim during the year under consideration. In the backdrop of her aforesaid contentions, it was averred by the ld. D.R that the assessee cannot be allowed to canvass that it was unaware about the mandate of law. In fact, it was submitted by the ld. D.R, that as the assessee had capitalised the other expenses which were directly related to the development of technology, and had also treated other costs as sunk costs and disallowed the same in its computation of income, therefore, it was beyond comprehension that it was ignorant about its statutory obligation of disallowing its claim of depreciation on a similar footing during the year under consideration. In sum and substance, it was averred by the ld. D.R that the raising of the claim for depreciation by the assessee could not be treated to be a bonafide claim, as the same as per her was clearly in the nature of a wrong claim. Insofar the „revised‟ computation of income that was filed by the assessee in the course of the assessment proceedings was concerned, it was submitted by the ld. D.R, that the A.O had rightly observed that the only remedy that was available with the assessee to correct its mistake was by way of P a g e | DCIT-12(3)(2) Vs. M/s Movida India Private Limited filing a „revised‟ return of income, and no cognizance of the aforesaid „revised‟ computation which was non est in the eyes of law could be drawn. Apart therefrom, it was submitted by the ld. D.R, that the very fact that the assessee despite realising its so called mistake had taken substantial time for admitting the same before the A.O in itself dislodged its claim that it had inadvertently on account of a bonafide mistake raised the aforesaid claim for depreciation. Ld. D.R vehemently submitted, that the assessee as a matter of fact had adopted a calculated approach which by no means could be characterised as a bonafide mistake on its part. On the basis of her aforesaid contentions, it was claimed by the ld. D.R, that it could safely be concluded that the assessee in the present case had raised a wrong claim of depreciation, which had thereafter been rightly subjected to levy of penalty under Sec.271(1)(c) by the A.O. Adverting to the observations of the CIT(A) that the penalty imposed by the A.O under Sec.271(1)(c) could not be sustained as the „Explanation 1‟ to Sec.271(1)(c) had not been invoked by the A.O, it was averred by the ld. D.R that as per the mandate of law no statutory obligation was cast upon the A.O for invoking „Explanation 1‟ for imposing penalty under Sec.271(1)(c). On the basis of her aforesaid contentions, it was submitted by the ld. D.R that the CIT(A) had erred in dislodging the well reasoned order passed by the A.O, wherein the latter after appreciating the facts had justifiably imposed penalty under Sec.271(1)(c) of the Act.

Per contra, the ld. Authorized Representative (for short „A.R‟) relied on the order of the CIT(A). Apart therefrom, it was submitted by the ld. A.R that as the claim of depreciation was inadvertently on account of a bonafide mistake raised by the assessee, therefore, bypassing the said material fact no penalty under Sec. 271(1)(c) could have been validly imposed on the assessee. It was submitted by the ld. A.R, that the very fact that the assessee had neither claimed the “set off” of the loss emerging from its aforesaid claim of depreciation either in the year under consideration or in the immediately succeeding year i.e A.Y. 2013-14, nor had carried forward the same to the subsequent years, therein in itself evidenced the fact that its aforesaid claim for depreciation during the year under consideration was prompted by a bonafide mistake. Also, it was claimed by the ld. A.R, that the assessee could not have benefitted by any means by raising the aforesaid claim for depreciation, specifically when it had neither any income during the year under consideration nor had „carried forward‟ the said loss to the succeeding years. In support of her contention that no penalty under Sec.271(1)(c) could P a g e | DCIT-12(3)(2) Vs. M/s Movida India Private Limited be validly imposed in a case where the loss arising from an inadvertent claim of depreciation during the year was not „carried forward‟ and „set off‟ in the subsequent years, the ld. A.R had drawn support from the judgment of the Hon’ble High Court of Bombay in the case of CIT-10 Vs. First Data (India) Pvt. Ltd. (2016) 384 ITR 260 (Bom). On the basis of her aforesaid submission, it was averred by the ld. A.R that no penalty under Sec. 271(1)(c) could have been validly imposed by the A.O.

We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements relied upon by them. Admittedly, the assessee company had not yet commenced its business operations during the year under consideration. As observed by us hereinabove, it was the claim of the assessee that though it had not commenced its operations during the year under consideration, the assets were put to use and the depreciation on the same was calculated as per the I.T Act. On being called upon to justify its claim for depreciation, it was admitted by the assessee that it had inadvertently omitted in not disallowing the depreciation in the computation of income and consequently in the return of income. As is discernible from the orders of the lower authorities, it had throughout been canvassed by the assessee, that the fact that it had not sought any „set off‟ of the depreciation loss in any subsequent year clearly evidenced the fact that the raising of claim of depreciation was merely backed by a bonafide mistake on its part. However, we find that the aforesaid explanation of the assessee who had tried to justify his bonafides in respect of the aforesaid inadvertent claim of depreciation had not found favour with the A.O. As a matter of fact, the A.O was of the view, that now when the assessee during the year had capitalised the „direct costs‟ related to development of technology, and had also disallowed all other expenses in the computation of income, for the reason, that its business operations had yet not commenced, therefore, it could safely be gathered that the aforesaid claim of depreciation was not backed by a bonafide mistake on its part. Also, we find, that the „revised‟ computation of income which was filed by the assessee in the course of the assessment proceedings was declined to be admitted by the A.O, as he was of the view that the only way for the assessee to correct/undo the mistake was by way of filing a „revised‟ return of income, which however could not be done as the prescribed time limit for filing the same had expired way back as on 31.03.2014. On the basis of his P a g e | DCIT-12(3)(2) Vs. M/s Movida India Private Limited aforesaid observations, the A.O was of the view that the said „revised‟ computation of income filed by the assessee in the course of the assessment proceedings had no existence in the eyes of law. Apart therefrom, the A.O was also of the view, that the claim of the assessee that it had not sought „set off‟ of the depreciation loss for the year under consideration in any of the subsequent years would not absolve it from the repercussions of raising a wrong claim in its return of income for the year under consideration. As had been observed by us at length hereinabove, in the backdrop of the aforesaid deliberations, the A.O after inter alia disallowing the assesses claim for depreciations of Rs. 7,02,47,029/- had thereafter saddled it with the default of having intentionally raised a wrong claim of depreciation in its return of income, and consequently subjected it to a penalty of Rs. 2,27,91,648/- under Sec. 271(1)(c). As can be gathered from a perusal of the order of the CIT(A), we find, that the penalty imposed under Sec. 271(1)(c) was vacated by him, for the reason, that he was of the view that as neither any actual „concealment‟ nor any „furnishing of inaccurate particulars‟ of income had occasioned in the present case, therefore, the A.O was in error in imposing penalty under Sec.271(1)(c) without invoking the “deeming provisions” of “Explanation 1” to Sec. 271(1)(c) of the Act. In sum and substance, the CIT(A) held a conviction that as “Explanation 1” to Sec. 271(1)(c) was in the nature of „deeming provision‟ which had expanded the scope of the cases where a penalty under the aforesaid statutory provision could be imposed, therefore, as in the case before him, there was neither any actual „concealment‟ nor any actual „furnishing of inaccurate particulars‟ of income, thus the A.O without invoking the provisions of “Explanation 1” could not have imposed penalty under the said statutory provision on the assessee.

We have deliberated at length on the issue under consideration before us in the backdrop of the contentions advanced by the authorised representatives for both the parties. As is discernible from the “Notes” to the financial statements of the assessee for the year under consideration, we find, that the assessee had therein categorically disclosed two primary aspects viz. (i) that, the company had not yet commenced its business operations during the year; and (ii) that, depreciation was provided on a straight line method over the estimated useful life of the fixed assets. Also, in the backdrop of the fact that the assessee had not yet commenced its business operations during the year, it had therefore while filing its return of income for the year under consideration i.e A.Y. 2012-13 disallowed all the expenses. On the P a g e | DCIT-12(3)(2) Vs. M/s Movida India Private Limited basis of the aforesaid facts, we are of the considered view, that the aforesaid claim of depreciation raised by the assessee has to be read in conjunction with the fact that the assessee in its return of income/financial statements had made a complete disclosure of the fact that its business operations had not yet commenced during the year under consideration. In sum and substance, the claim of deprecation raised by the assessee was not based on incorrect facts, but in fact was backed by a true disclosure of the fact that its business operations had not yet commenced during the year under consideration. On the basis of the aforesaid facts, it can safely be gathered that though the assessee had not begun its business operations during the year under consideration, however, for the reason, that as the assets were put to use, therefore, it had calculated the depreciation on the same under the I.T Act, which thereafter had inadvertently remained omitted to be disallowed in the tax computation and consequently in the return of income. In our considered view, the fact that the assessee had not „set off‟ the aforesaid depreciation loss in any subsequent year lends substantial credence to the explanation of the assessee that it had on account of a bonafide omission failed to disallow deprecation in the tax computation and consequently in the return of income for the year under consideration. In fact, we find, that it has been the claim of the assessee before the lower authorities that as it had not „carried forward‟ the aforesaid depreciation loss and therein „set off‟ the same in the subsequent years, therefore, the fact that it had no intention of raising a false claim of depreciation while filing of the return of income for the year under consideration was proved beyond doubt.

We have given a thoughtful consideration and find substantial force in the claim the ld. A.R, that the aforesaid claim for deprecation was inadvertently raised by the assessee in its return of income for the year under consideration. As is discernible from the orders of the lower authorities, it is an admitted fact that the assessee company was a start up company which during the year under consideration was in its nascent stage in India. Insofar the various costs which were incurred during the year under consideration were concerned, we find, that the assessee had capitalised the „direct costs‟ related to development of technology. On the other hand, all other costs were treated as sunk costs and were disallowed in the computation of income. As is discernible from the orders of the lower authorities, it is the claim of the ld. A.R, that as the assessee during the year was in its nascent stage in India, therefore, in the absence P a g e | DCIT-12(3)(2) Vs. M/s Movida India Private Limited of any dedicated finance and tax team it had outsourced its tax related work to a third party consultant. Accordingly, it has been the claim of the assessee, that while filing the return of income for the year under consideration though the tax consultant to whom the tax related work was outsourced had disallowed the expenses incurred by the assessee during the year, for the reason, that its business had not yet commenced, however, inadvertently, the depreciation that was calculated as per the I.T Act at Rs.7,02,47,029/- had remained omitted to be disallowed by him in the tax computation and consequently in the return of income. Resultantly, in the return of income the consequential loss was reflected at Rs.7,02,47,028/- and the same as per its software was automatically shown in the „carried forward‟ schedule of the return of income for the year under consideration. It is the claim of the assessee, that the fact the depreciation had wrongly been claimed during the year under consideration was brought to its notice by its new tax consultant on 30.11.2013 i.e at the time of filing of the return of income for the immediately succeeding year viz. A.Y. 2013-14. Accordingly, it is the claim of the assessee, that on learning about its aforesaid inadvertent mistake that had crept in its return of income for the year under consideration, i.e A.Y 2012-13, it took the necessary steps and had not claimed any benefit of the „brought forward‟ unabsorbed depreciation loss of Rs.7,02,47,029/- in its return of income for A.Y 2013-14. In sum and substance, it is the claim of the assessee that its bonafides as regards the inadvertent claim of depreciation can safely be gathered from the fact that no benefit of the consequential „brought forward‟ depreciation loss was claimed in the return of income for the immediately succeeding year i.e A.Y. 2013-14. We find substantial force in the aforesaid contention of the ld. A.R, and are of the considered view that the fact that the assessee in its return of income for A.Y. 2013-14 had not sought any benefit of the „brought forward‟ loss emanating from its claim for depreciation raised during the year under consideration i.e A.Y. 2012-13 in itself fortifies the veracity of the explanation of the assessee that the aforesaid claim of depreciation was merely backed by a bonafide mistake. In fact, we find, that the assessee by way of a disclosure in the “Notes” forming part of its „financial statements‟ for the year under consideration had categorically stated that it had not commenced its business operations during the year under consideration. Apart therefrom, as observed by us hereinabove, the assessee had disallowed all other expenses during the year under consideration, for the reason, that its business operations had not yet commenced. In our considered view, the aforesaid state of affairs substantially lends credence to the explanation of P a g e | DCIT-12(3)(2) Vs. M/s Movida India Private Limited the assessee that it had by way of a bonafide mistake raised a claim of depreciation at the time of filing of the return of income for the year under consideration. Also, the claim of the assessee that the mistake in raising the aforesaid claim of depreciation had occasioned on the part of the third party tax consultant to whom the tax related matters were outsourced during the year, though had not been conclusively proved to the hilt by the assessee, however, the same also cannot be discarded in the absence of any „material‟ placed on record by the revenue which would prove to the contrary. In fact, neither is there any „material‟ borne from the records which would disprove the aforesaid claim of the assessee, nor any effort has been put in by the ld. D.R to dislodge the said claim of the assessee.

Apart therefrom, we find that the sequence of events culminating into the imposition of penalty under Sec. 271(1)(c) would also have a strong bearing on the adjudication as regards the maintainability of the same. On a perusal of the records, we find that scrutiny proceedings were initiated by way of a notice issued under Sec. 143(2), dated 08.08.2013. Notice under Sec. 142(1), dated 02.04.2014 was thereafter issued to the assessee, however, a perusalof the same reveals that no specific query regarding the claim of depreciation was therein raised by the A.O. In reply, the assessee vide its letter dated 30.06.2014 had filed various details. At Point No. 9 of its reply, the assessee had voluntarily came forth with certain facts viz. (i) that, as specifically mentioned in the audited financials the company had not commenced its business operations during the year under consideration; (ii) that, though the commercial operations had not commenced during the year under consideration, however, depreciation was calculated on the assets, which however had inadvertently remained omitted to be disallowed in the return of income; (iii) that, the assessee company had no intention of raising the aforesaid claim of depreciation and had not used the losses emerging therefrom for any „set off‟ purposes; and (iv) that, the depreciation that was inadvertently claimed during the year under consideration was not „carried forward‟ for „set off‟ in the return of income for the immediately succeeding year i.e A.Y. 2013-14. Apart therefrom, we find that the A.O had thereafter raised certain queries in the course of the assessment proceedings, which were replied by the assessee vide its letters dated 25.08.2014, 27.08.2014, 23.01.2015 and 02.02.2015. However, we find that in neither of the aforesaid letters issued by the A.O any query was raised as regards the assesses claim for depreciation. On 13.02.2015 the assessee reiterating its aforesaid claim that it had P a g e | DCIT-12(3)(2) Vs. M/s Movida India Private Limited inadvertently omitted to disallow depreciation in the tax computation, had thus filed its „revised‟ computation of income as „Annexure 1‟ to its aforesaid letter. In the revised computation of income, the assessee had categorically stated that the depreciation calculated was not being claimed as a deduction as the business operations had not commenced during the year. Further, the assessee vide its letter dated 28.01.2016 had once again submitted before the A.O, that it had inadvertently claimed depreciation as deduction in its tax computation and consequently in the return of income for the year under consideration. We find that it is a matter of fact borne from the records that the assessee had vide its letter dated 30.06.2014, had on a suo motto basis submitted before the A.O that depreciation on assets had wrongly been claimed during the year under consideration. Also, it was requested by the assessee that as the time limit to file the „revised‟ return of income had lapsed, therefore, the aforesaid details may be placed on record. On the basis of the aforesaid facts, we find, that there is substantial force in the claim of the assessee that as it had in the course of the assessment proceedings prior to any query having been raised by the A.O as regards its claim for depreciation came forth with clean hands and therein admitted its mistake of having inadvertently raised the aforesaid claim for depreciation on its assets, therefore, it could not have been visited with penalty u/s 271(1)(c) in respect of such disallowance. Apart therefrom, we find, that the fact that the assessee after learning about its aforesaid mistake had thereafter not claimed any benefit of the „brought forward‟ depreciation loss while filing its return of income for A.Y. 2013-14 on 30.11.2013, further lends credence to its bonafides. Rather, an in depth consideration of the aforesaid facts reveals, that while for the assessee had filed its return of income for A.Y. 2013-14 on 30.11.2013, the first notice/questionnaire which was issued by the A.O under Sec.142(1) was dated 02.04.2014 (de hors any specific query regarding assesses claim for depreciation). In the backdrop of the aforesaid facts, we find, that the fact that the assessee had not claimed any benefit of the „brought forward‟ depreciation loss while filing its return of income for A.Y. 2013- 14 in itself substantiates that it had raised the aforesaid claim of depreciation on account of an inadvertent bonafide mistake at the time of filing of the return of income for the year under consideration i.e A.Y 2012-13. Accordingly, in the totality of the facts of the case, we are of the considered view, that as the bonafides of the assessee as regards the raising of the aforesaid claim of depreciation stands clearly established, therefore, the A.O was not justified in imposing penalty under Sec. 271(1)(c) of the Act.