PPG ASIAN PAINTS P.LTD,MUMBAI vs. DCIT RG LTU, MUMBAI

This appeal has been filed by the assessee against the order dated 80.03.2016 passed by the Commissioner of Income Tax (Appeals)-1 (for short ‘the CIT(A), Mumbai, for the assessment year 2008-09, whereby the Ld. CIT(A) has dismissed the appeal filed by the assessee against the penalty order passed u/s 271 (1) (c) of the Income Tax Act, 1961 (for short the ‘Act’).

He failed to appreciate and ought to have held that:

Before us, the Ld. counsel for the assessee submitted that the Ld. CIT (A) has wrongly confirmed the penalty imposed by the AO u/s 271 (1) (c) of the Act on the basis of addition of 20.83 crores made by treating the solatium received as revenue receipt as against the capital receipt claimed by the assessee. The Ld. counsel submitted before us that the assessee a division of Asian Paints acquired Advanced Refinish 2K Business from ICI Ltd. as a going concern on slum sale basis for a total consideration of Rs. 48.80 crore vide agreement dated 06.03.2007. This consideration was allocated by the assessee towards its assets. Clause 13.7 of the agreement specified that in case a third party acquires control of the holding company of ICI and such third party is engaged in the competing business as that of the assessee, then the ICI or such party or any of its affiliates shall be liable to pay the assessee an amount of Rs. 1,10,00,000/- per month commencing from the date of acquisition of such control up to July, 2009. Imperial Chemical Industries PLC the holding company of ICI India was acquired by Akzo Nobel NV in January, 2008. Consequently, in terms of the aforesaid agreement, the assessee company became entitled to recover from ICI India an amount of Rs. 1,10,00,000/- per month from 2nd January, 2008 till 30th July, 2009 aggregating to Rs. 20,82,90,323/- as solatium. Accordingly, the entire amount was accounted for as receivable from ICI India with corresponding credit to written down value (WDV) of intangible assets as on 1st January, 2008, whereby the value of goodwill and non compete fees was reduced to nil and balance amount was allocated to other intangible assets in the proportion of their WDV. The assessee claimed the receipt as capital, however the AO treated the same as revenue receipt. The Ld. CIT (A) confirmed the addition made by the AO. In further appeal, the ITAT also confirmed the findings of the Ld. CIT (A). The assessee challenged the decision of the ITAT before the Hon’ble jurisdictional Assessment Year: 2008-09 High Court and the Hon’ble Court admitted the questions raised in the appeal. The Ld. counsel further submitted that since the Hon’ble High Court has admitted the appeal of the assessee, the issue is debatable, therefore, the Ld. CIT (A) has wrongly confirmed the order passed by the AO.

The Ld. counsel further contended that penalty u/s 271 (1) (c) can be imposed only if the authority concerned is satisfied that the assessee has concealed the particulars of his income or furnished inaccurate particulars of such income. In the present case, the AO has imposed penalty for furnishing inaccurate particulars of income by the assessee on the ground that the addition of Rs. 20.83 crores made by him treating the same as revenue receipt has been confirmed by the CIT (A) and ITAT. The Ld. counsel further submitted that confirmation of addition by the ITAT does not ipso facto make the assessee liable for penalty u/s 271 (1) (c). The Ld. counsel placing reliance of the judgment of the Hon’ble Supreme Court in the case of CIT vs. Reliance Petorproducts Pvt. Ltd., submitted that rejection of claim by the revenue itself would not attract penalty u/s 271(1)(c) of the Act. The Ld. counsel further pointed out that in notice issued to the assessee u/s 274 of the Act the AO had not mentioned the limb under which he intended to pass order imposing penalty u/s 271(1)(c) of the Act.

On the other hand, the Ld. Departmental Representative (DR) relying on the concurrent findings of the authorities below submitted that since the ITAT has confirmed the addition made by the AO there is no merit in the appeal of the assessee. Since, the assessee has furnished inaccurate particulars of its income by claiming the receipt in question as capital receipt, the Ld. CIT (A) has rightly confirmed the penalty imposed by the AO. Hence, the appeal filed by the assessee is liable to be dismissed.

We have heard the rival submissions of the parties and also gone through the entire material on record in the light of the rival contentions of the parties. The only grievance of the assessee is that the Ld. CIT (A) has wrongly upheld the penalty imposed u/s 271 (1) (c) of the Act for furnishing inaccurate particulars of income by the assessee. No doubt in the present case, the Assessment Year: 2008-09 addition made by the AO has been confirmed by the first appellate authority as well as by the ITAT and the further appeal against the ITAT order is pending disposal before the Hon’ble High Court. The contention of the assessee is that the amount in question was received by the assessee as compensation in lieu of impairment of business in terms of clause 13.7 of the business agreement dated 06.03.2007. The assessee further contended that as per the definition given in para 14.06 by the Institute of Chartered Accountants of India (ICAI), the receipt in question cannot be considered as revenue receipt, since, it does not arise from the sale of goods, rendering of services etc. Para 14.06 of the Accounting Standard issued by the ICAI defines the term ‘revenue’ as under:-

As per the provisions of the Act, penalty u/s 271 (1) (c) read with explanation (1) can be imposed if the authority concerned is satisfied that any person has concealed the particulars of income or furnished inaccurate particulars of such income, if the such person fails to offer an explanation or offers an explanation which is found by the authority concerned to be false or such person offers an explanation which he is not able to substantiate and fails 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, then the amount added to the income shall be deemed to represent the income in respect of which particulars have been concealed for the purpose of Assessment Year: 2008-09 clause (c) of sub-section (1) of section 271 of the Act. In the present case, the assessee has given explanation which is in our opinion bona fide as the assessee has taken the receipt in question as capital in view of the definition of revenue given by the ICAI in para 14.06 of the Accounting Standard. The assessee has reflected the transaction in its books of account and the revenue has not disputed the transaction. Under these circumstances, the only issue remains to be determined, which is essential to adjudicate the sole issue in this case is, whether the claim of the assessee is bona fide in the light of the facts of the case and the evidence on record and whether the assessee has offered explanation and substantiated that explanation offered 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.

In the present case, admittedly, the assessee has reflected the transaction in its books of account. The assessee has also explained the entire transaction before the AO vide written submissions dated 03.09.2011 made in response to the notice issue u/s 143(2) of the Act. The assessee has based its claim on the definition of revenue given by the ICAI in para 14.06 referred above. Since the Hon’’ble High Court has admitted the appeal filed by the assessee against the order of the ITAT, there is merit in the contention of the assessee that the issue was debatable at the time of filing of return and the same is still debatable as the Hon’ble High Court has admitted the question of law raised by the assessee. In the light of the aforesaid facts, it cannot be concluded that the assessee has furnished inaccurate particulars of its income. As per the settled law, penalty provisions cannot be invoked where two views are possible. In the present case since the Hon’ble High Court has admitted the appeal of the assessee on the legal issue, we cannot discard the contention of the assessee that since the issue is debatable, the penalty imposed u/s 271 (1) (c) of the Act is bad in law.

In the case of CIT vs. Reliance Petorproducts Pvt. Ltd. (supra), the Hon’ble Supreme Court has held that the penalty provision cannot be invoked unless the cases strictly covered by the provisions. Making an incorrect claim in law Assessment Year: 2008-09 cannot tantamount to furnishing of inaccurate particulars. The observations of the Hon’ble Supreme Court read as under:- “9. We are not concerned in the present case with the mens rea. However, we have to only see as to whether in this case, as a matter of fact, the assessee has given inaccurate particulars. In Webster’s Dictionary, the word “inaccurate” has been defined as:- “not accurate, not exact or correct, not according to truth, erroneous, as an inaccurate statements, copy or transcript.”