MSEB HOLDING COMPANY LIMITED ,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX 10(1), MUMBAI

The only common issue in these appeals of assessee is against the order of CIT(A) confirming the levy of penalty by the AO under section 271(1)(c) of the Act. For this assessee has raised identically worded grounds and issues and facts are also exactly identical in both the years. In AY 2007-08, the AO has levied the penalty on the disallowance of expenditure claimed by assessee under the following heads: -

However, the AO for AY 2009-10 has levied the penalty only on the item of interest and finance charges of ₹ 332,40,17,077/-. Since, the facts and circumstances are exactly identical in both years; hence we will take up the lead year i.e. AY 2007-08 in and will decide the issue. The relevant grounds raised

Briefly stated facts are that original return of income was filed by assessee on 31.10.2007 declaring a total loss of ₹ 375,38,82,215/-. Subsequently, the return was revised on 27.03.2010 declaring a total loss of ₹ 287,10,66,330/-. The AO framed assessment under section 143(3) of the Act dated 30.12.2009 and assessed the total income of the assessee at ₹ 118,65,53,810/- without granting assessee set off of brought forward loss. Difference between the total loss as return by the assessee at ₹ 287,10,66,330/- and total income assessed by AO at ₹ 118,65,53,810/- was ₹ 405,76,20,140/- due to the following adjustments.

Further, the learned Counsel for the assessee took us through the Tribunal’s order in quantum appeal, which is common order for AY 2006- 07 to 2010-11, wherein, the issue of disallowance of interest and finance expenses of ₹ 418,24,48,398/- was discussed as under:-

We have heard the rival contentions and perused the material available on record. Undisputedly, as per the scheme of transfer, formulated on demerger of MSEB a part of the assets and liabilities of MSEB, including the loan liability arising out of State Government loan was transferred to the assessee company. However, on 31st March 2016, the Government of Maharashtra in its Industries, Energy and Labour Department issued a notification amending the Maharashtra Electricity Reform Transfer Scheme, 2005 and as per clause (10B) of the said notification, the liabilities of the erstwhile MSEB were taken over by the State Government from 5th June 2005. Thus, as could be seen, as per above notification dated 31st March 2016, the loan liabilities of erstwhile MSEB which was transferred to the assessee under the transfer scheme of 2005, was taken over by the State Government with retrospective effect from June, 2005. That being the case, the liability accruing to the assessee on account of State Government loan to MSEB which stood transferred to assessee no longer remains liability of the assessee with retrospective effect. As a consequence, the interest on such loan liability is also not payable by the assessee. Therefore, by virtue of changed scenario arising out of the taking over of the loan liability of erstwhile MSEB by the State Government, the assessee is not entitled to claim the deduction of interest expenditure. In fact, during the scrutiny assessment proceedings for assessment year 2014–15, on the basis of notification dated 31st March 2016, of the State Government taking over the loan liability the assessee voluntarily came forward and filed revised computation of income before the Assessing Officer withdrawing its claim of interest expenditure both under the normal provisions and the MAT. It is evident, the Assessing Officer completed the assessment by accepting the income declared under the revised computation of income. Thus, in view of the aforesaid facts and circumstances, without entering into the issue whether the interest expenditure was incurred wholly and exclusively for the purpose of assessee’s business, hence, allowable under section 36(1)(iii), we hold that in view of the fact that the loan liability for which assessee has claimed deduction of the interest expenditure, since, was taken over by the State Government from June 2005, it no longer remains a liability of the assessee, therefore, the assessee is not entitled for deduction of the interest expenditure on such loan liability. Having held so, we propose to examine the without prejudice claim made by the assessee in ground no.2.5.”

The assessing officer levied the penalty vide his order dated 31.03.2012 by observing that the CIT(A) has confirmed these disallowance on account of repair and maintenance expenses, depreciation and interest and financial expenses in quantum proceedings. According to AO, the assessee’s explanation is not tenable and therefore it is held that the assessee has knowingly furnished inaccurate particulars of its income. Aggrieved, assessee preferred the appeal before CIT(A), who also confirmed the action of the AO. Aggrieved, now assessee is in appeal before Tribunal.

Before us, the learned Counsel for the assessee argued that the opening balances of assets and liabilities as on 06.06.2005 have been incorporated in the accounts pursuant to the provisional Transfer scheme for restructuring of erstwhile Maharashtra State Electricity Board, notified vide Govt. Notification No. Reform 1005/CR 90611(1) NRG-5, dated 4 June 2005, notified by the Government of Maharashtra (GOM) and thereafter as approved by the Board, the said scheme being provisional and the balances of assets & liabilities are subject to change on notification of final transfer scheme by Govt. of Maharashtra. Any effect arising out of the finalization of transfer scheme shall be incorporated in the year, the finalization takes place and the accounts for the period 2005-2006 shall not be affected. Allocation of opening balances as on 06.06.2005 into five restructured entities namely Maharashtra State Power Generation Company Ltd. (MSPGCL), Maharashtra State Electricity Transmission Company Ltd. (MSETCL), Maharashtra State Electricity Distribution Company Ltd. (MSEDCL), MSEB Holding Company Ltd. (MSEBHCL) and MESS (residual Board) has been arrived at on the basis of audited balances of erstwhile MSEB as on 05.06.2005 The allocation of these balances has been as approved by the Board of the company. Details of certain opening balances as allocated to the company are in the process of being obtained from the concerned departments of erstwhile MSEB and the further adjustment if any, arising out of such details will be carried out in due course.

In view of the above facts and further the loans from State Govt. amounting to ₹ 2547.09 crores, have been accounted for based on opening balances as received under provisional scheme transfer. Further, details including terms and conditions of payment of principal as well as interest are available with MSEDCL which are being sought for any further necessary accounting adjustments. Interest payable amounting to ₹ 311.61 crs for the period under review has been accounted for on the basis of Government Resolutions (G.Rs.), as available with the company and the loan amount has been adjusted for repayment with G.R.s available in relation to such adjustments. Confirmation, reconciliation and pending accounting adjustments, if any required, will however be done at the time of finalization of transfer scheme. Unsecured Loans also include CPSU Bonds for coal related Liabilities Rs. 567.19 crores; CPSU Bonds for power purchase Rs. 451.41 crores; Interest accrued & due on CPSU bonds for power purchase 56.70 crores; Interest accrued & due on CPSU bond for coal payment, 73.12 crores, which were created by erstwhile MSEB in the books of accounts from 2001-2002 towards amount payable to GOM on securitization of CPSUs dues under one-time settlement scheme of Govt. of India. These balances are as transferred to the company under the provisional scheme of transfer and supporting records thereof are being sought from respective departments of erstwhile MSEB. As per the principles of Provisional Transfer Scheme 2005, these amounts have been proposed to be taken over by GOM. The company has not borrowed any additional amounts during the period. The loans shown in the accounts are as received under the provisional Transfer scheme. The company is in the process of passing a resolution u/s 293(I)(d) of the Companies Act, 1956 in due course.

Subsequently, when the quantum appeal for the year tiled by the assessee before the ITAT, which came up for hearing and in view of the fact that the loan liability for which the assessee was claiming the interest expenditure was taken over by the State Government with effect from 05 June 2005 (the date from which it was sought to have been transferred to it – the assessee), no longer remained a liability of the assessee. The assessee during the course of the hearing before the ITAT pointed out that it is not entitled to the deduction of the interest expenditure on such loan liability even if otherwise allowable by following the principles laid down by the Apex Court in the case of S.A. Builders v/s. CIT reported in (2006) 288 ITR 1(SC).

As regards to the claim of depreciation disallowed amount to ₹ 2,51,46,050/-, it was stated that for the purpose of preparing its accounts under the Companies Act 1956, the assessee has debited a sum of ₹ 2,51,46,050/- as depreciation on the premises, which it owned and were let out during the year under consideration. However, while computing the income for the purpose of computation of tax assessee has suo moto disallowed the depreciation and the CIT(A) after looking at the relevant documents accepted that the depreciation was suo moto disallowed and no further disallowance in this respect thereof was called for.

In view of the above facts and circumstances of the case we find that the Tribunal in quantum order dated 21.04.2017 has categorically recorded finding of fact at Para 11 that, “……However, on 31st March 2016, the Government of Maharashtra in its Industries, Energy and Labour Department issued a notification amending the Maharashtra Electricity Reform Transfer Scheme, 2005 and as per clause (10B) of the said notification, the liabilities of the erstwhile MSEB were taken over by the State Government from 5th June 2005. Thus, as could be seen, as per above notification dated 31st March 2016, the loan liabilities of erstwhile MSEB which was transferred to the assessee under the transfer scheme of 2005, was taken over by the State Government with retrospective effect from June, 2005. That being the case, the liability accruing to the assessee on account of State Government loan to MSEB which stood transferred to assessee no longer remains liability of the assessee with retrospective effect. As a consequence, the interest on such loan liability is also not payable by the assessee. Therefore, by virtue of changed scenario arising out of the taking over of the loan liability of erstwhile MSEB by the State Government, the assessee is not entitled to claim the deduction of interest expenditure. In fact, during the scrutiny assessment proceedings for assessment year 2014–15, on the basis of notification dated 31st March 2016, of the State Government taking over the loan liability the assessee voluntarily came forward and filed revised computation of income before the Assessing Officer withdrawing its claim of interest expenditure both under the normal provisions and the MAT. It is evident, the Assessing Officer completed the assessment by accepting the income declared under the revised computation of income. Thus, in view of the aforesaid facts and circumstances, without entering into the issue whether the interest expenditure was incurred wholly and exclusively for the purpose of assessee’s business, hence, allowable under section 36(1)(iii), we hold that in view of the fact that the loan liability for which assessee has claimed deduction of the interest expenditure, since, was taken over by the State Government from June 2005, it no longer remains a liability of the assessee, therefore, the assessee is not entitled for deduction of the interest expenditure on such loan liability….”. From this finding of Tribunal it is clear that there is every particular regarding the claim of deduction on account of interest expenditure was available before the AO and there is no concealment by the assessee of these particulars.

In view of the above facts and circumstances on all the three appellate issues, we are of the view that the case law relied on by the learned Counsel for the assessee of Hon’ble Supreme Court in the case of Price Waterhouse Coopers (P.) Ltd. vs. CIT (2012) 348 ITR 306 (SC), clearly shows that wherever bonafide mistakes and inadvertent error is discovered, whether assessee was not guilty either of furnishing of inaccurate particulars of income or admitting the concealment of its income. Hon’ble Supreme Court held as under: - “15. The assessee has filed an affidavit dated 14th September, 2012 in which it is stated that the assessee is engaged in Multidisciplinary Management Consulting Services and in the relevant year it employed around 1,000 employees. It has a separate accounts department which maintains day to day accounts, payrolls etc. It is stated in the affidavit that perhaps there was some confusion because the person preparing the return was unaware of the fact that the services of some employees had been taken over upon acquisition of a business, but they were not members of an approved gratuity fund unlike other employees of the assessee. Under these circumstances, the tax return was finalized and filled in by a named person who was not a Chartered Accountant and was a common resource.

Having heard learned counsel for the parties, we are of the view that the facts of the case are rather peculiar and somewhat unique. The assessee is undoubtedly a reputed firm and has great expertise available with it. Notwithstanding this, it is possible that even the assessee could make a "silly" mistake and, indeed this has been acknowledged both by the Tribunal as well as by the High Court

The fact that the Tax Audit Report was filed along with the return and that it unequivocally stated that the provision for payment was not allowable under section 40A(7) of the Act indicates that the assessee made a computation error in its return of income. Apart from the fact that the assessee did not notice the error, it was not even noticed even by the Assessing Officer who framed the assessment order. In that sense, even the Assessing Officer seems to have made a mistake in overlooking the contents of the Tax Audit Report.

The contents of the Tax Audit Report suggest that there is no question of the assessee concealing its income. There is also no question of the assessee furnishing any inaccurate particulars. It appears to us that all that has happened in the present case is that through a bona fide and inadvertent error, the assessee while submitting its return, failed to add the provision for gratuity to its total income. This can only be described as a human error which we are all prone to make. The calibre and expertise of the assessee has little or nothing to do with the inadvertent error. That the assessee should have been careful cannot be doubted, but the absence of due care, in a case such as the present does not mean that the assessed is guilty of either furnishing inaccurate particulars or attempting to conceal its income.

We are of the opinion, given the peculiar facts of this case, that the imposition of penalty on the assessee is not justified. We are satisfied that the assessee had committed an inadvertent and bona fide error and had not intended to or attempted to either conceal its income or furnish inaccurate particulars."

Identical issue has been dealt with by Mumbai Bench of this Tribunal in the case of Tropical Clothing Co. Ltd. Vs. ACIT in wherein it has been held that once the assessee himself disclose the particulars / details in their annual accounts the question of furnishing of inaccurate particulars of income does not arise. In the present case before us, complete disclosure regarding the expenditure claimed as allowable was given in the statement of accounts and in the return of income.

We also find that the Hon’ble supreme court in the case of CIT vs. Reliance Petroproducts Pvt. Ltd (2010) 322 ITR 158 (SC), held that the term inaccurate particulars of income means the details supplied in the return, which are not accurate, not exact or correct, not according to truth or erroneous. We find that honorable Supreme Court in Para 7 & 9 considered the issue as under: - “7……………………However, the learned Counsel for revenue suggested that by making incorrect claim for the expenditure on interest, the assessee has furnished inaccurate particulars of the income. As per Law Lexicon, the meaning of the word "particular" is a detail or details (in plural sense); the details of a claim, or the separate items of an account. Therefore, the word "particulars" used in the section 271(1)(c) would embrace the meaning of the details of the claim made. It is an admitted position in the present case that no information given in the Return was found to be incorrect or inaccurate. It is not as if any statement made or any detail supplied was found to be factually incorrect. Hence, at least, prima facie, the assessee cannot be held guilty of furnishing inaccurate particulars. The learned Counsel argued that "submitting an incorrect claim in law for the expenditure on interest would amount to giving inaccurate particulars of such income". We do not think that such can be the interpretation of the concerned words. The words are plain and simple. In order to expose the assessee to the penalty 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 inaccurate particulars……………

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 statement, copy or transcript."