ACIT, FARIDABAD vs. M/S NUCHEM LTD, FARIDABAD

The penalty has been levied on the following additions, which have been upheld in the quantum proceedings:-

The brief facts qua the levy of penalty on the aforesaid expenditures are that during the course of assessment proceedings, the Assessing Officer noted that the assessee- company was reimbursing expenses besides commission given to the agents for collection/ renewal of FDRs on behalf of the assessee-company. In the absence of regular bills, the Assessing Officer held that the documents furnished do not prove that the expenses have actually been incurred and none of the agents had filed any documentary evidence to show that the expenses were actually incurred. Accordingly, he proceeded to make disallowance of Rs.13,60,980/- out of the total expenses claimed at Rs.67,46,413/- paid to the sister concerns/agents of the assessee-company namely, M/s Precision Industrial Moulders and M/s Kraft Foil Printers.

The ld. CIT (A) in the quantum proceedings confirmed only 50% of such disallowance, which has been upheld by the Tribunal.

So far as disallowance of advertisement and publicity expenses are concerned, the Assessing Officer has disallowed a sum of Rs.13,970/- on the ground that the same pertains to assessment year 1993-94, as it was incurred in earlier year and the same cannot be allowed in this year and this addition too has confirmed from the stage of the Tribunal.

Lastly, with regard to the disallowance of amount written off of Rs.27,88,311/- outstanding against one party namely, M/s Southern Synthetic Ltd., the assessee’s case before the Assessing Officer was that the company has given advance given to M/s Southern Synthetic Ltd. out of their own funds in the form of share capital, reserve and surplus as shown in the balance sheet as on 31/3/1994, amounting to Rs.51.40 crores in business interest, which could not be recovered due to various reasons. This amount was advanced from time to time and counter guarantee was also given by the assessee company against various advances provided to the bank to its subsidiary. It was submitted that the advances were given only at the time of extreme emergencies, however, later on the subsidiary company got merged with ‘M/s Kothari Plantation and Industries Ltd.’ w.e.f. 31/3/1994. The order of BIFR was conveyed to the assessee vide letter dated 10/2/1994 and accordingly, assessee company took a decision to write-off this amount in its book as unrecoverable. Assessee’s submission in this regard has been incorporated in the assessment order at page 3. In the quantum proceedings the ld. CIT (A) has deleted the said disallowance, however, in the second appeal filed by the Revenue, Tribunal directed the Assessing Officer to grant assessee benefit of write off of the interest portion only out of the amount written off and regarding the principal amount, it was held by the Tribunal that it is not in the nature of bad debt which could be written off and resultantly, the balance amount disallowed was at Rs.22,89,115/-.

In the penalty proceedings, the Assessing Officer mainly relying upon the finding given in the quantum proceedings, has levied penalty on the charge of furnishing of inaccurate particulars of income to the extent of Rs. 29,83,575/-. Accordingly, penalty of Rs.15.44 lakhs has been levied.

Assessee’s submission before the ld. CIT (A) in the impugned penalty proceedings with regard to all the additions has been dealt and incorporated from pages 5 to 7 of the appellate order. The ld. CIT (A), after considering assessee’s submission and material placed on record, deleted the said penalty not only on merits but also on various legal grounds. So far as the deletion of penalty on merits are concerned, the ld. CIT(A), firstly, on the addition of Rs.6,80,490/- in respect of expenses relating to agents for collecting of FDRS, held that, since there was a difference of opinion or two views for making the disallowance and looking to the fact that disallowance has been restricted to 50%, it cannot be held that there was any concealment or furnishing of inaccurate particulars of income by the assessee. Secondly, on the issue of disallowance of expenditure of Rs.13,978/- on advertisement and publicity expenses, he noted that assessee admitted that it was a bona-fide mistake in respect of claiming expenditure in this assessment year but the genuineness of the same cannot be doubted. Thus, it cannot be held that it amounts to furnishing of inaccurate particulars. Lastly, with regard to the amount written off, he held that the Tribunal itself has noted that all the particulars have been furnished by the assessee and the amount was confirmed only on the ground that it cannot be treated as bad debt.

None appeared on behalf of the assessee despite service of notice. After hearing the Ld. DR and on a perusal of the impugned order, we find that first of all, so far as the addition of Rs.6,80,490/- is concerned, addition made by the Assessing Officer has been reduced to half, as the same were based on ad- hoc disallowance only. Assessee’s contention before the authorities below has been that it has given full details of all the payments which were duly reflected in the books of account and has been made through account payee cheques and such a payment has been made in the past and accepted by the department. Therefore, in such a situation, it cannot be held that assessee has furnished any inaccurate particulars of income because as a matter of past practice, assessee has been reimbursing the expenses incurred by the agents for collecting FDRs and the findings given in the quantum side goes to show that disallowance has been made purely on ad-hoc basis which definitely cannot warrant levy of penalty for concealment on the charge of furnishing of inaccurate particulars. There is no material referred in the assessment order that these are bogus or non-genuine payments. Therefore, the ld. CIT (A) has rightly deleted the penalty on this addition.

Similarly, with regard to the advertisement and publicity expenses, the expenses have been incurred but since they pertain to the earlier years, therefore, disallowance has been made in this year. However, there is no finding that bills for incurring such expenditure too were received in earlier years or expenditure had not been crystallized in this year. Mere disallowance of expense in quantum proceedings does not ipso- facto lead to an inference of charging assessee for furnishing of inaccurate particulars of income and levy penalty thereon in absence of any material brought on record that assessee’s claim in this year lacks bonafide. In any case, such claim of expenditure which otherwise is related to business not claimed in the earlier year albeit in this year cannot fall in the category of furnishing of inaccurate particulars as held by the ld. CIT(A) and, therefore, we uphold the deletion of penalty on this score.

Lastly, on the issue of disallowance of amount written off, we find that the assessee has made advance to its subsidiary company, M/s Southern Synthetic Ltd. from time to time for urgent requirement of the said subsidiary company and also on account of its business needs, as the said company was manufacturing certain chemicals which were raw materials for the assessee-company’s product. The amounts were advanced to the subsidiary company with a view to help in production of raw material and manufacturing line of business of the company. In light of such business requirement and commercial expediency; advances were given to the subsidiary company from time to time. Since the subsidiary company got merged with another company and BIFR wrote a letter to this effect and in view of such an event Assessee Company took a business decision that the amount has become irrecoverable in the wake of BIFR order; and therefore, assessee has written off the said advance from its books. Since the advances given by the assessee-company were for the purpose of business and writing off of such advance has been claimed, then it cannot be held that the assessee has furnished inaccurate particulars. Assessee’s explanations qua this addition before the Assessing Officer as well as the ld. CIT(A) are reproduced hereunder:-

Such an explanation of the assessee has not been rebutted and found to be false by the Assessing Officer, therefore, it cannot be held that such writing off of the sum as bad debt amounts either furnishing of inaccurate particulars or concealment of income. In any case this at best can be reckoned as business loss incurred during the course of business and was result of commercial expediency which has a very wide connotation. Thus, we hold that the ld. CIT(A) has rightly deleted the penalty on this addition and the appeal of the Revenue is dismissed.

In the result, appeal of the Revenue is dismissed.