ECS LTD vs. COMMISSIONER OF INCOME TAX

A.K. SIKRI, J.

For orders see, ITA No.1003 of 2008.

(SIDDHARTH MRIDUL) JUDGE

FEBRUARY 05, 2010.

pmc

IN THE HIGH COURT OF DELHI AT NEW DELHI


ITA No. 1003 of 2008 & Cross-Objection No. 15335/2009 with

ITA No. 1028 of 2008 & Cross-Objection No.15664/2009 and

ITA No. 1030 of 2008 & Cross-Objection No.15666/2009

Reserved On: 26th October, 2009. Date of Decision: 05th February, 2010.

1) ITA No. 1003 of 2008 & Cross-Objection No. 15335/2009

...Respondent

Mr. Ajay Vohra with Ms. Kavita Jha, Mr. Sriram Krishan and Ms. Akansha

2) ITA No. 1028 of 2008 & Cross-Objection No.15664/2009

. . .Respondent

Mr. Ajay Vohra with Ms. Kavita Jha,

Mr. Sriram Krishan and Ms. Akansha

3) ITA No. 1030 of 2008 & Cross-Objection No.15666/2009


CORAM :-

THE HON'BLE MR. JUSTICE A.K. SIKRI THE HON'BLE MR. JUSTICE SIDDHARTH MRIDUL

- Whether Reporters of Local newspapers may be allowed to see the Judgment? - To be referred to the Reporter or not? - Whether the Judgment should be reported in the Digest?

A.K. SIKRI, J.

In these three appeals preferred by the Revenue, we are concerned 1. with the validity of the orders passed by the Income Tax Appellate Tribunal (hereinafter referred to as 'the Tribunal') deleting the penalty levied under Section 271(1)(c) of the Income Tax Act (hereinafter referred to as 'the Act') and in respect of Assessment Years 1994-95, 1995-96 and 1996-97. The reason for passing penalty orders by the Assessing Officer (AO) in all the three Assessment Years are recapitulated below:

The respondent/assessee is a company engaged in the business of providing consultancy services. Consultancy services were provided to some foreign clients from whom the appellant earned foreign exchange. To the extent, any expense is incurred in foreign currency, the same is reduced from the foreign consultancy income and deduction under Section 80-O of the Act claimed @ 50% of the net foreign consultancy income. No expenses incurred in India are allocated/apportioned to earning of foreign consultancy income. Section 80-O of the Act, as it stood at material time reads as under:


Assessment . Year | Foreign | . Deduction under Section 80-0 Consultancy Income | Claimed by the Assessee . | Allowed by the Assessing Officer 1994-95 | Rs.15,74,543/- | Rs.7,87,272/- | Rs.68,437/- 1995-96 | Rs.38,74,260/- | Rs.19,37,637/- | 1,76,630/- 1996-97 | Rs.1,20,92,449/- | Rs. 60,46,224/- | Rs.4,49,947 + allowed by ITAT and confirmed by the High Court. Rs.67,82,500

- 3. The order of the AO was upheld by the CIT(A) as well as Tribunal. - In view of the short allowance of deduction under Section 80-O of the Act, the AO imposed the penalty in respect of all these three Assessment Years. The appeal preferred by the assessee against the penalty orders was dismissed by the CIT(A), who confirmed the imposition of penalty. On further appeal to the Tribunal, the assessee contended that penalty under Section 271(1)(c) of the Act was not exigible in respect of short allowance of deduction under Section 80-O of the Act, inter alia, on the following grounds: - a) The issue whether Indian expenses were to be taken into account for purposes of calculation of deduction, at the time of the filing of the return of income, was debatable. - b) No satisfaction was recorded in the assessment order while initiating proceedings under Section 271(1)(c) of the Act. - c) The AO having allocated/apportioned Indian expenses


assessee that expenses incurred in India would not be take account for purposes of calculation of deduction while determining the following substantial question of law:

"Whether the ITAT was correct in law in deleting the penalty imposed by the Assessing Officer under Section 271(1)(c) of the Act?"

- 8. We take up three limbs of this issue in the following order: - (a) Re: Whether no satisfaction is recorded in the assessment order, if so; its effect.

Section 271(1)(c) of the Act has been amended retrospectively with effect from 01.04.1989 vide Finance Act, 2008 where Clause (1B) in explanation to Section 271(1) (c) has been inserted. As per this Clause, it is not necessary for the AO to record is satisfaction while initiating penalty proceedings. The vires of this provision were challenged by filing a writ petition in the Court. In the said case entitled Madhushree Gupta and British Airways LC vs. Union of India and Another [317 ITR 107] while upholding the validity of the aforesaid amendment, the Division Bench was of the opinion that provisions are to be read down and held that even after the amendment if the satisfaction is not discernible from the assessment order, penalty cannot be imposed. This would be clear 'from the reading of Paras 19 and 20 of the said judgment, wherein the conclusions are summarized by the Court in the following manner:


- (i) Section 271 (1B) of the Act is not violative of Article of the Constitution. - (ii) The position of law both pre and post amendment is similar, in as much, the Assessing Officer will have to arrive at a prima facie satisfaction during the course of proceedings with regard to the assessee having concealed particulars of income or furnished inaccurate particulars, before he initiates penalty proceedings. - (iii) 'Prima facie' satisfaction of the Assessing Officer that the case may deserve the imposition of penalty should be discernible from the order passed during the course of the proceedings. Obviously, the Assessing Officer would arrive at a decision, i.e., a final conclusion only after hearing the assessee. - (iv) At the stage of initiation of penalty proceeding the order passed by the Assessing Officer need not reflect satisfaction vis-a-vis each and every item of addition or disallowance if overall sense gathered from the order is that a further prognosis is called for. - (v) However, this would not debar an assessee from furnishing evidence to rebut the prima facie satisfaction of the Assessing Officer; since penalty proceeding are not a continuation of assessment proceedings. [See Jain Brothers v. Union of India: (1970) 77 ITR 107(SC)] - (vi) Due compliance would be required to be made in respect of the provisions of Section 274 and 275 of the Act. - (vii) the proceedings for initiation of penalty proceeding cannot be set aside only on the ground that the assessment order states 'penalty proceedings are initiated separately' if otherwise, it conforms to the parameters set out hereinabove are met. - 20. In view of the above we reject the prayers made in the writ petitions with the caveat that provisions of Section 271 (1) (c) post-amendment will be read in the manner indicated above.

The net effect of the aforesaid judgment is that even when the

AO has not recorded his satisfaction in explicit terms, the


assessee's earning in convertible foreign exchange should not be estimated. In response to such show-cause notice, the assessee came out with the plea that the expenditure incurred in India to earn foreign exchange was not to be deducted. In this behalf, the AO noted as under:

"I have considered the above submission made by the assessee made by the assessee. I find that the assessee company has only described the general customary practices in the business of consultancy but has not furnished any evidence to show that direct expenses relatable to their earning in foreign exchange have been borne by their clients or recovered from them. I find from the Schedule of P & L Account that expenditure of \$8.03 lacs have been incurred on travelling, 6.83 lacs on consultancy fee, 26.72 lacs on communication and 9.32 lacs on training and development. These expenditures cannot be de-associated with the earning in foreign exchange.

(emphasis supplied)"

The AO thereafter discussed the legal position relating to the deductions admissible under Section 80-O of the Act answering by referring to certain judgments that the contention of the assessee by holding that the correct position of law is that the expenses are to be deducted from such foreign exchange income before claiming deduction under Section 80-O of the Act. He thereafter mentioned that:

"The assessee has not furnished the details of amount of expenditure relatable to the earning of income in foreign exchange despite opportunity given repeatedly. Moreover, the assessee not only interpreted the law expensive but also did not furnish the details of


expenditure in the ratio of proportion of foreign income total income, which was Rs.12.27%. Thereafter, he calculated the eligible deduction under Section 80-O, arrived at the taxable income, and observed that the penalty under Section 271(1)(c) of the Act had been initiated.

It becomes clear from the reading of the assessment order in its entirety that the AO has been influenced by the consideration that not only the assessee had interpreted the law wrongly, but also did not furnish the details of expenditure attributable to such foreign income because of which penalty proceedings under Section 271(1)(c) were initiated by him. Thus, his prima facie satisfaction about non-furnishing of particulars/inaccurate particulars is clearly discernible.

(b) Re: Estimated Disallowance under Section 80-O:

The submission of the learned counsel for the assessee in this behalf was that the AO while computing assessment under Section 80-O of the Act allocated/apportioned Indian expenses debited in the Profit & Loss Account in the proportion of foreign income to total income. The very expenditure which was disclosed in the books of accounts was allocated and apportioned by the AO to arrive at the net foreign consultancy income on the basis of which reduction under Section 80-O of

restored to an estimate to disallow part of the deduction

Section 80-O as claimed by the assessee. He thus argued that in these circumstances, it was rightly held by the Tribunal that the estimated disallowance made by the AO out of the claim of deduction under Section 80-O of the Act was not on account of any expenditure, which was found to be bogus or excessive. We may also note that going by the aforesaid circumstance, the Tribunal has held that the assessee was not guilt in furnishing inaccurate particulars to sustain levy of penalty and has relied upon the following judgments:

i) Commissioner of Income Tax Vs. Prem Dass [248 ITR 234 (P & H)];

ii) Commissioner of Income Tax Vs. Ajaib Singh & Co. [253 ITR 630 (P&H)]; and

Hargopal Singh Vs. Commissioner of Income Tax [258 ITR 85 (P&H)].

In the aforesaid cases, it was held that where the assessee's returned his income on estimate basis but the AO as well as the CIT (A) admitted the different estimate, it was a case of difference of opinion and on estimation of disallowance, no penalty under Section 271(1)(c) can be made. No doubt, in those cases where there would be difference of opinion as regards estimate, it cannot be said that the assessee had concealed the particulars of income. However, that is not the position in the instant case. We are of the opinion that the

to claim higher deduction and thus escaping the cor imposition of taxes. It is settled now that claiming exces deductions also amount to concealment of income. Falsehood in accounts can take either of the two forms: either an item of receipt may be suppressed fraudulently, or an item, of expenditure may be falsely claimed. Both types attempt to reduce the taxable income. Both types amount to concealment of particulars of one's income as well as furnishing of inaccurate particulars of income. Penalty may be imposed for either or both such attempts [CIT v/s India Sea Foods, 1976 105 ITR 708, Kerala; Nagin Chand Shiv Sahai v/s CIT (1938) 6 ITR 534 (Lah); CIT v/s Gates Foan and Rubber Company (1973) 91 ITR 467 (Ker)]. It is not right to say on the part of the appellant that the Assessing Officer has to record the satisfaction before initiating the penalty proceedings under Section 271(1)(c) for the reason that the factum of concealment on account of furnishing inaccurate particulars of one's income clearly emanates from the assessment order and I consider the same as recording of satisfaction on the part of the Assessing Officer."

- The upshot of the aforesaid discussion would be to hold that the penalty was rightly imposed by the Assessing Officer and confirmed by the CIT(A). We accordingly decide the question of law framed in favour of the Revenue and against the assessee and thereby set aside the order of the Tribunal and restore the penalty orders passed by the Assessing Officer. - We, however, leave the parties without any costs.

JUDGE

ARTH MRIDUL)

JUDGE