THE DCIT, 1(1), INDORE vs. M/S. MOIRA STEEL LTD., INDORE

आदेश / आदेश / आदेश /

PER O.P. MEENA, ACCOUTANT MEMEBR

This appeal is filed by the Revenue against the order of ld.

Commissioner of Income tax (Appeals)-I, Indore,[hereinafter referred to as the CIT(A)] dated 30.08.2013. This appeal

pertains to Assessment Year 2005-06 as against appeal

decided in respect of assessment order dated 16.12.2010

passed u/s. 143(3)/147 of Income Tax Act, 1961(herein after

referred to as "the Act) by the DCIT, 1(1), Indore [hereinafter

referred to as the AO].

authorities are that the assessee has entered into one time

settlement with the Bank during the subject year. Under the said settlement, Bank waived sum of Rs.2,54,42,837/-, which included principal as well as overdue interest. Therefore, the assessee was asked to show cause as to why the same should

not be charged u/s 41(1) of the Act. It was explained by the assessee that the assessee was having credit facility under which the interest debited by the Bank was clubbed with the principal amount, thereby getting a character of principal

amount. Accordingly, it was submitted that the amount of Rs.

lakhs was cessation of revenue liabilities. However, the AO was not satisfied with the explanation and observed that, no doubt,

the interest is clubbed with principal on day to day basis, but this exercise carried out by the Bank for the purpose of charging interest. There is nothing to establish that interest

component is converted into principal amount, because the bank accounts for the interest on day to day basis but reckons

it periodically for accounting in their own books. Therefore, the submission made by the assessee was mis-conceived.

Accordingly, the AO has apportioned the amount of waiver in the ratio of payment made by the assessee and the figures of principal and interest outstanding as on the date of settlement

and worked out the interest component of the amount waived

as under :-

Ratio of interest in the total Rs. 2,23,18,945/Rs. 3,75,42,837 outstanding dues Interest component in the waived [2,23,18,945/3,75,42,837]x amount 2,54,42,837 = Rs. 1,51,25,582/-

before CIT(A) as against the addition of Rs. 1,51,25,582/- made

by the AO.

outstanding balances of Rs. 335 lakhs. The said amount includes interest component at Rs. 40 lakhs. However, the AO

made the pro-rata bifurcation of the settlement amount for taxation purposes, principal and interest. Considering the Nil

tax effect, the assessee did not file any appeal against the re-

assessment order being pro-rata bifurcation. However, the AO

noted that the assessee entered into one time settlement with State Bank of India against its outstanding balances of Rs.

3,75,42,837/- to be payable to it. This balance was comprised

of principal amount of loan of Rs. 1,52,23,892/- and interest of Rs. 2,23,18,945/-. Further, as per the settlement the Bank had waived the assessee’s liability of Rs. 2,54,42,837/- inclusive of interest. Thus, the component and liability of interest was ceased to be operative and, accordingly, the same was to be considered as income u/s 41(1) of the Act. However, the assessee has not offered the same as its income nor the bifurcation of principal amount and component of interest

waived, was furnished. Therefore, on pro-rata basis, the component of interest waived was worked out at Rs. 1,51,25,582/- and the same was added to the total income.

The AO further observed that the arguments of the assessee

that Bank had not given the break up of the principal amount

and interest in the settlement letter. The AO noted that the examination of the past records shows that the assessee had claimed expenditure on account of interest payable on the cash

credit facility provided by the Bank. Thus, the character of the same would always remain the revenue expenditure for the purpose of the provisions of Section 41(1) of the Income-tax

Act, 1961, irrespective of the fact that the same was considered

by the Bank or by the assessee in the subsequent previous

year of its accrual. As per the provisions of Section 41(1), any expenditure or deduction claimed in any previous year and written off in subsequent year needs to be considered as profit

for the assessment year in which the same has been written

off. Therefore, it follows from the above discussion that the remission of interest claimed in earlier years as expenditure in profit and loss account was to be considered as assessee’s profit in the assessment year under consideration. With regard

to the non-filing of the appeal due to nil tax effect, the AO

observed that it is always prerogative of the assessee to file the appeal and not to file the appeal. Accordingly, assessee’s

arguments on this account in the context of penalty

proceedings is found to be redundant. As regards non-

furnishing of inaccurate particulars of income, the AO observed

that the total amount written off was mentioned in the profit

and loss account. Therefore, it would suffice to say that the assessee had not furnished any material evidence to establish

that out of the aforesaid amount, a particular portion was principal amount. Further, the assessee itself had considered

the entire amount as principal amount by not giving any reason in the details furnished alongwith return. Thus,

claiming the entire liability as capital in nature, is not a self-

evident fact and incorrect. Hence, the assessee’s claim

tantamounts to furnishing of inaccurate particulars of income,

especially in view of the provisions of Section 41(1) of the Income-tax Act, 1961. As regards the claim of assessee for non-

availability of details of break up of principal and interest from bank, the AO noted that the burden was on the assessee to furnish the requisite information and provide evidence in support of its claim. The AO further noted that as per details

available on record, the principal amount of loan taken by the assessee from the Bank was Rs. 1,52,23,892/-) and the amount of remission was Rs. 2,23,18,945/-. From these

details, the remission of the quantum of interest was Rs.

70,95,053/- (i.e. Rs. 2,23,18,945/- (-) Rs. 1,52,23,892/-.)

These facts clearly establish that the assessee had furnished

inaccurate particulars of its income as the assessee has not given any particulars of its income u/s 41(1) of the Act, neither

in the return filed u/s 139(1) nor in the return filed u/s 148 of the Income-tax Act, 1961. In the back drop of the above

position of law and facts, the AO held that the assessee did

commit a default within amendment of provisions of Section 271(1)(c) of the Act and, therefore, it is liable for penalty in respect of concealing the correct particulars and furnishing

inaccurate particulars of income to the extent of Rs.

1,55,21,582/- in the return. Accordingly, the AO levied the a minimum amount of penalty of Rs. 55,34,753/-.

CIT(A). The ld. CIT(A) has observed that the AO made addition

based on one time settlement of the assessee with the State

Bank of India against its outstanding dues of Rs. 3,75,42,837/-

. This balance comprised of principal amount of loan of Rs.

1,52,23,892/- and interest of Rs. 2,23,18,945/-. As per the one

time settlement, the assessee paid Rs. 1.21 crores to the Bank

and balance of Rs. 2,54,42,837/- was waived. Thus, the AO

came to the conclusion that out of the aforesaid amount the proportionate amount allocable to interest is Rs. 1,51,25,582/-

on the basis of proportion of total amount of interest ( i.e. Rs.

254 crores x 2.32 crores x 3.75 crores). The rest of the amount

of Rs. 1.03 crore was considered as waiver of principal loan

amount. Therefore, this waiver of interest apportioned of Rs. 1.51 crores was added in the hands of the assessee u/s 41(1)

of the Act as the cessation of liability. The AO found this approach of the AO as judicious and hence observed that the same cannot be disturbed and even the assessee cannot raise

any valid objection in such addition. However, with regard to levy of penalty, the ld. CIT(A) has observed that the assessee

has fully disclosed the fact that SBI has waived the amount of Rs. 2.54 crores in his profit and loss account as income below

the line as income related to previous year. Therefore, the assessee contended that no facts were concealed and no inaccurate particulars were furnished. The assessee also offered that the said amount of income as they were in bona

fide belief that it was a waiver of principal amount. The ld.

CIT(A) noted that no dues certificate issued by SBI dated

mentioned as to whether the payments made by the assessee of Rs. 1.21 crores was adjusted towards loan amount or towards interest amount and hence there is no clarity from such letter

as to which amount was waived. Therefore, the ld. CIT(A) was of the view that the pro rata bifurcation of the amount of waiver

of Rs. 2.5 crores as done by the AO is only an estimation of component of interest for invoking Section 41(1) of the Act.

Hence, such estimation cannot be ground for levy of concealment of penalty u/s 271(1)(c) of the Income-tax Act,

Ltd., (2013) 35 taxmnn.com 236 (Mum) and also Tribunal held

that the assessee settled the liability of Rs. 26.65 crores of sales tax by paying Rs. 17.65 crores. Therefore, the addition of balance amount of sales tax of Rs. 9.03 crores was correct

instead of Rs. 5.65 crores shown by the assessee, but Tribunal

cancelled levy of penalty on this argument that the issue of determination of exact income of the assessee from assignment

business was not free from doubt on which different views were possible. Hence, the penalty cannot be levied because the assessee has disclosed the accounting policy adopted by it in determining profit. The Hon'ble Bombay High Court upheld the decision of Tribunal by stating that all the relevant particulars

about the income relating to assignment of business were fully

furnished and even accounting policy adopted for determining

the said income are disclosed. The ld. CIT(A) also relying on the case laws of National Textiles, (2001) 249 ITR 125 (Guj),

wherein it was held that when two views are possible, no penalty can be imposed and the aforesaid decision of Hon'ble

Mumbai High Court, held that the levy of penalty is not justified in this case.

its outstanding dues of Rs. 3,75,42,837/- with State Bank of India. The assessee entered into a settlement with SBI by which the assessee has paid Rs. 1.21 crores to the Bank and balance of Rs. 2.54 crores was waived. The outstanding amount of Rs. 3,75 crores was comprising the principal

amount of Rs. 1.52 crores and interest of Rs. 2.23 crores.

amount of Rs. 2,23,18,945/- was of inclusive of principal

amount of Rs. 1,52,23,892/-. Hence, the remission of the quantum of interest was atleast of Rs. 70,95,053/- ( Rs.

2,23,18,945/- (-) Rs. 1,52,23,892/- ). Therefore, the ld. DR

contended that when the principal amount itself was less than the amount waived of by the Bank, the assessee was required

to disclose the said amount as its income in the profit and loss

account as per the provisions of Section 41(1) of the Act.

Therefore, by mentioning that the amount of Rs. 2.54 crores in the profit and loss account as one time settlement does not establish that the assessee has furnished full particulars of its income. The ld. Authorized Representative of the assessee also submitted that the assessee has been claiming deduction on account of interest paid to the Bank on the principal amount as appearing in its accounts. Therefore, the assessee was well

aware of the fact that the amount waived, which is more than the principal amount is inclusive of interest. It was also submitted that the assessee had not given any particulars of its income u/s 141(1) neither in the return filed u/s 139 nor in the return in response to Section 148, whereas in the original

return filed u/s 139 of the Act, the assessee has claimed

payment of interest to Bank. The ld. DR relied on the case of James Finlay & Co.Ltd. vs. CIT, (1983) 144 ITR 423 (Cal),

wherein it was held that the correspondence between the assessee and with the firm with regard to relevant previous

year showed that the assessee has not waived any claim for interest nor was there any agreement for communication

between the parties for any settlement of payment of interest in instalment. The Tribunal confirmed the order of penalty. The Hon'ble High Court has held that there was no change in method of accounting in the relevant previous year and no agreement which prevented the accrual of interest. The assessee had offered no legal plausible or possible explanation

for not including the interest in its income and must, as a matter of fact, be held to had deliberately concealed the particulars of its income. Accordingly, the penalty u/s 271(1)(c)

was imposable on the assessee company. The ld. DR also relied in the case of S.S.Ratanchand Bholanath v. CIT, (1994)

210 ITR 682 (MP), wherein it was held that finding in the assessment proceedings are not conclusive for levying penalty

and conscious concealment must be proved. However, where

assessment is not challenged in appeal, the order as such cannot be collaterally challenged in penalty proceedings.

Therefore, it was contended that non-filing of appeal by the assessee does not mean that it has not concealed the income

whether it amounts to admission of concealment on the part of the assessee non disclosing the particular fact. The ld. DR

supported his further view by placing reliance on the decision

of Hon'ble Delhi High Court in the case of CIT vs. Zoom

Communication (P) Limited, (2010) 327 ITR 510 (Del), wherein it was held that the view that a claim which is wholly untenable

in law and has absolutely no foundation on which it could be made, the assessee would not be liable to imposition of penalty

even if he was not acting bona fide while making a claim of this nature, that would give a licence to unscrupulous assessees to make wholly untenable and unsustainable claims without

there being any basis for making them – Assessee did not explain either to the IT authorities or to the Tribunal as to in what circumstances and on account of whose mistake, the amounts claimed as deductions were not added while

computing the income of the assessee company – amounts

claimed as deductions were not added while computing the income of the assessee company - If the claim besides being as CIT(A) erred in making addition u/s41(1) and confirmed the same respectively.

submitted that Section 41(1) has only a machinery Section and not charging Section. Therefore, the penalty was not leviable on the income assessed under machinery provisions as held by the Hon'ble High Court in the case of K. V. Moosa Koya and Co. vs. ITO, 175 ITR 120 (Ker). Even otherwise initiation and levy of penalty on the income assessed u/s 41(1) is not justified

looking to the facts that it is not the real income received but it is a settlement between debtor and creditor. Moreover, the penalty could not be initiated unless there is evidence of concealment or furnishing inaccurate particulars. The assessee

has clearly shown in the return and annexure that one time

settlement has been reached with the assessee and his

bankers. Quantum of settlement was also specific and clear in return of income and final accounts annexed thereto.

Therefore, the assessee has not suppressed any particulars or furnished any inaccurate particulars. On the other hand, the income has been assessed by the AO by applying self designed

formula of pro-rata basis. Even the AO and CIT(A) were not firm on the question of quantum of interest paid. Therefore, the amount of Rs. 1,51,25,582/- assessed u/s 41(1) is nothing but guess work on the part of the AO. It may also be seen that the AO as well as CIT(A) have estimated the amount of Rs. 1,51,25,582/-. No penalty u/s 271(1)(c) could be levied on the assessment order reveals that the AO has made addition u/s 41(1) by making the apportionment of the amount waived by SBI on the basis of certain formula applied by him. Thus, the AO has made estimated bifurcation of the principal amount

that interest component out of total amount of Rs. 2.54 total

amount of Rs. 2.54 crores waived off by the Bank. We find

from the record as well as audited profit and loss account

placed at page 8 of the paper book that the assessee has mentioned the waiver amount of Rs. 2,54,42,838/- in the profit

and loss account below mandatory for the year as “income

related to previous year B-129”. We further find that this fact

has also disclosed by the assessee in column ‘h’ of Schedule-P

annexed to the balance sheet, profit and loss account, which is appearing at page 11 of paper book, reads as under :-

“h) The company has entered into One Time Settlement (OTS) with State Bank of India for a total amount of Rs. 121 lacs against the total outstanding of principal of Rs. 1,52,23,892/- & overdue interest of Rs. 2,23,18,945/-. The company has fully paid the OTS amount during the year & received the no dues certificate from the said bank.”

that the addition so made by the AO on the basis of apportionment amounts to estimation only for which the AO

had a different opinion from the point of view of the assessee.

We also note that the Bank had not given the break up of the principal amount and interest in the settlement letter (copy

placed at paper book page 15 dated 30.06.2004 ). Therefore, it was not possible for the assessee to bifurcate as to how much

amount is principal and how much amount on account of interest is waived off. Ld. DR has contended that out of total

remission amount of Rs. 2.23 crores, the principal amount of loan taken by the assessee was at Rs. 1.52 crores, therefore,

Rs. 70.95 lakhs ( Rs. 2.23 crores (-) Rs. 1.52) at least interest

component, therefore, the assessee is alleged to have furnished

inaccurate particulars of income to this extent. However, we

find that the total amount outstanding was at Rs. 3.75 crores

as against which one time settlement was reached subject to payment of Rs. 1.21 crores to the Bank. Further, that no dues certificate issued by SBI dated 08.08.2005 in which Bank has only mentioned that liability of the assessee stands discharged,

but the Bank has nowhere mentioned as to whether the payment made by the assessee of Rs. 1.21 crores was adjusted

towards loan amount or towards interest amount. Hence, there

was no clarity from the said letter as to which amount was waived. Therefore, we are of the considered opinion that the pro-rata bifurcation of the amount of waiver of Rs. 2.54 crores

as done by the AO is filed with an estimation of component of interest for invoking of Section 41(1) of the Income-tax Act,

of concealment of penalty u/s 271(1)(c) of the Act. Further, this reproduce the provisions of Section 271(1)(c) as under:-

“Failure to furnish returns, comply with notices,

concealment of income, etc.

(c) has concealed the particulars of his income or [* * *] furnished inaccurate particulars of [such income, or] (d) xxx xxx xxx

he may direct that such person shall pay by way of penalty,— (i) [* * *] [(ii) in the cases referred to in clause (b), [in addition to tax, if any, payable] by him, [a sum of ten thousand rupees] for each such failure ;] [(iii) in the cases referred to in clause (c) [or clause (d)], [in addition to tax, if any, payable] by him, a sum which shall not be less than, but which shall not exceed [three times], the amount of tax sought to be evaded by reason of the concealment of particulars of his income [or fringe benefits] or the furnishing of inaccurate particulars of such income [or fringe benefits]. [* * *] [Explanation 1.—Where in respect of any facts material to the computation of the total income of any person under this Act,— (A) such person fails to offer an explanation or offers an explanation which is found by the [Assessing] Officer or the [***] [Commissioner (Appeals)] [or the Commissioner] to be false, or…

that penalty would be deemed to attract where in respect of the fact material to the computation of income either no explanation is offered or explanation offered found to be false.

In the case of the assessee, we find that the AO has made

addition by applying deeming provisions of Section 41(1) and making pro-rata bifurcation of the amount waived by the Bank

into principal and interest component. These facts found disclosed by the assessee in the profit and loss account as well

as notes in account of clause ‘h’ of Schedule P appearing at page 11 of the paper book. The AO has not doubted the amount disclosed in the profit and loss account. The assessee

has furnished all relevant facts and merely because that it was not found acceptable by the AO does not mean that the penalty

is automatic. Thus, the assessee has offered explanation,

which was not found to be false and, accordingly, clause ‘A’ of Explanation 1 to Section 271(1)(c) does not cover the case

under consideration.

provides that where the assessee is not able to substantiate its explanation and fails to prove that such explanation is bona

fide and all the facts relating to the same have been disclosed,

penalty is leviable. We find that the assessee has disclosed all the facts and substantiated the same with the letter issued by the Bank on 30.06.2004 and 08.08.2005, wherein the Bank

has given details of amount waived without any bifurcation of interest and principal amount. Therefore, the addition made on the basis of deeming provisions of Section 41(1) of the Act does

not attract penalty u/s 271(1)(c) and its case is not covered by Explanation Clause ‘B’ to Section 271(1)(c) as the assessee has substantiated its explanation that it was bona fide and all the facts relating to the same have been disclosed and as appearing

from the profit and loss account and balance sheet. Based on the above facts of the case, it can be held that the assessee has made all the necessary disclosure on a bona fide belief which is not agreeable to the AO, which does not automatically lead to the case for penalty u/s 271(1)(c) of the Act, which is also supported by the decision of Hon'ble Jurisdictional High Court (2010) 328 ITR 611 (Del), wherein it was held as under :-

“Held, dismissing the appeal, that the assessee had filed the return and furnished all particulars. The assessee had explained during the penalty proceedings that the investments were written off in the books of account and were claimed as deduction on account of loss which occurred to the assessee in the computation of total income. The Tribunal analysing the facts had expressed the view that there had been no furnishing of inaccurate particulars of such income and the assessee had declared the entire material. It was a case where a claim put forth by the assessee as regards the loss was not accepted but that would not per se tantamount to furnishing any kind of inaccurate particulars. Thus, there had been no concealment of income or furnishing of inaccurate particulars. Hence, the cancellation of penalty was valid.”

decision also. Further, it is relevant to mention that the assessee is a sick company and has brought forward business

losses from the earlier years and after making disallowance on account of interest also, the income comes to loss figure leaving

further set off for brought forward losses. Therefore, there

appears no motive to reduce the tax liability by not showing

interest amount. We are, therefore, of the considered view that the penalty is not sustainable in law. Moreover, in the light of the decision of Hon'ble Supreme Court in the case of CIT vs.

Reliance petro Products Limited, 322 ITR 158 ( S.C.), wherein it was held that merely because the assessee has claimed

expenditure, which claim was not accepted or was not found

acceptable by the Revenue, penalty u/s 271(1)(c) cannot be attracted. In the light of these facts, we do not find any infirmity in the order of the order of ld. CIT(A). Accordingly, the same is upheld. Therefore, the grounds of appeal of Revenue

are dismissed.

The order pronounced in the open court on 14.03.2017. (सी.एम.गग") (ओ.पी.मीना) "याियक सद"य लेखा सद"य "दनांक /Dated : 14th March, 2017