ITO WARD 3(3)(1), MUMBAI vs. REGENCY INTERNATIONAL CLOTHING P.LTD, MUMBAI

The brief facts of the case are that assessee is a private limited company incorporated in India. The return of income for AY 2010-11 was filed declaring total income of Rs.Nil. Thereafter, the case was selected for scrutiny and noticed u/s 143(2) was issued and after serving statutory notices, order of assessment u/s 143(3) was completed by the AO determining the total income at Rs. 84,21,590/-. Later on, the application for rectification of mistake u/s 154 was filed by the assessee to reduce the total income to Nil. The AO made two additions /disallowances i.e. i) Depreciation of building at Rs. 64,21,593/- and ii) Professional Fees & Consultancy at Rs. 20 lakhs. Against this order no appeal was filed by the assessee.

We have heard counsels for both the parties at length, judgment cited by the parties and we have also perused the material placed on record as well as the orders passed by revenue authorities. From the records, we find that assessee has claimed depreciation of Rs. 1,10,08,445/- on the building owned by him during the year under consideration and the AO during the course of assessment, noticed that the said building was on lease to M/s Standlyne Amalgamationas Pvt. Ltd. w.e.f. 01.09.2009 and the assessee has shown „rental income‟ from the said building as „income from house property‟. The plea of the assessee with regard to claim of depreciation was found not acceptable by the AO. The assessee admitted and accepted the mistake of claiming wrong deduction and agreed for its disallowance. Thereafter, AO restricted the additions on account of claim of depreciation from 01.04.09 to 31.08.04 and remaining amount of depreciation claimed by the assessee was disallowed.

Another addition made by the AO was on account of professional fee and consultancy expenses. In this respect, we noticed that in the P & L account, the assessee had debited Rs. 20 lakhs towards professional and consultancy payment made to M/s Hanu Reddy Realty India Pvt. Ltd and on investigation, the AO found that these expenses were not allowable expenditure u/s 37(1) of the I.T. Act as the assessee has already claimed deduction u/s 24 of the I.T. Act. In response thereto, the assessee vide letter dated 04.03.13 offered the said amount for taxation to buy peace of mind and to avoid further litigation.

The AO during the course of assessment initiated penalty proceedings u/s 271(1)(c) of I.T. Act for furnishing inaccurate particulars of income by the assessee. It was found by the AO that the claim of depreciation as well as expenses raised by the assessee during the course of assessment were not at tenable and maintainable under law, therefore the AO after considering the facts of the present case had rightly concluded that this act on the part of the assessee was a clear and undisputed detection of concealment. In case, the claim of the assessee was bonafide or Regency International Clothing Pvt. Ltd. there was any mistake in raising the claim, then he could have revised its return of income as there was sufficient time, but it was not done so by the assessee.

From the above facts and discussion, we are of the considered view that in view of specific provisions of I.T. Act, the claim raised by the assessee for claiming depreciation on his property which was admittedly under tenancy and the expenses for alleged professional fee and consultancy in view of section 24 of the I.T. were not at all sustainable and the same could not have been claimed by the assessee while computing his income. Therefore, the claim raised by the assessee, was not only incorrect in law but was also wholly without any basis.

It is true that mere submitting a claim which is incorrect in law would not amount to giving inaccurate particulars of the income of the assessee, but it cannot be disputed that the claim made by the assessee needs to be bonafide.. If the claim besides being incorrect in law is malafide, Explanation 1 to Section 271(1) would come into play and work to the disadvantage of the assessee.

The Court cannot overlook the fact that only a small percentage of the Income Tax Returns are picked up for scrutiny. If the assessee makes a claim which is not only incorrect in law but is wholly without any basis and the explanation furnished by him for making such a claim is not found to be bonafide, it would be difficult to say that he would still not be liable to penalty under Section 71(1)(C) of the Act. If we take 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 Regency International Clothing Pvt. Ltd. penalty, even if he was not acting bonafide 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, in the hope that their return would not be picked up for scrutiny and they would be assessed on the basis of self Assessment under Section 143(1) of the Act and even if their case is selected for scrutiny, they can get away merely by paying the tax, which in any case, was payable by them. The consequence would be that the persons who make claims of this nature, actuated by a malafide intention to evade tax otherwise payable by them would get away without paying the tax legally payable by them, if their cases are not picked up for scrutiny. This would take away the deterrent effect, which these penalty provisions in the Act have.

We find that the assessee before us did not explain either to the Income Tax Authorities or to the Income Tax Appellate Tribunal as to in what circumstances and on account of whose mistake, the amounts claimed as deductions in this case were not added, while computing the income of the assessee company. We cannot lose sight of the fact that the assessee is a company which must be having professional assistance in computation of its income, and its accounts are Regency International Clothing Pvt. Ltd. compulsorily subjected to audit. In the absence of any details from the assessee, we fail to appreciate how such deductions could have been left out while computing the income of the assessee company and how it could also have escaped the attention of the auditors of the company.

The explanation offered by the assessee company was not accepted either by the Assessing Officer or by the Commissioner of Income Tax(Appeals). The view of Income Tax Appellate Tribunal regarding admissibility of the deduction on account of written off of certain assets, under Section 32(1)(iii) of the Act is wholly erroneous. The Tribunal has not recorded a finding that the explanation furnished by the assessee in respect of the deduction due to certain assets being written off was a bonafide explanation. The Tribunal has nowhere held that it was .due to oversight that the amount of this deduction could not be added while computing the income of the assessee company.

As regards deduction on account of income tax paid by the assessee, the Tribunal felt that since no person would claim the same as deduction, to evade payment of tax, the claim made by the assessee was not malafide. In the absence of the assessee company telling the Assessing Officer asto who committed the Regency International Clothing Pvt. Ltd. oversight resulting in failure to add this amount while computing the income of the assessee, under what circumstances the oversight occurred and why it was not detected by those who checked the Income Tax Return before it was filed and later by the auditors of the assessee company, we cannot accept the general view taken by the Tribunal. In our view, no such view could have reasonably been taken, on the facts and circumstances prevailing in this case and, therefore, the decision of the Tribunal in this regard suffers from the vice of perversity. We cannot accept the general proposition that no person would ever claim the amount of income tax as a deduction with a view to avoid payment of tax. No hard and fast rule in this regard can be laid down and every case will have to be decided considering the facts and circumstances in which such a deduction is claimed, coupled with as to whether the explanation offered by the assessee for making the claim, is shown to be bonafide or not.

For the reasons given in the preceding paragraphs, we answer the question of Lw framed in this case in favour of the revenue and against the assessee. The Income Tax Appellate Tribunal erred in law in deleting the penalty in respect of the amount of Rs. 1 lakh claimed as deduction on account of payment of income tax and the amount of Rs.13,24,539/- debited under the Regency International Clothing Pvt. Ltd. head equipment written off, in the Profit and Loss Account of the assessee. The appeal stands disposed of accordingly.

From the facts of the case, there is no difference of opinion that the disallowance of the claims raised by the assessee and incorrect computation given by the assessee was an act of paying less tax then what was due from it. This fact cannot be ignored that the assessee was a big company, assisted by a team of tax auditors, therefore the question of making bonafide claim by the assessee does not arise, as the claim raised by the assessee were not at all sustainable under the provisions of law. However, the assessee has raised the plea that in order to avoid litigation, the assessee had agreed for disallowance. The Hon‟ble Supreme Court in the case of Mac Data Private Ltd. Vrs. CIT under these situations had categorically held as under:-

The AO, in our view, shall not be carried away by the plea of the assessee like voluntary disclosure, buy peace, avoid litigation, amicable settlement, etc. to explain away its conduct. The question is whether the assessee has offered any explanation for concealment

Assessee has only stated that he had surrendered the additional sum of Rs.40,74,000/- with a view to avoid litigation, buy peace and to channelize the energy and resources towards productive work and to make amicable settlement with the income tax department. Statute does not recognize those types of defences under the explanation 1 to Section 271(1)(c) of the Act. It is trite law that the voluntary disclosure does not release the Appellant-assessee from the mischief of penal proceedings. The law does not provide that when an assessee makes a voluntary disclosure of his concealed income, he had to be absolved from penalty.

The AO has to satisfy whether the penalty proceedings be initiated or not during the course of the assessment proceedings and the AO is not required to record his satisfaction in a particular manner or reduce it into writing. The scope of Section 271(1)(c) has also been elaborately discussed by this Coiiit in Union of India vs. Dharmendra Textile Processors (2008) 13 SCC 369 and CIT vs. Atul Mohan Bindal (2009) 9 SCC 589. ii. The principle laid down by this Court, in our view, has been correctly followed by the Revenue and we find no illegality in the department initiating penalty proceedings in the instant case. We, therefore, fully agree with the view of the High Court. Hence, the appeal lacks merit and is dismissed. There shall be no order as to costs.

The Ld. AR submitted before us that because of mistake, the assessee had raised the claims and the said mistake was a human error which has crept into while making the computation. The Ld. AR also relied upon the orders of the Coordinate Bench

We have considered the facts of the above mentioned orders, however the same are not applicable upon the facts of the present case as the factual position contained in the present case is altogether different. On the contrary, the Jurisdictional Hon‟ble Bombay High Court in the case of Samson Maritime Ltd. Vrs. CIT has held as under:-

In view of above facts and circumstances of the present case, it is clear that the assessee by raising the totally unsustainable claims had committed serious laxity, while filing computation of income and thus the mistake committed by it could not be said to be bonafide. Even the surrender of income in this case is not voluntarily, in the sense that the offer of surrender was made in view of detection made by the AO during the scrutiny proceedings. In that situation, it cannot be said that the surrender of income was voluntarily. Consequently, the assessee had no intention to declare its true income and was thus a case of filing “inaccurate particulars of income.”

Therefore we set aside the order of Ld. CIT(A) and uphold the order of AO of imposing the penalty upon the assessee. Resultantly, these grounds raised by the revenue stands allowed.

In the net result, the appeal filed by the revenue stands allowed. Order pronounced in the open court on 23rd Feb, 2018 Sd/- Sd/- (Rajendra) (Sandeep Gosain) लेखासदस्य / Accountant Member न्याययकसदस्य / Judicial Member मुंबई Mumbai;यदनांकDated : 23.02.2018 Sr.PS. Dhananjay आदेशकीप्रनिनिनिअग्रेनर्ि/Copy of the Order forwarded to : अपीलाथी/ The Appellant 1. 2. प्रत्यथी/ The Respondent 3. आयकरआयुक्त(अपील) / The CIT(A) आयकरआयुक्त/ CIT- concerned 4. 5. यवभागीयप्रयतयनयध, आयकरअपीलीयअयधकरण, मुंबई/ DR, ITAT, Mumbai 6. गार्डफाईल / Guard File आदेशधिुसधर/ BY ORDER,