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Facts
The assessee's return of income for AY 2005-06 was subject to scrutiny, and the Assessing Officer levied a penalty of Rs. 25,47,52,538/- under section 271(1)(c) for alleged furnishing of inaccurate particulars. This penalty arose from various additions/disallowances, including compensation received on termination of a distribution agreement (treated as business income instead of capital gain by AO), an insurance claim, R&D expenditure, and depreciation on an R&D unit. The Ld. CIT(A) had previously deleted the penalty, citing a defective notice, and some quantum appeals for these additions were remanded back to the AO by the ITAT (except for the compensation, which was upheld as business income).
Held
The Tribunal deleted the penalty in its entirety. For additions where quantum proceedings were restored to the AO (insurance claim, R&D expenditure, and depreciation), the penalty cannot survive as its basis is unsettled. For the compensation received, the Tribunal ruled that since the assessee had disclosed all relevant particulars and the dispute pertained to the characterization of income (capital gain vs. business income), penalty under section 271(1)(c) is not attracted, relying on precedents from the Supreme Court and High Courts.
Key Issues
Whether penalty under section 271(1)(c) is sustainable when the quantum additions are remanded to the AO or when the assessee discloses all material facts, but there is a dispute regarding the head of income or legal claim.
Sections Cited
271(1)(c), 143(3), 115JB, 274, 35(2AB), 35(1)(iv), 28(ii)(c), 28(va)(a), 2(47), 45, 55(2)
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Income Tax Appellate Tribunal, MUMBAI BENCH “C” MUMBAI
Before: SHRI OM PRAKASH KANT & SHRI RAJ KUMAR CHAUHAN
The captioned appeal and cross The captioned appeal and cross-objection filed by the Revenue objection filed by the Revenue and the assessee respectively are directed against order dated and the assessee respectively are directed against order dated and the assessee respectively are directed against order dated 15.05.2024 passed by the Ld. Commissioner of Income-tax 15.05.2024 passed by the Ld. Commissioner of 15.05.2024 passed by the Ld. Commissioner of (Appeals) – 57, Mumbai [in short ‘the Ld. CIT(A)’] for assessment 57, Mumbai [in short ‘the Ld. CIT(A)’] for assessment 57, Mumbai [in short ‘the Ld. CIT(A)’] for assessment year 2005-06 in relation to penalty u/s 271(1)(c) of the Income 06 in relation to penalty u/s 271(1)(c) of the Income-tax 06 in relation to penalty u/s 271(1)(c) of the Income Act, 1961 (in short ‘the Act’). Act, 1961 (in short ‘the Act’).
2. The Revenue has raised following ground in its appeal: The Revenue has raised following ground in its appeal: The Revenue has raised following ground in its appeal:
1. Whether on the facts and circumstances of the case and in law the Ld. Whether on the facts and circumstances of the case and in law the Ld. Whether on the facts and circumstances of the case and in law the Ld. CIT(A) has erred in not appreciating the fact that while passing the CIT(A) has erred in not appreciating the fact that while passing the CIT(A) has erred in not appreciating the fact that while passing the assessment order u/s 143(3) of the I T Act dated 31.12.2008, the AO has assessment order u/s 143(3) of the I T Act dated 31.12.2008, the AO has assessment order u/s 143(3) of the I T Act dated 31.12.2008, the AO has covered both the limbs of initiating penalty covered both the limbs of initiating penalty i.e. I. furnishing inaccurate i.e. I. furnishing inaccurate particulars 2. concealing the particulars of income And in addition to above, initiating 2. concealing the particulars of income And in addition to above, initiating 2. concealing the particulars of income And in addition to above, initiating penalties for excess claims / losses etc. Hence the penalty order passed by penalties for excess claims / losses etc. Hence the penalty order passed by penalties for excess claims / losses etc. Hence the penalty order passed by the AO is justified in each and every way. the AO is justified in each and every way. 2.1 The The assessee assessee has raised cross-objection objections which are reproduced as under: reproduced as under:
CROSS-OBJECTION I: OBJECTION I:
1.
1. On the facts and circumstances of the case and in law, the ld. Assessing 1. On the facts and circumstances of the case and in law, the ld. Assessing 1. On the facts and circumstances of the case and in law, the ld. Assessing Officer ("AO") erred in levying penalty amounting to Rs. 25,47,52,538/ Officer ("AO") erred in levying penalty amounting to Rs. 25,47,52,538/ Officer ("AO") erred in levying penalty amounting to Rs. 25,47,52,538/- u/s 271(1)(c) of the 271(1)(c) of the Income-tax Act, 1961 (*the Act®).
2. The Cross objector prays that the Id. AO be directed to delete the 2. The Cross objector prays that the Id. AO be directed to delete the 2. The Cross objector prays that the Id. AO be directed to delete the penalty levied u/s 271(1)(c) of the Act. penalty levied u/s 271(1)(c) of the Act. WITHOUT PREJUDICE TO THE ABOVE: WITHOUT PREJUDICE TO THE ABOVE:
CROSS-OBJECTION II: OBJECTION II:
1.
On the facts and circumstances of the case and in law, t 1. On the facts and circumstances of the case and in law, the Id. AO erred 1. On the facts and circumstances of the case and in law, the Id. AO erred in levying 100% penalty u/s 271(1)(c) of the Act on compensation received in levying 100% penalty u/s 271(1)(c) of the Act on compensation received in levying 100% penalty u/s 271(1)(c) of the Act on compensation received on termination of agency rights by treating it as business income. on termination of agency rights by treating it as business income. on termination of agency rights by treating it as business income.
2. The Cross objector prays that the ld. AO be directed to levy penalty u/s 2. The Cross objector prays that the ld. AO be directed to levy penalty u/s 2. The Cross objector prays that the ld. AO be directed to levy penalty u/s 271(1)(c) of the Act, i 271(1)(c) of the Act, if any, only on the differential tax rate between f any, only on the differential tax rate between business income and long business income and long-term capital gains before setting off the brought term capital gains before setting off the brought forward capital loss. forward capital loss.
3. The cross-objection has been filed by the assessee, three days objection has been filed by the assessee, three days objection has been filed by the assessee, three days after the prescribed period of limitation. T after the prescribed period of limitation. The assessee has filed an he assessee has filed an affidavit from the taxation inchage of the company explaining the affidavit from the taxation inchage of the company explaining the affidavit from the taxation inchage of the company explaining the delay of 3 days. In view of short delay of three days and explanation delay of 3 days. In view of short delay of three days and explanation delay of 3 days. In view of short delay of three days and explanation on behalf of the assessee company, we condone the delay of three on behalf of the assessee company, we condone the delay of three on behalf of the assessee company, we condone the delay of three days in filing the cross objec days in filing the cross objection and admit the same for tion and admit the same for adjudication.
Briefly stated, facts of the case are that the assessee had filed Briefly stated, facts of the case are that the assessee had filed Briefly stated, facts of the case are that the assessee had filed return of income on 31.10.2005 declaring total income at return of income on 31.10.2005 declaring total income at return of income on 31.10.2005 declaring total income at Rs.43,80,32,246/- under the normal provisions of the Act and under the normal provisions of the Act and under the normal provisions of the Act and Rs.1,98,56,14,437/- u/s 115JB of the Act. The return of income 15JB of the Act. The return of income filed by the assessee was selected for scrutiny and the Assessing filed by the assessee was selected for scrutiny and the Assessing filed by the assessee was selected for scrutiny and the Assessing Officer passed assessment order u/s 143(3) of the Act on Officer passed assessment order u/s 143(3) of the Act on Officer passed assessment order u/s 143(3) of the Act on 27.12.2007 27.12.2007 27.12.2007 wherein wherein wherein he he he assessed assessed assessed the the the total total total income income income at Rs.1,07,32,57,650/- under normal provisions of the Act at of the Act at Rs.1,98,56,14,437/- u/s 115JB of the Act after making certain u/s 115JB of the Act after making certain disallowances/additions/adjustments disallowances/additions/adjustments and initiated penalty u/s and initiated penalty u/s 271(1)(c ) of the Act by way of issue of notice u/s 274 r.w.s 271(1)© by way of issue of notice u/s 274 r.w.s 271(1)© by way of issue of notice u/s 274 r.w.s 271(1)© of the Act dated 27.12.2007 of the Act dated 27.12.2007.
On further appe On further appeal, the Ld. First Appellate Au al, the Ld. First Appellate Authority granted partial relief in respect of partial relief in respect of quantum of disallowance/additions made disallowance/additions made by the Assessing Officer. by the Assessing Officer.
Aggrieved, the assessee filed assessee filed appeal filed before the Income appeal filed before the Income-tax Appellate Appellate Tribunal Tribunal (ITAT) (ITAT) in in respect respect of of quantum quantum of disallowance/addition. D disallowance/addition. During the pendency of the uring the pendency of the said appeal before the ITAT, the Assessing Officer issued show cause he Assessing Officer issued show cause notice for he Assessing Officer issued show cause levy of the penalty o levy of the penalty on the ground of furnishing inaccurate n the ground of furnishing inaccurate particulars of the income particulars of the income by the assessee with regard to ith regard to following disallowance/additions: additions:
“1. Compensation received on Termination of Distributor agreement being 1. Compensation received on Termination of Distributor agreement being 1. Compensation received on Termination of Distributor agreement being assessed as Business Income amounting to Rs.92,76,62,688/ assessed as Business Income amounting to Rs.92,76,62,688/ assessed as Business Income amounting to Rs.92,76,62,688/- instead of Capital Gain as returned by the Capital Gain as returned by the assessee.
Addition on account of Insurance Cl 2. Addition on account of Insurance Claim received during the year aim received during the year amounting to Rs.2,75,00,000/ Rs.2,75,00,000/-.
Disallowance of Research and Development Expenditure u/s. 35(2AB) & 3. Disallowance of Research and Development Expenditure u/s. 35(2AB) & 3. Disallowance of Research and Development Expenditure u/s. 35(2AB) & 35(i)(iv) of the Act amounting to Rs.3,19,78,297/ 35(i)(iv) of the Act amounting to Rs.3,19,78,297/-.
4. Disallowance of Depreciation on Excess Capital Expenditure of R&D 4. Disallowance of Depreciation on Excess Capital Expenditure of R&D 4. Disallowance of Depreciation on Excess Capital Expenditure of R&D Unit amounting to Rs.38,62,993/ amounting to Rs.38,62,993/-.”
The Assessing Officer after considering submission of the The Assessing Officer after considering submission of the The Assessing Officer after considering submission of the assessee levied penalty of Rs.25,47,52,538/ assessee levied penalty of Rs.25,47,52,538/- i.e. equivalent 100% of i.e. equivalent 100% of the tax sought to be evaded. On further appeal by the assessee, the the tax sought to be evaded. On further appeal by the assessee, the the tax sought to be evaded. On further appeal by the assessee, the Ld. CIT(A) deleted the pena Ld. CIT(A) deleted the penalty on the additional ground raised by additional ground raised by the assessee that the notice the assessee that the notice u/s 274 r.w.s. 271(1)(c) u/s 274 r.w.s. 271(1)(c) dated 27.12.2007 of the Act issued was defective as particular limb i.e. of the Act issued was defective as particular limb i.e. of the Act issued was defective as particular limb i.e. concealment of income or furnishing of inaccurate particulars of the concealment of income or furnishing of inaccurate particulars of the concealment of income or furnishing of inaccurate particulars of the income was not strick income was not stricken off by the Assessing Officer while issuing by the Assessing Officer while issuing notice for initiation of penalty, notice for initiation of penalty, relying on the decision of the relying on the decision of the Hon’ble Bombay High Court in the case of Hon’ble Bombay High Court in the case of Mohd. Farhan Shaikh v. Mohd. Farhan Shaikh v. DCIT (2021) 125 taxmann.com 253 (Bombay) DCIT (2021) 125 taxmann.com 253 (Bombay).
8. Aggrieved, the assessee assessee is in cross-objection submitting that objection submitting that even otherwise on merit also penalty is not leviable in the case of even otherwise on merit also penalty is not leviable in the case of even otherwise on merit also penalty is not leviable in the case of the assessee.
We have heard rival submission of the parties and perused the We have heard rival submission of the parties and perused the We have heard rival submission of the parties and perused the relevant material on record. Before us, the Ld. counsel for the relevant material on record. Before us, the Ld. counsel for the relevant material on record. Before us, the Ld. counsel for the assessee referred to the Paper Book which is running from page 1 to d to the Paper Book which is running from page 1 to d to the Paper Book which is running from page 1 to 294. The Ld. counsel submitted that subsequent 294. The Ld. counsel submitted that subsequent to to the impugned 11/01/2024 in ITA order of the Ld. CIT(A), the ITAT order of the Ld. CIT(A), the ITAT in order dated 11/01/2024 in and has decided No. 3706/Mum/2010 and ITA No. 5091/Mum/2024, No. 3706/Mum/2010 and ITA No. 5091/Mum/2024, made in quantum proceedings. He the additions/disallowances /disallowances made in quantum proceedings. He submitted a chart of the submitted a chart of the finding of ITAT (supra) qua each issue on (supra) qua each issue on under: which AO had levied penalty, which is extracted as under:
Sr. No. Ground of Appeal
Ground of Appeal
Held by ITAT Compensation received on Compensation received on 1. Compensation received by the Assessee from Compensation received by the Assessee from termination of ag termination of agreement - RDG to the tune of Rs. 92,76.62,688/- in RDG to the tune of Rs. 92,76.62,688/ Rs.92,76,62,688/ 92,76,62,688/- out of court settlement is a business income out of court settlement is a business income and not capital gains. Thus, provisions of S. and not capital gains. Thus, provisions of S. 28(ii)(c) and 28(va)(a) of the Act are attracted. 28(ii)(c) and 28(va)(a) of the Act are attracted. Consequently, sequently, this this ground ground determined determined against the Assessee [Para 38] against the Assessee [Para 38]
2. Addition Addition on on account account of of Remitted back to the file of AO to decide Remitted back to the file of AO to decide Insurance Insurance claim claim received afresh on verifying the actual loss incurred afresh on verifying the actual loss incurred during during the the year year Rs. by the Assessee due to accidental fire. Thus, e to accidental fire. Thus, 2,75,00,000/ 2,75,00,000/- decided in favour of the Assessee for decided in favour of the statistical purposes [Para 65] statistical purposes [Para 65] Disallowance Disallowance of deduction Restored to AO to decide after providing
3. Restored to AO to decide after providing u/s u/s 35(2AB) 35(2AB) and and u/s u/s opportunity of being heard to the Assessee to of being heard to the Assessee to 35(1)(iv) furnish the approval of competent authority furnish the approval of competent authority respect of Chennai unit respect of Chennai unit - Rs. in Form 3CM: Thus, allowed for statistical 3,19,78,297/ 3,19,78,297/- purposes [Para 58] Disallowance of depreciation 4. Disallowance Restored to AO on capital expenses of R&D on capital expenses of R&D unit - Rs. 38,62,993/ Rs. 38,62,993/- 9.1 The Ld. counsel for the assessee submitted that as far as issue el for the assessee submitted that as far as issue el for the assessee submitted that as far as issue of penalty for addition on account of addition on account of insurance claimed insurance claimed is concerned, the ITAT(supra) (supra) has restored the issue back to the file of has restored the issue back to the file of the Assessing Officer. The relevant finding of the the Assessing Officer. The relevant finding of the ITAT ITAT is reproduced as under:
“64. During the year under consideration the assessee has made a claim 64. During the year under consideration the assessee has made a claim 64. During the year under consideration the assessee has made a claim of Rs. 12.22 crore with the insurance company on the basis of insurance of Rs. 12.22 crore with the insurance company on the basis of insurance of Rs. 12.22 crore with the insurance company on the basis of insurance cover purchased by it in respect of its corporate office where fire took cover purchased by it in respect of its corporate office where fire took cover purchased by it in respect of its corporate office where fire took place. The assessee company has place. The assessee company has received interim claim of Rs. 2.75 received interim claim of Rs. 2.75 crores on adhoc basis. The assessee has incurred a loss of Rs. 7.95 crores on adhoc basis. The assessee has incurred a loss of Rs. 7.95 crores on adhoc basis. The assessee has incurred a loss of Rs. 7.95 crores approximately due to the fire accident. The AO has treated the crores approximately due to the fire accident. The AO has treated the crores approximately due to the fire accident. The AO has treated the payment of Rs. 2.75 crores received by the assessee as insurance claim payment of Rs. 2.75 crores received by the assessee as insurance claim payment of Rs. 2.75 crores received by the assessee as insurance claim on adhoc bas on adhoc basis and taxed the same under the head business or is and taxed the same under the head business or profession. The Ld. CIT(A) observed that the amount received by the profession. The Ld. CIT(A) observed that the amount received by the profession. The Ld. CIT(A) observed that the amount received by the assessee was windfall and as such the same is the revenue receipt assessee was windfall and as such the same is the revenue receipt assessee was windfall and as such the same is the revenue receipt taxable under the head business or profession. taxable under the head business or profession.
The Ld. A.R. for the a 65. The Ld. A.R. for the assessee contended that since the assessee has ssessee contended that since the assessee has ultimately incurred a loss it cannot be taxed in its hand as revenue ultimately incurred a loss it cannot be taxed in its hand as revenue ultimately incurred a loss it cannot be taxed in its hand as revenue receipt. During the course of argument the assessee was called upon to receipt. During the course of argument the assessee was called upon to receipt. During the course of argument the assessee was called upon to produce the evidence regarding loss incurred by it due to accidental f produce the evidence regarding loss incurred by it due to accidental f produce the evidence regarding loss incurred by it due to accidental fire which the assessee has not brought on record. Moreover all the four which the assessee has not brought on record. Moreover all the four which the assessee has not brought on record. Moreover all the four policies purchased by the assessee was for plant & machinery. The Ld. policies purchased by the assessee was for plant & machinery. The Ld. policies purchased by the assessee was for plant & machinery. The Ld. A.R.s for the parties to the appeals unanimously contended that the issue A.R.s for the parties to the appeals unanimously contended that the issue A.R.s for the parties to the appeals unanimously contended that the issue be remitted back to the AO to decide afr be remitted back to the AO to decide afresh on verifying the actual loss esh on verifying the actual loss incurred by the assessee due to accidental fire. In view of the matter for incurred by the assessee due to accidental fire. In view of the matter for incurred by the assessee due to accidental fire. In view of the matter for cause of substantive justice the issue is remitted back to the AO to decide cause of substantive justice the issue is remitted back to the AO to decide cause of substantive justice the issue is remitted back to the AO to decide afresh within six months from the date of receipt of the order on filing afresh within six months from the date of receipt of the order on filing afresh within six months from the date of receipt of the order on filing actual loss suffered due to accidental fire. So ground No. 11 is decided in actual loss suffered due to accidental fire. So ground No. 11 is decided in actual loss suffered due to accidental fire. So ground No. 11 is decided in favour of the assessee for statistical purposes. favour of the assessee for statistical purposes.” disallowance of deduction u/s 9.2 Regarding the Regarding the penalty for disallowance of 35(2AB) and section 35(1)(iv) of the Act 35(2AB) and section 35(1)(iv) of the Act in respect of Mulund in respect of Mulund Unit and Ennore Unit, Chennai d Ennore Unit, Chennai, also the ITAT(supra) (supra) has restored the issue back to the file of the Assessing Officer, observing as the issue back to the file of the Assessing Officer the issue back to the file of the Assessing Officer under:
54. The assessee has claimed research and development expenses 54. The assessee has claimed research and development expenses 54. The assessee has claimed research and development expenses incurred during the year under consideration for Mulund unit, incurred during the year under consideration for Mulund unit, incurred during the year under consideration for Mulund unit, Mumbai and Ennore unit, Chennai as under: and Ennore unit, Chennai as under: (in Lakhs)
(i) R&D - revenue exp. u/s 0.35(2AB) revenue exp. u/s 0.35(2AB) Rs.4140.62 (ii) R&D - capital exp. (building) u/s 0.35(1)(iv) capital exp. (building) u/s 0.35(1)(iv) Rs.3196.96 (iii) R&D - capital exp. (Plant & machinery, computers, etc) u/s capital exp. (Plant & machinery, computers, etc) u/s Rs.2350.13 0.35(1)(iv) Rs.9687.71
We have perused the impugned order passed by the Ld. CIT(A) who 55. We have perused the impugned order passed by the Ld. CIT(A) who 55. We have perused the impugned order passed by the Ld. CIT(A) who has directed the AO to verify the actual figures/expenses to work out the has directed the AO to verify the actual figures/expenses to work out the has directed the AO to verify the actual figures/expenses to work out the disallowance by returning following findings: disallowance by returning following findings: "*The AO should verify the actual "*The AO should verify the actual figures/expenses. The figures/expenses. The disallowance to be accordingly worked out. disallowance to be accordingly worked out. *As per AO, the approval in respect of R&D unit at Chennai has *As per AO, the approval in respect of R&D unit at Chennai has *As per AO, the approval in respect of R&D unit at Chennai has been given by Ministry of Science and Tech. letter dated 23 been given by Ministry of Science and Tech. letter dated 23 been given by Ministry of Science and Tech. letter dated 23-2-05 upto 31 upto 31-3-07 (no period mentioned). Besides, no approval in 07 (no period mentioned). Besides, no approval in prescribed Form No. 3CM has been enclosed before AO/before scribed Form No. 3CM has been enclosed before AO/before scribed Form No. 3CM has been enclosed before AO/before this office also. The said statutory Form No. 3CM is a mandatory this office also. The said statutory Form No. 3CM is a mandatory this office also. The said statutory Form No. 3CM is a mandatory Form and as such, the AO has rightly held that R & D expenditure Form and as such, the AO has rightly held that R & D expenditure Form and as such, the AO has rightly held that R & D expenditure incurred at Ennore only after approval given by Ministry i.e. 23 incurred at Ennore only after approval given by Ministry i.e. 23 incurred at Ennore only after approval given by Ministry i.e. 23-2- 2005 can be allowed that too if given in Form No. 3CM which is a. 05 can be allowed that too if given in Form No. 3CM which is a. 05 can be allowed that too if given in Form No. 3CM which is a. mandatory requirement. Besides, no breakup of expenditure in mandatory requirement. Besides, no breakup of expenditure in mandatory requirement. Besides, no breakup of expenditure in respect of R & D facility at Ennore between 23 respect of R & D facility at Ennore between 23-2-05 and 31 05 and 31-3-05 has been given. The disallowance made by AO is upheld." has been given. The disallowance made by AO is upheld." has been given. The disallowance made by AO is upheld."
The assessee has failed to bring on record approval in prescribed essee has failed to bring on record approval in prescribed essee has failed to bring on record approval in prescribed form No. 3CM before the AO as well as the Ld. CIT(A). It is fact on record form No. 3CM before the AO as well as the Ld. CIT(A). It is fact on record form No. 3CM before the AO as well as the Ld. CIT(A). It is fact on record that only R&D expenditure incurred at Ennore for which approval has that only R&D expenditure incurred at Ennore for which approval has that only R&D expenditure incurred at Ennore for which approval has been given by the Ministry on 29 been given by the Ministry on 29-3-2005 can be allowed only if form No. only if form No. 3CM is brought on record. The Ld. A.R. for the assessee contended that 3CM is brought on record. The Ld. A.R. for the assessee contended that 3CM is brought on record. The Ld. A.R. for the assessee contended that despite filing form 3CL by the assessee with DSIR it has not received despite filing form 3CL by the assessee with DSIR it has not received despite filing form 3CL by the assessee with DSIR it has not received form 3CL, since it is an old data even copy of reminders filed by the form 3CL, since it is an old data even copy of reminders filed by the form 3CL, since it is an old data even copy of reminders filed by the assessee are not readily av assessee are not readily available with the assessee and it cannot be ailable with the assessee and it cannot be penalized for inaction on the part of the DSIR and pressed for deduction penalized for inaction on the part of the DSIR and pressed for deduction penalized for inaction on the part of the DSIR and pressed for deduction under section 35(2AB) to at least from the date of application i.e. June 25, under section 35(2AB) to at least from the date of application i.e. June 25, under section 35(2AB) to at least from the date of application i.e. June 25, 2004. It is also contended that identical issue in 2008 2004. It is also contended that identical issue in 2008-09 was 09 was restored to the AO to allow at least weighted deduction till form 3CM is given. the AO to allow at least weighted deduction till form 3CM is given. the AO to allow at least weighted deduction till form 3CM is given.
We have perused the order for A.Y. 2008 57. We have perused the order for A.Y. 2008-09 which is qua the 09 which is qua the identical issue of the co identical issue of the co-ordinate Bench of the Tribunal restored the issue ordinate Bench of the Tribunal restored the issue back to AO by returning following fi back to AO by returning following findings: "27. We have considered rival submissions and perused materials "27. We have considered rival submissions and perused materials "27. We have considered rival submissions and perused materials on record. It is an undisputed fact that there is no approval by the on record. It is an undisputed fact that there is no approval by the on record. It is an undisputed fact that there is no approval by the competent authority in Form no. 3CM in respect of the expenditure competent authority in Form no. 3CM in respect of the expenditure competent authority in Form no. 3CM in respect of the expenditure incurred towards the R&D facility. Section 35(2AB incurred towards the R&D facility. Section 35(2AB incurred towards the R&D facility. Section 35(2AB) of the Act mandates furnishing of approval in Form no. 3CM for the purpose mandates furnishing of approval in Form no. 3CM for the purpose mandates furnishing of approval in Form no. 3CM for the purpose of availing deduction. It is the contention of the assessee that of availing deduction. It is the contention of the assessee that of availing deduction. It is the contention of the assessee that though, it has made application seeking approval in Form no. though, it has made application seeking approval in Form no. though, it has made application seeking approval in Form no. 3CM, however, it is still awaited. As held by the Tri 3CM, however, it is still awaited. As held by the Tri 3CM, however, it is still awaited. As held by the Tribunal, Mumbai Bench, in case of PCP Chemicals Pvt. Ltd. (supra), Mumbai Bench, in case of PCP Chemicals Pvt. Ltd. (supra), Mumbai Bench, in case of PCP Chemicals Pvt. Ltd. (supra), approval by the competent authority in Form no. 3CM is approval by the competent authority in Form no. 3CM is approval by the competent authority in Form no. 3CM is mandatory for claiming deduction under section 35(2AB) of the mandatory for claiming deduction under section 35(2AB) of the mandatory for claiming deduction under section 35(2AB) of the Act. The same view has also been expressed in Vivimed Labs Ltd. Act. The same view has also been expressed in Vivimed Labs Ltd. Act. The same view has also been expressed in Vivimed Labs Ltd. (supra). H (supra). However, considering the contention of the learned Sr. owever, considering the contention of the learned Sr. Counsel that the assessee has applied for approval in Form no. Counsel that the assessee has applied for approval in Form no. Counsel that the assessee has applied for approval in Form no. 3CM which is still pending, we are inclined to restore the issue to 3CM which is still pending, we are inclined to restore the issue to 3CM which is still pending, we are inclined to restore the issue to the Assessing Officer for providing an opportunity to the assessee the Assessing Officer for providing an opportunity to the assessee the Assessing Officer for providing an opportunity to the assessee to furnish the approval of the competent authority in the urnish the approval of the competent authority in the urnish the approval of the competent authority in the prescribed manner for claiming deduction under section 35(2AB) prescribed manner for claiming deduction under section 35(2AB) prescribed manner for claiming deduction under section 35(2AB) of the Act. This ground is allowed for statistical purposes." of the Act. This ground is allowed for statistical purposes." of the Act. This ground is allowed for statistical purposes."
Since the issue is identical the same is restored to the AO to decide 58. Since the issue is identical the same is restored to the AO to decide 58. Since the issue is identical the same is restored to the AO to decide after providing opportunity of being heard to the assessee in view of the er providing opportunity of being heard to the assessee in view of the er providing opportunity of being heard to the assessee in view of the directions given by the Tribunal extracted above. Consequently ground directions given by the Tribunal extracted above. Consequently ground directions given by the Tribunal extracted above. Consequently ground No. 6 is allowed for statistical purposes. No. 6 is allowed for statistical purposes.” 9.3 As far as penalty related to penalty related to disallowance of depreciation of disallowance of depreciation of capital expenditure expenditure of R&D unit, also the ITAT (supra) ITAT (supra) restored the issue back to the file of the Assessing Officer observing as the issue back to the file of the Assessing Officer observing as the issue back to the file of the Assessing Officer observing as under:
“59. Ground No. 7 is interconnected with ground No. 6 being claim of 59. Ground No. 7 is interconnected with ground No. 6 being claim of 59. Ground No. 7 is interconnected with ground No. 6 being claim of depreciation on capital expenses and it is to be decided depreciation on capital expenses and it is to be decided depreciation on capital expenses and it is to be decided by the AO accordingly in the light of the findings returned on issue in ground No. 6. accordingly in the light of the findings returned on issue in ground No. 6. accordingly in the light of the findings returned on issue in ground No. 6.” 9.4 We find that the issue the issues in dispute related to the penalty in in dispute related to the penalty in respect of above three above three issues, have already been restored back to already been restored back to the file of the Assessing Officer. e file of the Assessing Officer. Since, the basis on which the , the basis on which the penalty was levied itself has been restored penalty was levied itself has been restored, then no such penalty then no such penalty could survive. The The Hon’ble Supreme Court in the case of Supreme Court in the case of KC Builders (2004) 265 ITR 562 Builders (2004) 265 ITR 562 has observed that where alternation has observed that where alternation is made to the assessment order on the is made to the assessment order on the basis of which penalty was basis of which penalty was levied for levying penalty for concealment and no such penalty can penalty for concealment and no such penalty can penalty for concealment and no such penalty can survive and mere as liable to be cancelled. The relevant para of the survive and mere as liable to be cancelled. The relevant para of the survive and mere as liable to be cancelled. The relevant para of the Hon’ble Supreme Court is reproduced as under: Hon’ble Supreme Court is reproduced as under:
“14... Ordinarily, penalty cannot stand if the 14... Ordinarily, penalty cannot stand if the assessment itself is set assessment itself is set aside. Where an order of assessment or reassessment on the basis of aside. Where an order of assessment or reassessment on the basis of aside. Where an order of assessment or reassessment on the basis of which penalty has been levied on the assessee has itself been finally set which penalty has been levied on the assessee has itself been finally set which penalty has been levied on the assessee has itself been finally set aside or cancelled by the Tribunal or otherwise, the penalty cannot stand aside or cancelled by the Tribunal or otherwise, the penalty cannot stand aside or cancelled by the Tribunal or otherwise, the penalty cannot stand by itself and the same is liable to be cancelled as in the instant case the same is liable to be cancelled as in the instant case the same is liable to be cancelled as in the instant case ordered by the Tribunal and later cancellation of penalty by the ordered by the Tribunal and later cancellation of penalty by the ordered by the Tribunal and later cancellation of penalty by the authorities.
It is a well 30. It is a well-established principle that the matter which has been established principle that the matter which has been adjudicated and settled by the Tribunal need not b adjudicated and settled by the Tribunal need not be dragged into the e dragged into the criminal courts unless and until the act of the appellants could h criminal courts unless and until the act of the appellants could h criminal courts unless and until the act of the appellants could have been described as culpable.” described as culpable.” 9.5 Respectfully following the above decision, we set aside Respectfully following the above decision, we set aside Respectfully following the above decision, we set aside the finding of the Ld. CIT(A), however, t finding of the Ld. CIT(A), however, the Assessing Officer is it liberty he Assessing Officer is it liberty to initiate penalty proceedings in the order initiate penalty proceedings in the order , which will be , which will be passed consequent to the direction of the ITAT. consequent to the direction of the ITAT. Accordingly, the penalty in Accordingly, the penalty in respect of three additions respect of three additions i.e. (i) Addition on account of Insurance (i) Addition on account of Insurance claim received during the year Rs. 2,75,00,000/ claim received during the year Rs. 2,75,00,000/-; ( (ii) Disallowance of deduction u/s 35(2AB) and u/s 35(1)(iv) of the Act respect of of deduction u/s 35(2AB) and u/s 35(1)(iv) of the Act respect of of deduction u/s 35(2AB) and u/s 35(1)(iv) of the Act respect of Chennai unit and (iii) Disallowance of depreciation on capital Chennai unit and (iii) Disallowance of depreciation on capital Chennai unit and (iii) Disallowance of depreciation on capital expenses of R&D unit expenses of R&D unit - Rs. 38,62,993/-, is hereby deleted. is hereby deleted.
Now, the only issue where the quantum addition h only issue where the quantum addition has been only issue where the quantum addition h upheld by the ITAT (supra) ITAT (supra) is in relation to compensation is in relation to compensation amounting to Rs.92,76,62,688/ amounting to Rs.92,76,62,688/- received from Roche Diagnostics from Roche Diagnostics Gmbh ( RDG) on termination of agreement of termination of agreement of agency, distribution agency, distribution and manufacturing rights and manufacturing rights.
10.1 We have heard rival submissions and perused the relevant .1 We have heard rival submissions and perused the relevant .1 We have heard rival submissions and perused the relevant material on record. material on record. The assessee company was granted exclusive company was granted exclusive rights to distribute market and sale various products in India and rights to distribute market and sale various products in India and rights to distribute market and sale various products in India and also to manufacture certain products under the agreement with also to manufacture certain products under the agreement with also to manufacture certain products under the agreement with Boehringer Mannheim GMBH (Roche Diagnostics GMBH) agreement ringer Mannheim GMBH (Roche Diagnostics GMBH) agreement ringer Mannheim GMBH (Roche Diagnostics GMBH) agreement dated 03.06.1997. This agreement was subsequently, terminated dated 03.06.1997. This agreement was subsequently, terminated dated 03.06.1997. This agreement was subsequently, terminated vide Settlement Agreement dated 20.10.2004. The assessee vide Settlement Agreement dated 20.10.2004. The assessee vide Settlement Agreement dated 20.10.2004. The assessee submitted that it had received a sum of Rs.92,76,62,688/- from submitted that it had received a sum of Rs.92,76,62,688/ submitted that it had received a sum of Rs.92,76,62,688/ Roche Diagnostics GMBH (RDG) of Germany towards termination of GMBH (RDG) of Germany towards termination of GMBH (RDG) of Germany towards termination of the agency, distribution and manufacturing rights granted to it by the agency, distribution and manufacturing rights granted to it by the agency, distribution and manufacturing rights granted to it by RDG vide agreement dated 03.06.1997. According to the assessee, RDG vide agreement dated 03.06.1997. According to the assessee RDG vide agreement dated 03.06.1997. According to the assessee it lost its rights of carry carrying out business of distributing, marketing of distributing, marketing and selling due to extinguishment of those rights ng due to extinguishment of those rights ng due to extinguishment of those rights, which were a capital asset. The Ld. counsel for the assessee submitted that capital asset. The Ld. counsel for the assessee submitted that capital asset. The Ld. counsel for the assessee submitted that relinquishment of asset and extinguishment of right thereon is in relinquishment of asset and extinguishment of right thereon is in relinquishment of asset and extinguishment of right thereon is in relation to capital asset under the provision of section 2(47) of the relation to capital asset under the provision of section 2(47) of the relation to capital asset under the provision of section 2(47) of the Act and therefore, the settlement payment received on account of t and therefore, the settlement payment received on account of t and therefore, the settlement payment received on account of such transfer was held to be such transfer was held to be a capital gain. The contentions of the e contentions of the assessee have not been accepted by the not been accepted by the ITAT (supra), ITAT (supra), in quantum proceedings. The relevant finding of the ITAT (supra) is repr The relevant finding of the ITAT (supra) is reproduced The relevant finding of the ITAT (supra) is repr as under:
“32. Hon'ble Supreme Court in case of Kettlewell Bullen & Co. Ltd. Hon'ble Supreme Court in case of Kettlewell Bullen & Co. Ltd. Hon'ble Supreme Court in case of Kettlewell Bullen & Co. Ltd. (supra) held that where payment is made to compensate a person from (supra) held that where payment is made to compensate a person from (supra) held that where payment is made to compensate a person from cancellation of contract, as in the instant case qua agency distribution cancellation of contract, as in the instant case qua agency distribution cancellation of contract, as in the instant case qua agency distribution agreement dated 3 agreement dated 3-6-1997 terminated vide settlement agreement dated ated vide settlement agreement dated 20-10-2004 and such cancellation has left the assessee free to carry on 2004 and such cancellation has left the assessee free to carry on 2004 and such cancellation has left the assessee free to carry on his trade the receipt is revenue receipt. his trade the receipt is revenue receipt.
33. Similarly, Hon'ble Supreme Court in case of Chari and Chari Ltd.
Similarly, Hon'ble Supreme Court in case of Chari and Chari Ltd.
33. Similarly, Hon'ble Supreme Court in case of Chari and Chari Ltd. (supra) has also held that when the (supra) has also held that when the termination of an agency did not termination of an agency did not impair the profit impair the profit-making structure of the assessee, but was within the making structure of the assessee, but was within the framework of the business, the receipt for termination of agency would be framework of the business, the receipt for termination of agency would be framework of the business, the receipt for termination of agency would be a revenue receipt. Hon'ble Madras High Court in case of Indo Foreign a revenue receipt. Hon'ble Madras High Court in case of Indo Foreign a revenue receipt. Hon'ble Madras High Court in case of Indo Foreign Traders (P) Ltd. (supra) held that when an assessee was appointed as a P) Ltd. (supra) held that when an assessee was appointed as a P) Ltd. (supra) held that when an assessee was appointed as a sales organizer of a drug company on commission basis and on sales organizer of a drug company on commission basis and on sales organizer of a drug company on commission basis and on termination of the said agreement compensation for termination of the termination of the said agreement compensation for termination of the termination of the said agreement compensation for termination of the agreement was income assessable to tax under section 10(va) of agreement was income assessable to tax under section 10(va) of agreement was income assessable to tax under section 10(va) of the Income-tax Act, 1922, which is akin to section 28(ii) of the Act. Ratio of tax Act, 1922, which is akin to section 28(ii) of the Act. Ratio of tax Act, 1922, which is akin to section 28(ii) of the Act. Ratio of the case law discussed by the Ld. CIT(A) is : any compensation received the case law discussed by the Ld. CIT(A) is : any compensation received the case law discussed by the Ld. CIT(A) is : any compensation received by a party on termination of the earlier agency agreement is a revenue by a party on termination of the earlier agency agreement is a revenue by a party on termination of the earlier agency agreement is a revenue receipt to be assessed as business receipt to be assessed as business income.
The contention raised by the Ld. A.R. for the assessee that agreement 34. The contention raised by the Ld. A.R. for the assessee that agreement 34. The contention raised by the Ld. A.R. for the assessee that agreement between the parties is to be read as intended by the parties and it is not between the parties is to be read as intended by the parties and it is not between the parties is to be read as intended by the parties and it is not open to AO to give another interpretation is also not sustainable because open to AO to give another interpretation is also not sustainable because open to AO to give another interpretation is also not sustainable because agreement in ADMA (supra) is cate agreement in ADMA (supra) is categoric in all respects which has been goric in all respects which has been further clarified by the settlement agreement (supra) and as such reliance further clarified by the settlement agreement (supra) and as such reliance further clarified by the settlement agreement (supra) and as such reliance placed on the decision rendered by Hon'ble Calcutta High Court in case of placed on the decision rendered by Hon'ble Calcutta High Court in case of placed on the decision rendered by Hon'ble Calcutta High Court in case of CIT v. Arun Dua CIT v. Arun Dua [1989] 45 Taxman 246/[1990] 186 ITR 494 /[1990] 186 ITR 494 is misplaced.
Furthermore, the provisions contained under section 28(ii)(c) are very 35. Furthermore, the provisions contained under section 28(ii)(c) are very 35. Furthermore, the provisions contained under section 28(ii)(c) are very categoric in giving the treatment of compensation received from the categoric in giving the treatment of compensation received from the categoric in giving the treatment of compensation received from the termination of any agency business which has been further clarified from termination of any agency business which has been further clarified from termination of any agency business which has been further clarified from the new provisions contained under section 28(va)(a) w.e.f. 1 w provisions contained under section 28(va)(a) w.e.f. 1 w provisions contained under section 28(va)(a) w.e.f. 1-4-2003, wherein it is specifically included within the purview of profit and gains wherein it is specifically included within the purview of profit and gains wherein it is specifically included within the purview of profit and gains of business "any sum whatever received or receivable in cash or kind of business "any sum whatever received or receivable in cash or kind of business "any sum whatever received or receivable in cash or kind under any agreement for guarantee any activity i under any agreement for guarantee any activity in relation to any n relation to any business".
The contentions raised by the Ld. A.R. for the assessee inter 36. The contentions raised by the Ld. A.R. for the assessee inter 36. The contentions raised by the Ld. A.R. for the assessee inter-alia qua the provisions contained under section 28(va) that the existing provisions the provisions contained under section 28(va) that the existing provisions the provisions contained under section 28(va) that the existing provisions of clause (ii) of section 28(a) is restrictive in its scope as far as taxatio of clause (ii) of section 28(a) is restrictive in its scope as far as taxatio of clause (ii) of section 28(a) is restrictive in its scope as far as taxation of compensation is concerned; a large segment of compensation received in compensation is concerned; a large segment of compensation received in compensation is concerned; a large segment of compensation received in connection with business and employment is within the purview of connection with business and employment is within the purview of connection with business and employment is within the purview of taxation, is not sustainable because it is nowhere case of the assessee taxation, is not sustainable because it is nowhere case of the assessee taxation, is not sustainable because it is nowhere case of the assessee before the AO or the Ld. CIT(A) that becaus before the AO or the Ld. CIT(A) that because of settlement agreement qua e of settlement agreement qua the termination of agency and distribution business the compensation is the termination of agency and distribution business the compensation is the termination of agency and distribution business the compensation is in respect of business loss and employment. Rather in the preceding para in respect of business loss and employment. Rather in the preceding para in respect of business loss and employment. Rather in the preceding para it is discussed that after termination of the agency and distribution it is discussed that after termination of the agency and distribution it is discussed that after termination of the agency and distribution assessee's business has been increased considerably. business has been increased considerably.
Moreover, when the assessee and the RDG were entered into 37. Moreover, when the assessee and the RDG were entered into 37. Moreover, when the assessee and the RDG were entered into agreement to do business and any settlement arrived at between them agreement to do business and any settlement arrived at between them agreement to do business and any settlement arrived at between them for termination of the business would be business income. The assessee for termination of the business would be business income. The assessee for termination of the business would be business income. The assessee has also raised one additional ground to supplement ground No. 1 to the ed one additional ground to supplement ground No. 1 to the ed one additional ground to supplement ground No. 1 to the effect that compensation received on termination of agreement is a capital effect that compensation received on termination of agreement is a capital effect that compensation received on termination of agreement is a capital receipt. When it is nowhere case of the assessee that it has lost its receipt. When it is nowhere case of the assessee that it has lost its receipt. When it is nowhere case of the assessee that it has lost its livelihood on account of termination of the business livelihood on account of termination of the business livelihood on account of termination of the business agreement compensation received by it by virtue of the termination agreement is compensation received by it by virtue of the termination agreement is compensation received by it by virtue of the termination agreement is business income. business income.
So in view of what has been discussed above, we are of the 38. So in view of what has been discussed above, we are of the 38. So in view of what has been discussed above, we are of the considered view that answer to questions framed in para 11 & 17 of the considered view that answer to questions framed in para 11 & 17 of the considered view that answer to questions framed in para 11 & 17 of the order is "compensation r order is "compensation received by the assessee from RDG to the tune of eceived by the assessee from RDG to the tune of Rs. 92,76,62,688/ Rs. 92,76,62,688/- in out of court settlement is a business income and in out of court settlement is a business income and not an income assessed to capital gains as claimed by the assessee" and not an income assessed to capital gains as claimed by the assessee" and not an income assessed to capital gains as claimed by the assessee" and as such provisions contained under section 28(ii)(c) read with se as such provisions contained under section 28(ii)(c) read with se as such provisions contained under section 28(ii)(c) read with section 28(va)(a) of the Act are attracted. Hence, the Ld. CIT(A) has rightly 28(va)(a) of the Act are attracted. Hence, the Ld. CIT(A) has rightly 28(va)(a) of the Act are attracted. Hence, the Ld. CIT(A) has rightly confirmed the addition of Rs. 92,76,62,688/ confirmed the addition of Rs. 92,76,62,688/- as business income. as business income. Consequently ground No. 1 is determined against the assessee. Consequently ground No. 1 is determined against the assessee. Consequently ground No. 1 is determined against the assessee. 10.2 Before us, the ld Counsel for the assessee, h Before us, the ld Counsel for the assessee, howe owever submitted that although the ITAT upheld the addition made by the AO but that although the ITAT upheld the addition made by the AO but that although the ITAT upheld the addition made by the AO but same does not attract penalty proceedings for the reason ot attract penalty proceedings for the reason ot attract penalty proceedings for the reason that mere disallowance of legal claim does not attract penalty as held by the disallowance of legal claim does not attract penalty as held by the disallowance of legal claim does not attract penalty as held by the Hon’ble Supreme Court in the case of CIT v. R CIT v. Reliance Hon’ble Supreme Court in the case of Petroproudcts Pvt. Ltd. (SC) 322 ITR 158 (SC). Petroproudcts Pvt. Ltd. (SC) 322 ITR 158 (SC). Further, the Ld. Further, the Ld. counsel for the assessee submitted that all counsel for the assessee submitted that all information information in respect of the compensation for the compensation for termination of agreement were were duly filed before the Assessing Officer before the Assessing Officer. He referred to computa e referred to computation of the total income available on paper book page 3 income available on paper book page 39. He further referred to 9. He further referred to note-7, which is part of notes to which is part of notes to computation of income income available on page 48 of the Paper Book. The relevant page 48 of the Paper Book. The relevant note is reproduced as is reproduced as under:
7. During the previous year, the assessee company had to discontinue its 7. During the previous year, the assessee company had to discontinue its 7. During the previous year, the assessee company had to discontinue its marketing and distribution arrangement with Roche Diagnostics Gmbh marketing and distribution arrangement with Roche Diagnostics Gmbh marketing and distribution arrangement with Roche Diagnostics Gmbh vide the Settlement Agreement dated 20.10.2004. Under the said vide the Settlement Agreement dated 20.10.2004. Under the said vide the Settlement Agreement dated 20.10.2004. Under the said Settlement Agreement the assessee company has receive Settlement Agreement the assessee company has received an amount of d an amount of Rs.98,45,50,688/ Rs.98,45,50,688/-consisting of Rs.5,68,88,000/- being amount received being amount received for instruments and Rs.92,76,62,688/ for instruments and Rs.92,76,62,688/- for termination of the agreement. for termination of the agreement. Accordingly, Rs.5,68,88,000/ Rs.5,68,88,000/- has been reduced from the block of plant & has been reduced from the block of plant & machinery for the purpose machinery for the purpose of calculating Depreciation as per IT Act / Rules. of calculating Depreciation as per IT Act / Rules. As regards Rs.92,76,62,688/ As regards Rs.92,76,62,688/-, received in lieu of termination of right to , received in lieu of termination of right to carry-on a business, the same is subject to Long Term Capital Gains u/s. on a business, the same is subject to Long Term Capital Gains u/s. on a business, the same is subject to Long Term Capital Gains u/s. 45, (refer Schedule 3). Cost of acquisition for the same i 45, (refer Schedule 3). Cost of acquisition for the same is adopted as Nil in s adopted as Nil in accordance with Section 55(2). accordance with Section 55(2).
10.3 Further, the assessee referred to paper book page 186 Further, the assessee referred to paper book page 186 Further, the assessee referred to paper book page 186, which is note No. 5 to Schedule 22 of the balance sheet. The assessee No. 5 to Schedule 22 of the balance sheet. The assessee also No. 5 to Schedule 22 of the balance sheet. The assessee explained the nature of the payment received during the course of explained the nature of the payment received during the course explained the nature of the payment received during the course the assessment proceedings, assessment proceedings, therefore, in our opinion, the assessee therefore, in our opinion, the assessee has filed all particulars material to the issue in dispute. Therefore, has filed all particulars material to the issue in dispute. has filed all particulars material to the issue in dispute. no penalty could be levied merely for the o penalty could be levied merely for the reason that claim reason that claim of the assessee has not been accepted assessee has not been accepted, as held by the Hon’bl as held by the Hon’ble Supreme Court in the case of Reliance Petroproducts Ltd. (supra). The Court in the case of Reliance Petroproducts Ltd. (supra) Court in the case of Reliance Petroproducts Ltd. (supra) relevant part of the decision of Hon’ble relevant part of the decision of Hon’ble Supreme Supreme Court is reproduced as under: reproduced as under:
“7. As against this, learned Counsel appearing on behalf of the respondent 7. As against this, learned Counsel appearing on behalf of the respondent 7. As against this, learned Counsel appearing on behalf of the respondent pointed out that the language pointed out that the language of section 271(1)(c) had to be strictly of section 271(1)(c) had to be strictly construed, this being a taxing statute and more particularly the one construed, this being a taxing statute and more particularly the one construed, this being a taxing statute and more particularly the one providing for penalty. It was pointed out that unless the wording directly providing for penalty. It was pointed out that unless the wording directly providing for penalty. It was pointed out that unless the wording directly covered the assessee and the fact situation herein, there could not be a covered the assessee and the fact situation herein, there could not be a covered the assessee and the fact situation herein, there could not be any penalty under the Act. It was pointed out that there was no concealment or penalty under the Act. It was pointed out that there was no concealment or penalty under the Act. It was pointed out that there was no concealment or any inaccurate particulars regarding the income were submitted in the any inaccurate particulars regarding the income were submitted in the any inaccurate particulars regarding the income were submitted in the Return. Section 271(1)(c) is as under : Return. Section 271(1)(c) is as under :— "271. (1) If the Assessing Officer or the Commissioner (Appeals) or "271. (1) If the Assessing Officer or the Commissioner (Appeals) or "271. (1) If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied Commissioner in the course of any proceedings under this Act, is satisfied Commissioner in the course of any proceedings under this Act, is satisfied that any person that any person— (c )has concealed the particulars of his income or furnished inaccurate (c )has concealed the particulars of his income or furnished inaccurate (c )has concealed the particulars of his income or furnished inaccurate particulars of such income." particulars of such income." A glance at this provision would suggest that in order to be covered, there A glance at this provision would suggest that in order to be covered, there A glance at this provision would suggest that in order to be covered, there has to be concealment of the particulars of the income of the assessee. has to be concealment of the particulars of the income of the assessee. has to be concealment of the particulars of the income of the assessee. Secondly, the assessee must have furnished inaccurate particulars of his Secondly, the assessee must have furnished inaccurate particulars of his Secondly, the assessee must have furnished inaccurate particulars of his income. Present is not the case of income. Present is not the case of concealment of the income. That is not concealment of the income. That is not the case of the Revenue either. However, the learned Counsel for revenue the case of the Revenue either. However, the learned Counsel for revenue the case of the Revenue either. However, the learned Counsel for revenue suggested that by making incorrect claim for the expenditure on interest, suggested that by making incorrect claim for the expenditure on interest, suggested that by making incorrect claim for the expenditure on interest, the assessee has furnished inaccurate particulars of the income. As pe the assessee has furnished inaccurate particulars of the income. As pe 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 Law Lexicon, the meaning of the word "particular" is a detail or details (in 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. plural sense); the details of a claim, or the separate items of an account. 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 Therefore, the word "particulars" used in the section 271(1)(c) would Therefore, the word "particulars" used in the section 271(1)(c) would embrace the meaning of the deta embrace the meaning of the details of the claim made. It is an admitted ils of the claim made. It is an admitted position in the present case that no information given in the Return was position in the present case that no information given in the Return was 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 found to be incorrect or inaccurate. It is not as if any statement made or 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 any detail supplied was found to be factually incorrect. Hence, at any detail supplied was found to be factually incorrect. Hence, at least, prima facie, the assessee cannot be held guilty of furnishing inaccurate prima facie, the assessee cannot be held guilty of furnishing inaccurate prima facie, the assessee cannot be held guilty of furnishing inaccurate particulars. The learned Counsel argued that "submitting an incorrect claim particulars. The learned Counsel argued that "submitting an incorrect claim particulars. The learned Counsel argued that "submitting an incorrect claim in law for the expenditure on interest would amount to giving inaccurate in law for the expenditure on interest would amount to giving inaccurate in law for the expenditure on interest would amount to giving inaccurate particulars of such income" particulars of such income". We do not think that such can be the . We do not think that such can be the interpretation of the concerned words. The words are plain and simple. In interpretation of the concerned words. The words are plain and simple. In 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 order to expose the assessee to the penalty unless the case is strictly order to expose the assessee to the penalty unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By a covered by the provision, the penalty provision cannot be invoked. By a covered by the provision, the penalty provision cannot be invoked. By any stretch of imagination, making an incorrect claim in law cannot tantamount stretch of imagination, making an incorrect claim in law cannot tantamount stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing inaccurate particulars. In CIT v. Atul Mohan Bindal [2009] 9 to furnishing inaccurate particulars. In CIT v. Atul Mohan Bindal [2009] 9 to furnishing inaccurate particulars. In CIT v. Atul Mohan Bindal [2009] 9 SCC 589, where this Court was considering the same provision, the Court SCC 589, where this Court was considering the same provision, the Court SCC 589, where this Court was considering the same provision, the Court observed that the Assessing Off observed that the Assessing Officer has to be satisfied that a person has icer has to be satisfied that a person has concealed the particulars of his income or furnished inaccurate particulars concealed the particulars of his income or furnished inaccurate particulars concealed the particulars of his income or furnished inaccurate particulars of such income. This Court referred to another decision of this Court in of such income. This Court referred to another decision of this Court in of such income. This Court referred to another decision of this Court in Union of India v. Dharamendra Textile Processors [2008] 13 SCC 3 Union of India v. Dharamendra Textile Processors [2008] 13 SCC 3 Union of India v. Dharamendra Textile Processors [2008] 13 SCC 369, as also, the decision in Union of India v. Rajasthan Spg. & Wvg. Mills [2009] also, the decision in Union of India v. Rajasthan Spg. & Wvg. Mills [2009] also, the decision in Union of India v. Rajasthan Spg. & Wvg. Mills [2009] 13 SCC 448 and reiterated in para 13 that : 13 SCC 448 and reiterated in para 13 that :— "13. It goes without saying that for applicability of section 271(1)( c), "13. It goes without saying that for applicability of section 271(1)( c), "13. It goes without saying that for applicability of section 271(1)( c), conditions stated therein must exist." conditions stated therein must exist."
Therefore, it 8. Therefore, it is obvious that it must be shown that the conditions under is obvious that it must be shown that the conditions under section 271(1)(c) must exist before the penalty is imposed. There can be no section 271(1)(c) must exist before the penalty is imposed. There can be no section 271(1)(c) must exist before the penalty is imposed. There can be no dispute that everything would depend upon the Return filed because that dispute that everything would depend upon the Return filed because that dispute that everything would depend upon the Return filed because that is the only document, where the assessee can fur is the only document, where the assessee can furnish the particulars of his nish the particulars of his income. When such particulars are found to be inaccurate, the liability income. When such particulars are found to be inaccurate, the liability income. When such particulars are found to be inaccurate, the liability would arise. In Dilip N. Shroff v. Jt. CIT [2007] 6 SCC 329, this Court would arise. In Dilip N. Shroff v. Jt. CIT [2007] 6 SCC 329, this Court would arise. In Dilip N. Shroff v. Jt. CIT [2007] 6 SCC 329, this Court explained the terms "concealment of income" and "furnishing inaccurate explained the terms "concealment of income" and "furnishing inaccurate explained the terms "concealment of income" and "furnishing inaccurate particulars". The Court went on to hold therein that in order to attract the The Court went on to hold therein that in order to attract the The Court went on to hold therein that in order to attract the penalty under section 271(1)(c), mens rea was necessary, as according to penalty under section 271(1)(c), mens rea was necessary, as according to penalty under section 271(1)(c), mens rea was necessary, as according to the Court, the word "inaccurate" signified a deliberate act or omission on the Court, the word "inaccurate" signified a deliberate act or omission on the Court, the word "inaccurate" signified a deliberate act or omission on behalf of the assessee. It went on to hold t behalf of the assessee. It went on to hold that Clause (iii) of section 271(1) hat Clause (iii) of section 271(1) provided for a discretionary jurisdiction upon the Assessing Authority, provided for a discretionary jurisdiction upon the Assessing Authority, provided for a discretionary jurisdiction upon the Assessing Authority, inasmuch as the amount of penalty could not be less than the amount of inasmuch as the amount of penalty could not be less than the amount of inasmuch as the amount of penalty could not be less than the amount of tax sought to be evaded by reason of such concealment of particulars of tax sought to be evaded by reason of such concealment of particulars of tax sought to be evaded by reason of such concealment of particulars of income, but it may not exceed three times thereof. It was pointed out that , but it may not exceed three times thereof. It was pointed out that , but it may not exceed three times thereof. It was pointed out that the term "inaccurate particulars" was not defined anywhere in the Act and, the term "inaccurate particulars" was not defined anywhere in the Act and, the term "inaccurate particulars" was not defined anywhere in the Act and, therefore, it was held that furnishing of an assessment of the value of the therefore, it was held that furnishing of an assessment of the value of the therefore, it was held that furnishing of an assessment of the value of the property may not by itself be furnis property may not by itself be furnishing inaccurate particulars. It was hing inaccurate particulars. It was further held that the assessee must be found to have failed to prove that further held that the assessee must be found to have failed to prove that further held that the assessee must be found to have failed to prove that his explanation is not only not bona fide but all the facts relating to the his explanation is not only not bona fide but all the facts relating to the his explanation is not only not bona fide but all the facts relating to the same and material to the computation of his income were not disclosed same and material to the computation of his income were not disclosed same and material to the computation of his income were not disclosed by him. It was then held that the explanation must be preceded by a finding him. It was then held that the explanation must be preceded by a finding him. It was then held that the explanation must be preceded by a finding as to how and in what manner, the assessee had furnished the particulars as to how and in what manner, the assessee had furnished the particulars as to how and in what manner, the assessee had furnished the particulars of his income. The Court ultimately went on to hold that the element of of his income. The Court ultimately went on to hold that the element of of his income. The Court ultimately went on to hold that the element of mens rea was essential. It was only mens rea was essential. It was only on the point of mens rea that the on the point of mens rea that the judgment in Dilip N. Shroff's case (supra) was upset. In Dharamendra judgment in Dilip N. Shroff's case (supra) was upset. In Dharamendra judgment in Dilip N. Shroff's case (supra) was upset. In Dharamendra Textile Processors' case (supra), after quoting from section 271 extensively Textile Processors' case (supra), after quoting from section 271 extensively Textile Processors' case (supra), after quoting from section 271 extensively and also considering section 271(1)(c), the Court came to the conclusion and also considering section 271(1)(c), the Court came to the conclusion and also considering section 271(1)(c), the Court came to the conclusion that since section 271(1)(c) indicated the element of strict liability on the at since section 271(1)(c) indicated the element of strict liability on the at since section 271(1)(c) indicated the element of strict liability on the assessee for the concealment or for giving inaccurate particulars while assessee for the concealment or for giving inaccurate particulars while assessee for the concealment or for giving inaccurate particulars while filing Return, there was no necessity of mens rea. The Court went on to filing Return, there was no necessity of mens rea. The Court went on to filing Return, there was no necessity of mens rea. The Court went on to hold that the objective behind enact hold that the objective behind enactment of section 271(1)(c) read with ment of section 271(1)(c) read with Explanations indicated with the said section was for providing remedy for Explanations indicated with the said section was for providing remedy for Explanations indicated with the said section was for providing remedy for loss of revenue and such a penalty was a civil liability and, therefore, loss of revenue and such a penalty was a civil liability and, therefore, loss of revenue and such a penalty was a civil liability and, therefore, wilful concealment is not an essential ingredient for attracting civil li wilful concealment is not an essential ingredient for attracting civil li wilful concealment is not an essential ingredient for attracting civil liability as was the case in the matter of prosecution under section 276C of the Act. as was the case in the matter of prosecution under section 276C of the Act. as was the case in the matter of prosecution under section 276C of the Act. The basic reason why decision in Dilip N. Shroff's case (supra) was The basic reason why decision in Dilip N. Shroff's case (supra) was The basic reason why decision in Dilip N. Shroff's case (supra) was overruled by this Court in Dharamendra Textile Processors' case (supra), overruled by this Court in Dharamendra Textile Processors' case (supra), overruled by this Court in Dharamendra Textile Processors' case (supra), was that according to this Cour was that according to this Court the effect and difference between section t the effect and difference between section 271(1)(c) and section 276C of the Act was lost sight of in case of Dilip N. 271(1)(c) and section 276C of the Act was lost sight of in case of Dilip N. 271(1)(c) and section 276C of the Act was lost sight of in case of Dilip N. Shroff (supra). However, it must be pointed out that in Dharamendra Shroff (supra). However, it must be pointed out that in Dharamendra Shroff (supra). However, it must be pointed out that in Dharamendra Textile Processors' case (supra), no fault was found with the reason Textile Processors' case (supra), no fault was found with the reason Textile Processors' case (supra), no fault was found with the reasoning in the decision in Dilip N. Shroff's case (supra), where the Court explained the the decision in Dilip N. Shroff's case (supra), where the Court explained the the decision in Dilip N. Shroff's case (supra), where the Court explained the meaning of the terms "conceal" and "inaccurate". It was only the ultimate meaning of the terms "conceal" and "inaccurate". It was only the ultimate meaning of the terms "conceal" and "inaccurate". It was only the ultimate inference in Dilip N. Shroff's case (supra) to the effect that mens rea was inference in Dilip N. Shroff's case (supra) to the effect that mens rea was inference in Dilip N. Shroff's case (supra) to the effect that mens rea was an essential ingredie an essential ingredient for the penalty under section 271(1)(c) that the nt for the penalty under section 271(1)(c) that the decision in Dilip N. Shroff's case (supra) was overruled. decision in Dilip N. Shroff's case (supra) was overruled.” 10.4 Further, the Hon’ble Further, the Hon’ble jurisdictional High Court in the case of High Court in the case of Bennett Coleman & Co ltd in (2013) 33 taxmann.com Bennett Coleman & Co ltd in (2013) 33 taxmann.com Bennett Coleman & Co ltd in (2013) 33 taxmann.com 227(Bombay) have deleted the have deleted the penalty on account of change of penalty on account of change of head of income by the assessing officer particularly when he could head of income by the assessing officer particularly when he could head of income by the assessing officer particularly when he could not establish concealment of income or furnishing of inaccurate not establish concealment of income or furnishing of inaccurate not establish concealment of income or furnishing of inaccurate particulars of income by stating incorrect facts by the assessee. The particulars of income by stating incorrect facts by the assessee. The particulars of income by stating incorrect facts by the assessee. The relevant finding of H relevant finding of Hon’ble Bombay high Court is reproduced as on’ble Bombay high Court is reproduced as under:
3. So far as question (ii) is concerned, the respondent 3. So far as question (ii) is concerned, the respondent 3. So far as question (ii) is concerned, the respondent-assessee had claimed premium on redemption of debentures as income from capital claimed premium on redemption of debentures as income from capital claimed premium on redemption of debentures as income from capital gains. Whereas the assessing officer held that the redemption of gains. Whereas the assessing officer held that the redemption of gains. Whereas the assessing officer held that the redemption of debentures is revenue receipt assessable to tax under the head income tures is revenue receipt assessable to tax under the head income tures is revenue receipt assessable to tax under the head income from other sources. The CIT(A) confirmed the order of the assessing officer. from other sources. The CIT(A) confirmed the order of the assessing officer. from other sources. The CIT(A) confirmed the order of the assessing officer. The respondent The respondent-assessee did not file any further appeal on the quantum assessee did not file any further appeal on the quantum proceedings. Thereafter, the assessing offi proceedings. Thereafter, the assessing officer levied penalty under Section cer levied penalty under Section 271(1)(c) of the Act on the respondent 271(1)(c) of the Act on the respondent-assessee. The CIT(A) also confirmed assessee. The CIT(A) also confirmed the levy of penalty upon the respondent the levy of penalty upon the respondent-assessee. On further appeal, the assessee. On further appeal, the Tribunal held that there is no dispute with regard to the fact that the Tribunal held that there is no dispute with regard to the fact that the Tribunal held that there is no dispute with regard to the fact that the respondent-assessee had disclosed that the amount received as premium assessee had disclosed that the amount received as premium assessee had disclosed that the amount received as premium on redemption of debentures in its computation of income. Further, the on redemption of debentures in its computation of income. Further, the on redemption of debentures in its computation of income. Further, the Tribunal records that it is not the case of the department that the Tribunal records that it is not the case of the department that the Tribunal records that it is not the case of the department that the respondent-assessee had concealed any particulars assessee had concealed any particulars of income or furnished of income or furnished inaccurate particulars of income by stating incorrect facts. The assessing inaccurate particulars of income by stating incorrect facts. The assessing inaccurate particulars of income by stating incorrect facts. The assessing officer considered the said premium received on redemption of debentures officer considered the said premium received on redemption of debentures officer considered the said premium received on redemption of debentures to be taxable under the head income from other sources while the to be taxable under the head income from other sources while the to be taxable under the head income from other sources while the respondent-assessee assessee considered the same to be taxable under the head considered the same to be taxable under the head capital gains. In view of the fact that there is only a change of head of capital gains. In view of the fact that there is only a change of head of capital gains. In view of the fact that there is only a change of head of income and in the absence of any facts that the claim of the assessee was income and in the absence of any facts that the claim of the assessee was income and in the absence of any facts that the claim of the assessee was not bonafide, the Tribunal deleted the penalty imposed unde not bonafide, the Tribunal deleted the penalty imposed unde not bonafide, the Tribunal deleted the penalty imposed under Section 271(1)(c) of the Act. The revenue has not been able to point out that the 271(1)(c) of the Act. The revenue has not been able to point out that the 271(1)(c) of the Act. The revenue has not been able to point out that the finding of the Tribunal is perverse. In these circumstances, we see no finding of the Tribunal is perverse. In these circumstances, we see no finding of the Tribunal is perverse. In these circumstances, we see no reason to entertain the proposed question (ii). reason to entertain the proposed question (ii).
10.5 Similarly, Hon’ble Bombay High Court in the cas Similarly, Hon’ble Bombay High Court in the cas Similarly, Hon’ble Bombay High Court in the case of CIT Vs Procter & Gamble Hygiene and Healthcare Ltd in Procter & Gamble Hygiene and Healthcare Ltd in Procter & Gamble Hygiene and Healthcare Ltd in ITA No. 946 of 2012 deleted the penalty for change of head of income from “ deleted the penalty for change of head of income from “ deleted the penalty for change of head of income from “ Income from House property” m House property” to “Business income usiness income”. Therefore, respectfully relying on the decision relying on the decisions of the Hon’ble Supreme of the Hon’ble Supreme Court and jurisdictional high court referred above, i and jurisdictional high court referred above, in our opinion no n our opinion no penalty could be sustained in respect of addition of compensation penalty could be sustained in respect of addition of compensation penalty could be sustained in respect of addition of compensation received on termination of the agreement. Thus received on termination of the agreement. Thus, the penalty in respect of this issue is hereby d respect of this issue is hereby deleted.
10.6 The grounds raised in the cross The grounds raised in the cross-objection of the assessee are objection of the assessee are accordingly allowed.
10.7 Since, the penalty levied is penalty levied is deleted on the merit therefore, deleted on the merit therefore, determination of the legal issue raised in the appeal of the Revenue determination of the legal issue raised in the appeal of the determination of the legal issue raised in the appeal of the is rendered academic is rendered academic, which we are not adjudicating adjudicating upon at this stage and left open and left open. Accordingly, the appeal of the Revenue is . Accordingly, the appeal of the Revenue is dismissed as infructuous. dismissed as infructuous.
In the result, the cross In the result, the cross-objection of the assessee is allowed objection of the assessee is allowed whereas appeal of the Revenue is dismissed. whereas appeal of the Revenue is dismissed.
Order pronounced in the open Court on unced in the open Court on 30/08/2024. /08/2024.