DCIT, NEW DELHI vs. M/S. PODDAR PIGMENTS LTD., NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: ‘F’ NEW DELHI BEFORE SH. H.S. SIDHU, JUDICIAL MEMBER AND SH. O.P. KANT, ACCOUNTANT MEMBER ITA No. 2219/Del/2014 Assessment Year: 2007-08 Vs. M/s. Poddar Pigments Ltd., A- DCIT, Circle-14(1), New Delhi 283, Ground Floor, Okhla Indl. Area-1, New Delhi. PAN : AAACP1125E (Appellant) (Respondent) Appellant by Sh. F.R. Meena, Sr.DR Respondent by Sh. P.C. Parwal, FCA Date of hearing 08.08.2016 Date of pronouncement 05.10.2016 ORDER PER O.P. KANT, A.M.: This appeal by the Revenue is directed against the order dated 15/01/2014 passed by the learned Commissioner of Income-tax (Appeals) for assessment year 2007-08, wherein he allowed the appeal of the assessee against order of the Assessing Officer dated 29/03/2012 levying penalty under section 271(1)(c) of the Income-tax Act, 1961. The grounds of appeal raised by the Revenue are as under: i. On the facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals) erred in deleting the penalty made by the Assessing Officer u/s 271(1)(c) of the Act on account of additions under the head of u/s 40(a)(i) amounting to Rs.9,14,191/- and LTCG amounting to Rs.41,62,154/- holding that the assessee has not furnished any inaccurate particulars or has made any deliberate attempt to conceal income. ii. On the facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals) erred in deleting the above

2 ITA No. 2219/Del/2014 AY: 2007-08 said penalty ignoring the fact that the quantum addition on disallowance u/s 40(a)(ia) of the Act was confirmed by the first appellate authority and the assessee did not contest on the issue of LTCG. iii. The appellant craves to be allowed to add any fresh grounds of appeal and/or delete or amend any of the grounds of appeal. 2. The facts in brief of the case are that in the case of the assessee the assessment under section 143(3) of the Income Tax Act, 1961 (in short “the Act”) was passed on 18/09/2009 assessing the total income at Rs.3,83,03,325/- as against the returned income of Rs.3,55,15,180/-. The assessing officer also initiated penalty proceedings under section 271(1)(c) of the Act .The additions/disallowances made by the Assessing Officer was confirmed by the learned Commissioner of Income Tax (Appeals) vide his order dated 26/07/2010. The Assessing Officer issued a show cause for levy of penalty on the additions disallowances confirmed by the learned Commissioner of Income Tax (Appeals). The submission made by the assessee that the assessee was not liable for levy of penalty, were not considered by the Assessing Officer and he levied the penalty of Rs.18,68,590/- under section 271(1)(c) of the Act on 29/03/2012 equivalent to the 100% of the tax sought to be evaded by the assessee. Aggrieved, the assessee filed appeal before the learned Commissioner of Income-tax (Appeals), who vide the impugned order dated 15/01/2014 allowed the appeal of the assessee deleting the penalty under section 271(1)(c) of the Act on all the issues of addition/disallowances. Aggrieved, by the order of the learned Commissioner of Income-tax (Appeals), the Revenue is in appeal raising the grounds as reproduced above. The Revenue is in appeal against deletion of penalty only on two issues. The first issue is in respect of penalty under section 271(1)(c) on the addition of Rs.9,14,191/- under section 40(a)(i) of the Act. The second issue is in respect of penalty under section 271(1)(c) of the Act on the long-term capital gain

3 ITA No. 2219/Del/2014 AY: 2007-08 amounting to Rs.41,62,154/- which was not contested by the assessee before the appellate authorities. 2.1 The facts in respect of first issue are that penalty in respect of disallowance of Rs.9,14,191/- under section 40(a)(i) of the Act was levied by the Assessing Officer on the following three amounts: (i) payment of Rs.4,43,363/- made to M/s. Coperion Werner & Pfleiderer (ii) payment of Rs. 4,44,690/- made to Dr UK Thiele (iii) depreciation of Rs. 26,138/- claimed on payment of Rs. 1,74,254/- made to M/sHenchal Industrietichik for supervision and direction of machines. 2.2 While levying the penalty, the Assessing Officer observed as under: “3.1.4 Here it is important to note that it is not a case where claim of deduction was disallowed in a year but was allowable/allowed in subsequent year. Rather, in this case, since no tax was deducted at all at any point of time, even at a later date, this amount was never allowable to the assessee at any point of time even in future. Further, the income of the recipient as received by it/him from the assessee was taxable in India which would have been either offered by him to tax or at least TDS made would have gone to the government exchequer. However, because of assessee’s fault of non-deduction of tax, no tax could be realized from the recipient as it/he is a foreign national. Thus, assessee by its act also caused loss of revenue which was otherwise realizable from the recipient of the income.” 2.3 Before the learned Commissioner of Income-tax (Appeals), the assessee filed the submission, which are reproduced by the learned Commissioner of Income-tax (Appeals) as under: “The AR of the appellant submitted as under: "Submission:- A.Penalty in respect of disallowance u/s 40(a)(i) of Rs.8,88,053/- (Rs.4,43,363 + Rs.4,44,690)

4 ITA No. 2219/Del/2014 AY: 2007-08

5 ITA No. 2219/Del/2014 AY: 2007-08 inaccurate particulars were furnished. The assessee was under a bonafide belief that payment is of business profit/independent scientific activities and therefore no income has accrued to the non- resident so as to call for withholding tax u/s 195. It is not the case of any of the authorities that the explanation of the assessee is false or malafide. It is a case of difference in the interpretation as to whether the payment is of business profit/independent scientific activities or fees for technical services. The Hon'ble ITAT has upheld the disallowance only for the reason that assessee has failed to demonstrate the applicability of Article 7/14 of DTAA with Germany. Hence, on such interpretational difference and particularly when the disallowance is made u/s 40(a)(1), penalty u/s 271(l)(c) is not leviable as per the various case laws referred below:- Tanushree Basu Vs. ACIT (2013) 36 CCH 089 (Mum.)(Trib.) It was a fact that assessee had claimed expenses & same were disallowed by the AO while completing the assessment u/s 143(3) of the Act on the ground that assessee failed to deduct TDS. It was observed that the genuineness of the claim of the assessee had not been disputed by the department Therefore, it could not be said that assessee had claimed expenses which were false or not genuine. Assessee had furnished all the relevant facts concerning the claim made by it in the return filed. It was held that the AO had levied penalty in respect of said amount merely because said claim of the assessee was disallowed u/s 40(a)(ia) of the Act as assessee failed to deduct TDS thereon. In the case of CIT vs. Reliance Petro products P. Ltd., 322 ITR 158(SC) it was held that a mere making of the claim which was not sustainable in the law, by itself will not amount to furnishing inaccurate particulars of income. It was held that, in the present case, admittedly, assessee made a claim but the same was rejected and disallowed not for the reason that the claim was not genuine or was fabricated but in view of provisions of law that assessee did not deduct TDS thereon. It was opined that the ratio of judgment in the case of Reliance Petro products Ltd (supra) squarely applied to the facts of the present case and, therefore, levy of penalty was not justified. It was also observed that similar issue had also been considered in the case of ACIT vs. Mazda Ltd (2012) 33 CCH 047 (Ahd.) (Trib.), wherein, levy of penalty u/s 271(l)(c) of the Act was cancelled which was levied on account of disallowance of claim for deduction of royalty and technical know-how as per section 40(a)(ia) of the Act., as the assessee failed to deduct TDS on above payments. The ratio of the said case also applied squarely to the present case. In view of above, it was held that levy of

6 ITA No. 2219/Del/2014 AY: 2007-08 penalty, in the facts and circumstances of the case, was not in accordance with law and same was deleted. ACIT Vs. Medversity Online Ltd. (2012) 69 DTR 326 (Hyd.) (Trib.) Penalty u/s 271(l)(c) was levied on disallowance of expenditure made by invoking provisions of sec. 40(a)(ia). It was held that assessee having furnished all the relevant material facts and the audit report in the statutory form along with its return & also filed an explanation which could not be said to be not bona fide, it cannot not be said to be guilty of concealment of income or furnishing of inaccurate particular thereof, merely because certain expenses have been disallowed u/s 40(a)(ia). Further, it is a case of honest difference of opinion between the assessee and the revenue regarding the disallowance made & applicability of provisions of section 40(a)(ia). Therefore, no case for imposition of penalty u/s 271(l)(c) can be made out. ACIT vs. Global Associates (Del.)(Trib.) ITA No. 4819/Del./2012 dt. 28.06.2013 "Disallowance u/s 40(a)(ia) and u/s 14A of the Act: Both these disallowances made by the AO are legal disallowances. No inaccurate particulars were filed as far as the claim of deductions is concerned. There was no concealment of any facts with regard to the claim of the deductions. Complete details were filed during the course of assessment proceedings as asked for by the A.O. In fact it is on the basis of the details filed by the appellant that the A.O. worked out the disallowable amounts both u/s 40(a)(ia) and 14A of the Act. The expenses claimed by the appellant were genuine expenses incurred for business purposes and there are no contrary observations by the Assessing Officer. The disallowance made by the A.O. u/s 40(a)(ia) of the Act was on account of legal provision and u/s 14A of the Act by attributing expenses to the tax free income claimed by the appellant." ”. ….. The A.O. has in the last page of his order u/s 271(l)(c) levied the penalty on the assessee on the ground that "assessee has willfully furnished inaccurate particulars of income." The Ld. Commissioner of Income Tax (Appeals) held that the assessee has furnished all the required details and that hence no penalty can be levied on technical/legal disallowances u/s 14A or u/s 40(a)(ia). We on the facts of this case agree with these findings of the Ld. Commissioner of Income Tax (Appeals). We find no infirmity in the

7 ITA No. 2219/Del/2014 AY: 2007-08 conclusions drawn by the Ld. CIT(A) on this issue. In the result this ground of Revenue is dismissed." 4. The only reason given by the AO for levy of penalty is that no tax was deducted at all at any point of time, even at a later date and thus no tax could be realized from the recipient being a foreign national thus causing loss to the revenue. This cannot be a reason for levy of penalty as once the tax along with interest is recovered from the assessee by raising demand by disallowing the expenditure, no loss is caused to the revenue. Gujarat High Court in case of CIT Vs. LG Chaudhary 215 Taxman 95 (Magz.) where AO imposed penalty on assessee u/s 271(l)(c) for not deducting and depositing TDS on time, held that where there was no concealment of income or furnishing of inaccurate particulars of income by assessee, nonpayment of TDS being a technical default; deletion of penalty was justified. In view of above, penalty levied u/s 271(l)(c) on the above disallowance be deleted. B. Penalty in respect of disallowance of depreciation of Rs. 26.138/- u/s 40(a)(i) The assessee made payment of Rs. 1,74,254/- to M/s. Henchel Industrietichik for supervision and erection of machine which has been capitalized. It claimed depreciation of Rs. 26,138/- on the same being 15% of Rs. 1,74,254/-. The AO observed that as tax has not been deducted at source on the said payment, the claim of depreciation is not allowable. CIT(A) confirmed the disallowance. However, Hon'ble ITAT vide Para 7 of its order dt. 21.12.2012 deleted the disallowance bv holding since the amount paid was not debited to the P&L A/c, there cannot be any question of disallowance of depreciation or adding it back to the income of the assessee on the around that it was liable for TDS u/s 40(a)(i). Since the disallowance is deleted by Hon'ble ITAT, the penalty levied u/s 271(1)(c) on this amount be deleted.”

2.4 After considering the submission of the assessee, learned Commissioner of Income-tax (Appeals) deleted the penalty levied on the issue in dispute with following findings:

8 ITA No. 2219/Del/2014 AY: 2007-08 “5.11. The fourth issue on which penalty has been imposed by the AO is on the issue of non deduction of tax u/s 40(a)(i) on an amount of Rs.8,88,053/-. In appeal, the addition has been confirmed by the Ld. CIT(A) and the Hon'ble ITAT. 5.12. The appellant had made payments of Rs.4,43,363/- to an entity M/s Coperion Werner & Pfeerderer for sending an engineer to India for process training. The appellant stated that this payment was covered under article 7 and therefore no TDS was required to be made. 5.13. The AO stated that TDS was required to be deducted and made a disallowance u/s 40(a)(i). The addition made by the AO u/s 40(a)(i) was confirmed by the Ld. CIT(A) and the Hon'ble ITAT. The Hon'ble ITAT stated that Article 7 will not be applicable. 5.14. The appellant had further made a payment of Rs.4,44,690/- to Dr. U. K. Thele. This was for scientific services. The AO however held that the payment was for technical services and subject to TDS and therefore disallowed the amount u/s 40(a)(i). The Ld. CIT(A) and Hon'ble ITAT up held the addition. The Hon'ble ITAT observed that the payment to Dr. U. Thele was for rendering technical services not falling under Article 14 of the DTAA. 5.15. I shall now discuss whether penalty will be imposable on these amounts. All the particulars had been furnished by the appellant. All facts relating to the computation of his total income had been disclosed by him. The explanation give by the appellant appears to be bonafide. 5.16. As per the views of the AO, the Ld. CIT(A) and the Hon'ble ITAT the appellant was in default for not deducting TDS. However, there is no concealment of income or furnishing of inaccurate particulars of income. The explanation given by the appellant stating that no inaccurate particulars were filed has merit. The explanation of the appellant is bonafide. 5.17. To conclude it was seen that in respect of all the issues, all particulars had been furnished by the appellant. The AO also has not stated that particulars furnished were not correct or inaccurate. 5.18. The bonafides of the appellant can be seen from the fact that details of all the expenditure which was claimed were furnished. The AO has nowhere stated that the appellant had furnished false or

9 ITA No. 2219/Del/2014 AY: 2007-08 fabricated bills or had claimed expenditure not related to business or particulars which were not correct. The action of the appellant is not deliberate or for concealment of income. There was no concealment of material facts. There was no intention of the appellant to conceal income and evade tax and mislead the revenue. 5.19 The Hon’ble Supreme Court of Indian in K.P. Madhusudan Vs. CIT (2011) 118 TAXMAN 324 (SC) held that in the circumstances stated in the Explanation, if his failure to return his correct income was not due to fraud or neglect, he shall be not deemed to have concealed the particulars of his income or furnished inaccurate particulars thereof and consequently be liable to the penalty provided by that section. In view of the above, the onus is on the appellant to prove that there was no fraud or neglect in filing correct income, which the appellant has proved.”

2.5 Before us, learned Senior Department Representative relied on the order of the Assessing Officer and prayed that the order of the Assessing Officer might be restored. 2.6. On the other hand, the learned Authorized Representative of the assessee relied on the finding of the learned Commissioner of Income- tax(Appeals) and submitted that all the particulars in respect of the claim were filed in the return of income or before the Assessing Officer and the explanation furnished by the assessee was bona fide and, therefore, no penalty under section 271(1)(c) of the Act could be leviable on the issue of disallowance under section 40(a)(i) of the Act. The learned Authorized Representative also relied on the decision of the Tribunal in ITA No. 2572 to 2574/Ahd/2011 in the case of Sh. Vishal Neeraj Aggarwal versus DCIT, Baroda. 2.7 We have heard the rival submissions and perused material on record. From the submission of the assessee before the lower authorities, we find that the assessee has filed all the particulars in respect of the expenses incurred, which has been held to be disallowable under section 40(a)(i) of the Act. The explanation furnished

10 ITA No. 2219/Del/2014 AY: 2007-08 by the assessee in support of its claim of non-deduction of tax at source, though, has not been found correct, however, same was not malafide. According to the assessee, the payment of Rs.4,43,363/- paid to an entity M/s. Coperion Werner & Pfleiderer was covered under Article-7 of the DTAA with Germany whereas the Tribunal has held that the Article-7 was not applicable in the case of the assessee. Similarly, in respect of payment of Rs.4,44,690/- to Dr. UK Thiele, the assessee claimed that the payment was towards independent scientific activity which fall under Article 14 of DTAA with Germany, whereas the Tribunal held that the assessee failed to demonstrate that the services rendered by Dr UK Thiele are independent scientific services. The Assessing Officer has nowhere stated that the assessee has furnished false and fabricated bills or claimed expenditure which was not related to the business of the assessee. The Hon’ble Supreme Court in the case of CIT Vs. Reliance Petroproducts Private Limited has observed that making an incorrect claim in law cannot tantamount to furnishing of inaccurate particulars. The assessee has given an explanation which is found to be bonafide, thus, in our opinion the Explanation -1 to the section 271(1)(c) of the Act is not attracted in the case of the assessee and, therefore, no penalty is leviable. The Tribunal in the case of Sh. Vishal Neeraj Aggarwal (supra) after taking into account the decision of the Hon’ble Gujarat High Court in the case of CIT–IV Vs. LG Chaudhary reported in (2013) 33 taxmann.com 156 (Guj) held that disallowance under section 40(a)(ia) of the Act was due to non-payment of TDS, which was at the most technical default, and hence no penalty was leviable. The relevant finding of the Tribunal is as under: “12. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below as well as the judgement relied upon the ld.counsel for the assessee. There is no dispute with regard to the fact that the addition was made on account of non-deduction of tax. The Hon’ble

11 ITA No. 2219/Del/2014 AY: 2007-08 High Court of Gujarat in the case of CIT-IV vs. L.G.Chaudhary (supra), has held as under:- 3. We heard learned counsel, Ms. Paurami Sheth for the appellant and senior counsel, Mr. Soparkar for the respondent. Learned counsel, Ms. Sheth has argued that the Tribunal had failed to see that the assessee had failed to deduct the IDS as per law which was also deposited late and on such disallowance as has been confirmed by both CIT (Appeals) and ITAT and therefore, the imposition of penalty by Assessing Officer was just and proper. Per contra, learned senior counsel submitted that none of the elements of Section 271(1 )(c) get attracted in case of the respondent assessee. On due consideration of the submissions of both sides and on examining the orders of all the authorities, we find no reason to interfere in this appeal in as much as both the authorities namely C1T(A) and IT AT have rightly deleted the penalty observing that the disallowance was due to non-payment ofTDS, which was at the most a technical default. There being nothing to indicate any concealment of the income or furnishing of inaccurate particulars of income by the assessee, the Assessing Officer was rightly not justified in levying the penalty. 4. This being a correct approach adopted by both the authorities concurrently, this tax appeal poses no question of law and the same requires no interference and is consequently to be dismissed. ” 13. Therefore, respectfully following the judgment of Hon’ble Jurisdictional High Court, we hereby direct the Assessing Officer to delete the penalty on this amount. Thus, this ground is allowed and the appeal of the assessee for AY 2006-07 is allowed.”

2.8 Thus respectfully following the above decision no penalty is leviable in the case for disallowances towards non-deduction of tax at source. 3. Third disallowance of Rs.26,138/- under section 40(a)(i) has already been deleted by the Tribunal and, therefore, no penalty was leviable corresponding to the disallowance of Rs.26,138/-. In view of above discussion, we find that order of the learned Commissioner of

12 ITA No. 2219/Del/2014 AY: 2007-08 Income-tax (Appeals) on the issue in dispute is well reasoned and no interference is required on our part and accordingly we uphold the same. The grounds of the Revenue on the issue are dismissed. 4. The second issue contested before us is in respect of penalty levied under section 271(1)(c) of the Act in respect of disallowance of long-term capital gain of Rs.41,62,154/-. The facts in respect of the issue in dispute are that in the return of income the assessee shown long-term capital gain (LTCG) on sale of shares of M/s. Mayuka Investment Ltd. and claimed the same as exempt under section 10(38) of the Act. Before the Assessing Officer, the assessee explained that at the time of filing of return, the assessee was expecting that the CBDT would clarify to the BSE on the matter of STT but no such clarification was issued and as a result of which STT was paid on the sale of shares, accordingly, the assessee offered the long-term capital gain (LTCG) for taxation in the course of assessment proceeding. This long-term capital gain was adjusted against the brought forward long-term capital loss (LTCL). According to the Assessing Officer, this addition was not contested in appeal, therefore, he levied penalty under section 271(1)(c) of Act. The learned Commissioner of Income-tax (Appeals) held that no inaccurate particulars of income has been filed by the assessee and there is no concealment made by the assessee and hence no penalty under section 271(1)(c) of the Act was attracted in the case of the assessee. The relevant finding of the learned Commissioner of Income-tax(Appeals) on the issue in dispute is reproduced as under: “5.9 In respect of adjustment of capital gain made by the AO it is seen that the appellant had shown long term capital gain but had not set off this amount against the long term capital loss. The AO therefore set off the gains and allowed carry forward of the balance amount. 5.10 In respect of this, I do not find anywhere as to how inaccurate particulars were furnished. Nowhere has the AO claimed

13 ITA No. 2219/Del/2014 AY: 2007-08 that the particulars furnished by the AO were inaccurate or incorrect. There is no income which was concealed by the appellant. The appellant has given an explanation which in my view is clearly bonafide. In my view penalty u/s 271(1)(c) would not be attracted on this issue.” 4.1 Before us, the learned Sr. Departmental Representative relied on the finding of the Assessing Officer and submitted that the assessee has filed inaccurate particulars of income and hence the penalty was leviable in the case of the assessee. 4.2 On the other hand, learned Authorized Representative of the assessee relied on the findings of the learned Commissioner of Income Tax (Appeals). 4.3 We have heard the rival submission and perused the material on record. We find that all the particulars in respect of the sale of shares were duly filed before the Assessing Officer. The learned Authorized Representative submitted that the long-term capital gain (LTCG) was claimed as exempt by the assessee at the time of filing the return, inasmuch as, the assessee was of bonafide view that STT would be paid in the due course once the BSE would get the issue clarified from the CBDT. The correspondence of the BSE in this respect was also filed before the Assessing Officer. However, since the assessee failed to get the same clarified until the last date of revision of return of income i.e. 31/03/2008, the assessee during the course of assessment proceeding, without any show cause notice issued by the Assessing Officer, offered the long-term capital gain (LTCG) for taxation which was accepted by the Assessing Officer and he adjusted long-term capital loss (LTCL) from the long-term capital gain (LTCG) so offered. This explanation offered by the assessee has not been found false by the Assessing Officer. Further, the assessee substantiated the explanation with necessary evidence and explanation filed is bonafide and all the facts

14 ITA No. 2219/Del/2014 AY: 2007-08 relating to the explanation and material to the computation of income on the issue have been disclosed by the assessee. In view of these facts, the Explanation-1 to the section 271(1)(c) of the Act is not attracted in the case of the assessee. We may like to repeat the findings of the Hon’ble Supreme Court in the case of Reliance Petroproducts Pvt. Ltd. (supra) that making an incorrect claim in law cannot tantamount to furnish of inaccurate particulars. Thus, in our opinion, in such circumstances no penalty under section 271(1)(c) of the Act is leviable on the issue in dispute. We find that the order of the learned Commissioner of Income-tax (Appeals) on the issue in dispute is well reasoned and no interference on our part is required. Accordingly, we uphold the same. The grounds of appeal on the issue in dispute are dismissed. 5. In the result, the appeal of the Revenue is dismissed. The decision is pronounced in the open court on 5th October, 2016.

Sd/- Sd/- (H.S. SIDHU) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 5th October, 2016. Laptop/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi