FLSMITH MINERALS (P) LTD.,CHENNAI vs. DCIT, CHENNAI

आदेश /O R D E R

PER S. JAYARAMAN, ACCOUNTANT MEMBER:

The assessee filed this appeal against the order of the

Commissioner of Income Tax (Appeals)-II, Chennai in ITA No. 411/2013-14

dated 16.01.2014.

:-2-: I.T.A. N0. 1279/Mds/2014

Limited) is a company, engaged in the business of design and supply of

automation systems to cement and other industries In the assessment made

for the assessment year 2003-04 on 10.03.2006, the Assessing Officer made

various additions and disallowances and initiated penalty proceedings u/s.

271(1)(c) . Assessee appealed against that assessment order, the CIT(A)

confirmed the additions/disallowance of (i) depreciation claimed on let out

properties at Rs. 4,32,251/- and (ii) reversal of warranty provision of earlier

years of Rs. 87,84,696/-. Consequent to the order of the CIT (A), the

Assessing Officer initiated penalty proceedings, gave opportunity of being

heard, after considering all the objections and the details submitted by the

assesse, levied penalty at Rs. 33,87,230/- being 100% of the tax sought to

be evaded. Aggrieved, the assessee filed an appeal before the CIT(A). The

CIT(A) dismissed the appeal.

grounds:

a. The Commissioner of Income Tax (Appeals) erred in rejecting the appeal of the Appellant herein, vide order dated 16.01.2014, confirming the penalty u/s. 271(1)(c) of the Act levied vide order dated 30.03.2010. b. The Commissioner of Income Tax (Appeals) erred in confirming the levy of penalty with respect to the claim of depreciation on leased factory building in the absence of concealment or furnishing of

:-3-: I.T.A. N0. 1279/Mds/2014

inaccurate particulars in this regard. The provisions of Sec. 271(1)(c) are not attracted in the present case. c. The lower authorities ought to have noted that it is entitled to depreciation in respect of the factory building irrespective of whether the income therefrom offered to tax under the head 'business' or 'other sources'. The claim is thus in order. d. In any event, the eligibility to depreciation is a legal issue and any difference in interpretation thereof does not result in concealment or furnishing of accurate particulars. The fact that the Appellant did not challenge the rejection aim of depreciation does not impact the levy of penalty which is to be levied on the basis of the applicable provisions. e. The Commissioner of Income Tax (Appeals) erred in confirming the levy of penalty on the basis of non-reversal of provisions for warranty relating to assessment years 1999-2000 and 2000-01. The authorities have noted the position that the appeals in this regard were still pending before the Income Tax Appellate Tribunal. Thus, there was no finality with regard to the issue till the order of the Jurisdictional High Court in T.C.(A) No.263 of 2007 dated 9.6.2009 and 7.12.2009. Upon pronouncement thereof, the provisions stand reversed in full. The levy of penalty in such circumstances is wholly unjustified. f. The order of the Commissioner of Income-tax (Appeals) confirming the levy of penalty proceeds on assumptions and presumptions. This is wholly contrary to law. The levy of tax and penalty is to be completed de novo in respect of every assessment year and observations in regard to other periods cannot form the basis of levy of penalty for other periods. This is all the more so in the case of levy of penalty.”

building at Arakkonam which was not used for its business from the

:-4-: I.T.A. N0. 1279/Mds/2014

assessment year 1999-2000 onwards. It let out this unused factory buildings

to one of its group concerns, received rental income during the financial year

2002-03 and admitted the income under the head income from 'house

property' in its return filed for the a y 2003-04. However, the assessee

claimed a depreciation of Rs.4,32,251/- on those factory buildings also, as if it

was used for the assessee's business. The Assessing Officer in the

assessment order held that since the rental income is offered to tax under

the head income from 'house property' , the assessee is not eligible to claim

depreciation on such let out buildings and disallowed the assessee's claim of

depreciation. The CIT(A) confirmed the disallowance, on which the AO levied

the penalty and the CIT(A) confirmed the levy. The AR pleaded this issue on

the lines of ground nos (b) to (d) of the appeal grounds extracted above.

4.1 Per contra, the DR relied on the C’sIT(A) finding that the assessee's

claim that it had an option to offer the rental income to tax under the head

'income from other sources' where it can claim depreciation u/s. 57(ii) of the

Act, is not correct. Though it is a factory building, what was let-out was only

the building. There are no plant and machinery included in the said let-out.

Thus ,the rental income is not a composite rent, in order to offer it under the

head 'income for other sources'. The assessee's rental income from factory

building is, therefore, indisputably assessable under the head income from

'house property' only. In fact the assessee, who has sufficient professional

:-5-: I.T.A. N0. 1279/Mds/2014

advise, itself offered the rental income under the head income from 'house

property'. Therefore, assessee’s explanation is devoid of ally merits. Further,

if the assessee wants to offer the rental income under the head 'income for

other sources' and claim depreciation u/s.57(ii) , it will not be entitled for

standard deduction of 30% of the rentals u/s.24(a) . In other words, if the

assessee wants to claim depreciation u/s.57(ii) by offering the rental income

to tax under the head 'income for other sources', it has to loose the benefit of

deduction of 30% of the rentals u/s. 24(a). But the intentions of the assessee

are otherwise. On one hand, by offering the rental income under the head

income from 'house property', it has claimed deduction of 30% of the rentals

u/s.24(a). At the same time, it has also claimed depreciation on the same let-

out buildings under section 32 . This is a clear double deduction, which is not

permitted in the Act. Further, the fact of claiming depreciation on the let-out

buildings has come to the notice of the Assessing Officer only during the

course of assessment proceedings. Thus, there is a clear concealment of

taxable income, by furnishing inaccurate particulars, on account of claiming

depreciation of Rs.4,32,251/- on the let-out buildings. Therefore ,the

Assessing Officer has rightly concluded that the claim of depreciation on let-

out buildings is a concealment of income by furnishing inaccurate particulars,

for levying penalty u/s. 271 (1)(c) .

:-6-: I.T.A. N0. 1279/Mds/2014

material.From the above, it is clear that the assessee, on one hand, by

admitting the rental income under the head income from 'house property', has

claimed deduction of 30% of the rentals u/s.24(a) . At the same time, it has

also claimed depreciation on the same let-out buildings under section 32.

Thus, there is a double deduction claim, which is not permitted in the Act.

Further, the fact of claiming depreciation on the let-out buildings has come to

the notice of the Assessing Officer only during the course of assessment

proceedings. Thus, there is a clear concealment of taxable income, by

furnishing inaccurate particulars, on account of claiming depreciation of

Rs.4,32,251/- on the let-out buildings. Therefore, the assessee’s explanation

is found to be false within the scope of Explanation1 rws 271(1)( c). On such

facts and circumstances, the Assessing Officer and the CIT(A) have rightly

concluded that the claim of depreciation on let-out buildings is a concealment

of income by furnishing inaccurate particulars and hence the levy penalty u/s.

271 (1)(c) on this issue is confirmed.

In some of these projects, as per the terms and conditions, the assessee is

liable for certain warranties. In its accounts (P&L account), the assessee is

showing the entire income on the credit side and debiting the warranty

liabilities “by way of provisions for warranties". When the warranty period is

:-7-: I.T.A. N0. 1279/Mds/2014

expired and where there are no warranty claims from the contractees, the

assessee is recognizing the said amount as income by crediting the same by

way of "warranty provisions no longer required - written back". The returns

were also being filed on the same lines. This is the consistent method of

accounting followed by the assessee. In the scrutiny assessments made for

ays 1997 -98 to 2002-03, the Assessing Officer disallowed assessee's claims of

'provisions for warranties" debited in P&L account holding that they are

unascertained liabilities. The CIT (A) confirmed the Assessing Officer's action.

For the current a y 2003-04 also , the books of accounts were maintained in

the same manner . However, in the 'computation of taxable income

statement' , the assessee reduced the amounts of "warranty provisions no

longer required - written back", on the ground that the corresponding

provisions for warranties in the ays. 1997-98 to 2000-01 were disallowed by

the Assessing Officer. Subsequently, the ITAT had allowed the assessee's

appeals on 'provision for warranty claims' as a deduction. Hence, the

Assessing Officer while doing the assessment for ay 2003-04 considered the

'warranty provision written back' at Rs.87,74,691/- pertaining to ays.1999-00

and 2000-01, which was claimed as deduction in the computation of income,

as the income and added to the taxable income. The CIT (A) confirmed the

disallowance, on which the AO levied the penalty and the CIT (A) confirmed

the levy.

:-8-: I.T.A. N0. 1279/Mds/2014

6.1 In this regard, the AR pleaded that the assessee's claim is that the

amount added as income represents the 'provisions for warranties' created in

a ys.1999-00 and 2000-01, against such additions it filed appeals before the

ITAT which was pending at the time of filing the revised return and submitted

the chronological events as under :

12.12.2002 ITAT dismissed appeals of AYs 1997-98 & 1998-99 thus confirming the disallowance of provision for warranty 24.11.2003 ROI of A.Y. 2003-04 was filed on 24.11.2003, wherein the reversal of the warranty provisions of AYs. 1997-98 to 2000-01 was reduced in computation statement. In that the provision for warranties created & debited in P&L a/c of this year was not claimed as deduction 21.07.2014 ITAT allowed the Miscellaneous Petition of assessee and deleted the addition of 'provisions for warranties' in A.Ys 1997-98 & 1998-99 18.10.2004 AO issued first notice u/s.143(2) for A.Y.2003-04 31.03.2005 Assessee filed revised ROI for A.Y.2003-04 offering the reversal of the warranty provisions of AYs 1997-98 & 1998- 99 to tax. At the same time the provisions for warranties created in F.Y.2002-03 were also claimed as deduction in this revised ROI 10.03.2006 Assessment u/s.143(3) was made by bringing the reversal of the warranty provisions of RS.87,84,696 of AYs 1999-00 & 2000-01 to tax. 29.03.2007 ITAT allowed the Assessee's appeals and deleted the addition of 'provisions for warranties' made by the AO in AYs 1999-00 & 2000-01

:-9-: I.T.A. N0. 1279/Mds/2014

31.03.2008 CIT(A) confirmed the additions made by the AO for this year 16.05.2017 Revenue's appeals before the High Court for AYs.1997-98, 1998-99, 1999-2000 & 2000-01 filed and are pending even today and argued that as on the date of filing the original return of ay.2003-

04 on 24.11.2003, the assessee lost its appeals up to ITAT level. Therefore,

the assessee had a reason in not offering the reversal of the provisions of

earlier years, though the same was recognized as revenue and credited to the

P&L account of F.Y.2002-03. Similarly, the assessee has not claimed the

current year's warranty provisions, as deduction, even though they are

debited in the P&L account of F.Y. 2002-03. However, the assessee company

had filed miscellaneous application against the orders of ITAT in ays.1997-98

and 1998-99. The ITAT while passing the orders on miscellaneous applications

for ays.1997-98 and 1998-99, on 21.07.2004, held that the warranty

provisions debited in the P&L accounts are allowable deductions. Therefore,

as on 21.07.2004, the issue of allowability of "provisions for warranties", has

been held in favour of the assessee by the ITAT. On receipt of the orders of

ITAT of ays.1997-98 and 1998-99, the assessee filed a revised return of

income for a y .2003-04, in which the assessee -

(i) Considered and offered the reversal of warranty provisions of

a ys.1997- 98 and 1998-99 as the income of the year (A.Y.2003-

04); and

:-10-: I.T.A. N0. 1279/Mds/2014

(ii) Considered and claimed the current year's provisions for

warranty as expenditure (deduction) of the year.

While considering and offering the reversal of warranty provisions of

the earlier years as the income of F.Y.2003-04, the assessee company has

taken the provisions claimed in the ays.1997-98 and 1998-99 only. The

reversal of warranty provisions of Rs 87,74,696/-, pertaining to the ays.1999-

2000 and 2001-02, were not considered by the assessee as income in the

revised return as the corresponding appeals were still pending before the

ITAT as on the date of filing the revised return. The AR further argued on the

lines of ground nos (e) & (f) of the appeal grounds extracted above .

6.2 Per contra, the DR submitted relying on the order of the CIT(A) stating

that firstly, though the appeals of ays.1999- 2000 and 2000-01 are still

pending before the ITAT, the issue has been decided in favour of the

assessee in the immediate two preceding ays.1997-97 and 1998-98. Since the

facts are common and the issue in recurring and in continuation the said

decision, by all probability, would have been followed in following ays.1999-

2000 and 2000-01 also. Hence the assessee was well aware that it is, by all

probability, is going to win the appeals of the following two ays. 1999-2000

and 2000-01 also. Secondly, the assessee has been following the system of

claiming the 'provisions for warranty' as expenditure by debiting to the P&L

account; and reversal of the 'warranty provisions no longer required' as

:-11-: I.T.A. N0. 1279/Mds/2014

income by crediting in the P&L account. This is a consistent practice by the

assessee including the current year. Therefore, when the assessee itself had

recognized the (reversal of warranty provisions of ay s. 1997-98 to 2000-01 as

the income of the FY.2002-03 in its books of accounts by crediting the same

in the P&L account, it should have included the same in its taxable income,

especially when the ITAT held the issue of allowability of 'provisions for

warranty' in favour of the assessee. In such a situation, the assessee's act of

offering the 'reversal of the warranty provisions' of only ays.1997 -97 and

1998-99 and not those of a. ys. 1999-00 and 2000-01, is a smart and

deliberate attempt to defraud the revenue. When the issue is decided by the

ITAT in the first two years and likely to be followed in the following years

(where the appeals are pending), the assessee should consider the same for

all the years, especially when the decision is in line with the method of

accounting and recognising the income in its books of accounts. Any failure in

this regard, will amount to concealment of income or furnishing of inaccurate

particulars.

material. From the above, it is clear that the assessee has admitted the

income for the period for which the ITAT has decided the appeals ie for ays

1997 & 1998 in its revised return. It’s explanation that its appeals for ays,

1999-00 and 2000-01 was pending before the ITAT as on the date of filing

:-12-: I.T.A. N0. 1279/Mds/2014

the revised return for ay 2003-04 and hence it did not admit the income

related to those ays is a fact, as per the chronological events extracted,

supra. Neither the AO nor the CIT (A) found that this explanation of the

assessee to be false. Hence, on this issue, there is no ground to levying

penalty u/s 271(1) (c) read with Explnation1. In view of that the penalty

levied on this issue is directed to be deleted. All the grounds of appeal on this

issue is allowed.

Order pronounced on 18th August, 2017 at Chennai.

Sd/- Sd/- (एन एन एन.आर एन आर आर.एस आर एस एस . . . .गणेशन एस गणेशन गणेशन) गणेशन (एसजयरामन एसजयरामन एसजयरामन) एसजयरामन (N.R.S. GANESAN) (S. JAYARAMAN) �याियकसद�य �याियकसद�य/Judicial Member �याियकसद�य �याियकसद�य लेखासद�य लेखासद�य/Accountant Member लेखासद�य लेखासद�य

चे�ई/Chennai, �दनांक/Dated: 18th August, 2017 JPV आदेशक��ितिलिपअ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकरआयु� (अपील)/CIT(A) 4. आयकरआयु�/CIT 5. िवभागीय�ितिनिध/DR 6. गाड#फाईल/GF