J.R. SHARMA OVERSEAS LTD vs. ITO WARD 4 (1),

The sole main effective ground raised by the assessee reads as follows:

We have heard arguments of both the sides and carefully perused the relevant materials placed on the record of the Tribunal. The Ld. Counsel of the assessee submitted that since the return was filed belatedly and not claim for carry forward loss of Rs.28,76,930/- was claimed and return was filed at NIL income. The Ld. Counsel also pointed out that after making additions the income reached to Rs.5,70,535/- which was further reduced to Rs.4,26,373/- when the rectification application filed by the assessee u/s 154 of the Act was allowed by the A.O.

The Ld. Counsel pointed out that in the first para of penalty order the A.O incorrectly noted that return was filed at returned loss of Rs.28,76,930/-. The Ld. Counsel also pointed out however the CIT(A) directed the A.O to recompute the penalty on Rs.5,70,335/- but this penalty is also not validly sustainable.

The Ld. Counsel submitted out that the assessee made a bonafide claim of stock written off, depreciation and expenses and there was a losses which could not be claimed due to belated filing of return. The Ld. Counsel pointed out that quantum and penalty proceedings are separate and the CIT(A) reduced the penalty to the tune of assessed income after making additions and thus the A.O passed penalty order without application of mind and by ignoring the relevant provisions of the Act. The Ld. Counsel reiterating the written synopsis dated 9/6/2016 contented that addition in quantum has resulted from difference in opinion where the bonafide claim of the assessee was not found sustainable due to adoption of adverse opinion by the authorities below, since, penalty was not leviable on the assessee.

The Ld. Counsel vehemently pointed out that regarding stock written off despite of bonafide efforts by the assessee, no deal of sale could be materialized as Ball point pens were absolute because body of the pens cracked and ink therein dried; condition of HDPE bags was not good and thus they also became absolute; computer components became absolute due to arrival of new technology in the market. The Ld. Counsel also submitted that in these circumstances the director of the company took a conscious decision in the interest of company to write off the stock as there was no point of keeping the absolute stock contended, regarding claim of depreciation and other expenses, that the incurrence and genuineness of the expenditure has not been doubted by the A.O and the same was disallowed on account of no business activity allegation which is not acceptable. The Ld. Counsel also contended that merely because no business activity was carried out during the period a company cannot be deprived form claiming expenses for running and maintaining its legal assistance. Placing reliance entire decision of Hon'ble Supreme Court in the case of CIT Vs. Reliance Petro Products Pvt. Ltd (2010) 322 ITR 158 (S.C) the Ld. Counsel submitted that where there is no finding that the assessee had either concealed particulars of its income or furnished inaccurate particulars of income or suppressed the material facts relating to computation of income penalty u/s 271(1)(c) of the Act cannot be validly levied.

The Ld. Counsel also submitted that additions on which penalty has been imposed, has been made because at difference of opinion and hence is no finding alleging that the claims of the assessee is not genuine or bogus end hence, penalty on debatable issue cannot be the following decisions/orders:

Replying to the above contentions the Ld. DR, at the outset, pointed out that the Tribunal ITAT, “H” Bench allowed appeal of the assessee and penalty was deleted by following the preposition laid down by Hon'ble Supreme Court in the case of Virtual Soft Systems Pvt. Ltd vs. CIT 289 ITR 83 (S.C) and subsequently on the Miscellaneous application filed by the Revenue i.e M.A No.528/Del/2008 the Tribunal related the order by following the ratio of the subsequent decision of Hon'ble Supreme Court in the case of CIT Vs. Gold Coin Foods Pvt. Ltd 172 Taxman 38 (S.) wherein it was held that the operation of Explanation 4 to Section 271(1)(c) of the Act being clarificatory, will have retrospective effect. The Ld. DR also pointed out that in view of subsequent division of Apex Court the penalty order has to be sustained. above submission of the Ld. DR, and contended that the Tribunal allowed the appeal only on the basis of proposition laid down by the Hon'ble Supreme Court in the case of the Virtual Soft Systems Ltd (Supra) and other contentions of the assessee on merits and regarding explanation on the additions has not been considered this leaving aside the applicability of Explanation 4 being declared as retrospective by the Hon’ble Apex Court the other contentions of the assessee on merits of the additions and consequent penalty was not considered by the Tribunal in the related order hence, the same may be considered in this second round of proceedings which clearly demonstrate that penalty on all three courts is not levaible u/s 271(1)(c) of the Act.

On careful consideration of above rival submission, at the outset, from the earlier order of the Tribunal we note that the appeal of the assessee was allowed only by following the preposition laid down by the Hon'ble Supreme Court in the case of Virtual Soft (Supra) and other contentions on merits have not been dealt therein. From the rectification order of the Tribunal dated 22-5-2009 (Supra) we note that the order of the Tribunal deleting the penalty was recalled by following the ratio of the subsequent decision of Hon'ble Supreme hearing and thus in these circumstances the appeal was reheard on other contentions and explanation of the assessee on merits and all three additions which were basis for imposing penalty on the assessee.

Therefore, in view of above, we decline to accept contention of the Ld. DR that penalty should be upheld by only following preposition laid down by Hon’ble Apex Court in the case of Gold Coin (Supra) as certainly penalty cannot be deleted on the legal ground i.e. prospective effect of Explanation 4 to Section 27(1)(c) of the Act but other submission, contentions and explanation of the assessee on the merits of the all three issues on which penalty has been levied has to be considered for the logical analysis and evaluation of the impugned order of the A.O as well as of the CIT(A).

Now in view of foregoing discussion we proceed to decide contention of the assessee on merits of the penalty. First of all we may point out that the three additions have been made during original assessment proceedings and appeal of the assessee was dismissed on account of non prosecution without any adjudication on merits. In this backdrop when we analyze the firs addition made on account of stock assessee filed letter of three different parties to whom impugned stock was shown and the same was rejected by them. Thereafter, the directors of the company took a conscious decision to write off stock considering the condition of the market and to save cost of storage etc. From the assessment order para (b) we note that the A.O has alleged that the ball pen could have been used by replacing the dried refills and HDPE bags could have been recycled but on this allegation we agree with the contention of the Ld. AR that the plastic body of ball pen has cracked and for recycling of bags the assessee is not a manufacturer but it is a simple trader who can’t recycle the absolute stock.

On the issue of disallowance regarding other deprecation and expenses we note that in the impugned order the genuineness and incurrence of expenditure has not been doubted and this disallowances have been made on the allegation of non-existence at any business activity and disallowances on these counts have been made merely because not business activity was carried out during the A.Y by the assessee. However, the addition based on the said allegations have attained finality due to dismissal of appeal on account of non- limited company, a legal entity, cannot be deprived from claiming the expenses incurred in running and maintaining the existence of a legal entity. On the basis of above, we are inclined to hold that there is no sustainable allegation by A.O in the penalty order that either the assessee has concealed particulars of its income or has furnished in accurate particulars of its income. We may point out that in the case of CIT vs. Reliance Petro Products Pvt. Ltd 322 ITR 158 (S.C) as relied by the Ld. AR , it has been held that mere disallowance of a claim cannot by itself, from the basis for initiation of penalty proceedings in absence of any material to show that the claim of the assessee was unjustified and deliberately under false premises with the interior intent to evade fiscal liability. The relevant operative part of said decision reads as follows:

Accordingly sole ground no. 2 of the assessee is allowed and impugned penalty and order of CIT(A) and the A.O are set aside and directed to delete the penalty.

In the result, appeal of the assessee is allowed.