DCIT 8(3), MUMBAI vs. S.M. DYECHEM LTD, MUMBAI

The brief facts of the case are that assessee filed return of income for relevant AY on 30.11.2006 declaring total income of Rs. Nil. Further revised return was filed on 23.02.2007 declaring total income of Rs. Nil. The assessment order u/s 143(3) was passed on 11.12.2008 assessing the income at Nil. The Assessing Officer (AO) made the disallowance on account of debit balance written off of Rs. 2,27,88,192/- and un- reconciled income of Rs. 51,126/-,. On appeal before CIT(A) the disallowance of Rs. 54,67,146/- was sustained. After order of ld. CIT(A), the AO issued notice u/s 274 rws 271(1)(c) dated 11.12.2008. No response was made by assessee. The AO again issued notice dated 06.03.2013. The AO recorded that no response was made by assessee. Thus, the AO levied the penalty @ 100% on the tax sought to be evaded and works out the penalty of Rs. 18,40,241/- in its order dated 21.03.2013. Aggrieved, by the penalty order, the assessee filed appeal before the ld. CIT(A) wherein the entire penalty was deleted. Thus, being aggrieved by the order of ld. CIT(A), the Revenue has filed this appeal before us.

We have heard ld. DR for Revenue and ld. AR for the assessee and perused the material available on record. The Ld. DR for the Revenue supported the order of AO and would argue that the penalty was levied by AO only on the disallowance which was confirmed by ld. CIT(A). The assessee despite service of notice has not given any explanation before the AO. The AO levied the minimum penalty on the disallowance sustained by ld. CIT(A). On the other hand, ld. AR of the assessee supported the order of ld. CIT(A) and argued that out of the total write off of debit balance, only a sum of Rs. 54,67,146/- was sustained. It was further argued that it is settled law that in all cases where disallowance is made penalty is not followed automatically.

We have considered the rival contention of the parties and further gone through the orders of authorities below. The AO levied the penalty holding that on appeal before ld CIT(A) the disallowance was restricted to Rs. 54,67,146/-. The AO further concluded that on show cause notice for initiation of penalty, no explanation was furnished by assessee. During first appellate proceeding, it was submitted during the assessment proceedings the Bankers of the assesses took the possession of the under SARFESAI Act. The Bankers of assessee recommended the winding up of assessee in BIFR and in those circumstances; the assessee could not attain the assessment as well as appellate proceeding in quantum assessment. After considering the facts of the case, ld. CIT(A) concluded that assessee claimed a bad debt written off of Rs. 2,27,88,192/- which was disallowed by AO and bring back to the taxable income. On appeal, the ld. CIT(A) restricted the amount to Rs. 54,67,146/- on which penalty was levied. After considering the various decision of Hon’ble Apex Court, the ld. CIT (A) comes to the conclusion that the assessee neither concealed any particular of income nor submitted inaccurate particular to meet a claim of bad debt which was written off of in the books of account. Thus, levy of penalty u/s 271(1)(c) of the Act is not sustainable.

We have seen that the order of ld CIT(A) is supported with the sound reasoning, based on the settled legal position that mere disallowance of claim in all cases where the additions / disallowance is made penalty shall not automatically follow as held by