THE COMMISSIONER OF INCOME TAX vs. M/S MWP LTD

IN THE HIGH COURT OF KARNATAKA AT BANGALORE

Dated this the 26th day of November 2013 PRESENT

THE HON’BLE MR. JUSTICE N KUMAR AND

THE HON’BLE MRS. JUSTICE RATHNAKALA

ITA No. 332 of 2007 In ITA No.332 of 2007 BETWEEN:

C.R. Building

Queens Road

Bangalore

Central Circle – 2(3)

C.R. Building

Queens Road

Bangalore

…Appellants

(By Sri K.V. Aravind & Sri B. Pramod, Advocates)

AND:

M/s. MWP Ltd., (since amalgamated with United Breweries Holdings Ltd.,

2 UP Anchorage, 5th Floor 100/1, Richmond Road Bangalore

…Respondent (By Sri D.L.N. Rao, Senior Counsel for Smt. Anuradha, Advocate)

This ITA filed U/s. 260A of I.T. Act, 1961 arising out of order dated 31-10-2006 passed in ITA No.458/Bang/2006 for the Assessment year 2002-03 praying to (i) formulate the substantial questions of law stated therein; (ii) allow the appeal and set aside the orders passed by ITAT, Bangalore in ITA No.458/Bang/2006 dated 31-06-2006 & confirm the order passed by the Appellate Commissioner confirming the order passed by the Assistant Commissioner Income Tax, Central Circle-2(3), Bangalore.

This ITA coming on for admission this day, N. KUMAR J., delivered the following:

J U D G M E N T

This appeal is preferred by the Revenue against the order passed by the Tribunal setting aside the order imposing penalty.

The assessee is a Limited Company. They are carrying on business of investment. For the assessment year 2002-03, assessee filed returns declaring loss of Rs.44,44,84,483-00. The loss comprised of the provisions

3 for diminution in the value of investment of Rs.4,40,00,000-00. The case was taken up for scrutiny under Section 143(3) of the Income Tax Act, 1961. After noticing the provisions for value of investment on 02.09.2003 a letter was addressed to the assessee seeking explanation for the reasons for providing for diminution in the value of investment in the profit and loss account. On 31.10.2003 a reply was sent relying on the Accounting Standard 13. However in the end the assessee made it clear that although the provision for diminution in the value of investment is under the provisions of the Income Tax Act, the said decline is not allowable. On receipt of the said explanation, the department wrote another letter on 04.11.2003 calling upon the assessee to categorically state whether he is withdrawing the said claim. By letter dated 07.11.2003 a reply was sent stating that claims regarding both the expenditure may be kindly be treated as withdrawn. Thereafter the Assessing Authority proceeded to pass assessment order disallowing the said claim of

4 Rs.4,40,00,000-00. Thereafter it was observed in the end of the order that ‘Penalty under u/s 271(1)(c) initiated separately’.

The assessee contested the said proceedings by contending that on the date of levy of penalty, the assessee ceased to exist inasmuch as the same was merged with the UB Holdings Ltd., vide Karnataka High Court order dated 31.08.2005. It was contended that the notice issued in proceedings is invalid. On merits, it was contended that the assessee had withdrawn the claim of diminution in value of investment with intention to buy peace. The assessee being an investment company, the diminution in value of investment was an allowable claim thereby establishing the bonafides of the assessee. They also pressed into service the Accounting Standard 13 issued by ICAI in support of their claim. The issue was debatable. However the Assessing Authority over-ruled the objections and imposed penalty.

The assessee preferred an appeal to the Commissioner of Income Tax (Appeals), which came to be dismissed.

It is against the said order, the assessee preferred an appeal to the Tribunal. The Tribunal on reconsideration of the entire material on record held that the assessee had filed the return of income declaring loss. Thereafter the claim for write down of investment loss was withdrawn during the course of assessment. Ultimately the assessment resulted in positive income of Rs.1,28,740-00. There was a further change in the total income computed as a result of rectification under Section 154, thereby final position is that the loss returned is assessed at ‘nil’. The claim of Rs.4,40,00,000-00 was also withdrawn by the assessee even before any meaningful query or investigation was carried out by the department. Being a company, it was mandatory that the account of the assessee is prepared in

6 line with the Accounting Standard as, otherwise, the results declared by the assessee would not reflect true and fair view. The withdrawal was only to buy peace from the department and to avoid litigation. After referring to the statutory provisions and the judgment of the Apex Court in the case of K.C. BUILDERS & ANOTHER Vs. ACIT (265 ITR 562) (SC), the Tribunal held that there is no case for concealment, as in this case there is no loss of revenue. Therefore the imposition of penalty was set aside.

Aggrieved by the said order, the Revenue is in appeal.

The learned Counsel for the Revenue assailing the impugned order contended that though the assessee knew that the diminution in the value of the investment is not allowable under the Income Tax Act, still the claim was made. It is only during Section 143(3) proceedings, when explanation was sought for, the said claim was withdrawn.

7 Therefore it is a case of furnishing incorrect particulars and if scrutiny proceedings had not been initiated, the assessee would have got the benefit of the diminution in value. Therefore he submits that a case for imposition of penalty was made out. Even after disallowing the said diminution in value, the assessee is not liable to pay tax as the assessee was under loss and that is no reason for not claiming penalty as held by the Apex Court. Lastly it was contended that even in the absence of a direction in the assessment order, to initiate penalty proceedings the deeming provision is applicable and proceedings initiated is in accordance with law.

Per contra, the learned Senior Counsel appearing for the assessee contended that even though the deeming provision is attracted, satisfaction of the concealment is not to be found in the order of assessment, still only if the Assessing Authority is satisfied that it is a case of concealment, he has to pass a direction for initiation

8 of proceedings. If that direction is not there in the order, the entire proceedings initiated is vitiated. Secondly he contended that diminution in value of the assets was claimed as a business loss. It was pointed out that in order to purchase peace and to avoid litigation, they have withdrawn the claim. Therefore there was no intent to conceal the said amount. Therefore, Section 271 of the Act is not attracted.

In the light of the aforesaid facts and rival contentions the substantial question of law which arises for consideration in this appeal is as under:

“Whether the Tribunal was correct in holding that penalty under Section 271(1)(c) of the Act, cannot be levied as there was no concealment, no loss of revenue and subsequent withdrawal was with no ulterior motive ?”

9 10.

Section 271(1)(c) of the Act, was the subject matter of interpretation by this Court in the case of COMMISSIONER OF INCOME TAX Vs. MANJUNATHA COTTON & GINNING FACTORY reported in (2013) 35 TAXMANN.COM 250 (KARNATAKA). Interpreting the deeming provisions it has been held as under:

“48. As the opening words of Explanation 1 makes it clear where in respect of any facts material to the computation of the total income of any person under this Act such person fails to offer an explanation or offers an explanation which is found to be false or offers an explanation which is not able to substantiate and fails to prove that such explanation is bonafide, then the amount added or disallowed in computing the total income of such person as a result thereof shall for the purposes of clause (c) of this sub- section be deemed to represent the income in respect of which particulars have been concealed. Therefore, it is clear that aforesaid instances by itself do not constitute concealment. The Assessing Officers were just writing at the end of

10 the assessment order that penalty proceedings are initiated or something to the effect. The Delhi High Court in the case of Ram Commercials has held that such a note alone in the assessment order does not satisfy the requirement of assuming jurisdiction in law in respect of the initiation of penalty proceedings. The satisfaction should be in the assessment order. The said view was also approved by the full Bench of the Delhi High Court in the case of RAMPUR ENGINEERING reported in 309 ITR 143. The said view has been approved by the Apex Court in the case of DILIP SHROFF reported in 291 ITR 591. That is the view the courts have consistently taken. After taking note of the judicial pronouncements in this regard, the Legislature thought it fit to insert Section 271(1)(B), which reads as under:

“271(1)(B) Where any amount is added or disallowed in computing the total income or loss of an assessee in any order of assessment or reassessment and the said order contains a direction for initiation of penalty proceedings under clause (c) of sub-Section (1), such an order of

11 assessment or reassessment shall be deemed to constitute satisfaction of the Assessing Officer for initiation of the penalty proceedings under the said clause (c).”

49.

By the aforesaid deeming provision a legal fiction is created. When the assessment order contains a direction for initiation of penalty proceedings such order shall deem to constitute satisfaction of the Assessing Officer for initiation of penalty proceedings under sub-clause (c) of Section 271 of the Act. As the language of Section 271 makes it clear before a direction is issued to pay penalty, the person issuing the direction must be satisfied about the condition mentioned in clause (c) of Section 271(1). The question is, whether such satisfaction should be in writing. As the satisfaction has to be in the course of any proceedings and it is at the time of computation of the total income of any person and as it results in an assessment order which has to be mandatorily in writing, the satisfaction should be found in the said order. The existence of these facts is a condition precedent for initiation of

12 penalty proceedings under Section 271. This provision is attracted once in any such assessment orders, a direction for initiation of penalty proceedings under clause (c) of sub- section (1) is made. Thereby, it means even if the order does not contain a specific finding that the assessee has concealed income or he is deemed to have concealed income because of the existence of facts which are set out in Explanation 1, if a mere direction to initiate penalty proceedings under clause (c) of sub- section (1) is found in the said order, by legal fiction, it shall be deemed to constitute satisfaction of the Assessing Officer for initiation of penalty proceedings under said clause (c). The said provision came up for interpretation by the Delhi High Court in the case of MADHUSHREE GUPTA reported in 317 ITR 107, wherein the Delhi High Court held that the satisfaction should be discernable in the assessment order. Position post amendment is not in much variance with pre- amendment. They held that provisions will fall foul of Article 14 of the Constitution if the same is not read in the manner it has read and in fact has read down the provisions to hold it

13 Constitutional. Therefore according to Delhi High Court, in post amendment and pre amendment there is not much difference and the satisfaction is required to arrived in the course of assessment proceedings and should be discernable in the assessment order. Therefore, this provision makes it abundantly clear that satisfaction of the Assessing Officer before initiation of penalty proceedings is a must. The satisfaction should be that he has concealed particulars of his income or furnished inaccurate particular of such income and even in the absence of those expressed words or findings recorded in the Assessment proceedings, if a direction as aforesaid is mentioned, it constitutes satisfaction of the Assessing Officer.

DIRECTION 50. A reading of Section clearly indicates that the assessment order should contain a direction for initiation of penalty proceedings. The meaning of the word direction is of importance. Merely saying that penalty proceedings are being initiated will not satisfy the requirement. The direction to initiate proceedings should be clear

14 and not be ambiguous. It is well settled law that fiscal statutes are to be construed strictly and more so the deeming provisions by way of legal fiction are to be construed more strictly. They have to be interpreted only for the said issue for which it has deemed and the manner in which the deeming has been contemplated to be restricted in the manner sought to be deemed. As the words used in the legal fiction or the deeming provisions of Section 271(1B) is Direction, it is imperative that the assessment order contains a direction. Use of the phrases like (a) penalty proceedings are being initiated separately and (b) penalty proceedings under Section 271(1)(c) are initiated separately, do not comply with the meaning of the word direction as contemplated even in the amended provisions of law. The direction should be clear and without any ambiguity. The word ‘direction’ has been interpreted by the decision of the Apex Court in the case of RAJENDRANATH reported in 120 ITR pg.14, where it has been held that in any event whatever else it may amount to, on its very terms the observation that the ITO is free to take action, to assess the excess in the hand of the co-owners

15 cannot be described as a direction. A direction by a statutory authority is in the nature of an order requiring positive compliance. When it is left to the option and discretion of the ITO whether or not take action, it cannot be described as a direction.

11.

In the instant case in the assessment order what has been said regarding diminution in the value of investment is as under:

“1. Provisions for diminution in the value of investment: The assessee has claimed an amount of Rs.4,40,00,000/- under this head. This has been claimed as a revenue expenditure and included in the loss of Rs.4,44,84,483/- shown under the head business or profession. On

16 enquiry it is intimated by the company that there is a diminution in the value of investment on account of the Asian Age South Ltd., It was further stated in the letter dated 2-9-2003, that according to the company it forms a part of the loss of the company. The assessee was requested to furnish factual and legal justification of the claim. In reply vide ltr. dt. 31-10-03, the procedure of valuation as per accounting standard No.13 was explained, however in the last para it was stated that the company is of the view that under the provisions of the I.T. Act, the said claim is not allowable. The company was again requested to intimate whether the claim is being withdrawn. Vide letter dt. 10-11-03, it is stated that the claim is being withdrawn. In view of this the claim of Rs.4,40,00,000/- is not considered for computation and claim disallowed.”

Thereafter, in the end, it is stated as under: “Penalty u/s 271(1)(c) initiated separately.”

17 12.

A reading of the aforesaid order makes it clear that Assessing Authority was not satisfied that there is any concealment of the intent. Further there is no direction for initiation of penalty proceedings could be gathered from the said order also. It is held in the aforesaid judgment that (a) phrases like penalty proceedings are being initiated separately (b) penalty proceedings under Section 271(1)(c) are initiated separately do not comply with the meaning of the word direction as contemplated even in the amended provisions of law. The direction should be clear and without any ambiguity. The word ‘direction’ has been interpreted by the decision of the Apex Court in the case of Rajendranath 120 ITR pg.14, where it has been held that in any event whatever else it may amount to, on its very terms the observation that the ITO is free to take action, to assess the excess in the hand of the co-owners cannot be described as a direction. A direction by a statutory authority is in the nature of an order requiring positive compliance. When it is

18 left to the option and discretion of the ITO whether or not take action, it cannot be described as a direction.

13.

In the absence of such a direction, the deeming provision is not attracted. Therefore the conditions prescribed under Section 271(1)(c) of the Act, is not attracted. Therefore the Tribunal was justified in setting aside the order passed by the Assessing Authority as well as the Appellate Authority, imposing penalty. No merits. Dismissed. The substantial question of law is answered in favour of the assessee and against the Revenue.

Sd/- JUDGE

Sd/- JUDGE

ksp/-