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1 IN THE HIGH COURT OF KARNATAKA AT BANGALORE
DATED THIS THE 25th DAY OF SEPTEMBER 2013
PRESENT
THE HON’BLE MR. JUSTICE DILIP B BHOSALE
AND
THE HON’BLE MR. JUSTICE B MANOHAR
ITA.NO.340/2007
BETWEEN
THE COMMISSIONER OF INCOME TAX C R BUILDING, QUEENS ROAD BANGALORE
THE ASSISTANT COMMISSIONER OF INCOME TAX INTERNATIONAL TAXATION CIRCLE-19(1), C.R.BUILDING QUEENS ROAD, BANGALORE ... APPELLANTS
(BY SRI K P KUMAR, SR. CL. FOR M/S KING AND PATRIDGE, ADV.,)
AND
M/S MAKINO ASIA PVT LTD NOW AMALAGAMATED WITH MAKINO MACHINE TOOLS (INDIA)PVT LTD. NO.11 EPIP, OPP. SATHYA SAI BABA HOSPITAL NO.11, K.R.PURAM BANGALORE
... RESPONDENT
(BY SRI K.V. ARAVIND, ADV.,)
2 THIS ITA FILED U/S.260-A OF I.T.ACT, 1961 ARISING OUT OF ORDER DATED 15-09-2006 PASSED IN ITANO.3026/BANG/2004 FOR THE ASSESSMENT PERIOD 2002- 03, PRAYING THAT FOR THE REASONS STATED THEREIN THIS HON'BLE COURT MAY BE PLEASED TO:
I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY ITAT BANGALORE, IN ITANO.3026/BANG/2004 DATED 15-09- 2006 & CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE ASST.COMMISSIONER OF INCOME TAX, INTERNATIONAL TAXATION, CIRCLE-19(1), BANGALORE, IN THE INTEREST OF JUSTICE AND EQUITY.
THIS ITA COMING ON FOR HEARING, THIS DAY, THE COURT DELIVERED THE FOLLOWING:
ORAL JUDGMENT: (DILIP B. BHOSALE J.)
This appeal, under Section 260-A of the Income Tax Act, 1961, is directed against the order dated 15.09.2006 rendered by the Income Tax Appellate Tribunal, Bangalore, (for short ‘the Tribunal’) in ITA No.3026/Bang/2004. By this order, the Tribunal confirmed the order dated 23.07.2004 passed by the Commissioner of Income Tax (Appeals)-IV, Bangalore, (for short “the Appellate Authority”) in penalty proceedings under Section 271(1)(c) of the Act, for the Assessment year 2002-03.
3 2. When hearing of the appeal commenced, we noticed that the substantial questions of law framed in the memorandum of appeal were not happily worded and hence, with the assistance of learned counsel for the parties, we have framed the following questions for consideration and proceeded to hear the appeal on merits: “(1) Whether the Appellate Authorities were justified in setting aside the penalty levied under Section 271(1)(c) of the Act based on the judgment in Hindustan Steel Ltd. v. State of Orissa (S.C.) 83 ITR 26 without taking into consideration the findings recorded by the Assessing Officer?
(2) Whether the assessee furnished either inaccurate particulars or concealed the income while filing the return of income for the Assessment year 2002-03, as contemplated under Section 271(1)(c) of the Act, so as to attract levy of penalty under this provision?”
The facts that are relevant for deciding the questions of law are as under:-
The assessee had filed return of income for the Assessment year 1998-99 on 31.12.1999. In the return, the assessee computed the loss and sought carry forward as contemplated by Section 72 of the Act. The return filed
4 by the assessee was processed by the Assessing officer. The Assessing officer issued an intimation under Section 143(1) of the Act dated 19.09.2000. Though, an intimation was issued under Section 143(1), no further steps as contemplated by Section 143(2) and 143(3) were initiated/taken by the Assessing Officer in respect of the regular assessment for the Assessment year 1998-99.
Subsequently, the Assessing Officer initiated reassessment proceedings under Section 148 for reassessing “commission attributable to the branch”. The assessee, pursuant to the notice under Section 148, filed revised return of income for the Assessment year 1998-99 on 19.03.2003 claiming the loss. The proceedings, however, were dropped and the assessee was so informed by the Assessing Officer vide letter dated 04.04.2003. In the said letter, the Assessing Officer informed the assessee that the notice under Section 148 of the Act dated 19.03.2003 had been dropped. The assessee was further informed to take notice that their original return of income for the
5 Assessment year 1998-99 was filed belatedly i.e., on 31.12.1999, and in view thereof, the assessee was not entitled to carry forward the business loss to the subsequent years. Though the assessee was so informed by the Assessing officer, according to the assessee, no order was passed either under Section 148 or Section 143(3), or rectification of the intimation issued under Section 143(1) of the Act was made. In view thereof, the assessee informed the Assessing officer to pass such order vide letter dated 05.05.2003. Despite such request, according to the assessee, no order at any point of time was passed by the Assessing officer in respect of the Assessment year 1998-99.
Thereafter, the assessee filed return of income for the Assessment year 2002-03 on 31.10.2002. In the return for 2002-03, the assessee claimed set off of the loss carried forward of Assessment year 1998-99. The assessee filed the return of income on 31.10.2002 declaring profit under Section 115JB at Rs.18,97,490/-. The same was processed and the case was selected for
6 scrutiny with the previous approval of the Commissioner of Income Tax (International Taxation), Bangalore. In the meanwhile, the assessee filed revised return on 12.05.2003 declaring total income of Rs.31,75,180/-. In the footnote, it was made clear that income of the Assessee’s company was enhanced in view of the counting of commission from 3% to 5%. In other words, in view of the counting of commission at the rate of 5%, the income of Rs.31,75,180/- was shown in the place of Rs.18,97,490/-, as was shown in the original return.
The revised return was accordingly accepted and the assessment was completed without the benefit of set off of the loss carried forward of the Assessment year 1998-99. The Assessment order dated 30.06.2003 passed by the Assessing officer was, therefore, carried in appeal by the assessee before the Appellate Authority under Section 246-A of the Act. The Appellate Authority confirmed the order of the Assessing Officer dated 30.06.2003 and disposed of the appeal vide order dated 20.10.2003. The
7 assessee did not carry the matter further. In other words, the assessment order dated 30.06.2003 attained finality.
It appears that even before the assessment order was passed, a penalty proceedings under Section 271(1)(c) of the Act were initiated. The Assessing officer vide order dated 06.02.2004 levied 100% penalty under Section 271(1)(c)(iii) of the Act i.e., Rs.41,04,239/-. It would be necessary to notice the observations made by the Assessing officer for levying penalty, which read thus:- “The assessee company had filed its original return of income on 31.10.2002. While filing this return, the assessee company was aware that the return filed for asst.year 98-99 was belated and thus it was not entitled to carry forward the business loss. The assessee company filed a revised return of income on 12/5/20003. In that return also the assessee maintained the claim of carry forward and set- off of business loss of Rs.85,50,497/- relating to the asst.year 1998-1999. This claim in the revised was made by the assessee in spite of the fact that this office had written a letter dt.4/4/2003 as under:
“The notice u/s 148 of the I.T.Act 1961, dated 19.3.2003 is hereby dropped. You may please note that the original return for Asst.Year 1998-1999 was filed on 31-12-1999. Hence you are not entitled to carry forward the business loss for subsequent years.
8 Depreciation loss of Rs.607326/- is allowed to be carried forward”.
Thus the assessee was well aware that it was not entitled to the carry forward of business loss. In spite of the clear cut position of law and also having been in the know of things, the assessee preferred to wrongly claim the benefit of carry forward and set-off of business loss. By doing so, the assessee has managed to avoid paying interest under sec.234C since such interest is payable only on returned income and not on the assessed income. Had the assessee not claimed the set- off, it would have been liable to pay interest under sec.234C to the extent of Rs.2,99,965/-. Further, had the return been not taken up for scrutiny, the assessee would have walked away with the benefit of Rs.8,55,049/- as set off business loss, which was clearly not allowable. Such commission of error cannot be termed bonafide, accidental or unintentional, especially to carry forward of the business loss for the A.Y.98-99. Further, the assessee had claimed a set-off of Rs.1,35,32,414/- on account of business loss pertaining to A.Y.98- 99 in its original return of income, whereas in its revised return, the assessee had claimed a deduction of only Rs.85,50,497/- which clearly shows that the asseessee had applied its mind while furnishing the revised return and it was not the case of simply copying the amount of carry forward of loss from the original return”.
The assessee carried the order passed by the Assessing officer dated 06.02.2004 in appeal before the Appellate Authority, bearing Appeal No.ITA 219/R-19/CIT
9 (A) IV/2003-04. The Appellate authority allowed the appeal vide judgment and order dated 23.07.2004 and cancelled the penalty levied for the following reasons:-
“I have considered the facts of the case. The assessee had loss for A.Y.1998-99 in respect of which it filed a return of income showing the above loss and claiming its carry forward. The assessee cannot be faulted for doing this even though the return was late. In the intimation dated 19/02/2000 made by the Assessing Officer, the returned loss has been accepted. No mention has been made that the claim of carry forward of business loss is not allowed in view of delay in filing of return of income. In the second return for A.Y.1998-99 filed, the assessee returns a revised business loss and claims its carry forward. The Assessing Officer issued a notice u/s 148 for this year but dropped the proceedings u/s 148 vide letter dated 04/04/03 in which he mentions that the claim of carry forward of loss is not being allowed as the return is late. In reponse to this, the assessee has written a letter dated 05/05/03 requesting for completion of assessment proceedings for A.Y. 1998-99. For A.Y. 2002-03, set off of loss for A.Y.98-99 was made in the original return based on the return filed for A.Y.98-99. In the revised return filed on 12/5/03, the claim of set off of loss for A.Y.98-99 was maintained. The Assessing Officer has taken objection to this on the ground that he had already intimated to the assessee that the loss for A.Y.98-99 was not carried forward. The assessee’s response is that it had sought reassessment for A.Y.98-99 vide its
10 subsequent letter and the claim for set off of loss of A.Y.98-99 was based on its return as well as original intimation which had not been rectified.
Having regard to the facts of the case, I do not see any justification for levy of penalty u/s 271(1)(c). There is merit in the assessee’s plea that in the original intimation, the claim of carry forward of loss had not be negatived. Even otherwise, there appears to be no intention to deceive the Assessing Officer and claim excess set off considering that scrutiny assessment or 147 assessment was being made for all the years starting from A.Y.1997- 98. For the A.Y.2002-03 also scrutiny assessment was in progress when the revised return was made. This is not a case where the assessee has omitted to disclose certain crucial facts or has deliberately withheld certain information from the Department. At best there is technical mistake in claiming set off of loss when the law does not allow it though as mentioned earlier the mistake is in consonance with the intimation u/s 143(3) received from the Assessing Officer.
The decision of Supreme Court in Hindustan Steel Ltd. V State of Orissa 83 ITR 26 (SC) would be applicable to a case like this since the furnishing of inaccurate particulars, if any, if at best technical in nature. The assessee has shown reasonable cause for filing his return of income as he did and having regard to Sec.273, penalty should not have been levied.”
The order of the Appellate Authroity was thereafter carried in further appeal before the Tribunal by the Revenue in ITA No.3026/Bang/2004. The Tribunal
11 confirmed the order passed by the Appellate Authority. It is against this backdrop, the questions as framed in the beginning of the judgment fall for our consideration in the present appeal.
At the outset, we would like to reproduce Section 271 of the Act to the extent it is necessary, which reads thus:- 271.(1) If the [Assessing] Officer or the[***][Commissioner (Appeals)][or the Commissioner] in the course of any proceedings under this Act, is satisfied that any person -
(a) xxxxxxxx
(b)xxxxxxxxx
(c) has concealed the particulars of his income or [***] furnished inaccurate particulars of [such income or]
(d) xxxxxxxxxx
(i) xxxxxxxxx (ii) xxxxxxxxx (iii) in the case referred to in clause (c) [or clause (d)], [in addition to tax, if any, payable] by him, a sum which shall not be less than, but which shall not exceed [three times], the amount of tax sought to be evaded by reason of the concealment of particulars of his income [or fringe benefits] or the furnishing of inaccurate particulars of such income [or fringe benefits].
A glance at this provision would show that in order to be covered, there has to be “concealment of particulars of income” of the assessee or the assessee must have “furnished inaccurate particulars of his income”.
In the present case, though Mr.Aravind, learned Standing Counsel appearing for the revenue could not state whether the act of the assessee amounts to concealment of income or furnishing inaccurate particulars, we proceeded to examine the case to find out both. In order to understand the purport of Section 271(1)(c), it would be advantageous to look into the observations made by the Supreme Court while considering the very same provision in Commissioner of Income-Tax vs. Reliance Petroproducts Pvt. Ltd., (2010) 322 ITR 158. The relevant observations in the said report read thus:
“In order to expose the assessee to the penalty unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing inaccurate
13 particulars. In CIT v. Atul Mohan Bindal (2009) 9 SCC 589, where this court was considering the same provision, the court observed that the Assessing Officer has to be satisfied that a person has concealed the particulars of his income or furnished inaccurate particulars of such income. This court referred to another decision of this court in Union of India v. Dharamendra Textile Processors (2008) 13 SCC 369 as also, the decision in Union of India v. Rajasthan Spg. & Wvg. Mills (2009) 13 SCC 448 and reiterated in paragraph 13 that (page 13 of 317 ITR) :
“13. It goes without saying that for applicability of section 271(1)(c), conditions stated therein must exist.”
Therefore, it is obvious that it must be shown that the conditions under section 271(1)(c) must exist before the penalty is imposed. There can be no dispute that everything would depend upon the return filed because that is the only document, where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise.”
(emphasis supplied)
The Supreme Court, then, in the judgment, proceeded to observe that merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the Revenue, that by itself would not, in our opinion, attract the penalty under Section 271(1)(c) of the Act. Further, the Supreme Court observed that “if we
14 accept the contention of the Revenue then in case of every return where the claim made is not accepted by the AO for any reason, the assessee will invite penalty under Section 271(1)(c) of the Act. That is clearly not intendment of the Legislature”.
Thus, it appears to us that the power to levy penalty or not is discretionary in nature and that has to be exercised by AO on the facts and circumstances of each case. In order to expose the assessee to the penalty unless the case is strictly covered by the provision, the penalty provision cannot be invoked. It is also clear, making an incorrect claim in law would not tantamount to furnishing inaccurate particulars. The word “particulars” used in Section 271(1)(c) would embrace the meaning of details of the claim made. It is not the case of the revenue that, in the present case, information given in the return of Income filed for the assessment year 2002-03 was either incorrect or inaccurate. In other words, the details supplied in the return in respect of loss
15 suffered in the year 1998-99 were factually correct. It is in this backdrop, we would like to consider the submission advanced on behalf of the revenue to examine whether the assessee was guilty of furnishing inaccurate particulars.
Learned Counsel for the revenue submitted that the assessee was informed by the AO vide letter dated 4.4.2003 that the assessee was not entitled to carry forward the business loss for subsequent years since the return of income for the assessment year 1998-99 was filed after the due date. Despite such intimation, he submitted, the assessee dared to file revised return on 12.5.2003 once again claiming set off of the loss carried forward of the assessment year 1998-99. Thereby, he submitted that the act of seeking set off of loss despite the letter dated 4.4.2003 would amount to not only the concealment of income but also furnishing inaccurate particulars. He further submitted that Section 139(3) and Section 80 of the Act do not permit such assessee to seek
16 set off of the loss carried forward of the assessment year 1998-99. On the other hand, Mr.K.P.Kumar, learned Senior counsel, invited our attention to the aforementioned judgment of the Supreme Court in Reliance Petroproducts Pvt. Ltd., to contend that by no stretch of imagination, claiming of the set off of loss carried forward of the assessment year 1998-99 could be termed either concealment of income or furnishing of inaccurate particulars. In support of his contention, he placed reliance upon the judgment of the Supreme Court in Hindustan Steel Ltd. –vs- State of Orissa (1972) 83 ITR 26 and in T.Ashok Pai –vs- Commissioner of Income-Tax (2007) 292 ITR 11 (SC).
In Hindustan Steel Limited (supra) the Supreme Court was dealing with similar provisions, as is 271(1)(c) of the Act, in Orissa Sales Tax Act namely Section 25(1)(a) while dealing with this provision, the Supreme Court made the following observations, which read thus:
“Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute. Those in charge of the affairs of the company in failing to register the company as a dealer acted in the honest and genuine belief that the company was not a dealer. Granting that they erred, no case for imposing penalty was made out.”
In T.Ashok Pai (supra) the Supreme Court, while examining the expression “inaccurate particulars” as occurred in Section 271(1)(c) after looking into dictionary meaning the word ‘inaccurate’ observed thus:
“The term “inaccurate particulars” is not defined. Furnishing of an assessment of value of the property may not by itself be furnishing of inaccurate particulars.
Even if the explanations are taken recourse to, a finding has to be arrived at having regard to clause (A) of Explanation 1 that the Assessing Officer is required to arrive at a finding that the explanation offered by an assessee, in the event he offers one was false. He must be found to have failed to prove that such explanation is not only not bonafide but all the
18 facts relating to the same and material to the income were not disclosed by him. Thus, apart from his explanation being not bona fide, it should have been found as of fact that he has not disclosed all the facts which were material to the computation of his income.
The explanation having regard to the decisions of this court, must be preceded by a finding as to how and in what manner he furnished the particulars of his income. It is beyond any doubt or dispute that for the said purpose the Income-tax Officer must arrive at his satisfaction in this behalf. (See CIT v. Ram Commercial Enterprises (2000) 246 ITR 568 (Delhi) and Diwan Enterprises v. CIT (2000) 246 ITR 571 (Delhi).
The order imposing penalty is quasi- criminal in nature and, thus, the burden lies on the Department to establish that the assessee had concealed his income. Since the burden of proof in penalty proceedings varies from that in the assessment proceeding, a finding in an assessment proceeding that a particular receipt is income cannot automatically be adopted, though a finding in the assessment proceeding constitutes good evidence in the penalty proceeding. In the penalty proceedings, thus, the authorities must consider the matter afresh as the question has to be considered from a different angle.
It is now a well-settled principle of law that the more stringent the law, the more strict a construction thereof would be necessary. Even when the burden is required to be discharged by an assessee, it would not be as heavy as the prosecution (See P.N.Krishna Lal v. Government of Kerala (1995) Supp 2 SCC 187).”
At the outset, in our opinion, claiming set off of the loss carried forward of the assessment year 1998-99 would not amount to either concealment of income or furnishing inaccurate particulars. The contention urged on behalf of the revenue was that the assessee ought not to have claimed set off of loss carried forward of the assessment year 1998-99 despite the letter dated 4.4.2003 whereby the assessee was clearly informed that he was not entitled to carry forward the business loss since the return of income for the assessment year 1998-99 was filed belatedly. It is true that a letter dated 4.4.2003 was addressed to the assessee and that he was informed accordingly. It is also true that the assessee requested by his letter dated 5.5.2003 to pass order in respect of the assessment year 1998-99 to enable the assessee to challenge the order, and despite such written request, no assessment order was passed for the year 1998-99. It is in this backdrop, revised return was filed in which the assessee claimed set off of the loss carried forward of the
20 assessment year 1998-99. As observed earlier, merely because the assessee claimed set off of the loss carried forward would not mean that there was concealment of income as alleged or such claim would amount to furnishing inaccurate particulars.
The term “inaccurate particulars” is not defined. Claiming of set off of the loss carried forward, in the present case, in our opinion, would not by itself amount to furnishing inaccurate particulars. As a matter of fact, the particulars that were furnished were based on the fact of loss. It is not in dispute that the assessee did not suffer loss or the loss shown in the return for the assessment year 1998-99 was not suffered by the assessee. That being so, in our opinion, claiming set off of the loss carried forward of the assessment year 1998-99 in the face of the letter dated 4.4.2003 would not amount to furnishing inaccurate particulars. That would at the most amount to either furnishing incorrect return of income. As observed by the Supreme Court in Reliance
21 Petroproducts Pvt., Ltd., by no stretch of imagination, making an incorrect claim in law would tantamount to furnishing inaccurate particulars.
In order to expose the assessee to penalty, unless the case is strictly covered by the provision, the penalty provision cannot be invoked. There cannot be any dispute that everything would depend upon the return filed by the assessee, because that is the only document where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. In the present case, we do not find that the assessee furnished any inaccurate particulars of his income in the return and hence the liability would not arise. It is true, the propriety demands that an assessee who is otherwise not entitled to claim set off of the loss carried forward of the business, should avoid making such claim. But, such claim, in our opinion, would not attract levy of penalty.
22 In the circumstances, we dispose of the appeal answering both the substantial questions of law in favour of the assessee and against the revenue.
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JUDGE
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