COMMISSIONER OF INCOME TAX vs. SHYAM TEX INTERNATIONAL LTD

ITA 321/2010 Page 1 of 7

#16 * IN THE HIGH COURT OF DELHI AT NEW DELHI

+ ITA 321/2010

COMMISSIONER OF INCOME TAX

..... Appellant

Through Ms. Sonia Mathur,

Advocate

versus

M/S. SHYAM TEX INTERNATIONAL LTD.

..... Respondent

Through Mr. O.P. Sapra, Advocate

% Date of Decision : 6th August, 2010

CORAM: HON'BLE THE CHIEF JUSTICE HON'BLE MR. JUSTICE MANMOHAN

Yes 3. Whether the judgment should be reported in the Digest?

Yes

J U D G M E N T MANMOHAN, J

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reduce its statutory liability. According to her, the respondent-assessee had not made sufficient disclosure to justify deletion of penalty of Rs. 16,10,000/- under Section 271(1)(c) of Act, 1961. 3. She lastly submitted that making a provision for encashment of leave amounted to furnishing of inaccurate particulars regarding the income of the respondent-assessee. In this connection, she relied upon a judgment of the Supreme Court in Union of India (UOI) and Ors. Vs. Dharamendra Textile Processors and Ors. reported in (2008) 306 ITR 277 (SC). 4. Upon a perusal of the impugned order, we find that the respondent-assessee had made full disclosure in the income tax return about the method of accounting employed for the subsidies. Moreover, the assessee’s provision for encashment of leave, per se cannot be said to be mala fide. In fact, ITAT in the impugned order has observed as under :- “3. We have considered the facts of the case and rival submissions. On the basis of the audit report in form no.3CD, it is clear that the assessee had made a disclosure that it was following cash method in so far as grants and subsidies are concerned. This method may not be permissible in the case of a company. At the same time, this method may not be appropriate in view of the fact that the assessee had to follow either cash or mercantile system of accounting and a hybrid system is not permissible. Nonetheless, the fact remains that the disclosure has been made in the return of income about the method in which the receipts in respect of subsidies were accounted for. When questioned as to whether the amount accrued but not received had been disclosed, it was submitted by the learned counsel that since the receipt hinges upon satisfaction of a number of conditions, there could have been no ascertainment of amount as in such a case it would amount to accrual of income. Therefore, the facts are that while method of accounting was disclosed, the amount liable to be taxed on mercantile system of accounting was not mentioned in any manner in the return of income.

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The learned DR had relied on the decision of Hon’ble Supreme Court in the case of CIT vs. Gates Foam & Rubber Company (1973) 91 ITR 467, in which it was held that to rebut the charge of furnishing inaccurate particulars of income under the fiction created by the Explanation to section 271(1)(c), the assessee has to show that his failiure to file the correct return of income did not arise from any fraud or willful neglect on its part. That was a case where a large portion of the income was diverted by making credits to the account of an agent, which was a bogus concern set up for this purpose. We find that the facts of that case and this case are distinguishable because it is not a case of diversion of income. Further, the assessee had made a disclosure in form 3CD, which may not have been accepted in assessment proceedings and addition in respect of which might have become final, but there was no diversion of income or there was no suppression of facts. The learned DR had also relied on the decision of Hon’ble Supreme Court in the case of Union of India and Others vs. Dharmendra Textile Processors & Others (2008) 306 ITR 277, in which it was held that the Explanation appended to section 271(1)(c) indicate the element of strict liability on the assessee while filing the return in respect of the concealment of income or furnishing inaccurate particulars of income. This aspect was not taken into account in the case of Dilip N. Shroff (2007) 8 SCALE 304. The Explanation were appended as a matter of remedy for loss of revenue. Therefore, the penalty was a civil liability and accordingly willful concealment was not an essential ingredient for attracting the penalty as is the case in respect of prosecution u/s 276C of the Act. In our view, this judgment holds that the issue of penalty has to be decided in terms of provisions contained in the Explanation to section 271(1)(c). Explanation-1 is applicable to the facts of the case and the assessee has furnished an explanation to the notice issued by the AO. The fact regarding accounting of subsidy on cash basis was disclosed in the return of income. The balance accrued portion of the subsidy was not included as in the perception of the assessee it was not reasonably certain whether the amount would be received or not. In our view, such a perception was not wholly unjustified and, thus, it cannot be said that the explanation was not bona fide. The learned DR had also relied on the decision of Punjab & Haryana High Court in the case of CIT vs. Lal Chand Tirath Ram (1997) 225 ITR 675. In that case, the AO noticed the difference between the stock shown in the books of account and stock kept in the warehouse. The explanation of the assessee was that some stock belonged to a third party who was a truck driver. No evidence could be produced to show that the truck driver owned agricultural land or cultivated it. In these circumstances, the explanation tendered by the assessee was held to be not substantiated by cogent and reliable evidence. Thus, the levy of penalty was upheld. We

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are of the view that the facts of that case and this case are also distinguishable for the simply reason that the assessee had made disclosure in the return of income about the method of accounting employed for the subsidies. Under such circumstances, the explanation cannot be held to be unsubstantiated.

3.1. In regard to the provision for encashment of leave, the learned counsel relied on the decision of Hon’ble Supreme Court in the case of Apollo Tyres Ltd. Vs. CIT (2002) 255 ITR 273, in which it was held that the accounts drawn in accordance with parts II and III, Schedule VI of the Companies Act, certified by the Chartered Accountant, passed in the general body meeting and submitted to the Registrar of Companies could not be reopened by the AO for the purpose of computing the book profits. On the other hand, the case of the learned DR was that the claim was not based on any certificate from the Actuary. As mentioned earlier, we are not on the issue of deciding the merits of the addition. The question before us is whether the explanation of the assessee is bona fide. A provision made on a reasonable basis in respect of liability which has been incurred by the assessee, a deduction has to be allowed, as held by Hon’ble Supreme Court in the case of Bharat Earth Movers Ltd. There is nothing on the record to show that the assessee was not liable to make payment in respect of unavailed earned leave. There may be a dispute about the quantum of the liability, which has been settled in the quantum appeal. However, it cannot be said that the claim per se was not bona fide.

3.2 Thus, we are of the view that the assessee has furnished reasonable explanation in respect of both the items, which meets the requirement of the provision contained in Explanation-1 to section 271(1)(c) of the Act. In view thereof, the levy of penalty is deleted.

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Joint CIT was overruled by this Court in Union of India v. Dharamendra Textile Processors, was that according to this Court the effect and difference between Section 271(1)(c) and Section 276C of the Act was lost sight of in the case of Dilip N. Shroff v. Joint CIT. However, it must be pointed out that in Union of India v. Dharamendra Textile Processors, no fault was found with the reasoning in the decision in Dilip N. Shroff v. Joint CIT, where the court explained the meaning of the terms “conceal” and “inaccurate”. It was only the ultimate inference in Dilip N. Shroff v. Joint CIT to the effect that mens rea was an essential ingredient for the penalty under Section 271(1)(c) that the decision in Dilip N. Shroff v. Joint CIT was overruled.

“not accurate, not exact or correct; not according to truth; erroneous; as an inaccurate statement, copy or transcript.”

12 It was tried to be suggested that section 14A of the Act specifically excluded the deductions in respect of the expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. It was further pointed out that the dividends from the shares did not form the part of the total income. It was, therefore, reiterated before us that the Assessing officer had correctly reached the conclusion that since the assessee had claimed excessive deductions knowing that they are incorrect; it amounted to concealment of income. It was tried to be argued that the falsehood in accounts can take either of the two forms; (i) an item of receipt may be suppressed

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fraudulently; (ii) an item of expenditure may be falsely (or in an exaggerated amount) claimed, and both types attempt to reduce the taxable income and, therefore, both types amount to concealment of particulars of one’s income as well as furnishing of inaccurate particulars of income. We do not agree, as the assessee had furnished all the details of its expenditure as well as income in its return, which details, in themselves, were not found to be inaccurate nor could be viewed as the concealment of income on its part. It was up to the authorities to accept its claim in the return or not. 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). If we accept the contention of the Revenue then in case of every return where the claim made is not accepted by the Assessing Officer for any reason, the assessee will invite penalty under section 271(1)(c). That is clearly not the intendment of the Legislature.”

MANMOHAN, J

CHIEF JUSTICE

AUGUST 6, 2010 rn