DCIT 8(1), MUMBAI vs. APTECH LTD, MUMBAI

The only issue in this appeal of Revenue is against the order of CIT(A) deleting the levy of penalty by the AO u/s 271(1)(c) of the Act on share issue management expenses of Rs.1,77,04,434/-, SAP maintenance of Rs.2,25,000/-, provision for Leave Encashment of Rs.3,49,561/- & Y2K expenses of Rs.28,19,404/-. For this Revenue has raised following two grounds: -

We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the CIT(A) in the quantum proceedings confirmed the disallowance in respect of share issue management expenses at Rs.1,77,04,434/-, SAP maintenance charges of Rs.2,25,00,000/, partly confirmed the disallowance in respect of provision of leave encashment at Rs.3,49,561/- out of total disallowance made by AO at Rs.72,26,030/- thereby deleting the balances of Rs.68,76,469/-, restricting the disallowance in respect of Y2K expenses at Rs.28,19,404/- out of total disallowance made by amounting to Rs.2,90,65,385/- thereby deleting the disallowance at Rs.2,62,45,981/-. The AO stated the penalty proceedings and levied penalty on above disallowances confirmed by the CIT(A) by observing in Para 1.6 as under: - “The assessee has not proved its case by giving any documentary evidence or the plausible explanation. The assessee has failed, to prove that it has not filed any inaccurate particulars which has resulted in reducing the profit of the company. The suppression of income by the assessee is proved beyond doubt. The assessee has even not availed of many opportunities given at the time of assessment and even at the time of penalty proceedings. From the foregoing paras, it is clear that the disallowances regarding – Share Issue Expenses of Rs.77,04,434/; SAP Maintenance Charges of Rs.2,25,000/- Provision for Leave Encashment of Rs.3,49,5611. and Y2K' Expenses of Rs.28,19,404/- are sustained by the Ld. CIT(A) and as the assessee has not preferred appeal before the Hon'ble ITAT, the disallowances to the extent have reach finality. Thus, the assessee has filed inaccurate particulars of income thereby tried to evade legitimate tax thereby attracting provisions of penalty uls.271(l)(c) which is levied hereby accordingly.

In view of the above remarks, I am of the opinion that this case is a fit case for levy of penalty uls.271(1)(c) of the IT Act, 1961. Hence, I am satisfied that the assessee has furnished inaccurate particulars of its income to the extent of the addition made.” Aggrieved, preferred appeal before CIT(A) and CIT(A) deleted the penalty on merits vide Para 1.6 as under: - “1.6 So far as, the merit of the case is concerned, the penalty has been levied on disallowance of SAP maintenance charges of Rs.2,25,000I- in which the Ld. CIT(A) has held that this allowance may be considered in AY 1999-2000 which shows that there is no concealment of income but due to difference of opinion, the expenses have been claimed in the AY 99-00 in place of the assessment year under consideration. Secondly, the provision of leave encashment of Rs.3,49,561/-, the Ld. CIT(A) has allowed the appeal on this issue, therefore the penalty is not allowable in view of the decision of Hon'ble Supreme Court in case of K.C. Builder 135 Taxman 461 (SC)

We have heard the rival contentions and gone through the facts and circumstances of the case. We have gone through the penalty order and noticed that the AO has discussed the facts regarding additions made by the AO on each item, wherein CIT(A) has confirmed the addition. The AO has further discussed the fact that the CIT(A) has restricted the disallowance in respect to share issue management expenses at Rs.77,4,434, SAP maintenance charges at Rs.2,25,000/- provisions for levy encashment at Rs.3,49,561/- and Y2K expenses at Rs.28,19,404/-. According to AO the ITAT has also dismissed the Revenue’s appeal and confirmed the findings of CIT(A) and AO has taken that very basis for levy of penalty for furnishing of inaccurate particulars of income by the assessee. We have reproduced the findings of the AO levying penalty and reasons given on merits. From the above reasons noted by the AO, it is noticed that mere basis for levy of penalty is the disallowance made by the AO and have been confirmed by CIT(A) and ITAT and disallowance to that extent have reached penalty. The entire basis of the AO for levying penalty for furnishing of inaccurate particulars of income is that only. In such circumstances, we are of the view that the assessment proceedings are quite distinct from the penalty proceedings, though order of assessment is a good piece of evidence but it is not of a conclusive nature. In the present case, the penalty for furnishing of inaccurate particulars by the assessee u/s 271(1)(c) of the Act is levied only on the basis that the disallowance is confirmed by appellate authorities i.e. the CIT(A) and ITAT. According to us, the disallowance confirmed and findings recorded by the CIT(A) or Tribunal in quantum appeal cannot be decisive or concluded factor in the penalty proceedings. In our view, the assessee has filed explanation for claiming of share issued management expenses, SAP maintenance charges, Provision for levy engagement and Y2K expenses and the same are disallowed due to difference of opinion that the expenses have to be claimed in A.Y. 1999-2000 instead the current assessment year. Even otherwise the AO has levied consolidated penalty on all the items of disallowance while adjudicating the issue without elaborating itemized issue for levy of penalty. Another aspect of the issue is that the assessee has filed explanation before the AO during penalty proceedings and which has not been negated by the AO or not proved to be false.

In view of the provisions of section 271(1)(c)of the Act, disclosure which has been made in any part of the return which is incorrect or false to the knowledge of the assessee and if that fact is established, such disclosure cannot take it out from the purview of the act of concealment of particulars of income or act of furnishing inaccurate particulars for the purpose of levy of penalty. But we are of the view that the process of inquiry into the correctness, truthfulness or accuracy of the particulars furnished by the assessee cannot be closed at the threshold by looking at the return. That would negative and render otiose the very provisions of the statute. We are of the view that as per rule of evidence, there is distinction between set of facts “not proved” and facts disproved and facts proved. Benefit of the principle that mere non-satisfactory nature of explanation furnished cannot amount to proof of falsity of explanation furnished can apply in case the fact-finding authority reaches to a stage where it can only conclude that the fact alleged is “not proved” which would result that except rejection of the explanation furnished by the assessee, there is no material to sustain the plea of concealment. But, on the other hand, if the state of affairs reveals a stage where one can positively reach a conclusion that the fact alleged is proved or disproved, the principle that mere rejection of explanation cannot result in levy of penalty will have no application. To reach this stage also, inquiry will have to be undertaken of the disclosure made in the return or in the statement annexed to the return and to arrive at a finding whether the particulars disclosed are truthful, or false or not proved to be satisfactory. In the first case, it would be a positive case of no concealment, in the second stage, it would be a positive case of concealment and in the third case, benefit of doubt will go in favour of assessee. But in either case, inquiry must proceed from the stage the alleged disclosure has taken place and not stop at that stage and close the inquiry at the threshold on the abstract principle that mere rejection of explanation does not result into levy of penalty. In the present case also the Revenue has no where proved the allegation of concealment despite explanation offered by the assessee. The AO has made disallowance of expenses without making any enquiry. The actual position in law is that merely because the assessee’s addition has been confirmed, that cannot automatically bring in levy of penalty for concealment. If the assessee offers an explanation, the Revenue authorities have to consider the acceptability of the explanation and pass necessary orders. In the present case, the Revenue has not rejected the explanation of the assessee and merely levied the penalty on the basis that the expenses are for disallowed.

Accordingly, we are of the view that this penalty levied by AO is without any basis and hence CIT(A) rightly deleted the same on merits. We confirmed the order of CIT(A) and dismiss this issue of Revenue’s appeal.

As regards to the issue raised by the learned Counsel for the assessee that the Revenue has not challenged findings of CIT(A) in respect to levy of penalty on non- existent company. The findings recorded by the CIT(A) reads as under:-

In the result, the appeal of the Revenue is dismissed. Order pronounced in the open court on 08-12-2016.