M/S. MOUNT EVEREST MINERAL WATER LIMITED,NEW DELHI vs. DCIT, NEW DELHI

Per L.P. Sahu, Accountant Member:

These two cross appeals are directed by the assessee and the revenue

against the order of ld. CIT(A)-VIII, New Delhi dated 31.01.2014 in relation to

penalty u/s. 271(1)(c) of the Income-tax Act, 1961 (for short ‘the Act’) for the

assessment year 2008-09 on the following grounds :

2 ITA Nos. 1498 & 2283/Del./2014

Grounds raised in Revenue’s appeal:

“1. Whether on the facts and circumstances of the case & in law, the Ld. CIT(A) erred in deleting penalty u/s 271(1)(c) against addition made by A.O and accepted by the assessee itself of Rs. 1,86,97,395/- towards provision for doubtful debts?

Grounds raised in assessee’s appeal:

“1. That on law as well as on the facts and in the circumstances of the case, the Ld. CIT(Appeals) grossly erred in not quashing the notice and thereby the penalty order passed by the Assessing Officer under section 271(1)(c) of the Act, as illegal and invalid since none of the conditions precedent for levy of penalty u/s 271(1)(c) of the Act existed.

3 ITA Nos. 1498 & 2283/Del./2014

the case of ACIT vs. M/s Transceivers India Ltd [ITA No. 196(Del)/2OO7] (Delhi) wherein it has been held that assessment proceedings and penalty proceedings are separate and mere acceptance of addition in quantum proceedings cannot lead to levy of penalty.

the business of manufacturing and sale of packaged drinking water and

trading of power horse-energy drinks. The assessment in this case was

completed u/s. 143(3) on 13.12.2010 at loss of (-) Rs.2,65,36,440/- as against

returned loss of (-) Rs.4,71,75,033/- after making following

additions/disallowances :

(i). disallowance for provision for doubtful debts : Rs.1,86,97,395/- (ii). Addition on a/c of Disallowance u/s. 14A : Rs. 15,15,457/- (iii). Disallowance for excess provision for MD’s Salary: Rs. 1,75,742/-

4 ITA Nos. 1498 & 2283/Del./2014

After recording satisfaction in the assessment order, penalty proceedings u/s.

271(1)(c) were subsequently initiated by the AO by issuing show cause notice

to the assessee.

amount of Rs.1,86,97,395/- to the Profit & Loss account on account of

provision for doubtful debts. The assessee was confronted on this issue during

the assessment proceedings that why this amount should not be added to the

total income of assessee as this is only a provision and not an actual

expenditure. The assessee accepted the discrepancy vide its submissions

dated 29.10.2010 submitting that by mistake it was not added back in the

computation of taxable income. Therefore, keeping in view that it was only a

provision and not actual ascertained expenditure, the AO added the same by

disallowing the claim made in the return. Since the assessee had admitted this

disallowance, he did not challenge the same in any further appeal.

to the inadvertent mistake that the said provision for doubtful debt was not

added back to the computation of taxable income and has admitted the same

vide reply dated 29.10.2010 without being questioned offering the same for

taxation. Therefore, there was no deliberate act on the part of Assessee

5 ITA Nos. 1498 & 2283/Del./2014

Company to conceal the amount of provision or filing inaccurate particulars of

income, as the amount of doubtful debts was clearly reflected in the books of

accounts submitted before the AO. Reliance was placed on the decision of

Hon’ble Supreme Court in the case of Price Waterhouse Coopers (P) Ltd. vs.

CIT, 348 ITR 306(SC). The Assessing Officer did not accept the reply of

assessee observing that the alleged mistake is not a bona fide mistake, as it

was only during the course of assessment proceedings when the AO

specifically pointed out this discrepancy to the assessee, then the assessee

accepted the default. Had the Assessing Officer not pointed out this

discrepancy to the assessee, the assessee would not have offered the same for

taxation. Therefore, relying on the following decisions, the AO imposed

penalty on the basis of this addition :

(i). CIT vs. Zoom Communications Pvt. Ltd., 327 ITR 51 (Del.) (ii). Thakur V. Hari Prasad vs. CIT, 167 ITR 603 (AP) (iii). Union of India vs. Dharmendra Textile Processors, 166 Taxman 65(SC) (iv). K.P. Madhusudan vs. CIT, 251 ITR 99. (v). Mussadilal Ram Bharose’s case, 165 ITR 14 (SC).

assessee earned an income of Rs.3,06,59,085/- from dividends and claimed

exemption u/s. 10(33) of the Act. As per computation of income, the assessee

disallowed a sum of Rs.2,50,000/- in view of section 14A read with Rule 8D of

the Act stating that no direct expenses like interest on borrowed capital or

6 ITA Nos. 1498 & 2283/Del./2014

commission has been incurred by the assessee company to earn the exempt

income and the investments to earn such dividend income were funded from

the increase in paid up capital during the year and issue of fresh equity shares.

The AO did not accept the claim of assessee observing that the assessee failed

to file any details and evidence in support of its claim and has suo moto

disallowed a sum of Rs.2,50,000/- on estimate basis. He, therefore, computed

the disallowable expenditure as per Rule 8D at Rs.17,65,457/- and after giving

benefit of expenditure of Rs.2,50,000/- disallowed by assessee itself, made net

disallowance at Rs.15,15,457/- and added the same to the total income of the

assessee company. This disallowance stood confirmed from the stages of first

appellate Authority. In the penalty proceedings, the assessee reiterated the

submissions made in the assessment proceedings and submitted that the

assessee has neither concealed any particulars nor furnished any inaccurate

particulars of income. The AO did not accept the reply of assessee observing

that no details or evidence were submitted by assessee to justify its claim of

suo moto disallowance of Rs.2,50,000/- and such disallowance was to be

made strictly as per method provided in clause (iii) of Rule 8D(2) of the IT

Rules, 1962. The AO, therefore, imposed penalty on the basis of this addition

observing that the assessee has deliberately concealed the true particulars of

its income.

7 ITA Nos. 1498 & 2283/Del./2014

MD’s salary, the AO noticed in the assessment proceedings that the assessee

has debited an amount of Rs.1,75,742/- in the Profit & Loss Account on

account of excess provision for Managing Director’s salary, which has been

reversed in the next year. The contention of the assessee was that this

provision was made on estimate basis which was reversed in the next year.

The AO was of the view that MD’s salary is fixed as per provisions of

Companies Act, 1956, and are fixed by passing required resolutions and

approvals from appropriate authorities. Any change in the salary requires the

same procedure. Moreover, this was not the actual liability, but a provision

without any basis. He, therefore, disallowed the same. This disallowance stood

confirmed in appeal before the CIT(A). The AO imposed penalty on the basis

of this disallowance stating that the assessee had furnished inaccurate

particulars of income.

CIT(A), who deleted the penalty imposed on the basis of addition of

Rs.1,86,97,395/- to the Profit & Loss account on account of provision for

doubtful debts and sustained the penalty imposed on the basis of other two

disallowances of Rs.15,15,457/- u/s. 14A and Rs.1,75,742/- on account of

excess provision for Managing Director’s salary. Both the parties were not

8 ITA Nos. 1498 & 2283/Del./2014

satisfied with the impugned order, hence, these cross appeals by the assessee

and the Revenue.

the essential ingredients for levy of penalty u/s. 271(1)(c), i.e., concealment of

income or furnishing inaccurate particulars of income do not exist in the

instant case. It was due to inadvertent mistake that the assessee did not add

the provision for doubtful debts in the computation of taxable income. Such

provisions were also being made and offered for taxation in past and

subsequent years. The assessee company is suffering from heavy losses in the

year under consideration, hence, there was no any purported intention to

derive any tax benefit by making such claim. Reliance is placed on the decision

of Hon’ble Supreme Court in the case of Reliance Petroproducts (P) Ltd., 322

ITR 158 (SC) and in Price Waterhouse Coopers (P) Ltd. vs. CIT, 348 ITR

306(SC). Several other decisions are also relied on by the assessee.

was sustained in appeal, the ld. CIT(A) was not justified to confirm the

penalty, as it does not constitute furnishing of inaccurate particulars of

income. It was submitted that the appellant maintains the accounts on

mercantile basis wherein provisions are made on the basis of best available

9 ITA Nos. 1498 & 2283/Del./2014

estimate at the end of the year and paid in next year. Excess provision made

with respect of director’s salary was reversed in the next financial year at the

time of payment. Such provision has been reflected as contingent liability.

Therefore, merely because the disallowance was sustained in appeal does not

warrant to hold that the assessee had furnished inaccurate particulars of

income.

of penalty imposed with respect to not offering the provision of bad debts for

taxation in the computation of income. It was submitted that the assessee

offered the same to tax only when he was confronted with the fact in the

assessment proceedings. It was submitted that had the case of assessee not

been selected for scrutiny and assessee not been apprised of the above

discrepancy, there was no reason to offer the same for taxation. Therefore, the

penalty imposed for furnishing inaccurate particulars of income is sustainable

in view of the decisions relied on by the Assessing Officer. It was also

submitted that the remaining two additions stood confirmed at the appellate

stage and the assessee could not be able to properly explain as to why such

provisions were being made with respect of excess salary of MD, when there

was no such liability as the assessee was maintaining the accounts on

mercantile system of accounting. The suo moto disallowance u/s. 14A made

10 ITA Nos. 1498 & 2283/Del./2014

by assessee was based on estimate only and the assessee did not justify the

same. Therefore, the addition made by applying Rule 8D and penalty imposed

for furnishing inaccurate particulars of income are quite justified.

entire material available on record. As regards the penalty imposed with

respect to the of addition of Rs.1,86,97,395/- on account of disallowance of

provision for bad debts, a perusal of record shows that the ld. CIT(A) has

accepted the contentions of the assessee that –

(i). the company has been incurring huge losses in the past and future years and hence, there was no intended tax benefit in making this claim and;

(ii). the assessee had been adding such provision in the past and subsequent years in the computation of taxable income.

On this basis, the ld. CIT(A) observed that the mistake committed by the

assessee for not including the provision for bad debts in the computation of

taxable income was a bonafide mistake and the assessee cannot be penalized

for furnishing inaccurate particulars of income in view of the decision in the

case of Price Water Coopers (supra). We do not concur with the findings of

the ld. CIT(A). It is notable that the legislative intent behind the provisions of

11 ITA Nos. 1498 & 2283/Del./2014

section 271(1)(c) is to penalize the assessee for concealing particulars of

income and/or furnishing inaccurate particulars of such income. It is of no

consequence whether the income returned was a profit or loss. Therefore,

even if there is loss return and no tax was leviable even after disallowance,

penalty u/s 271(1)(c) was still leviable. For this view, we stand fortified by

the decision of Hon’ble Apex Court in JCIT, Surat vs Saheli Leasing &

Industries Ltd [2010] 191 TAXMAN 165 (SC). It is also evident from record

that there is no voluntary offer by the assessee to tax the provision for bad

debts, but it was only when the AO pointed out the discrepancy in the

assessment proceedings and when the assessee was cornered, then he offered

the same for taxation. The contention of assessee that it was a bona fide

inadvertent mistake on the part of assessee further does not get support from

the fact that he has been offering such provision to tax in past and subsequent

years. This fact rather goes against the assessee for the reason that the

assessee was well acquainted with law of such provision and therefore, it is

not acceptable at all that return compilation was done by one of company’s

employee, who on account of ignorance committed the said mistake, as no

support was taken from professional/tax expert. A perusal of the impugned

order further shows that the ld. CIT(A) has failed to rebut the findings

recorded by the Assessing Officer based on the decision of Hon’ble

jurisdictional High Court in the case of CIT vs. Zoom Communications Pvt. Ltd.,

12 ITA Nos. 1498 & 2283/Del./2014

327 ITR 51 (Del.), of AP High Court in Thakur V. Hari Prasad vs. CIT, 167 ITR

603 (AP) and Union of India vs. Dharmendra Textile Processors, 166 Taxman

65(SC). The decision in the case of Price Water Cooper (supra), in our opinion,

does not render any help to the assessee, as in that case, the assessee had filed

the revised return, which is not the case here. In view of decision of Hon’ble

Apex court in Dharmendra Textile Processor’s case, A.O. need not to prove

that the assessee intentionally made incorrect or submitted false information

or filed incorrect details in return of income. It is also worth consideration

that the provision for bad debt included in the computation of total income by

assessee in previous A.Yrs. 2005-06, 2006-07and 2007-08 was only for

Rs.2,46,982/-, Rs.4,43,195/- and Rs. Nil respectively and in subsequent years

2009-10 and 2010-11 was for Rs.79,37,279/- and Rs.21,37,000/- respectively

which was included in the respective computations of taxable income.

However, such provision claimed during the year under consideration was for

a huge amount of Rs.1,86,97,395/- which for want of any plausible

circumstantial or documentary evidence could not be treated to be left from

inclusion in the computation of taxable income due to inadvertent bona fide

mistake. It is significant to mention here that the assessee could have

voluntarily rectified this mistake while filing the return for the subsequent

assessment year 2009-10 where he included the provision for bad debts in the

computation of total income. The assessee had sufficient time to revise the

13 ITA Nos. 1498 & 2283/Del./2014

return for A.Y. 2008-09 upto 31.03.2010 and by that time, the scrutiny

proceedings would have also been started against the assessee as per law.

However, the assessee did not file any revised return. It was only on the query

of AO, the assessee admitted the default and offered the provision for taxation.

It, therefore, can be hardly assumed that the default was due to bonafide

inadvertent mistake on the part of assessee. We, therefore, do not find any

justification to sustain the impugned order deleting the penalty on this count,

as the AO has justifiably proved that the assessee has furnished inaccurate

particulars of income entailing penalty u/s. 271(1)(c) of the Act. Accordingly,

the penalty imposed on this account deserves to be sustained and the appeal

of the Revenue deserves to be allowed.

contentions of assessee that the disallowance u/s. 14A in the instant case was

inflicted on the legal contentions and hence, no charge can be imposed on the

assessee for concealing the particulars of income. The contention of the

assessee had been that no direct expenses like interest on borrowed capital or

commission has been incurred by the assessee company to earn the exempt

income and the investments to earn such dividend income were funded from

the increased paid up capital during the year and issue of fresh equity shares.

The ld. Authorities below have not tried to verify the contention of the

14 ITA Nos. 1498 & 2283/Del./2014

assessee from the books of account of the assessee before imposing penalty

u/s. 271(1)(c) for furnishing inaccurate particulars of income. The appellant

has submitted before us audited balance sheet, which is available at page 7 of

the paper book. The balance sheet shows that there was paid up capital of

Rs.49,64,91,569/- as at 31st March, 2007,which stood increased to

Rs.1,20,88,32,009/- as at 31st March, 2008. Accordingly, there was increase in

paid up capital by Rs.71,23,40,440/- during the year under consideration. The

schedule – 4 forming part of the balance sheet shows the investment of

Rs.70,61,82,823.10 which commensurate to the increase in paid up capital.

Therefore, without verifying the explanation of the assessee to justify the suo

moto disallowance made by it, it can hardly be said that the assessee had

furnished inaccurate particulars of income. A perusal of impugned order

shows that the ld. CIT(A) has recorded a categorical finding that the assessee

has disclosed all the expenses correctly in its books of account, which has

been disregarded by the AO. However, the ld. CIT(A) has affirmed the penalty

simply because the impugned addition u/s. 14A read with Rule 8D stood

confirmed in quantum appeal and the appellant did not challenge the same in

further appeal before the Tribunal. We are not inclined to concur with this

finding of the ld. CIT(A), for the simple reason that penalty and assessment

proceedings are separate proceedings and mere confirmation of addition does

not lead to hold that the assessee had furnished inaccurate particulars of

15 ITA Nos. 1498 & 2283/Del./2014

income for imposition of penalty. Moreover, the issue involved was a

debatable issue and the assessee had furnished all material facts before the

AO based on its books of account. Besides, simply because the assessee’s claim

was not found sustainable, does not warrant to hold that the assessee had

furnished inaccurate particulars, as held by Hon’ble Apex Court in the case of

Reliance Petroproducts (P) Ltd. (supra). On the above facts of this issue,

following decisions, as relied by the assessee, go to support its stand:

(i). Ravindra Bahl vs. ADIT, 42 Taxman.com 404(Del.) (ii). ACIT vs. M/s. Transceivers India Ltd.(ITA No. 1996/Del./2007- ITAT, New Delhi. (iii). CIT vs. Jayaraj Talkies, 239 ITR-914 (Mad) (iv). Aargee Drugs vs. DCIT, 61 Taxman.com 254. (v). ACIT vs. DSL Software Ltd., 147 TTJ 67.

In view of the above narration of facts, we set aside the order of the ld. CIT(A)

on this issue and delete the penalty imposed on the basis of addition of

Rs.15,15,457/- made u/s. 14A of the Act.

provision for MD’s salary, we further do not find any justification to disturb

the penalty order on this issue. It is notable that the Managing Director’s

salary is governed by Articles of Association of the company and is fixed by

passing required resolutions and any increase/decrease in the salary requires

the same procedure. Therefore, there was no reason for the assessee to make

16 ITA Nos. 1498 & 2283/Del./2014

such provision for excess salary of Managing Director. Moreover, there is

nothing on record to rebut the finding of AO that it was a mere provision and

not the actual liability. The addition on this account was confirmed in appeal

and the assessee did not challenge the same in any further appeal. The

assessee failed to offer plausible explanation to make such provision for

excess salary, which led the AO to hold that the assessee consciously furnished

inaccurate particulars of its income. We do not find any justification to disturb

the findings of the AO and therefore, the ld. CIT(A) has rightly confirmed the

penalty on this account. Accordingly, the appeal of the assessee deserves to

be allowed in part.

allowed.

Order pronounced in the open court on 31.01.2017.

Sd/- Sd/- (I.C. SUDHIR) (L.P. SAHU) Judicial Member Accountant Member

Dated : 31.01.2017 *aks/- Copy of order forwarded to: (1) The appellant (2) The respondent (3) Commissioner (4) CIT(A) (5) Departmental Representative (6) Guard File By order

Assistant. Registrar Income Tax Appellate Tribunal Delhi Benches, New Delhi