UNITED INK & VARNISH CO.P.LTD,MUMBAI vs. DCIT RG 8(3), MUMBAI

In this appeal, assessee has raised the following Grounds of appeal:

The Learned Commissioner of Income Tax Appeals failed to appreciate that making of a claim/expenditure, even if it is ultimately found to be legally unacceptable, cannot tantamount to concealment or furnishing of inaccurate particulars of income so as to levy penalty.

Although assessee has raised multiple Grounds of appeal, but the solitary grievance of the assessee arises from the action of CIT(A) in sustaining penalty u/s 271(1)(c) of the Act imposed by the Assessing Officer of Rs.21,77,000/-.

Before us, the learned representative for the assessee, at the outset, pointed out that the non-filing of appeal against the quantum assessment ought not to be considered as admission of any default u/s 271(1)(c) of the Act because the appeal was not filed primarily because assessee company was a loss-making concern and subsequently even the business has been substantially reduced. Be that as it may, on each of the three additions, the plea of the learned representative was that penalty u/s 271(1)(c) of the Act is not merited. Firstly, our attention has been drawn to the discussion in para 5 of the assessment order passed u/s 143(3) of the Act dated 15.3.2013 with respect to the addition of Rs.38,58,300/- made on account of difference in purchases. The relevant discussion reveals that on being asked to furnish party-wise details of purchases exceeding Rs. 5 lacs, assessee furnished the details in terms of which total purchases from two parties amounted to Rs.5,61,36,202/-, detailed as – M/s. DSV Chemicals Pvt. Ltd. – Rs.2,81,76,701/- and M/s. United Specialty Inks Pvt. Ltd. – Rs.2,79,59,501/-. The Assessing Officer noticed that the total purchases debited in the Profit and Loss account worked out to Rs. 5,22,77,902/- and, therefore, he held that the difference in the purchases reported by the assessee in the Profit & Loss account and in the details furnished amounting to Rs.38,58,300/- was undisclosed investment in purchases. Accordingly, the sum of Rs. 38,58,300/- was added to the returned income.

On this aspect, learned representative for the assessee pointed out that the details furnished by the assessee in the course of assessment proceedings was wrong inasmuch as the amounts credited to the account of the two parties on account of credit notes and certain receipts were not taken into consideration and, therefore, the purchases detailed at Rs.5,61,36,202/- was erroneous. The learned representative submitted that assessee had no time to explain the discrepancy during assessment proceedings as the assessment order was finalized immediately after submission of the details, but assessee had moved an application seeking rectification of the mistake vide application dt. 5.4.2013 before the Assessing Officer, a copy of which has been placed in the Paper Book at pg. 10. The learned representative for the assessee also pointed out that the two parties were indeed sister-concerns, whose account was also credited on account of certain receipts and credit notes. Before us, learned representative has referred to the relevant details furnished before the Assessing Officer in the course of rectification proceedings as also in the course of penalty proceedings. Before us, the learned representative also furnished reconciliation of purchases from the two parties and pointed out that the difference of Rs. 38,58,300/- was erroneous and that the only difference which remained was of an insignificant figure of Rs.75,302/-. It was therefore contended that the penalty, if any, be retained with respect to the difference of Rs.75,302/- only.

On the other hand, the ld. DR while defending the levy of penalty has not disputed the factual matrix brought out by the learned representative for the assessee.

In our considered opinion, the facts brought out by the assessee clearly establish that the addition to the extent of Rs.38,58,300/- on account of difference in purchases is misconceived as the un-reconciled difference is only Rs. 75,302/-. No doubt, the assessment of total income has been made by the Assessing Officer based on the difference of Rs.38,58,300/- but in the impugned penalty proceedings u/s 271(1)(c) of the Act, it is open for the assessee to establish that the addition itself is not merited. We are conscious that the fate of the quantum assessment proceedings is not before us but even in the penalty proceedings u/s 271(1)(c) of the Act, if the fact-situation establishes non-maintainability of a particular addition, then, to the extent of the levy of penalty, the same can be considered appropriately. In the present case, we find that the explanation of the assessee was very much before the lower authorities and, in fact, assessee had moved an application seeking rectification of mistake u/s 154 of the Act and there is no material on record to negate the assertions put forth by the assessee. Therefore, in view of the fact-situation canvassed by the assessee, we deem it fit and proper to hold that no penalty u/s 271(1)(c) of the Act is leviable with respect to a sum of Rs. 37,82,998/- on account of difference in purchases, as such addition is itself unsustainable. However, as fairly put-forth by the learned representative for the assessee, the un-reconciled balance of purchases to the extent of Rs.75,302/- would be exigible to penalty u/s 271(1)(c) of the Act. Thus, on this aspect the Assessing Officer is directed to rework the amount of penalty u/s 271(1)(c) of the Act.

The next addition on which penalty has been levied is a sum of Rs.25,40,362/- representing disallowances of balances written off. In this regard, the relevant discussion is contained in para 6 of the assessment order dated 15.3.2013 (supra). The learned representative explained that the details of sundry balances written-off, which was furnished by the assessee, included write-off of capital assets to the tune of Rs.12,70,181/- and capital work-in-progress to the tune of Rs.1,17,815/-. The learned representative for the assessee pointed out that the Assessing Officer had intended to disallow the aforesaid two amounts which totals to Rs.13,87,996/- only whereas the actual disallowance has been wrongly determined at Rs.25,40,362/-. It has also been pointed out that if the aforesaid totalling error is rectified, the addition on this ground would remain at Rs.13,87,996/- only. On the merits of the levy, the learned representative contended that it is a case where a claim made for write-off of certain balances, though capital in nature, has not been accepted in the assessment proceedings. According to the learned representative, non-acceptance of a claim by itself would not render it liable for penalty u/s 271(1)(c) of the Act and that it was an inadvertent mistake made in the return of income. In the course of hearing, the learned representative for the assessee placed reliance on the judgment of Hon'ble Supreme Court in the case of Price Waterhouse Coopers (P) Ltd. (supra) to point out that an inadvertent mistake would not justify levy of penalty u/s 271(1)(c) of the Act.

On the other hand, the ld. DR has defended the stand of the lower authorities by pointing out that in view of wrong claim made for write-off of capital items, penalty u/s 271(1)(c) of the Act is leviable.

We have carefully considered the rival submissions on this aspect and find that so far as the computational error is concerned, penalty u/s 271(1)(c) of the Act is not exigible. Insofar as the disallowance of Rs.13,87,996/- is concerned, the same relates to amounts written-off by the assessee which are capital in nature. No doubt, the claim of such write-off is not tenable in the eyes of law but we find that the relevant discussion in the assessment order does not reflect any filing of inaccurate particulars or concealment by the assessee. A mere non- acceptance of a claim made in the return of income by itself does not justify the penal provisions of Sec. 271(1)(c) of the Act. As a consequence, we set-aside the order of CIT(A) on this aspect and direct the Assessing Officer to delete the levy of penalty with respect to the aforesaid addition.

The third and the last addition which has been subjected to levy of penalty is a sum of Rs. 5,000/- representing dividend earned by the assessee from Saraswat Co-op. Bank. In the return of income, assessee had declared dividend income of Rs. 5,000/-, which was claimed as exempt. So however, the Assessing Officer noted that the said income was not exempt inasmuch as it has not been subject to any Dividend Distribution Tax. This was for the reason that such dividend income was received from a co-operative bank was not exempt in terms of Sec. 10(34) of the Act.

On this aspect, the learned representative for the assessee submitted that it was a clear case of an inadvertent error on the part of 9 M/s. United Ink & Varnish Co. Pvt. Ltd.

We have considered the rival submissions and find that there is no dispute to the fact that the exemption claimed by the assessee with respect to the impugned dividend income was not in accordance with law. So however, every case of a wrong claim cannot invite penalty u/s 271(1)(c) of the Act, especially in the present case where there is no material to suggest any concealment or furnishing of inaccurate particulars of income. In fact, apart from the fact that the exemption has been denied, the discussion in the assessment order does not reveal that the assessee had filed any particulars of income which were found to be wrong or otherwise false. Therefore, following the ratio of the judgment of the Hon'ble Supreme Court in the case of Reliance Petroproducts (P) Ltd, 322 ITR 158, penalty on this aspect of the addition is also directed to be deleted.

In the result, appeal of the assessee is partly allowed.