LARSEN & TOUBRO LTD,MUMBAI vs. DCIT CIR 2(2), MUMBAI

PER SAKTIJIT DEY, J.M.

Instant appeal of the assessee is directed against the order dated 19th February 2010, passed by the learned Commissioner (Appeals)-5, Mumbai, confirming the imposition of penalty under section 271(1)(c) of the Income Tax Act, 1961 (for short "the Act") for the assessment year 1990-91.

Larsen & Toubro Limited 2 income declaring total income of ` nil under the normal provisions and book profit of ` 13,88,82,280 under section 115J. The assessment in case of the assessee was completed under section 143(3) of the Act by determining the total income at ` nil after set-off of brought forward of business loss and unabsorbed depreciation under the normal provision and book profit of ` 15,31,42,900 under section 115J. While completing the assessment, the Assessing Officer made the following additions / disallowance:-

Commission ` 34,13,738 Expenditure relating to issue ` 25,96,19,969 of fully convertible debenture Expenditure project not ` 10,29,703 materialized

Larsen & Toubro Limited 3 furnishing inaccurate particulars of income. In response to the show cause notice, the assessee submitted its explanation in detail stating therein that as far as commission payment is concerned, while in assessment year 1988-89, the issue was decided in favour of the assessee by the Tribunal but in the assessment year 1989-90, the Tribunal took a contrary view. Similar is the case with debenture issue expenses. As far as expenses relating to project not materialized, it was submitted by the assessee that similar expenses were allowed by the Tribunal in assessee’s own case for the assessment year 1989-90, whereas, in the impugned assessment year, the Tribunal relying upon certain judicial pronouncements decided the issue against the assessee. Thus it was submitted by the assessee, issues relating to all the three additions are very contentious and on which more than one view is possible under the law. That being the case, imposition of penalty under section 271(1)(c) would not be justified. The Assessing Officer, however, did not find merit in the submissions of the assessee and proceeded to pass an order imposing penalty of ` 14,25,94,241, alleging furnishing of inaccurate particulars of income. Being aggrieved of the penalty order, the assessee preferred appeal before the first appellate authority. However, learned Commissioner (Appeals) also confirmed the imposition of penalty.

Larsen & Toubro Limited 4 4. The learned Counsel for the assessee contesting the imposition of penalty submitted before us, as far as commission payment is concerned, the reason for disallowance was, the contracts since were from the Government Department/PSU, there was no need / necessity to make commission payment. He submitted, only because commission payment was disallowed it will not lead to the conclusion that assessee has furnished inaccurate particulars of income. He submitted for the assessment year 1991-92, 1992-93 and 1993-94, the Tribunal, Mumbai Bench, in assessee’s own case has deleted the imposition of penalty under section 271(1)(c) on the basis of addition made on account of disallowance of commission payment on contract receipt from Government / PSU. In this context, he placed on record the order passed by the Tribunal in ITA no.3256-3258/Mum./2010 dated 21st October 2011. He further submitted, following the aforesaid decision, the Tribunal again in assessee’s own case for the assessment year 1994-95, deleted the penalty imposed under section 271(1)(c) in its order passed in ITA no.1941/Mum./2011 dated 5th February 2015. He, therefore, submitted that as far as commission payment is concerned, there cannot be any imposition of penalty under section 271(1)(c).

Larsen & Toubro Limited 5 that it was for increasing the capital base of the company, hence, capital in nature, is totally incorrect. He submitted, even otherwise also whether a particular expenditure is revenue or capital is a debatable issue and more than one opinion is possible. He submitted that different High Courts have also held that expenditure incurred in relation to issuance of convertible debenture can be allowed as revenue expenditure. In this context, he relied upon the following case laws:-

i) CIT v/s Secure Meters Ltd., [2011] 321 ITR 611 (Raj.) ii) CIT v/s Sukhijit Starch & Chemicals Ltd., [2010] 326 ITR 29 (P&H); iii) CIT v/s Havells India Ltd., [2012] 352 ITR 376 (P&H); iv) CIT v/s ITC Hotels Ltd., [2010] 334 ITR 109 (Kar.); v) CIT v/s Ranbaxy Laboratories Ltd., [2013] ITA no.93 of 2000 (Del.)

Thus, he submitted that in view of the fact that different High Courts have held the expenditure on issuance of convertible debenture as revenue in nature, the issue is highly contentious hence will not come within the purview of section 271(1)(c) as it is a debatable legal issue. For such proposition, he relied upon the decision of the Hon'ble Supreme Court in CIT v/s Reliance Petroproducts Pvt. Ltd., [2010] 322 ITR 158 (SC).

Larsen & Toubro Limited 6 expenditure claimed by the assessee by itself would not amount to furnishing of inaccurate particulars of income. He submitted the first appellate authority while deciding the issue has not at all give any finding as to whether a case of furnishing inaccurate particulars of income has been made out by Assessing Officer. Finally, the learned Counsel for the assessee submitted that question of law proposed by the assessee on all the three issues on which the additions have been made has been admitted by the Hon'ble Jurisdictional High Court while entertaining assessee’s appeal under section 260A of the Act and pending adjudication. He submitted, once an issue has been admitted by the High Court a question of law that itself proves the fact that it is a legal issue on which more than one view is possible hence, will not come within the purview of section 271(1)(c). For such proposition, he relied upon the decision of the Tribunal, Mumbai Bench, in Nain Builders and Developers Pvt. Ltd. v/s ITO, ITA no.2379/Mum./2009, order dated 18th March 2011. He submitted that the High Court approved the aforesaid view of the Tribunal while dismissing the appeal preferred by the Department. Thus, it was submitted the penalty imposed should be deleted.

Larsen & Toubro Limited 7 8. We have heard Shri J.D. Mistry, learned Counsel for the assessee and Shri G.S. Rao, learned Departmental Representative. We have also perused the orders of the Departmental Authorities as well as other material placed on record. We have also carefully applied our mind to the decisions relied upon by the learned Counsel for the assessee. As far as the factual aspect is concerned, there is no dispute that the Assessing Officer while completing the assessment made three additions as referred to herein before and such additions were also confirmed by the Tribunal. However, the issue to be decided is whether merely because such additions made have been confirmed in appeal, it will automatically lead to imposition of penalty under section 271(1)(c) on the basis that assessee has furnished inaccurate particulars of income. As far as the commission payment is concerned, it is seen from record that the Tribunal has taken contrary view regarding allowability of commission payment. While in assessment year 1988-89, commission payment was allowed in the assessment year 1989-90 and 1990-91 they have been disallowed. It is further relevant to observe that in the assessment year 1991-92 to 1993–94, penalty was imposed under section 271(1)(c) on the basis of addition made on account of commission payment. However, when the issue relating to imposition of penalty under section 271(1)(c) for these assessment years came up in appeal before the Tribunal, it deleted the penalty. It is further relevant to note that when the Department

Larsen & Toubro Limited 8 challenged the deletion of penalty before the High Court, the High Court not only dismissed the appeals of the Department but also imposed cost for instituting frivolous litigation. The facts are no different in the impugned assessment year. As could be seen the commission payment was disallowed only for the reason that contracts were received from Government / PSU, hence, there was no need / necessity to make such commission payment. However, on considering identical fact, the Tribunal in assessment year 1991-92 to 1993-94, have deleted penalty imposed under section 271(1)(c). The same view was again reiterated by the Tribunal in assessee’s own case for the assessment year 1994-95 cited supra. In view of the above, we hold that disallowance of commission payment does not invite imposition of penalty under section 271(1)(c) as the Assessing Officer has failed to make out a case that the assessee has furnished inaccurate particulars of income. As far as the expenditure on convertible debenture is concerned, the disallowance has been made by treating the expenditure as capital. Whether a particular expenditure is in the nature of revenue or capital is a highly contentious and debatable legal issue. As could be seen from the catena of decisions cited by the learned Counsel for the assessee different High Courts have held expenses relating to issuance of debenture as revenue expenditure. Therefore, just because the assessee claimed the expenditure being of the view that it is allowable as revenue expenditure and which cannot

Larsen & Toubro Limited 9 be considered to be totally unacceptable view, in our opinion, there cannot be imposition of penalty under section 271(1)(c) for furnishing inaccurate particulars of income. As far as the expenditure on project which did not materialize is concerned, it will also be guided by same principle on which we have held penalty not imposable on disallowance made on account of commission and expenses on convertible debenture. Moreover, as held by the Hon'ble Supreme Court in CIT v/s Reliance Petroproducts Pvt. Ltd. (supra), disallowance of a claim made by the assessee in the return of income by itself will not amount to furnishing of inaccurate particulars of income as allowability or disallowability of expenses has to be decided by the Assessing Officer in an assessment proceedings. By simply making a claim, the assessee does not automatically get entitled for the expenses. Having already held that in the particular facts and circumstances of the case, penalty is not imposable us 271(1)(c) on the basis of additions made, it will be pertinent to observe that questioning of law framed by the assessee relating to all the three additions on the basis of which penalty has been imposed, are admitted by the Hon'ble Jurisdictional High Court in an appeal preferred by the assessee under section 260A, registered as Income Tax Appeal no.741 of 2008. It needs to be noted, the Tribunal, Mumbai Benche, in Nayan Builders (supra) while examining the issue whether penalty under section 271(1)(c) can be sustained when the

Larsen & Toubro Limited 10 additions on the basis of which such penalty has been imposed are subject matter of appeal in the High Court held as under:-

“3. It is, therefore, abundantly clear that the additions in respect of which penalty was confirmed have been accepted by the Hon’ble Bombay High Court leading to substantial question of law. When the High Court admits substantial question of law on an addition, it becomes apparent that the addition is certainly debatable. In such circumstances penalty cannot be levied u/s 271(1)© as has been held in several cases including Rupam Mercantile Vs. DCIT [(2004) 91 ITD 237 (Ahd) (TM)] and Smt.Ramila Ratilal Shah Vs. ACIT [(1998) 60 TTJ (Ahd) 171]. The admission of substantial question of law by the Hon’ble High Court lends credence to the bona fides of the assessee in claiming deduction. Once it turns out that the claim of the assessee could have been considered for deduction as per a person properly instructed in law and is not completely debarred at all, the mere fact of confirmation of disallowance would not per se lead to the imposition of penalty. Since the additions, in respect of which penalty has been upheld in the present proceedings, have been held by the Hon’ble High Court to be involving a substantial question of law, in our considered opinion, the penalty is not exigible under this section. We, therefore, order for the deletion of penalty.

The aforesaid decision of the co-ordinate bench was affirmed by the Hon'ble Jurisdictional High Court while dismissing the Revenue’s appeal in ITA no.415 of 2012. Thus, taking a clue from the aforesaid decision of the Co-ordinate Bench of the Tribunal, we may observe that as the Hon’ble High Court has admitted the substantial questions of law framed by the assessee on all the three additions on the basis of which penalty has been imposed under section 271(1)(c) of the Act, the issues can be considered to be debatable, hence, in the particular circumstances of the case, penalty under section 271(1)(c) of the Act

Larsen & Toubro Limited 11 cannot be imposed. Accordingly, allowing assessee’s ground, we delete the penalty imposed under section 271(1)(c) of the Act.

Sd/- Sd/- SAKTIJIT DEY ASHWANI TAEAJA ACCOUNTANT MEMBER JUDICIAL MEMBER

MUMBAI, DATED: 30.10.2015 Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary (Dy./Asstt. Registrar) ITAT, Mumbai