DCIT, CIRCLE-1(1)(2), SURAT vs. J K PAPER LIMITED, SURAT

IN THE INCOME TAX APPELLATE TRIBUNAL, SURAT BENCH, SURAT BEFORE SHRI PAWAN SINGH, JUDICIAL MEMBER AND DR. ARJUN LAL SAINI, ACCOUNTANT MEMBER ITA No. 181/SRT/2020 (AY: 2012-13) (Hearing in Virtual Court) D.C.I.T. M/s J.K. Paper Ltd. Circle-1(1)(2), P.O. Central Pulp Mill, Vs. Surat. Fort Songadh, Surat. PAN : AAACT 6305 N APPELLANT RESPONDEDNT

Department by Shri H.P. Meena, CIT-DR Assessee by Shri Saurabh Soparkar, Senior Advocate with Ms. Urvashi Shodhan, Advocate Date of hearing 27/04/2022 Date of pronouncement 23/05/2022

Order under section 254(1) of Income Tax Act PER PAWAN SINGH, JUDICIAL MEMBER:

“1. Whether on the facts and circumstances of the case and law, the Ld. CIT(A) is justified in deleting penalty of Rs.4,21,36,403/-levied on the technical ground that the A.O while initiating and levy of the penalty has not struck off the inapplicable limbs of sec.271(l)(c) of the Act, ignoring that sec.292B would apply in the facts of the case, as assessee did not raise this technical ground before the A.O, during penalty proceedings showing that the assessee understood the

ITA 181/SRT/2020 DCIT Vs J K Paper Ltd. purport and import of notice U/s 274 r.w.s 271 of the IT Act and therefore ratio of case law of Madras High Court, in the case of Sundram Finance Pvt Ltd (2018)(93 taxmann.com250) would apply in this case, wherein the SLP of the assessee has been dismissed by Hon'ble Supreme Court?. 2. Whether on the facts and circumstances of the case and law, the Ld. CIT(A) is justified in deleting penalty levied on addition of Rs. 4,23,000/- on account of social forestry expenses without appreciating the fact that the assessee has furnished inaccurate particular of income by claiming expenses incurred for earning exempt income against business income of the assessee ?. 3. Whether on the facts and circumstances of the case and law, the Ld. CIT(A) is justified in deleting penalty levied on addition of Rs.2,52,99,629/- made on account of reduction on deduction claimed by the assessee U/s 80IA in respect of power generation unit without appreciating the fact that the assessee has furnished inaccurate particular of income by claiming excess deduction ? 4. Whether on the facts and circumstances of the case and law, the Ld. CIT(A) was justified in deleting penalty imposed on addition of Rs. 5,00,000/- made by the AO on account of club expenses without appreciating the fact that the assessee has furnished inaccurate particular of income by making incorrect claim? 5. Whether on the facts and circumstances of the case and law, the Ld. CIT(A) was justified in deleting penalty imposed on addition of Rs. 10,63,47,628/- on account of deployment of funds credited to capital work in progress as capital receipts instead of showing the same as Revenue receipts without appreciating that the assessee has furnished inaccurate particulars of income by not showing the income earned from such investments ? 6. Whether on the facts and circumstances of the case and law, the Ld. CIT(A) was justified in deleting penalty imposed on addition of Rs. 12,00,000/- made by the AO on account of U/s 40a(ia) of the IT Act without appreciating the fact that the assessee has furnished inaccurate particular of income by not deducting TDS on foreign remittance made as well as the case law of Guj High Court in the case of Dahyabhai Veljibhai Patel in TA No.793 of 2013 would not apply in this case as the issue has not reached its finality ? 7. The appellant craves leave to add, alter, amend and/or withdraw any ground(s) of appeal either before or during the course of hearing of the appeal.

ITA 181/SRT/2020 DCIT Vs J K Paper Ltd. 8. It is therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of assessing officer may be restored to the above extent. 2. Brief facts of the present case are that the assessee while filing return of income for the year under consideration, declared income of Rs. 23.21 crores and book profit under Section 115JB of the Act of Rs. 52.54 crores. The case of the assessee was selected for scrutiny and assessment was completed under Section 143(3) of the Act on 13/03/2015 determining total income of Rs. 42.62 crores and book profit of Rs. 53.91 crores. The Assessing Officer while passing the assessment order made following additions: 1. Disallowance of expenses claimed on account of Rs. 89,22,235/- social forestry expenses and depreciation on assets used for social forestry. 2. Disallowance of claim of expenses against liability Rs. 87,498/- written back 3. Addition on account of adjustment u/s 145A Rs. 14,35,104/- 4. Addition on account of unexplained sundry creditors Rs. 9,85,463/- 5. Addition on account of excess process stock Rs. 9,72,890/- 6. Disallowance u/s 14A of the I.T. Act Rs. 14,57,500/- 7. Disallowance on account of bad debts Rs. 27,49,340/- 8. Disallowance of expense claimed in company’s P&L Rs. 2,42,18,776/- account in respect to on power generation unit TG- 3, situated at the central pulp Mills. 9. On account of excess depreciation claimed (as per Rs. 6,75,646/- para 11) 10. On account of excess depreciation (as per para 12) Rs. 4,05,207/- 11. Disallowance on account of commission paid to Rs. 4,09,700/- directors 12. Disallowance on account of commission on sales Rs. 28,10,000/- 13. Disallowance on account of various expenses Rs. 1,54,58,700/- 14. Disallowance on account of staff welfare expenses Rs. 80,75,000/- 15. Disallowance of deferred tax credit as expenditure Rs. 1,22,18,632/- 16. Disallowance out of club expenses claim Rs. 12,63,976/- 17. Interest earned from deployment of FCCB fund Rs. 10,36,47,628/-

ITA 181/SRT/2020 DCIT Vs J K Paper Ltd. wrongly treated as capital receipt. 18. Disallowance section 40(a)(i) of the I.T. Act. Rs. 83,00,000/-. 3. The assessing officer initiated penalty proceedings under section 271(1)(c). However, on appeal before the ld. CIT(A) in quantum assessment, the ld. CIT(A) allowed substantial relief to the assessee on various additions and disallowancevide order No. CAS-1/145/2015-16 dated 11/05/2016, by following the orders of Tribunal in earlier year. The ld CIT(A), sustained the penaly on the following additions and disallowance; 1. Disallowance of expenses claimed on account of Rs. 4,23,000/- social forestry expenses and depreciation on assets used for social forestry (Restricted) 2. Prior period expenses Rs. 87,498/ 3. Adjustment u/s 145A of the I.T. Act Rs. 14,35,104/- 4. Disallowance u/s 14A of the I.T. Act Rs. 14,57,500/- 5. Reduction deduction claimed u/s 80IA Rs. 2,52,99,629/- 6. Income on deployment of FCCB funds Credited to Rs. 10,36,47,628/-. Capital Work in progress Account 4. On receipt of order of ld. CIT(A) in quantum assessment, the Assessing Officer issued fresh notice under Section 274 r.w.s. 271(1)(c) of the Act vide his notice dated 14/02/2018. The assessing officer identified the following addition/ disallowance; 1. Disallowance of expenses claimed on account of Rs. 4,23,000/- social forestry expenses and depreciation on assets used for social forestry (Restricted) 2 Reduction deduction claimed u/s 80IA Rs. 2,52,99,629/- 3 Disallowance under section 40(a)(ia) Rs.12,00,000/- 4. Club expenses Rs. 5,00,000/- 5. Income on deployment of FCCB funds Credited to Rs. 10,36,47,628/- Capital Work in progress Account Total Rs.13,10,71,257/-

ITA 181/SRT/2020 DCIT Vs J K Paper Ltd. 5. In response to said notice, the assessee filed reply dated 22/02/2018. Details of reply is extracted by the Assessing Officer in para 3 at page Nos. 2 to 11 of the penalty order. The Assessing Officer levied penalty on total addition of Rs. 13,10,70,257/-. The Assessing Officer imposed penalty @ 100% of tax sought to be evaded. The Assessing office worked out the penalty of Rs. 4,45,50,780/- in his order dated 26.03.2018. 6. Aggrieved by the penalty under Section 271(1)(c) of the Act, the assessee filed appeal before the ld. CIT(A). Before the ld. CIT(A), the assessee filed detailed written submissions on each of the additions/disallowances, on which the penalty was levied by the Assessing officer. On the disallowance of deduction under Section 80IA of the Act, it was contended by the assessee that the deduction has been claimed in respect of power undertaking installed at one of its manufacturing unit for which separate profit as required by law was computed which was duly certified by independent accountant in Form 10CCB during the assessment proceedings. The Assessing Officer was not satisfied by determination of profit of that power undertaking and allocates expenses of non- exempt unit to the exempt unit. There was no concealment of any income or furnishing inaccurate particulars of income. 7. The ld CIT(A) after considering the submissions of the assessee held that the assessing officer has not found any specific instances of furnishing particulars or details of concealment. All the details were furnished, including accounts and the impugned additions are the result of change of method/ manner of allocation of

ITA 181/SRT/2020 DCIT Vs J K Paper Ltd. expenses of different units. The case is covered by the decisions of Hon’ble Supreme Court in CIT Vs Reliance Petroproducts (322 ITR 158 SC) and Hon’ble Sri Rama Multi teck 32 taxmann.com 127 (Guj) & Gujarat Insecticides Ltd 35 taxmann.com 35 taxmann.com 313 (Guj). On his above observation, the ld CIT(A) deleted the penalty on disallowance of deduction under section 80IA. 8. With regard to income on deployment of funds credited, it was contended by the assessee that there was no concealment of facts as all the disclosure/facts are duly reflected in annual accounts for the year under consideration. Since two views are possible for treatment of income from deployment of funds credited to capital work in progress (CWIP) Account, this is not the case of concealment of income or inaccurate particular merely because of difference of opinion as held by various judicial pronouncements including the judgment of Hon'ble Apex court in the case of Diiip N Shroff Vs. JCIT reported in 291 ITR 519. He also contended that there was no tax leakage as on one hand income is treated as revenue receipt in the impugned order passed u/s 143(3) of the Act and on the other hand, depreciation has been allowed by A.O on enhanced project cost in order passed u/s 143(3) of the Act for A.Y 2015-16. The assessee also relied on the case law of Hon’ble Supreme Court in CIT Vs Bokaro Steel Ltd (236 ITR 315-SC). 9. The ld CIT(A) after considering the submissions of the assessee held that the assessee raised loan of Rs. 239.19 Crore through FCCB for the purpose of expansion of unit in Rayagada Odhisa. The amount was parked in fixed deposit of bank and earned interest of Rs. 10,36,47,628/-. The assessee instead of

ITA 181/SRT/2020 DCIT Vs J K Paper Ltd. showing the such interest income as revenue receipt and offering it to income, credited to the amount of capital work in progress (WIP) and thereby reducing cost of project. It was duly disclosed in the notes of account forming part audited accounts which is claimed in accordance with accounting standard. The ld CIT(A) held that the assessee has proved that the additions were made due to the difference of opinion and interpretation of law. The assessee adopted one of the possible views in law. The assessee made this accounting treatment only to delaying the tax effect. It was also held that the assessing officer has not found any specific instances of furnishing particulars or details of concealment. Thus, on such facts no penalty is leviable and deleted the penalty on this issue. 10. With regard to disallowance of social forestry expenses, it was contended by the assessee that on similar disallowance made in A.Y.2004-05, the Assessing Officer had levied penalty which was deleted by CIT(A) vide order dated 12.11.2009. By following the order for A.Y. 2004-05, the ld. CIT(A) had also deleted the penalty levied for the A.Y. 2011-12 vide order dated 23/05/2017. 11. The ld CIT(A) after considering the submissions of the assessee on disallowance of social forestry expenses held that similar issue arose in AY 2011-12 (Appeal No. CAS-1/10544/2016-17) and the same was deleted vide order dated 23.05.2017. The ld CIT(A) extracted the relevant part of the order of his predecessor in para 6.4.4 and held that like earlier year , in this year all the particulars were disclosed/ filed before assessing officer. There is no finding of the assessing officer of furnishing any inaccurate particulars or concealment of

ITA 181/SRT/2020 DCIT Vs J K Paper Ltd. details. The additions were made mainly on estimation basis, which was further reduced by ld CIT(A) and hence the same was due to difference of opinion and is covered by the decision of Hon’ble Supreme Court in CIT Vs Reliance Petroproducts Ltd (supra) and Gujarat High Court in Subhash Trading Co. 221 ITR 110 (Guj) and deleted the penalty on this issue/ addition. 12. With regard to disallowance under Section 40(a)(ia) of the Act for non deduction of tax at source, it was contended by the assessee that for the year under consideration, there was no concealment of facts as all the disclosure/facts stands made during the course of assessment proceedings. It was also contended that where two views are possible, this is not the case of inaccurate particulars merely because of difference of opinion as held by various judicial pronouncements including the judgment of Hon'ble Apex court in the case of Dilip N . Shroff Vs. JCIT reported in 291 ITR 519. 13. The ld CIT(A) after considering the submissions of the assessee held that disallowance was made solely on the ground that no TDS was made. The assessing officer has not questioned the genuineness of the expenses or questioned the purpose of expenses. The assessee explained that that they believed that no TDS to be made as per ration of decision of Hon’ble Supreme Court in CIT Vs Kotak Securities Ltd (CA No.3141 of 2016). The ld CIT(A) also relied on decision of Gujarat High Court in Dahyabhai Veljibhai Patel wherein the order of Tribunal was approved. Thus, with the above observations, the ld CIT(A) deleted the penalty on this issue/ disallowance.

ITA 181/SRT/2020 DCIT Vs J K Paper Ltd. 14. With regard to disallowance made on account of club expenses, it was contended that no penalty is leviable for ad-hoc disallowance as held by the ITAT Mumbai bench in the case of Vidya Synthetic (I) Pvt. Ltd. Vs DCIT in ITA No. 3647/Mum/2011. 15. The ld CIT(A) after considering the submissions of the assessee held that membership fees and subscription fee are allowable expenditure as held by the Hon'ble Madras High Court in the case of Gujarat State Export Co Op. Ltd. 209 ITR 335 (Mad.). The ld. CIT(A) has also observed that the Assessing Officer disallowed estimated figure of Rs. 5 lacs paid towards food and other facilities in the clubs because no specific business purpose was pointed out by the assessee. From the above, the ld. CIT(A) held that the expenses have been disallowed due to difference of opinion on what constitutes business purpose and that too on estimation basis. The ld.CIT(A) by following the decisions of various Hon'ble Courts i.e. decision in the case of Reliance Petroproducts (supra), Subash Trading Co. 221 ITR 110( Guj), Surat Fashion Ltd. ITA No. 3368/Ahd/2008 dated 27/05/2011, Cadila Pharmaceuticals Ltd. in ITA No. 0852/Ahd/2015 dated 04/04/2018, Deshman Pharmaceuticals in ITA No. 138 & 189/Ahd/2017 dated 07/09/2018 had deleted the addition. Before the ld. CIT(A), the ld. AR made out a case that there can be no such disallowance for the reason that expenses were of personal nature as has been held by the Hon'ble Jurisdictional High Court in the case of Sayaji Iron &Engg. Co. Ltd. (2002) 172 CTR 339 (Guj). Therefore,

ITA 181/SRT/2020 DCIT Vs J K Paper Ltd. the ld. CIT(A) had deleted the penalty levied with regard to club expenses. Thus, the ld CIT(A) deleted the entire penalty levied under section 271(1)(c) of the Act. 16. Against the order passed by the ld. CIT(A), the Revenue is in further appeal before this Tribunal. 17. We have heard the submissions of the learned commissioner of income tax- departmental representative (CIT-DR) for the revenue and the learned Senior Advocate Sh Saurabh Suparkar assisted by Ms Urvashi Sodhan Advocate. The ld. CIT-DR for the Revenue has vehemently supported the order of the Assessing Officer and would submits that the additions which were upheld by ld CIT(A) in quantum assessment, the assessing officer levied the penalty only on such additions and disallowances. 18. On the other hand, the ld. Sr. Counsel appearing on behalf of the assessee has relied on the order of the ld. CIT(A). The ld Senior Counsel for the assessee submits that the addition or disallowance on which the assessing officer levied penalty is covered by the decisions of various High Court or Supreme Court or by Tribunal. The ld CIT(A) deleted the penalty by following the decisions either in case of assessee or by the decision of Higher Courts. On first issue of social forestry expenses, the ld Senior Counsel for assessee submits that in all earlier years the similar disallowances were either substantially deleted or restricted on ad-hock basis, on the issue of reduction of claim under section 80IA, the ld Senior Counsel submits that this issue is covered by the decision of Gujarat High Court in CIT Vs Shah Alloys Limited (Tax Appeal No. 2092/2010 dated

ITA 181/SRT/2020 DCIT Vs J K Paper Ltd. 22/11/2011), disallowance of section 40(a)(ia) is covered by the decision of Supreme Court in Kotak Securities (supra), the additions of club expenses were made on ad-hock basis and the disallowance interest income earned on deployment of fund was based on change of opinion i.e. capita vs revenue. The ld Senior counsel submits that no penalty is leviable on any of the addition or disallowance. 19. We have considered the rival contentions of the parties and carefully perused the material placed on record and the orders passed by the lower authorities. We observed from perusal of the record that the penalty with regard to addition made on account of social forestry expenses, the ld. CIT(A) deleted the penalty on the ground that in assessee’s own case for the A.Y. 2011-12 vide order dated 23/05/2017, identical issue had been decided in favour of the assessee and against the revenue by the earlier ld. CIT(A) by following the decision of Hon'ble Supreme Court in the case of Reliance Petroproducts (P) Ltd. 322 ITR 158 (SC) wherein the Hon'ble Supreme Court has held that ”mere making of claim which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding income of the assessee.” No new facts and circumstances has been brought on record by the ld. CIT-DR to controvert the findings so recorded by the ld. CIT(A), therefore, considering the totality of facts and circumstances, we do not find any reason to deviate from the findings of the ld. CIT(A), which we affirms the same.

ITA 181/SRT/2020 DCIT Vs J K Paper Ltd. 20. We also observed that the penalty levied under Section 80IA of the Act, the ld. CIT(A) has deleted the addition by observing the fact that the Assessing officer has not found any specific instance of furnishing of inaccurate particulars or concealment of details. All details were furnished, including audited accounts and impugned addition is a result of change in method/manner of allocation of expenses to the different units, which was a difference of opinion. The ld. CIT(A) by following the decision of Hon'ble Supreme Court in the case of Reliance Petroproducts (supra) and the decision in the case of Shri Rama Multi Tech 32 taxmann.com 127 & Gujarat Insecticides Ltd. 35 taxmann.com 313 had deleted the penalty levied by the Assessing officer. No new facts and circumstances has been brought on record by the ld. CIT-DR to controvert the findings so recorded by the ld. CIT(A), therefore, considering the totality of facts and circumstances, we do not find any reason to deviate from the findings of the ld. CIT(A), which we affirms the same. 21. We find that ld CIT(A) also deleted the penalty levied on account of club expenses. The ld CIT(A) observed that the assessee company had claimed club expenses of Rs. 16.25 lacs in various clubs, the assessee company had stated that the club membership was taken for business purpose. The Assessing Officer disallowed 75% of the impugned expenses. The ld. CIT(A) held that the membership fees and subscription fee are allowable expenditure as held by the Hon'ble Madras High Court in the case of Gujarat State Export Co Op. Ltd. 209 ITR 335 (Mad.). The ld. CIT(A) has also observed that the Assessing Officer

ITA 181/SRT/2020 DCIT Vs J K Paper Ltd. disallowed estimated figure of Rs. 5 lacs paid towards food and other facilities in the clubs because no specific business purpose was pointed out by the assessee. The ld.CIT(A) by following the decisions of various Hon'ble Courts i.e. decision in the case of Reliance Petroproducts (supra), Subash Trading Co. 221 ITR 110( Guj), Surat Fashion Ltd. ITA No. 3368/Ahd/2008 dated 27/05/2011, Cadila Pharmaceuticals Ltd. in ITA No. 0852/Ahd/2015 dated 04/04/2018, Deshman Pharmaceuticals in ITA No. 138 & 189/Ahd/2017 dated 07/09/2018 had deleted the addition. Before the ld. CIT(A), the ld. AR made out a case that there can be no such disallowance for the reason that expenses were of personal nature as has been held by the Hon'ble Jurisdictional High Court in the case of Sayaji Iron &Engg. Co. Ltd. (2002) 172 CTR 339 (Guj). Therefore, the ld. CIT(A) had deleted the penalty levied with regard to club expenses. No new facts and circumstances has been brought on record by the ld. CIT-DR to controvert the findings so recorded by the ld. CIT(A), therefore, considering the totality of facts and circumstances, we do not find any reason to deviate from the findings of the ld. CIT(A), which we affirms the same. 22. We find that the penalty imposed on addition of Rs. 10,63,47,628/- on account of deployment of funds credited to capital work, the ld. CIT(A) had deleted the penalty by holding that the assessee raised loans of Rs. 239.19 crs through FCCB for purpose of expansion of its unit in Rayagada Odisha. The assessee parked the amount in fixed deposit of banks & earned interest of Rs.103647628/-. The assessee instead of showing it as revenue receipts & offering the same as

ITA 181/SRT/2020 DCIT Vs J K Paper Ltd. income, credited the amount to capital work in progress (WIP). Thereby reducing cost of the project. It was duly disclosed in notes to account forming part audited balance sheet. The Hon'ble Supreme Court in case of CIT v. Bokaro Steel Ltd. 236 ITR 315 and Hon'ble High Court in the case of NTPC Sail Power Company P. Ltd. V. CIT (210 Taxman 358) held that "interest earned on surplus funds which are inextricably linked to the setting up of the project is a capital receipt & not to be taxed as revenue receipts. Further, the ld. CIT(A) has also held that the accounting treatment given by assessee results only in delaying the tax effect, (in form of reduction in claim of depreciation as the project cost is reduced) so it is a dispute of year of taxation. It was further held that the accounting treatment was explained in notes to accounts forming part of balance sheet. The ld CIT(A) held that Assessing officer has not given finding of any instance of furnishing inaccurate particulars or of concealment of particulars of income. The impugned penalty levied on addition made due to difference in opinion cannot be sustained and the ld. CIT(A) had deleted the penalty. No new facts or law is brought to our notice to take other view, therefore, considering the totality of facts and circumstances, we do not find any reason to deviate from the findings of the ld. CIT(A), which we affirms the same. 23. We find that the penalty levied on disallowance under Section 40(a)(ia) was deleted by CIT(A) by holding that the disallowance is made solely for not making TDS. The Assessing Officer has not questioned genuineness of expenses or questioned the purpose of expenses. The explanation of the assessee was

ITA 181/SRT/2020 DCIT Vs J K Paper Ltd. that they believed that no TDS to be made as per ratio lay down by Hon'ble Supreme Court in CIT v. Kotalc Securities Lid. (supra). The ld. CIT(A) has further held that the assessee’s case is squarely covered by decision of Hon'ble jurisdictional High Court in case of Dahyabhai Veliibhc Patel, (supra) where in the Hon'ble High Court has approved of the decision of ITAT Ahmedabad Being in the case of Dahyabhai Veljibhai Patel in ITA No. 2481 /Ahd/2012 dated 04.01.2013 wherein Tribunal held that "when genuineness of expenditure is not questioned & disallowance made merely on ground that TDS is not deducted" penalty u/ 271(1)(c) cannot be imposed. No new facts or law is brought to our notice to take other view, therefore, considering the totality of facts and circumstances, we do not find any reason to deviate from the findings of the ld. CIT(A), which we affirms the same. Thus, all the grounds of appeal raised by the revenue is dismissed. 24. In the result, this appeal of the Revenue is dismissed. Order pronounced on 23/05/2022, in open court and result was also placed on notice board.

Sd/- Sd/- (Dr. ARJUN LAL SAINI) (PAWAN SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Surat, Dated: 23/05/2022 *Ranjan Copy to: 1. Assessee – 2. Revenue - 3. CIT(A)

ITA 181/SRT/2020 DCIT Vs J K Paper Ltd. 4. CIT 5. DR 6. Guard File

By Order

Sr. Private Secretary, ITAT Surat