DCIT, PARWANOO vs. M/S HYCRON ELECTRONICS, SOLAN

PER BENCH: The above appeals emanates from the order u/s 271(1 )(c) of the Income- tax Act, 1961 have been filed by the Revenue and Cross Appeals filed by the Assessee against the similar order of Ld. CIT(A), Shimla dt. 16/09/2016. The appeal in ITA No. 1195/CHD/2016 for the A.Y. 2011-12 is taken as the lead case as it comprises of all the grounds taken in various years.

2 assessee was not eligible for deduction @ 100% and escaped his income from tax willfully. 2. On the facts and in the circumstances, the Ld. CIT(A)was justified in deleting the penalty imposed under section 271(1)(c) ignoring the facts that the assessee was not eligible for income from currency fluctuation and escaped his income from tax willfully. 3. On the facts and in the circumstances, the Ld. CIT(A) was justified in deleting the penalty imposed under section 271(1)(c) ignoring the facts that the assessee should itself disallowed the proportionate interest after applying section 14A of the Income Tax Act, 1961 and escaped his income from tax willfully.

The assessee started its business operation/activities on 17.01.2004 and initial assessment year for claim of deduction u/s 80IC of the Act was A.Y. 2004- 05. The assessee filed its return of income declaring Nil income on 29.09.2011 after claiming deduction under section 80-IC of the IT. Act, 1961 amounting to Rs.10,03,39,227/-. The assessment was completed on 11.02.2014 at Rs.7,63,55,788/- by restricting the claim u/s 80IC made by the appellant.

The assessee had already claimed deduction u/s 80IC to the extent of 100% of the eligible profit for five years period starting from A.Y. 2004-05 to 2008-09. it was noticed that the assessee firm had again claimed 100% deduction against eligible profits in the relevant A.Y. 2011-12 which is 8th year of production for the assessee by claiming to have undertaken substantial expansion in A.Y.2009-10. The assessing officer, for the detailed reasons mentioned in the assessment order held that the assessee is eligible for deduction u/s 80IC only @ 25% as against the claim of 100% made by the assessee. The assessing officer further made the following additions to the returned income by treating the income under these heads as not eligible for deduction u/s 80IC.

Particulars Amount Interest received on Margin Money 2,20,282 Dividend Received 10,50,047 Foreign Exchange Fluctuation 7,99,987 Miscellaneous Receipt 1,14,089 Sundry Credit balances written back 99

A further addition of Rs.5,55,241/- was made by disallowing the expense claimed against exempt income u/s 14A. Penalty proceedings u/s 271(1)(c) were also initiated w.r.t. all the above referred restriction in deduction claimed and disallowances made. The issues on which penalty levied is as under:-

Amount of addition on which penalty Issues where penalty proceedings proceedings initiated initiated 8m A.Y. claim of deduction u/s 80IC Rs.7,36,16,042/- Other income Rs.21,84,505/- U/s 14A Rs.5,55,241/- Total Rs.7,63,55,788/-

(ii) CIT v Chittorgarh Kendriya Sahakari Bank Ltd (SLP - CC No(s). 8127/2014 dated 02.07.2014) Supreme Court dismissed the SLP filed by Tax Authorities against the Rajasthan High Court ruling in the case of Chittorgarh Kendriya Sahakari Bank Ltd [2014] 41 taxmann.com 11 wherein it was held penalty under section 271(1)(c) levied upon the assessee on incorrect claim for deduction was not justifiable as the same was on account of change of law and therefore, a matter of bona fide mistake..,.. (iii) Shree Krishna Electricals 2009-23 VST249 (SC) Penalty cannot be levied merely because exemption claimed by 'A'was disallowed. (iv) The Hon'ble Supreme Court in the matter of Dilip N, Shroff v. Joint Commissioner of Income-Tax, Mumhai reported in (2007) 6 SCC 329 observed that: "The expression "conceals"' is of great importance. According to Law Lexicon, the word "conceal" means: to hide or keep secret. The word "conceal" is con plus clear which implies to hide. It means to hide or withdraw from observation; to cover or keep from sight; to prevent the discovery of; to withhold knowledge of. The offence of concealment is, thus, a direct attempt to hide an item of income or a portion thereof from the knowledge of the income tax authorities. In Webster's Dictionary, "inaccurate" has been defined as: not accurate, not exact or correct; not according to truth; erroneous; as an inaccurate statement, copy or transcript. It signifies a deliberate act of omission on the part of the assessee. Such deliberate act must be either for the purpose of concealment of Income or furnishing of inaccurate particulars. The term 'inaccurate particulars' is not defined. Furnishing of an assessment of value of the property may not by itself be furnishing of inaccurate particulars. Even if the explanations are taken recourse to, a finding has to be arrived at having regard Clause (a) of Explanation 1 that the Assessing Officer is required to arrive at a finding that the explanation offered by an assessee, in the event, he offers one was false. He must be found to have failed to prove that such explanation is not only not bona fide but all the facts relating to the same and material to the income were not disclosed by him. Thus, apart from his explanation being not bona fide, it should be found as a fact that he has not disclosed all the facts which were material to the computation of his income. The explanation having regard to the decision of this Court must be preceded by a finding as to how and as to in what manner he furnished the particulars of his income, it is beyond any doubt or dispute that for the said purpose the income Tax Officer must arrive at its satisfaction in this behalf. [See Commissioner of Income Tax v. Ram Commercial Enterprises Ltd. reported in [2000] 246 ITR 568 (Delhi) and Diwan Enterprises vs. Commissioner of Income Tax reported in [2000] 246 ITR 571 (Delhi).] (v) The Hon'ble High Court of Madhya Pradesh in the matter of Narendra Kumar Rajendra Kumar Jain vs. Commissioner of Income Tax reported in (1988) 174 fTR 479 (MP) while deciding on the issue of levy of penalty u/s 271(1)(c) of the Act held that the penalty has been levied u/s 271(1)(c) after disallowing claim for certain deduction. However, the Tribunal did not find that expenditure was not incurred at all, or that it was claimed in earlier years and that the assessee made a false claim for deduction in the assessment year in question. Therefore, in the absence of any finding that assessee had deliberately made a false claim for deduction, levy of penalty under s. 271(1)(c) was not justified. ,y (vi) it is further respectfully submitted that the Hon'ble ITAT, Chandigarh the Jurisdictional ITAT have observed in the assesse own case relating to AY 2009-10 while deciding in appeal no 326/CHD/2015 on 8.10.2015, that penalty u/s 271(1)(c), on the issue is not leviable.

2 Since the Other income as above was duly disclosed in the annual audited accounts, which is also duly considered by the Ld AO in the original assessment order, there has been no concealment whatsoever on the part of the appellant. 3. On the aforesaid 'Other income' of Rs. 21,84,505/- (excluding dividend income of Rs 10,50,047), the appellant claimed deduction u/s 80IC, as all the income, as above, had direct nexus to the manufacturing activities of the unit eligible for deduction u/s 80IC, being the 8* year in succession after having undertaken substantial expansion in FY 2008-09. 4. The Ld. AO while framing the assessment order considered the 'other income' not eligible for deduction u/s 80IC and while disallowing also proposed penalty u/s 271(1)(c) of the IT Act for furnishing inaccurate particulars of income. 5. The Ld AO also proceeded with levy of penalty u/s 271(1)(c) on the disallowance ofRs 5,55,241/- u/s 14A r.w.r8D. 6. The Ld. AO while framing the order u/s 271(1)(c) of the IT Act on 23.02.2016 proceeded with levy of penalty of Rs. 2,35,93,940/- on Rs. 7,63,55,788/- the breakup of which is as under:

The assessee has further relied on the decision of the Hon'ble Supreme Court in the matter of Dilip N. Shroff v. Joint Commissioner of Income-Tax, Mumbai reported in (2007) 6 SCC 329 before the Ld. CIT(A).

As to the penalty levied on disallowance of Rs. 56.S5&- being expenses incurred on earning exempt income , the assessee has disclosed both the figures of expenses as well as income in its P&L account filed alongwith return of income and produced before us at paper book 21 & 22 of paper book II. There is no question of concealing or furnishing inaccurate particulars of income. The AO on part of deduction u/s 80IC on same facts has already dropped the penalty proceedings. The case of the assessee is squarely covered by the decision of the Apex Court in Reliance Petroproducts Pvt. Ltd. (2010) 322 ITR 158 (SC). The penalty imposed of Rs. 19,224/- is therefore hereby deleted.

The relevant extracts of the submission is reproduced as under:-

i.ln the Income Tax Appellate Tribunal Delhi Bench 'F' Delhi ITA No. 3805(Del)/2010 Assessment year. 2005- 06 Deputy Commissioner of Income-tax Vs. Nalwa Investments Ltd. It was held as under: No computation of disallowance was made u/s 14A as no disallowance/%' was made in the return of income. However, the accounts have been audited and the return was accompanied by the tax audit report. The latter did not suggest any disallowance u/s 14A. Therefore, it can be inferred that all expenses were claimed in full as the auditors did not suggest disallowance of any part of the expenditure relating it to the dividend income. Thus, it can be concluded that the claim was made on the basis of tax audit report. There is no allegation by the AO that there was any collusion between the auditor and the assessee to enhance the loss in the return of income by ignoring the provision contained in section 14A. Therefore, it can be said that the assessee has furnished an explanation which is bona fide. (Page 60 to 64 of paper book)

ii.Sunash Investment Co. Ltd. v. ACIT[2007] 14 SOT 80 (Mum.) (Trib.) -When Assessee claimed deduction of interest on borrowed funds which were invested in the financing business as well as purchase of shares of group companies under bona fide belief that such interest was deductible in entirety in view of some judicial 6

pronouncements, it cannot be said that the assessee is guilty of concealment or furnishing of inaccurate particulars of income. Held, penalty under s. 271(1)(c) was not leviable [AY 1998-99]. (Page 65 to 79 of paper book)

iii. CIT vs Liquid investment and Trading Co. [ITA 240/2009 dated 5/10/2010 - Delhi HC] - Disallowance u/s 14A of the Act was a debatable issue. Also, High Court had admitted the appeal of the assessee on quantum. Hence, penalty was not leviable.

iv. Skill Infrastructure Ltd. V.ACIT [2013] 157 TTJ 565 (Mum.)(Trib.) - Disallowance u/s 14A does not call for penalty.

It is respectfully submitted that appellant appeal on disallowance u/s 14A r.w.r 8D, being a debatable issue, is also admitted by Hon'ble High court of Himachal Pradesh and is pending for a decision.

The assessee further drew attention of the Ld. CIT(A) to the fact that Other Income of Rs. 21,84,505/- also included dividend income of Rs 10,50,047/- which has also been considered as part of Other income for the purpose of levy of penalty. It was submitted that Dividend income is separately shown in the computation of income and return of income for the year under appeal. The said dividend income, which is exempt u/s 2(22) and which is separately shown in the return of income is not liable for penalty u/s 271(1)(c) of the IT act, 1961,

A) The levy of penalty with regard to disallowance of deduction u/s 80IC : 9. The facts of the case, the order of the ld. CIT(A) under appeal and the arguments of the assessee on record and that of Ld. DR have been perused. The issue of levy of penalty u/s 271(1)(c) on the enhanced claim of deduction u/s 80IC on carrying out substantial expansion has been considered and decided by the Coordinate Bench of ITAT, Chandigarh in ITA.No. 326/CHD/2015 in the assessee's own case of M/s. Hycron Electronics vs. ITO for A.Y. 2009-10. While allowing the appeal of the assessee on the issue of levy of penalty, it was held as under-

6, We have considered the rival submissions and material available on record. The facts as noted above in the impugned orders are not in dispute. It is not in dispute that assessee was eligible for deduction under section 80IC of the Act and has been claiming the same deduction from assessment year 2004-05 till 2008-09, The 7

assessee in assessment year under appeal i.e. 2009-10 contended that since it has undertook substantial expansion, therefore, assessment year under appeal i.e. 2009-10 being initial year, assessee would be entitled for deduction under section 80IC of the Act @ 100%. However, the authorities below considered that the assessment year under appeal i.e. 2009-10 is the 6th year of the manufacturing activity of the Industrial Undertaking, therefore, instead of claim of 100% deduction under section 80IC, assessee would be entitled for deduction under section 80IC @ 25% only. The claim of assessee was supported by Audit Report and the past history submitted by assessee and considered by the authorities below. Thus, the claim of assessee was raised for the first time in the 6th year on undertaking substantial expansion and it was claimed to be first year/initial year for claiming 1 00% deduction under section 801C of the Act. Thus, the claim of the assessee was not false and was also not wrong. The assessee made claim of 1 00% deduction under section 80IC of the Act on the basis of substantial expansion carried out in financial year relevant to the assessment year under appeal. The assessee, therefore, furnished ail particulars of income in the return of income as well as before Assessing Officer at the assessment stage. Nothing was concealed to the Revenue Department. Whole issue was thus, based upon interpretation of provisions of Section 80IC of the Act for claim of deduction under section 80IC @ 100% on undertaking substantial expansion in the assessment year under appeal by claiming it to be initial year. Prior to that, there may be no history against the assessee for making such a claim. The issue is wholly debatable and the appeal of the assessee is pending before Hon'ble High Court for consideration of the similar issue. Though, this Bench has not followed the decision of Delhi Bench in the case of Tirupati LPG Ltd.(supra) on quantum an<t decided the issue against the assessee on quantum, but there was favourable, order for making such a claim under section 80IC of the Act. Therefore, it is a case where there may be a difference of opinion between the assessee firm and the Assessing Officer for claim of deduction under section 80IC of the Act in 6th 100%. 7. Considering the above discussion, it is clear that assessee claimed deduction section 80IC in assessment year under appeal in a bonafide manner and mere fact that claim of assessee has been disallowed, would not prove it to be a fit case of levy of penalty for filing inaccurate particulars of income. The issue of claim of deduction was debatable and bonafide. However, there was conflict for determination of provision of law. Merely making a claim of 100% deduction against 25% as per opinion of the Assessing Officer under section 801C of the Act would not be at par with concealment of income or furnishing inaccurate particulars of income. The decisions relied upon by Id. counsel for the assessee support the contention of Id. counsel for the assessee that it is not a fit case of levy of penalty under section 271(1)(c) of the Act. Hon'ble Supreme Court in the case of CIT V Reliance Petroproducts Ltd. 322ITR 158 held as under; "A glance at the provisions of Section 2 71( 1)(c) of the Income-tax Act, 1961 suggests that in order to be covered by it, there has to be concealment of the particulars of the income of the assessee. Secondly, the assessee must have furnished inaccurate particulars of his income. The meaning of the word 'particulars' used in Section 2 71(1){c) would embrace the details of the claim made. Where no information given in the return is found to be incorrect or inaccurate, the assessee cannot be held guilty of furnishing inaccurate particulars. In order to expose the assessee to penalty, unless the case is strictly covered by the provisions, the penalty provision cannot be invoked. By no stretch of imagination can making an incorrect claim tantamount to furnishing inaccurate particulars. There can be no dispute that everything would depend upon the return filed by the assessee, because that is the only document where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. To attract penalty, the details supplied in the return must not be accurate, not exact or correct, not according to the truth or erroneous.

8 Where there is no finding that any details supplied by the assessee in its return are found to be incorrect or erroneous or false there is no question of inviting the penalty u/s 271(1)(c). A mere making of a claim which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding tlie income of the assessee. Such a claim made in the return cannot amount to furnishing inaccurate particulars." 8. Considering the above discussion, we are of the view that it is not a fit case of levy of penalty under section 271(1)(c) of the Act because it is well settled that levy of penalty is not automatic in each and every case as it depends upon facts and circumstances of the case. Since the assessee's claim of deduction under section 80IC have been allowed in earlier years @ 100% and admittedly assessee undertook substantial expansion in assessment year under appeal therefore, assessee made bonafide claim of deduction under section 80IC of the Act and there were no judicial pronouncements against the assesses: on the date of making such a claim. Therefore, it could not be construed that the assessee has furnished inaccurate particulars of income so as to levy the penalty under section 271(1)(c) of the Act. We, accordingly, set aside the orders of authorities below and cancel the penalty. 9. In the result, the appeal filed by the assessee is allowed. 10. The issue of levy of penalty on this issue under appeal is squarely covered by the order of the ITAT referred supra. Following the same, the levy of penalty on the claim of deduction u/s 80IC w.r.t. carrying out substantial expansion in the 8th year is directed to be deleted.

B. Deduction on Interest received on margin money

C. Regarding the penalty on interest incurred under section 14A

perusal of the computation sheet shows that the submissions of the appellant are correct with regards to reducing the dividend income from business income and claiming it exempt separately .

Hence the A.O. is accordingly is directed to delete the penalty levied on this ground.

D. Penalty on foreign exchange fluctuation

Order pronounced in the Open Court.

Sd/- Sd/- (DIVA SINGH) (DR. B.R.R. KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated : 06/03/2018 AG

Copy to: The Appellant, The Respondent, The CIT, The CIT(A), The DR