Penalty proceedings: Mere submitting a claim which is incorrect in law would not amount to giving inaccurate particulars of income of assessee, but if claim besides being incorrect in law is malafide, Explanation 1 to section 271(1)(c) comes into play and work to disadvantage of assessee

 

 

[2010] 5 taxmann.com 117 (Ahd. - ITAT)

ITAT, AHMEDABAD BENCH ‘B’

Gujarat State Financial Services Ltd.

v.

ACIT

ITA Nos. 2078/Ahd/2006 & 2526/Ahd/2006

May 31, 2010

FACTS

Facts, in brief as per relevant orders are that return declaring income of Rs.16,17,56,630/- filed on 11-10-2001 by the assessee company, carrying on the business of providing loans/ finance & leasing/hire purchase besides providing financial services, after being processed on 30.9.2002 u/s 143(1) of the Income-tax Act ,1961[hereinafter referred to as the ‘Act’], was selected for ITA No.2078/Ahd/2006 & ITA No.2526 / Ahd/2006 for AY 2001-02 Gujarat State Financial Services Ltd. scrutiny with the issue of not ice u/s 143(2) of the Act on 29.10.2002. The assessment was completed u/s 143(3) of the Act vide order dated 26-2-2004, determining total income of Rs.29,05,15,132/-. Inter alia, following disallowances were made:

 

(1) U/s 14A Rs.6,98,72,062/ -

(2) Bad Debts Rs.1,62,81,557/ -

(3) Provision for diminution Rs. 21,98,638/ - in value of investments

(4) Income reversal Rs. 38,211/-

 

and penalty proceedings under section 271(1) (c) of the Act were also initiated . In response, neither anybody at tended nor any reply was furnished .On appeal, the ld. CIT(A) vide his order dated 29.11.2004 upheld the following disallowances:

 

(1) U/s 14A Rs. 9,91,000/-

(2) Bad Debts Rs.1,62,81,557/ -

(3) Provision for diminution Rs. 21,98,638/ - in value of investments

 

Here it may be worth mentioning that the assessee’s appeal on the aforesaid disallowances was also dismissed by the ITAT vide order dated 10.7.2009 in ITA no.229/Ahd. /2005.

 

HELD

 

If the disclosure of facts is incorrect or false to the knowledge of the assessee and it is established, then such disclosure cannot take it out from the purview of the act of concealment of particulars or furnishing inaccurate particulars thereof for the purpose of levy of penalty. The penalty u/s 271(1)(c) of the Act is leviable if the AO is satisfied in the course of any proceedings under this Act that any person has concealed the particulars of his income or furnished inaccurate particulars of such income. Here we may point out that the decisions relied upon by the assessee on the issue of recording of satisfaction by the AO before initiating penalty proceedings u/s 271(1) (c) of the Act are no longer relevant in view of sub-section 1B inserted in section 271 of the Act by ITA Finance Act, 2008. The said provision purports to create a fiction by which satisfaction of the AO is deemed to have been recorded in cases where an addition or disallowance is made by the assessing officer and a direction for initiation of penalty proceedings is issued. The said provision is made effective retrospectively with effect from 1st April, 1989. The ld. AR on behalf of the assessee has not explained as to how the decisions relied upon by him regarding recording of satisfaction were relevant in view of the said provisions of sec. 271(1B) of the Act.

 

It is well settled that assessment proceedings and penalty proceedings are separate and distinct and as held by Hon'ble Supreme Court in the case of Ananthraman Veerasinghaiah & Co. Vs. CIT - 123 ITR 457; the finding in the assessment proceedings cannot be regarded as conclusive for the purposes of the penalty proceedings. It is, therefore, necessary to reappreciate and reconsider the matter so as to find out as to whether the addition made in the quantum proceedings actually represents the concealment on the part of the assessee as envisaged in sec. 271(1 )(c) of the Act and whether it is a fit case to impose the penalty by invoking the said provisions. Explanation 1 to sect ion 271(1) (c) in respect of any fact relating to the computation of total income states that the amount added or disallowed in computing the total income of an assessee shall be deemed to be the income in respect of which particulars have been concealed. This deeming provision for concealment is not absolute one. The presumption under the explanation 1 is rebut table and not conclusive. The assessee can submit the explanation as the onus shifts on to the assessee to prove that he has not concealed the particulars of the income. The assessee in the instant case submitted an explanation, wherein in relation to their claim for provision for bad and doubtful debts , it was pointed out on behalf of the assessee that they were not aware of the amendment introduced by the Finance Act 2001 with retrospective effect from 01-04-1989,as it was not publicly known and that RBI directions override the provisions of the Act. The ld. CIT(A) found that there was no mention in the computation statement as to the claim u/s. 36(l)(vii) as regards provisions for bad and doubtful debts or as regards diminution in value of investments. Undisputedly, what the assessee had debited in the profit and toss account was mere provision and not bad debts written off. The relevant provisions of section 36(1)(vii) of the Act effective from 01-04-1989 stipulate that bad debts written off of as irrecoverable in the accounts of the assessee , alone were deductible. The explanation introduced by the Finance Act 2001 with retrospective effect from 01- 04-1989 clarifies that provision for bad and doubtful debts were not deductible. As pointed out by the ld. CIT(A), the assessee is an established company assisted by a number of reputed professionals. The explanation that they were not aware of the provisions of law while making huge claims for deductions, is not tenable , therebeing no material in support of such claim. Apparently, in the computation of income under the head "Business" the assessee made incorrect claims not supported by any provision of law. Rather the relevant provisions did not provide for the deduction claimed either on facts or the eye of law, since bad debts were never written off . There is nothing to suggest that the claim regarding deduction for either provision for bad and doubtful debts or diminution in value of investments was bonafide or supported by any provisions under the Act. It is well established that so long as the assessee has not concealed any material fact or the factual information given by him has not been found to be incorrect, he will not be liable to imposition of penalty under Section 271(1)(c) of the Act, even if the claim made by him is not sustainable in law, provided that he either substantiates the explanation offered by him or the explanation, even if not substantiated, is found to be bonafide. If the explanation is neither substantiated nor shown to be bonafide, explanation 1 to Section 271(1)(c) would come in to play and the assessee will be liable to for the prescribed penalty. It is true that mere submitting a claim which is incorrect in law would not amount to giving inaccurate particulars of the income of the assessee, but it cannot be disputed that the claim made by the assessee needs to be bonafide. If the claim besides being incorrect in law is malafide, explanation 1 to Section 271(1) comes into play and work to the disadvantage of the assessee. In the present case, despite the fact that provision for bad and doubtful debts was expressly made not deductible in terms of the relevant provisions of sec. 36(1)(vii) of the Act, the assessee claimed the deduction, even when the amount had not been written off. We cannot overlook the fact that only a small percentage of the Income Tax Returns are picked up for scrutiny. If the assessee makes a claim which is not only incorrect in law but is also wholly without any basis and the explanation furnished by him for making such a claim is not found to be bonafide, it would be difficult to say that he would still not be liable to penalty under Section 271(1)(c) of the Act. If we take the view that a claim which is wholly untenable in law and has absolutely no foundation on which it could be made, the assessee would not be liable to imposition of penalty, even if he was not acting bonafide while making a claim of this nature, that would give a license to unscrupulous assessees to make wholly untenable and unsustainable claims without there being any basis for making them, in the hope that their return would not be picked up for scrutiny and they would be assessed on the basis of self Assessment under Section 143(1) of the Act and even if their case is selected for scrutiny, they can get away merely by paying the tax, which in any case, was payable by them. The consequence would be that the persons who make claims of this nature,  ctuated by an intention to evade tax otherwise payable by them would get away without paying the tax legally payable by them, if their cases are not picked up for scrutiny. This would take away the deterrent effect, which these penalty provisions in the Act have. We find that the assessee before us did not explain either to the AO/ld. CIT(A) and even to us as to in what circumstances and on account of whose mistake, the amounts claimed as deductions in this case were not added back, while computing the income of the assessee company. We cannot ignore the fact that the assessee is a company which is having professional assistance in computation of its income, and its accounts are compulsorily subjected to audit. In the absence of any details/explanation from the assessee, we fail to appreciate how such deductions could have been left out while computing the income of the assessee company and how it could also have escaped the attention of the auditors of, especially when the deduction for provision for bad and doubtful debts and provisions for diminution in value if investments were claimed in flagrant violation of provisions of law. In these circumstances, especially when explanation given by the assessee during the penalty proceedings has not been substantiated nor found to be bonafide and there is no material before us to take a different view in the matter, we are of the opinion that the ld. CIT(A) was justified in upholding the levy of penalty on  ccount of furnishing of inaccurate particulars of income in relation to provision for bad and doubtful debts and provision for diminution in the value of investments.

 

 

 

ORDER

 

A N Pahuja:

 

These cross appeals filed against an order dated 04-09-2006 of the ld. CIT(Appeals)-VIII, Ahmedabad ,raise the following grounds :

 

1 The learned Commissioner of Income-tax (Appeals) erred in holding that penalty u/s 271(1)(c) is leviable. It is submitted that in the facts and circumstances of the case there is neither concealment of income nor furnishing of any inaccurate particulars and hence provisions of section 271(1)(c) is not applicable. It is submitted that it be so held now.

 

1.1 The learned Commissioner of Income-tax (Appeals) erred in not appreciating the fact that there was no satisfaction as regards concealment of income or furnishing of any inaccurate particulars while passing the assessment order. It is submitted that in absence of such satisfaction penalty u/s 271(1)(c) can not be levied. It is submitted that it be so held now.

1.2 The learned Commissioner of Income-tax (Appeals) erred in confirming the penalty levied u/s 271(1)(c) of the Act on the disallowance made for provision made for bad and doubtful debts for Rs.1,62,81,557/- and provision made for diminution in value of the investments for Rs.21,98,638/- as per the norms of Reserve Bank of India. It is submitted that in the facts and circumstances of the case penalty u/s 271(1)(c) is not leviable. It is submitted that it be so held now. Your appellant craves leave to add, alter and/or amend all or any of the grounds before final hearing of the appeal.

 

1 “The Ld. CIT(A) erred in law and on the facts of the case in canceling the part of the penalty levied u/s 271(1)(c) of the I.T. Act, 1961 which was attributable to the disallowance of Rs.9.91 lacs u/s 14A of the I.T. Act on the ground that the addition sustained was made on estimate basis.

2 The Ld. CIT(A) has further erred in appreciating the fact that the said addition was confirmed by the Ld. CIT(A) in quantum appeal.

 3 The Ld. CIT(A) has also erred in appreciating the fact that the concealment penalty is leviable even where the additions are made on the estimated basis as held in the cases of CIT vs. Warasat Hussian 171 ITR 405 (PAT), Dr. K.D. Arora vs. CIT, 162 ITR 481 (PAT), CIT vs. Swarup Cold Storage & General Mills 136 ITR 435 (ALL), CIT vs. Kedarnath Ramnath 106 ITR 172 (ALL), CIT vs. E V Rajan 151 ITR 189 (MAD) & Addl. CIT vs. Lakshmi Ind. & Cold Storage Co. Ltd. 146 ITR 492 (ALL).

4 On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer.

 5 It is, therefore, prayed that the order of the Ld. CIT(A) may be cancelled and that of the Assessing Officer may be restored to the above effect.

2 Facts, in brief as per relevant orders are that return declaring income of s.16,17,56,630/- filed on 11-10-2001 by the assessee company, carrying on the business of providing loans/ finance & leasing/hi re purchase besides providing financial services, after being processed on 30.9.2002 u/s 143(1) of the Income-tax Act ,1961[hereinafter refer red to as the ‘Act ’] , was selected for ITA No.2078/Ahd/2006 & ITA No.2526/Ahd/2006 for AY 2001-02 Gujarat State Financial Services Ltd. scrutiny with the issue of not ice u/s 143(2) of the Act on 29.10.2002. The assessment was completed u/s 143(3) of the Act vide order dated 26-2-2004, determining total income of Rs.29,05,15,132/-.

Inter alia, following disallowances were made:

 

(1) U/s 14A Rs.6,98,72,062/ -

(2) Bad Debts Rs.1,62,81,557/ -

(3) Provision for diminution Rs. 21,98,638/ - in value of investments

(4) Income reversal Rs. 38,211/-

 

and penalty proceedings under sect ion 271(1) (c) of the Act were also initiated . In response, neither anybody at tended nor any reply was furnished .On appeal, the ld. CIT(A) vide his order dated 29.11.2004 upheld the following disallowances:

 

(1) U/s 14A Rs. 9,91,000/-

(2) Bad Debts Rs.1,62,81,557/ -

(3) Provision for diminution Rs. 21,98,638/ - in value of investments

 

Here it may be worth mentioning that the assessee’s appeal on the aforesaid disallowances was also dismissed by the ITAT vide order dated 10.7.2009 in ITA no.229/Ahd. /2005.

 

2.1. After receipt of order of the ld. CIT(A), in response to a show cause not iced dated 8.2.2006 issued before levy of penalty, the assessee replied on 15.2.2006 that they have neither concealed any income nor furnished any inaccurate particulars thereof and therefore, the provisions of section 271(1)(c) would not be applicable . It was argued that out of additions of Rs.12.87 crores, additions / disallowances of Rs.1.87 crores were confirmed in respect of provision for doubtful debts and provision for diminution in value of the investment besides disallowance u/s 14A of the Act. It was pointed out that the provision for doubtful debts and diminution in investments having Gujarat State Financial Services Ltd. been made in view of the RBI directionsand in compliance with the accounting standard and separately disclosed in the audited accounts, it was not a case of any concealment of income. While relying upon decisions in the case of CIT v. Calcutta Trading Corporation,166 ITR 29 (Cal.),J. K. Jaju v. CIT,181 ITR 410 (MP),CIT v. Inden Bislers,240 ITR 943(Mad), CIT v. Gujarat Machineries,67 TTJ 466 (Ahd), Shivam R. Processors Ltd. v. ACIT,69 TTJ 600 (Ahd),ITO v. Rajkot Rice and General Mill,110 Taxman 102 (Chgandigarh SMC) ,DCIT v. Smt. Pannaben C.Desai,112 Taxman 84) (Ahd), the assessee pleaded that mere addition itself would not attract penalty u/s. 271(1)(c) of the Act, particularly when there was a true and complete disclosure in the return of income filed. However, the AO did not accept the submissions of the assessee on the ground that i) during the year under consideration, the assessee company claimed exempted income on account of dividends of Rs.4,81,45,543/- u/s. 10(33) of the Act. The disallowance on account of interest on funds invested in exempted assets and administrative & other expenses of Rs.6,98,72,062/- made by the AO was restricted by the ld. CIT(A) to Rs.9,91,000/-. ii) the assessee claimed deduction for provision for bad and doubtful debts of Rs.1,61,81,556/-,even when the explanation to the relevant provisions of sec. 36(1)(vii) of the Act clearly mentioned that for the purpose of the said clause any bad debt or part thereof written off as irrecoverable in the accounts of the assessee shall not include any provision for bad and doubtful debts made in the accounts of the assessee. Moreover, assessee’s claim was not maintainable even u/s.28 of the Act ; iii) the claim for deduction of a sum of Rs.21,98,638/- on account of diminution in the value of the investments was not admissible, these investments being not stock-in-trade ; and iv) the actions of the assessee in claiming the deductions were deliberate and with willful intention to evade tax.

 

2.2 Accordingly, relying upon decision of the Hon'ble Gujarat high Court in the case of Jamnadas & Co vs CIT (1994) 210 ITR 218 and explanation 1 to section 271(1)(c) of the Act, the AO imposed a penalty of Rs.77,00,857/- for furnishing inaccurate particulars of income leading to concealment of income of Rs.1,94,71,195/- .According to the AO, the assessee committed the default of concealment of its income due to furnishing inaccurate particulars thereof.

 

3. On appeal, it was contended on behalf of the assessee that no justification was given in the assessment order regarding concealment of income or furnishing of inaccurate particulars nor any satisfaction was recorded by the AO . The AO had not stated whether penalty proceedings were initiated for concealment of income or for furnishing inaccurate particulars. While relying upon the decisions of Hon'ble Delhi High Court in Diwan Enterprises v. CIT 246 ITR 571,CIT v. Ram Cornmercial Enterprises Ltd. 246 ITR 568, CIT v. Auto Lamps Ltd. 278 ITR 32 and CIT v. B.R. Sharma 275 ITR 303, the assessee contended that in the absence of any such satisfaction being recorded in the assessment proceedings, the jurisdiction to initiate the penalty proceedings could not have been exercised. Relying upon the decisions in the case of Dahod Sahkari Kharid Vechan Sangh Ltd. V. CIT 149 Taxman 456(Guj), DC1T v. Rural Electrical Cooperative Society Limited 279 ITR 319(MP) and Dena Bank Ltd. 25 ITD 104(Bombay), it was further contended that being a Government Company, there was no mala fide intention in claiming the deduction. Relying on the decisions in the case of ITO v. C. Chhotalal Textiles (P) Ltd. 95 TTJ 436 (Mumbai ITAT), CIT v. Raj Bans Singh 276 ITR 351 (Allahabad &ITO v Smt. Purnima Devi Gupta 3 SOT 753 (Jodhpur ITAT),the assessee further pleaded that penalty can not be levied for estimated disallowance u/s 14A of the Act. It was submitted that provision made for bad and doubtful debts and provision for diminution in value of investments were in accordance with the prudential norms of the Reserve Bank of India and were shown on the face of profit and loss account ,the assessee being a Non-Banking Finance Company. It was argued that the RBI Act overrides the provisions of Income-tax Act and therefore, the provisions made in the profit and loss account were allowable as deduction u/s. 28/37(1) of the Act in view of decision of Delhi Tribunal in the case of Tedco Investment and financial Services Pvt. Ltd. reported at 82 TTJ 259. and decision of Chennai Tribunal in the case of Overseas Sanmar Ltd. reported at 86 ITD 602. Since the assessee was under a bonafide belief that these provisions were allowable deductions, penalty u/s. 271(l)(c) was not applicable. Without prejudice to these contentions, it was pleaded that the disallowance on account of provisions for bad debts was made in view of the amendment to section 36(1)(vi) retrospectively by the Finance Act, 2001 effective from 01-04-1989 and the assessee was not aware of this as it was not publicly known. Relying further upon decisions in the case of CIT v. Calcutta Trading Corporation 166 ITR 29, CIT v. Inden Bislers 249 ITR 942 (Mad), DCIT v. Gujarat Machineries, 47 TTJ 466 (Ahmedabad}and Shivram R Procesors Limited v. ACIT 69 TTJ 600 (Ahmedabad), the assessee added that mere addition sustained by CIT(A) cannot be the base for levy of concealment penalty. In the light of these submissions, the ld. CIT(A) upheld the levy of penalty in relation to disallowance on account of provision for bad and doubtful debts- Rs.1,62,81,557/- and provision for diminution in value of investments- Rs.21,98,638/- while cancelling the penalty attributable to disallowance of Rs.9.91 lacs sustained on estimated basis in the following terms:-

 

“5 I have carefully considered the submissions of the appellant and also perused the various judicial pronouncements filed in support of arguments of the appellant. I have also gone through the relevant assessment order and the penalty order passed by the AO. It is quite pertinent to refer to the computation statement of the appellant filed along with the return of income which is extracted as under for the sake of facility.

 

 

Particulars

Rs.

Rs.

Rs.

1. BUSINESS INCOME

Net Profit as per P&L A/c

Add:(1) Depreciation as per Books

 

123227452

64000000

 

72833695

 

(2) Provision for Taxation

LESS: Prior period adjustment a/c

LESS: Excess Provision of I.T.

 

--------------------

187227452

---------------

260061147

186567

--------------

259874580

1391745

--------------

258482835

 

 

ADD: Disallowables

1) Out of Misc. Exp.

TDS Penalty of AY 97-98

2) Out of Office Exp.

PF Penalty

LESS: ITEMS TREATED SEPARATELY

Profit on sale of investments

Profit on sale of assets (net)

Dividend Income

LESS: Interest on infrastructure Bonds /

Debentures Exempt u/s 10(23G)

SSNL Bonds

GIPCL-97 11% Debentures

ADD: Amount of Lease Equalization

debited to Profit and Loss A/c.

LESS: Depreciation as per Income Tax

 

 

 

 

 

5.1 The appellant had provided for bad and doubtful debts and diminution in value of investments in the profit and loss account with the following narrations:

 

Profit Before Provisions Against Non Per forming Assets as per RBI Direct ions 278091(000)

Less: Provision for Leave Encashment 1089(000) Less: Provision for Bad & Doubtful Debts

As per RBI Directions 16282(000) Provision for Diminution in value of Investments as per RBI Direct ions 2199(000) Income Reversal as per RBI

Direct ions dated 12t h May,1998 38(000) 19608(000)

Profit Before Depreciat ion and Tax 258483(000)

 

5.1.1 Thus as seen from the computation statement and the profit and loss account, the appellant had added back provision for taxation and reduced excess provision for income-tax but did not add back the provisions made in the profit and loss account for provision for bad debts and provision for diminution in value of investments. There are also no notes forming part of computation statement that the above provisions were claimed in view of section 45Q of the RBI Act. There is no mention as to the reliance on any of the judicial pronouncements that the said provisions were claimed as deduction u/s. 26 or u/s. 37. In fact, there is no mention in the computation statement as to the claim u/s. 36(l)(vii) as regards provisions for bad and doubtful debts or as regards diminution in value of investments. The appellant had started of from the profit figure before appropriations as per profit arid loss account and computed the income under head "Business" as extracted supra. It is an admitted fact that the amended provisions of section 36(1)(viii) was on the Statute as on the date of filing of return. The appellant also admits that they were no aware of the said Amendment as it was not publicly known. Thus, it leads to the inevitable conclusion that the provision of the Act as regards bad debt claim was given a go by. It is not disputed by the appellant that what they had debited in the profit and toss account was mere provision and not bad debt written off. It is to be stated with emphasis that the provisions of section 36(1)(vii) was effective from 01-04-1989 which necessitates write off of bad debts as irrecoverable in the accounts of the appellant. Only the explanation below clarifying that provision for bad and doubtful debts made in the accounts would not qualify as bad debt or part thereof written off as irrecoverable, was introduced by the Finance Act 2001 with retrospective effect from 01-04-1989. Thus, write off of bad debts in the accounts is a must for claiming deduction u/s. 36(l)(vii). The appellant is an established concern assisted by reputed professional firms. It cannot be their case that they were ignorant of even the base requirements of law while making huge claims for deduction. As already stated there is no specific mention in the computation statement as to which of the provision was applicable in making the claim for deductions on account of provision for bad and doubtful debts and diminution in value of investments. In other words, the computation of income under the head "Business" was incorrect on facts as well as in the eye of law. It was only during the assessment proceedings that the AO scrutinized the accounts and rejected the appellant's claim in this regard. Nothing was made apparent on the records as to the bona fide basis for making the above claim as deduction or for not adding back the provisions, debited to profit and loss account while preparing the statement of total income. This is a clear default deserving proper explanation from the appellant.

 

5.1.2 Before the AO vide letter dated 17-02-2004, the appellant claimed that the provision for bad and doubtful debts and provision for diminution in the value of investments having been made as per the RBI directions, they are allowable as deduction in the computation of total income. As seen from the assessment order, the said claim was negatived by the AO and sustained by CIT(A), If it were the case of the appellant that the retrospective amendment by way of Explanation to section 36(1)(vii) was unknown to them, then during the course of assessment proceedings when the AO specifically called for the details they should have revised the computation statement admitting their mistakes. This was not done. Instead, they resorted to the new claim of the provisions of the RBI Act overriding the provisions of Income-tax Act, which never formed part of the computation statement as discussed above. This clearly shows the after thought or as the case may be shifting stance of the appellant. There is no consistency as regards their having any bonafide belief that the provision made in the accounts for bad and doubtful debts and diminution in value of investments were indeed an allowable deduction. As already pointed out the provision as to the allowance of bad and doubtful debts is already there in the Statute and not applicable for the first time to the A.Y. 2001- 02. Explanation therein was only for the removal of doubts that mere provision will not tantamount to write off. It was not the case of the appellant that mere provision was and had been allowed upto A.Y. 2000-01. This being the case, there is no basis for the appellant to form any

bonafide belief in not adjusting the said provision in the computation statement.

 

5.1.3 Be that as it may, now I shall advert to the arguments on the legal aspects as put forth by the appellant:

 

5.1.4 (i) Non recording of reasons by the AO in the assessment order: The appellant extensively relied on various decisions of the Hon’ble Delhi High Court as discussed in the preceding paragraphs. For the sake of brevity, it is pertinent to refer to the decision of the Hon'ble Madras High Court squarely covering the above aspect in the case of M. Sajjanraj Nahar v. CIT 283 ITR 230. In the said decision the Hon'ble High Court held that the indication in the assessment order by the AO that penalty proceedings are initiated separately is sufficient to prove that the AO had satisfied himself in the course of assessment proceedings that the assessee had concealed his income. In coming to the above decision, the Hon'ble High Court extensively quoted the decision of Hon'ble Apex Court in the case of CIT v. S.V. Angidi Chettiar 44 ITR 739 vide para 27, 28, 29 & 30 which is ns under:

 “The question of initiating penalty proceedings under section 28(1) of the Indian income-tax Act. 1922 came up for consideration of the apex court in CIT v. S.V. Angidi Chettiar (1962) 44 ITR 739. which is also relied upon in the Delhi High Court in (a) CIT v. Ram Commercial Enterprises Ltd. (2000) 246 ITR 568; and (b) Diwan Enterprises v. CIT (2000) 246 ITR 571. The apex court in CIT v. S.V. Angidi Chettiar (1362) 44 ITR 739, held as follows (page 745):

 "The power to impose penalty under section 28 depends upon the satisfaction of the Income-lax Officer in the course of proceedings under the Act; it cannot be exercised if he is not satisfied about the existence of conditions specified in clauses (a), (b) and (c) before the proceedings are concluded. The proceeding to levy penalty has, however, not to be commenced by the Income-tax Officer before the completion of the assessment proceedings by the Income-tax Officer.

Satisfaction before conclusion of the proceeding under the Act, and not the issue of a notice or initiation of any step for imposing penalty is a condition for the exercise of the jurisdiction."

By placing reliance on the said decision in CIT v. S.V. Angidi Chettiar (1962) 44 ITR 739 (SC), the Delhi High Court in Diwan Enterprises v. CIT (2000) 246 ITR 571, held that satisfaction has to be before the issue of notice or initiation of any step for imposing penalty and such requisite satisfaction has to be recorded in the proceedings or otherwise, the penalty proceedings initiated would suffer a jurisdictional defect which cannot be cured; and that initiation of penalty proceedings is itself bad and consequently, all the subsequent proceedings leading up to the passing of penalty order must fail. The ratio laid down by the apex court in CIT v. S.V. Angidi Chettiar (1962) 44 ITR 739 is also followed in CIT v. Vikas Promoters P. Ltd. (2005) 277 ITR 337 by the Delhi High Court. But, with respect, we are unable to agree with the view expressed by the Delhi High Court in (a) CIT v. Ram Commercial Enterprises Ltd. (2000) 246 ITR 568; (b) Diwan Enterprises v. CIT (2000) 248 ITR 571; and (c) CIT v. Vlkas Promoters P. Ltd. (2005) 277 ITR 337, with regard to the reliance placed on the ratio laid down by the apex court in CIT v. S.V. Angidi Chettiar (1952) 44 STR 739, because in the said decision, the Supreme Court also observed that (page 745):

"There is no evidence on the record that the Income-tax Officer was not satisfied in the course of the assessment proceeding that the firms had concealed its income. The assessment, order is dated November 10,1951, and there is an endorsement at the foot of the assessment order by the ITO that action u/s 28 had been taken for concealment of income indicating clearly that the ITO was satisfied in the course of the assessment proceedings that the firm had concealed its income” (emphasis supplied) .

The above observation of the apex court in CIT v. S.V. Angidi Chettiar (1962) 44 ITR 739, dealing with the indication of the Assessing Officer as to the proposed penalty proceedings with regard to the concealment of income in the course of the assessment proceedings by the assessee. in our considered opinion, was not brought to the notice of the Delhi High Court in (a) CIT v. Ram Commercial Enterprises Ltd. (2000) 246 ITR 568; (b) Diwan Enterprises v. CIT (2000) 246 ITR 571 (Delhi); and (c) CIT v. Vlkas Promoters P. Ltd. (2005) 277 ITR 337 (Delhi). Therefore, the indication in the assessment order by the Assessing Officer that penalty proceedings are initiated separately is suffice to prove that the Assessing Officer had satisfied himself in the course of the assessment proceedings that the assessee had concealed his income, as in the instance case.”

 

 5.1.4.1 Thus, the reliance placed by the appellant on the decision of Hon'ble Delhi High Court squarely fails in view of the dissenting judgement of Hon'ble Madras High Court and the appellant's contentions h this regard are rejected.

5.1.5 Section 43Q of R.B.I, Act to override the provisions of I.T. Act: Though the appellant made an attempt to explain their claim as per the provisions of the R,BJ. Act overriding the I.T. Act, the said claim does not survive in view of the decision of the Hon'ble Madras High Court in the case of T.N. Tower finance infrastructure Development Corporation Limited v. JCIT 280 ITR 491 (Mad). In the said decision, it was clearly held that the RBI directions could not override the mandatory provisions of the I.T. Act. The said decision squarely covers the issue and the same is extracted as below:

"Held, that merely because the Reserve Bank of India had directed the assessee to provide for non-performing assets, that direction could not override the mandatory provisions of the Income-tax Act contained in section 36(1)(viia) which stipulate a deduction not exceeding 5 per cent of the total income only in respect of the provision for bad and doubtful debts which are predominately revenue in nature or trade related and not for provision for non performing assets which are of predominately capital nature. The assessee was not entitled to deduction, in view of the Explanation to section 36(1)(vii) which says that the provision for bad and doubtful debts made in the accounts of the assessee is not an allowable deduction."

 

5.1.5.1 Thus, the claim of the appellant that their claim is allowable in view of their compliance to RBI directions of prudential norms is of no avail. It is to be stated at this juncture even this claim was not made obvious in the computation statement and was made only as an after thought.

5.1.6 The next legal aspect to be considered is the existence of malafide intention in the light of judgment of the Hon'ble Gujarat High Court in the case of Dahod Sahakari Kharid Vechan Sangh limited referred to in the preceding paragraphs. The said decision was rendered in the context of a Co-operative Society which received a sum from the Insurance Company on withdrawal from Group Insurance Scheme being premium paid in earlier years and the same was credited to the Gratuity Fund Account directly instead of routing the said receipt through the profit and loss account. In the said situation, it was held to be a bonafide mistake while preparing return of income and that the omission had occurred not with an intention but due to oversight and that there was nothing on record to show that any particular individual member of the Assessee Society had any personal interest in committing act of omission and hence no penalty was exigible. The facts of the case on hand as discussed in detail above are quite different and that it is not a mere receipt that was routed through the account which was omitted to be adjusted h the computation statement. But the present case is a sheer default of making a claim without carrying out the requisite write off in the accounts of the respective parties. In fact, it is a clear violation of the provisions of section 36(1)(vii). The only provision under which the said claim could have been allowed. All other subsequent claims are only afterthought and further rejected as untenable in view of the above discussion. The AO had rightly rejected the claim of the appellant as regards the provision for doubtful debts and the provision for diminution in value of assets as legally wrong claims and not in accordance with section 36(1)(vii) and further that the appellant did not furnish full and complete particulars of their claim either in the computation statement or during the course of assessment. The fact that the bad debts were not written off in the accounts remained undisclosed.

 

5.1.6.1 Why the appellant did not satisfy this section 36(1)(vii) also remains unexplained. Their claim that the RBI Act overrides the I.T. provisions remain over ruled in the light of the Hon'ble Madras High Court decision cited above. As regards the provision for diminution in value of investments, the same is rightly held by the AO as temporary fluctuation in any case not allowable deduction under the I.T. Act. The appellant has failed to satisfactorily explain as to the basis and bonafide on which they made the above claim. The appellant also failed to explain how they were ignorant of an important provision of the I.T. Act. Even if it were so then they should have revised their computation statement in accordance with the said provisions during the course of assessment proceedings, which they did not do. Instead of an afterthought they relied on the provisions of RBI Act which is of no avail in view of the Hon'ble Madras High Court decision cited above (280 ITR 491). It is also to be noted that whenever the legislature thought it fit to give due weightage to the provisions of the RBI Act, they have referred to the same in the I.T. Act itself. As for example, section 36(1)(via) proviso. Thus, when a specific provision is there to govern the issue, the appellant should satisfy the requisite conditions to avail the same and cannot hover around citing inapplicable provisions of law which could not form any basis at all. In short, the provision for bad and doubtful debts made in the accounts is only for book purpose and for income-tax computation it should have been added back there being no write off in the books of the appellant. The same was not done and the reason for not doing so is not explained by the appellant. There is also no legal basis for forming a belief that the same is an allowable deduction, in view of the specific provision, namely, section 36(l)(vii), being not satisfied. The same argument holds good as regards the diminution in value of investments which is purely notional. The failure to adjust the above entries in the computation of statement cannot be claimed to be either of ignorance of law or on any sound factual or legal basis. In fact, there is no case for any bonafide belief on the date of filing of the return along with computation statement. Had the return been accepted on the basis of the computation statement, such inadmissible claim leading to under assessment would have escaped the due treatment under the taw. in that view of the matter, I am convinced that the action of the AO in levying penalty holding that the appellant furnished inaccurate particulars by way of incorrect computation of income leading to under statement of taxable income is justified calling for levy of penalty u/s. 271(l)(c). However, as regards the disallowance of Rs.9.91 lacs sustained on an estimate basis in view of the legal pronouncements supporting the claim of the appellant, no penalty u/s. 271(l)(c) is leviable there being no furnishing of inaccurate particulars or concealment of information h this regard. In effect, the penalty u/s. 271(l)(c) attributable to provision for bad and doubtful debts at Rs.1,62,81,557/- and provision for diminution in value of investments at Rs.21,98,638/- is confirmed.”

4. The assessee is now in appeal before us against findings of the ld. CIT(A) in confirming the levy of penalty on the disallowance of provision for bad and doubtful debts- Rs.1,62,81,557/- and provision made for diminut ion in value of the investments- Rs.21,98,638/ - while the Revenue is in appeal against cancel lat ion of penalty in relation to estimated disallowance of Rs.9.91 lacs. The learned AR on behalf of the assessee submitted that the AO did not record the requisite satisfact ion while init iat ing penalty proceedings u/s 271(1) (c) of the Act and the disallowances have been made on estimated basis. . The learned AR further relied upon the decisions in the case of Overseas Sanmar Financial Ltd. vs. JCIT (2003) 86 ITD 602 (Chennai), Tedco Investment & Financial Services (P) Ltd. vs. DCIT (2004) 82 TTJ (Del) 259,CIT vs. Raj Bans Singh (2005) 276 ITR 351 (Al l ),) ITO vs. C Chhotalal Text iles (P) Ltd. (2005) 95 TTJ (Mumbai) 436,T N Power Finance and Inf rastructure Development Corporat ion Ltd. vs. JCIT (2006) 280 ITR 491 (Mad),CIT vs. Lakhani India Ltd. (2009) 17 DTR 304 (P&H), M/s West Coast Indust ries vs. ACIT 2009 – TIOL – 446, CIT vs. Haryana Warehousing Corporat ion (2009) 314 ITR 215 (P&H),CIT vs. Harshvardhan Chemicals and Minerals Ltd. (2003) 259 ITR 213 (Raj),Dahod Sahakari Kharid Vechan Sangh Ltd. vs. CIT (2005) 149 Taxman 456 (Guj) ,CIT vs. Nath Bros. Exim Internat ional (2007) 288 ITR 670 (Delhi ),CIT vs. Internat ional Audio Visual (2007) 288 ITR 570 (Delhi ), J K Jajoo vs. CIT (1990) 181 ITR 410 (MP),CIT vs. Nepani Bir i Company Trust (1991) 190 ITR 402 (All ),Sahyog Sahkar  Shram Samvida Samit i Ltd. vs. ACIT (2007) 111 TTJ (Lucknow) 540 and Commissioner of Income Tax vs. Reliance Petro Products Pvt. Ltd.: (2010) 322 ITR 158 (SC), and submitted that the AO had not been able to show any deliberate at tempt or mensrea for concealing income by the assessee. The ld. DR, on the other hand, supported the order of the AO and submit ted that the assessee committed the default of concealment of its income by furnishing inaccurate particulars thereof in relation to their claim for deduct ion of provision for bad and doubt ful debts- Rs.1,62,81,557/- and provision made for diminution in value of the investments- Rs.21,98,638/ -.

 

5. We have heard both the parties and gone through the facts of the case as also the decisions relied upon on behalf of the assessee. At the outset , we may have a look at the relevant provisions of section 271(1)(c) of the Act, which read as under:

“271.Failure to furnish returns, comply with notices, concealment of income, etc.

(1) If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person-

……………………………………………………………………………..

(c) has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty,-

(iii) in the cases referred to in clause (c) , in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income Explanation 1.-Where in respect of any facts material to the computation of the total income of any person under this Act,- (A) such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Deputy Commissioner (Appeals) or the Commissioner (Appeals) to be false, or

(B) such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bonafide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause

(c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed.

 

 5.1 In section 271 of the Income-tax Act, after sub-section (1A), the following sub-section has been inserted by Finance Act,2008 with effect from the 1st day of April, 1989, :-

"(1B) Where any amount is added or disallowed in computing the total income or loss of an assessee in any order of assessment or reassessment and the said order contains a direction for initiation of penalty proceedings under clause (c) of sub-section (1), such an order of assessment or reassessment shall be deemed to constitute satisfaction of the Assessing Officer for initiation of the penalty proceedings under the said clause (c).".

 

5.2 As is evident from the aforesaid cl. (c) of s. 271(1) of the Act, the words used are 'has concealed the particulars of his income' or furnished 'inaccurate particulars of such income'. Thus, both in case of concealment and inaccuracy, the phrase 'particulars of income' has been used. The legislature has not used the words 'concealed his income'. From this it would be apparent that penal provision would operate when there is a failure to disclose fully or truly all the particulars. The words 'particulars of income' refer to the facts which lead to the correct computation of income in accordance with the provisions of the Act. So when any fact material to the determination of an item as income or material to the correct computation is not filed or that which is filed is not accurate, then the assessee would be liable to penalty under s. 271(1)(c) of the Act. In the instant case, the ld. CIT(A) upheld the levy of penalty 271(1)(c) of the Act since the assessee furnished inaccurate particulars of the income by claiming provision for bad debts and provision for diminution of investments in violation of provisions of the Act. Rather the provisions of the Act expressly debar deduction of such provision for bad debts and provision for diminution of investments. The expression 'has concealed the particulars of income' and 'has furnished inaccurate particulars of income' have not been defined either in section 271 or elsewhere in the Act. However, notwithstanding the difference in the two circumstances, it is now well established that they lead to the same effect namely, keeping off a certain portion of the income from the return. According to Law Lexicon, the word "conceal" means:

"to hide or keep secret. The word 'conceal' is con+celare 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."

5.3 If the disclosure of facts is incorrect or false to the knowledge of the assessee and it is established, then such disclosure cannot take it out from the purview of the act of concealment of particulars or furnishing inaccurate particulars thereof for the purpose of levy of penalty. The penalty u/s 271(1) (c) of the Act is leviable if the AO is satisfied in the course of any proceedings under this Act that any person has concealed the particulars of his income or furnished inaccurate particulars of such income. Here we may point out that the decisions relied upon by the assessee on the issue of recording of satisfaction by the AO before initiating penal ty proceedings u/s 271(1) (c) of the Act are no longer relevant in view of sub-section 1B inserted in section 271 of the Act by ITA Finance Act, 2008. The said provision purports to create a fiction by which satisfaction of the AO is deemed to have been recorded in cases where an addition or disallowance is made by the assessing officer and a direction for initiation of penalty proceedings is issued. The said provision is made effective retrospectively with effect from 1st April, 1989. The ld. AR on behalf of the assessee has not explained as to how the decisions relied upon by him regarding recording of satisfaction were relevant in view of the said provisions of sec. 271(1B) of the Act.

 

5.4 It is well settled that assessment proceedings and penalty proceedings are separate and distinct and as held by Hon'ble Supreme Court in the case of Ananthraman Veerasinghaiah & Co. Vs. CIT - 123 ITR 457; the finding in the assessment proceedings cannot be regarded as conclusive for the purposes of the penalty proceedings. It is, therefore, necessary to reappreciate and reconsider the matter so as to find out as to whether the addition made in the quantum proceedings actually represents the concealment on the part of the assessee as envisaged in sec. 271(1 )(c) of the Act and whether it is a fit case to impose the penalty by invoking the said provisions. Explanation 1 to sect ion 271(1) (c) in respect of any fact relating to the computation of total income states that the amount added or disallowed in computing the total income of an assessee shall be deemed to be the income in respect of which particulars have been concealed. This deeming provision for concealment is not absolute one. The presumption under the explanation 1 is rebut table and not conclusive. The assessee can submit the explanation as the onus shifts on to the assessee to prove that he has not concealed the particulars of the income. The assessee in the instant case submitted an explanation, wherein in relation to their claim for provision for bad and doubtful debts , it was pointed out on behalf of the assessee that they were not aware of the amendment introduced by the Finance Act 2001 with retrospective effect from 01-04-1989,as it was not publicly known and that RBI directions override the provisions of the Act. The ld. CIT(A) found that there was no mention in the computation statement as to the claim u/s. 36(l)(vii) as regards provisions for bad and doubtful debts or as regards diminution in value of investments. Undisputedly, what the assessee had debited in the profit and toss account was mere provision and not bad debts written off. The relevant provisions of section 36(1)(vii) of the Act effective from 01-04-1989 stipulate that bad debts written off of as irrecoverable in the accounts of the assessee , alone were deductible. The explanation introduced by the Finance Act 2001 with retrospective effect from 01- 04-1989 clarifies that provision for bad and doubtful debts were not deductible. As pointed out by the ld. CIT(A), the assessee is an established company assisted by a number of reputed professionals. The explanation that they were not aware of the provisions of law while making huge claims for deductions, is not tenable , therebeing no material in support of such claim. Apparently, in the computation of income under the head "Business" the assessee made incorrect claims not supported by any provision of law. Rather the relevant provisions did not provide for the deduction claimed either on facts or the eye of law, since bad debts were never written off . There is nothing to suggest that the claim regarding deduction for either provision for bad and doubtful debts or diminution in value of investments was bonafide or supported by any provisions under the Act. It is well established that so long as the assessee has not concealed any material fact or the factual information given by him has not been found to be incorrect, he will not be liable to imposition of penalty under Section 271(1)(c) of the Act, even if the claim made by him is not sustainable in law, provided that he either substantiates the explanation offered by him or the explanation, even if not substantiated, is found to be bonafide. If the explanation is neither substantiated nor shown to be bonafide, explanation 1 to Section 271(1)(c) would come in to play and the assessee will be liable to for the prescribed penalty. It is true that mere submitting a claim which is incorrect in law would not amount to giving inaccurate particulars of the income of the assessee, but it cannot be disputed that the claim made by the assessee needs to be bonafide. If the claim besides being incorrect in law is malafide, explanation 1 to Section 271(1) comes into play and work to the disadvantage of the assessee. In the present case, despite the fact that provision for bad and doubtful debts was expressly made not deductible in terms of the relevant provisions of sec. 36(1)(vii) of the Act, the assessee claimed the deduction, even when the amount had not been written off.

We cannot overlook the fact that only a small percentage of the Income Tax Returns are picked up for scrutiny. If the assessee makes a claim which is not only incorrect in law but is also wholly without any basis and the explanation furnished by him for making such a claim is not found to be bonafide, it would be difficult to say that he would still not be liable to penalty under Section 271(1)(c) of the Act. If we take the view that a claim which is wholly untenable in law and has absolutely no foundation on which it could be made, the assessee would not be liable to imposition of penalty, even if he was not acting bonafide while making a claim of this nature, that would give a license to unscrupulous assessees to make wholly untenable and unsustainable claims without there being any basis for making them, in the hope that their return would not be picked up for scrutiny and they would be assessed on the basis of self Assessment under Section 143(1) of the Act and even if their case is selected for scrutiny, they can get away merely by paying the tax, which in any case, was payable by them. The consequence would be that the persons who make claims of this nature,  ctuated by an intention to evade tax otherwise payable by them would get away without paying the tax legally payable by them, if their cases are not picked up for scrutiny. This would take away the deterrent effect, which these penalty provisions in the Act have. We find that the assessee before us did not explain either to the AO/ld. CIT(A) and even to us as to in what circumstances and on account of whose mistake, the amounts claimed as deductions in this case were not added back, while computing the income of the assessee company. We cannot ignore the fact that the assessee is a company which is having professional assistance in computation of its income, and its accounts are compulsorily subjected to audit. In the absence of any details/explanation from the assessee, we fail to appreciate how such deductions could have been left out while computing the income of the assessee company and how it could also have escaped the attention of the auditors of , especially when the deduction for provision for bad and doubtful debts and provisions for diminution in value if investments were claimed in flagrant violation of provisions of law. In these circumstances, especially when explanation given by the assessee during the penalty proceedings has not been substantiated nor found to be bonafide and there is no material before us to take a different view in the matter, we are of the opinion that the ld. CIT(A) was justified in upholding the levy of penalty on  ccount of furnishing of inaccurate particulars of income in relation to provision for bad and doubtful debts and provision for diminution in the value of investments. In terms of provisions of sec. 271(1)(c) of the Act read with explanation 1 thereto and the judicial pronouncements in the case of B.A. Balasubramaniam & Bros. Co. v. CIT [1999] 157 CTR 556(SC), CIT v. B.A. Balasubramaniam & Bros. [1984] 40 CTR (Mad.)/[1985] 152 ITR 529 (Mad.) , CIT v. Mussadilal Ram Bharose [1987] 60 CTR (SC) 34/[ 1987] 165 ITR 14 (SC); TC 50 R. 474; CIT v. K.R. Sadayappan [1990] 86 CTR (SC) 120; [1990] 185 ITR 49 (SC); TC 50 R. 795, Addl. CIT v. Jeevan Lal Sah [1994] 117 CTR (SC) 130; [1994] 205 ITR 244 (SC); TC 50 R. 973 and K.P.Madhusudanan vs. CIT,251 ITR 99(SC), it is well established that whenever there is difference between the returned and assessed income, there is inference of concealment. The explanation 1 to sec. 271(1)(c) of the Act raises a presumption that can be rebutted by the assessee with reference to facts of the case. Thus, the onus is on the assessee to rebut the inference of concealment. The absence of explanation itself would attract penalty. The explanation offered by the assessee should not be false. The onus laid down upon the assessee to rebut the presumption raised under explanation 1 would not be discharged by any fantastic or fanciful explanation. It is not the law that any and every explanation has to be accepted. Since the assessee failed to substantiate their explanation in respect of amount in relation to disallowance on account of provision for bad and doubtful debts- Rs.1,62,81,557/- and provision for diminution in value of investments- Rs.21,98,638/-, the onus laid down upon the assessee in terms of explanation 1(B) to sec. 271(1)(c) of the Act remains undischarged. The ITA No.2078/Ahd/2006 assessee has neither substantiated his explanation nor proved that such an explanation is bonafide before the lower authorities . Thus, it cannot be said that in such a case, there could be no scope for saying that the assessee is guilty of furnishing of inaccurate particulars of income ., warranting penalty under section 271(1)(c) of the Act. Even if the AO/CIT(A) have not specifically invoked the explanation 1 to sec. 271(1)(c), it had to be considered at the appellate stage in view of decision of Hon’ble Bombay High Court in CIT Vs. SMJ Builders,262 ITR 60(Bom.) and of Hon’ble Apex Court in K.P.Madhusudanan,251 ITR 99(SC). There is no discretion on the Assessing Officer as to whether he can invoke the explanation or not. We agree with the findings of the ld. CIT(A) that there is no material in support of the claim for deduction of the aforesaid provisions or for not adding back the provisions, debited to profit and loss account while preparing the statement of total income. 5.5 Hon’ble Supreme court in the case of K.P.Madhusudanan(supra) held that “We find it difficult to accept as correct the two judgments aforementioned. The Explanation to section 271(1)(c) is a part of section 271. When the Income-tax Officer or the Appellate Assistant Commissioner issues to an assessee a notice under section 271, he makes the assessee aware that the provisions thereof are to be used against him. These provisions include the Explanation. By reason of the Explanation, where the total income returned by the assessee is less than 80 per cent. of the total income assessed under section 143 or 144 or 147, reduced to the extent therein provided, the assessee is deemed to have concealed the particulars of his income or furnished inaccurate particulars thereof, unless he proves that the failure to return the correct income did not arise from any fraud or neglect on his part. The assessee is, therefore, by virtue of the notice under section 271 put to notice that if he does not prove, in the circumstances stated in the Explanation,, that his failure to return his correct income was not due to fraud or neglect, he shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars thereof and, consequently, be liable to the penalty provided by that section. No express invocation of the Explanation to section 271 in the notice under section 271 is, in our view, necessary before the provisions of the Explanation therein are applied. The High Court at Bombay was, therefore, in error in the view that it took and the Division Bench in the impugned judgment was right.”

 

5.6. Similarly in the case of CIT v. Shama Magazine [1995] 213 ITR 64/82 Taxman 614, it was held by the Hon'ble Delhi High Court that whenever there was a failure on the part of the assessee in the circumstances referred to in Explanation to section 271(1)(c), the statutory presumption automatically followed and it had to be deemed that the assessee had concealed the particulars of his income. Though the said decision of the Delhi High Court relates to the assessment year 1964-65, the proposition of law and the ratio laid down in that case is equally applicable to Explanation 1 to section 271(1)(c) inserted by Taxation Laws (Amendment) Act, 1975, w.e.f. 1-4-1976.

 

5.7 The reliance on the decisions on behalf of the assessee in support of their assertion that mere disallowance of a claim for deduction of aforesaid provisions would not attract penalty, is totally misplaced since the assessee did not place any evidence before us regarding bonafide of their claim for deduction on account of provision for bad and doubtful debts and provision for diminution in value of investments nor referred us to any provision in the Act in support of such claim. It may be pointed out that in quantum appeal, the ITAT upheld the disallowance of provisions for bad and doubtful debts as also provision for diminution in value of investments relying upon the decision in the case of Gujrat Gas Financial Services Ltd. Vs. ACIT,115 ITD 218(Ahmedabad). Even the reliance on the decisions in the case of Overseas Sanmar Financial Ltd. vs. JCIT (2003) 86 ITD 602 (Chennai) and Tedco Investment & Financial Services (P) Ltd. vs. DCIT (2004) 82 TTJ (Del) 259 is also misplaced in view of decision of the Hon’ble Apex Court in Southern Technologies Ltd. Vs. JCIT, in civil appeal no. 1337/2003 in their decision dated 11.1.2010,wherein it was pointed out that the essence of RBI directions under Chapter IIIB of the RBI Act, 1934, deal essentially with Income Recognition. They force the NBFCs to disclose the amount of NPA in their financial accounts. They force the NBFCs to reflect "true and correct" profits. By virtue of Section 45Q, an overriding effect is given to the Directions 1998 vis-a-vis "income recognition" principles in the Companies Act, 1956. These Directions constitute a code by itself. However, these Directions 1998 and the IT Act operate in different areas. These Directions 1998 have nothing to do with computation of taxable income. These Directions cannot overrule the "permissible deductions" or "their exclusion" under the IT Act. The inconsistency between these Directions and Companies Act was only in the matter of Income Recognition and presentation of Financial Statements. The Accounting Policies adopted by an NBFC cannot determine the taxable income, the Hon’ble Apex Court observed. It was further held that “ As stated above, Section 36(1)(vii) after 1.4.1989 draws a distinction between write off and provision for doubtful debt. The IT Act deals only with doubtful debt. It is for the assessee to establish that the provision is made as the loan is irrecoverable. However, in view of Explanation which keeps such a provision outside the scope of "written off" bad debt, Section 37 cannot come in. If an item falls under Sections 30 to 36, but is excluded by an Explanation to Section 36(1)(vii) then Section 37 cannot come in. Section 37 applies only to items which do not fall in Sections 30 to 36. If a provision for doubtful debt is expressly excluded from Section 36(1)(vii) then such a provision cannot claim deduction under Section 37 of the IT Act even on the basis of "real income theory" as explained above. “5.8 Though the assessee made an attempt to explain their claim as per the provisions of the R,BI. Act overriding the I.T. Act, the said claim does not survive in view of the decision of the Hon'ble Madras High Court in the case of T.N. Tower finance infrastructure Development Corporation Limited v. JCIT 280 ITR 491 (Mad) and aforesaid decision of the Hon’ble Apex Court. Moreover, as already pointed out , Hon’ble Supreme Court in their decision in the case of K.P.Madhusdanan,251 ITR 99 held that the explanation to section 271(1)(c) is a part of section 271. When the AO or the CIT(A) issues to an assessee a notice under section 271, he makes the assessee aware that the provisions thereof are to be used against him. These provisions include the explanation. By reason of the explanation, the assessee is deemed to have concealed the particulars of his income or furnished inaccurate particulars thereof, unless he proves that the failure to return the correct income did not arise from any fraud or neglect on his part. The assessee is, therefore, by virtue of the notice under section 271 put to notice that if he does not prove, in the circumstances stated in the explanation, that his failure to return his correct income was not due to fraud or neglect, he shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars thereof and, consequently, be liable to the penalty provided by that section..

5.9 In their decision in the case of Usha Fertilisers vs. CIT,269 ITR 591(Guj), the Hon’ble jurisdictional High Court, while upholding the levy of penalty observed That The Supreme Court in the case of Mussadilal Ram Bharose [1987] 165 ITR 14 has specifically laid down the scope of the Explanation in the following words:

"The position, therefore, in law is clear. If the returned income is less than 80 per cent, of the assessed income, the presumption is raised against the assessee that the assessee is guilty of fraud or gross or willful neglect as a result of which              he has concealed the income but this presumption can be rebutted. The rebuttal must be on materials relevant and cogent." As to what could be the explanation by which the assessee can rebut the presumption raised against it, is stated by the apex court in the same decision in the following words while confirming the view expressed by the Full Bench of the Patna High Court in the case of CIT v. Nathulal Agarwala and Sons [1985] 153 ITR 292:

"The Patna High Court emphasised that as to the nature of the explanation to be rendered by the assessee, it was plain on principle that it was not the law that the moment any fantastic or unacceptable explanation was given, the burden placed upon him would be discharged and the presumption rebutted we agree. We further agree that it is not the law that any and every explanation by the assessee must be accepted. It must be an acceptable explanation, acceptable to a fact finding body. We are aware that it would not be possible for the High Court to enter into a fact finding exercise or reappreciate the evidence and we do not propose to do so. However, at the same time, it is apparent that the burden which is cast on the assessee remains undischarged when one applies the principles laid down by the apex court. As observed, the explanation has to be one which is not fantastic or unacceptable. It is not the law that any and every explanation by the assessee must be accepted. …………………."

 

5.10 The assessee before us failed to substantiate their explanation that they were not aware of provisions of explanation introduced by the Finance Act, 2001 w.e.f 1.4.1989 or that the RBI guidelines override the provisions of the Act or that their explanation was bonafide. Even it has not been stated as to on account of whose mistake, these deductions were claimed and consequently the amounts were left to be added back. Reliance on certain decisions of the ITAT while making such a claim is misplaced in view of aforesaid decision in the case of Southern Technologies Ltd.(supra). Needless to say that decision of an Apex Court only clarifies the law and no new law is laid down. It is only the legislature which can create a law and not the Court. The courts do not legislate. Since the assessee failed to establish the bonafide of their claim, therefore, in terms of explanation 1 to section 271(1)(c) of the Act, the onus is not discharged by the assesseer, despite sufficient opportunity allowed by the AO. Thus, levy of penalty

is justified.[CIT Vs. Altron Electronics India Ltd.,301 ITR 66(Kar)].

 

5.11 Moreover, it is a settled law that in economic offences, the statutory liability to pay either duty or tax is nothing but a strict liability where the question of proving beyond the shadow of doubt one's existence of bona fide belief that amount is not taxable does not arise. It goes without saying that any violation of the law or rules relating to economic offences, either relating to the payment of duty or tax as the case may be, the theory of mensrea is not attracted. In such matters, the rules of interpretation contemplate a strict interpretation rather than a liberal and wider interpretation. The breach of civil obligation which attracts a penalty under the provisions of an Act would immediately attract the levy of penalty irrespective of the fact whether the contravention was made by the defaulter with any guilty intention or not, vide Chairman, SEBI v. Shriram Mutual Fund [2006] 131 Comp Cases 591 (SC) ; [2006] 5 SCC 361. This view has been reiterated by the Hon’ble Supreme Court in their decision dated 29.9.2008 in the case of Union of India and others Vs. Dharmendra Textile Processors and others, in civil appeal nos.10289 -10303 of 2003, now reported in 306 ITR 227 (SC). In the light of the said decision , reliance on the decision in the case of Dahod Sahakari Kharid Vechan Sangh Ltd.(supra) is totally misplaced. We are of the opinion that no distinction can be made while considering applicability of explanation 1 to sec. 271(1)(c) of the Act between a Government Company and other companies, since there is no such provision in the Act

 

5.12 As regards reliance on behalf of the assesseee on the decision of Hon’ble Supreme Court in Commissioner of Income Tax vs. Reliance Petro Products Pvt. Ltd.: (2010) 322 ITR 158 (SC), is concerned, in that case, the assessee had claimed interest under Section 36(1)(iii) of the Act. The interest was paid on the loan which the assessee had utilized for purchasing some IPL shares by way of its business policies. However, the assessee did not earn any income by way of dividend from those shares. It was submitted before the Supreme Court that the assessee company was an investment company and that in its own case for the Assessment Year 2000-01 the Commissioner (Appeals) had deleted the disallowance of interest made by the Assessment Officer and the Tribunal had also confirmed the stand of the Commissioner (Appeals) for that year and it was on the basis of this that the expenditure was claimed. The Income Tax Appellate Tribunal had, however, restored the issue back to the Assessing Officer. In the appeal arising out of penalty proceedings, the Tribunal, in these circumstances, was of the view that the confirmation of disallowance by the Tribunal did not mean that the assessee had concealed the income or had filed inaccurate particulars thereof. The Tribunal felt that the bona fides of the explanation were clearly proved from the fact that the High Court admitted the appeal of the assessee about the disallowance of the interest. The Tribunal held that if there could be two views about the claims of the assessee, the explanation offered by it cannot be said to be false. The penalty was accordingly deleted by the Tribunal. The order of the Tribunal was maintained by the High Court. The Supreme Court was of the view that under Section 271(1)(c), there has to be concealment of income of the assessee or he must have furnished inaccurate particulars of his income. The contention of the Revenue that it was a case of furnishing of inaccurate by making incorrect claim for the expenditure on interest was rejected noticing that the words “particulars” used in Section 271(1)(c) would embrace the meaning of the details of the claim made by the assessee and that the assessee before the Court had not given any such information which was found to be incorrect or inaccurate. After considering the meaning of “inaccurate” given in Webster’s Dictionary, the Court was of the view that inaccurate particulars would mean the details supplied in the return which are not accurate, not exact or correct, not according to truth, or erroneous. In the case before us, the assessee claimed deduction for provision for bad and doubtful debts and provision for diminution in value of investments in violation of provisions of the Act and not an iota of evidence was placed before the AO./ CIT(A) or even before us , in relation to the bonafide of the claim. As is apparent from the findings of the ld. CIT(A), the claim made in the return was not supported either on facts or in law. Thus , the assessee while claiming deduction of the aforesaid provisions furnishe inaccurate particulars. Thus, reliance on the said decision, in our opinion, is totally misplaced.

 

5.13 The ld. AR on behalf of the assessee has not demonstrated as to how the facts in the decisions in the case of Lakhani India Ltd. (supra) West Coast Industries(supra), Nath Bros. EximInternat ional (supra) Harshvardhan Chemicals and Minerals Ltd. (supra) Nepani Biri Company Trust(supra) International Audio Visual (supra) J K Jajoo(supra) and Haryana Warehousing Corporation (supra) are parallel to the facts of the case under consideration, especially when in none of these decisions issue of claim of deduct ion on account of provisions for bad and doubt ful debts or provision for diminution in value of investments was involved. In the instant case, deduct ions have been claimed on account of provision for bad and doubtful debts and provision for diminution in value of investments in express violation of provisions of law and the issue is not at all debatable while the assessee failed to discharge the onus laid down upon them in terms of explanation 1B to sec. 271(1)(c) of the Act . We find from the impugned orders that the penalty has been levied for concealing income by furnishing inaccurate particulars in relation to claims for deduct ion on account of provision for bad and doubtful debts and provision for diminution in value of investments . There is no such finding either by the AO or the ld. CIT(A) that penalty has been levied for concealment of particulars of income also as contended on behalf of the assessee.

 

5.14 Hon’ble Allahabad High court held in the case of Sangam Enterprises Vs. CIT,288 ITR 396(All) that

 

“Having given our anxious consideration to the contention raised by Shri Mahajan, we find that after the insertion of Explanation 1 to section 271(1)(c) of the Act by the Taxation Laws (Amendment) Act, 1975, if the explanation offered by the assessee regarding the additions is either found to be false and remained unsubstantiated, the additions so made are deemed to be the concealed income, and therefore, the penalty provisions are attracted. The decision relied upon by the Tribunal relates to the assessment years prior to April 1, 1976, when the present Explanation was not in the statute book, and, therefore, they are not applicable in the present case. We are therefore, of the considered opinion that the Tribunal has completely misdirected itself in cancelling the penalty.”

 

5.15 In the case under consideration, the explanation given by the assessee during the assessment proceedings and reiterated in penalty proceedings has not been substantiated nor has been found to be bonafide, especially when the assessee before us did not explain either to the AO/CIT(A)or to us as to in what circumstances and on account of whose mistake, the amounts claimed as deductions in this case were not added back while computing the income of the assessee company in terms of the relevant provisions of the Act. The assessee is a Government company having professional assistance in computation of its income, and its accounts are compulsorily subjected to audit. In the absence of any details/evidence from the assessee, we fail to appreciate how such deductions could have been left out while computing the income of the assessee company and how these escaped the attention of the auditors of the company. Since the onus placed upon the assessee to explain the difference in the returned income and finally assessed income has not been discharged, in terms of explanation 1(B) to sec. 271(1)(c) of the Act, the amount added in computing the total income is deemed to represent income in respect of which particulars have been concealed. The ld. AR on behalf of the assessee has not referred us to any material so as to enable us to take a different view in the matter.

 

5.16 In the light of aforesaid decisions of Hon’ble Apex Court and jurisdictional High Court as also of other High Courts, the burden which lies on the assessee is not discharged by convincing explanation and evidence nor it is law that any explanation offered by the assessee must be accepted. We, therefore, have no alternative but to uphold the order of the ld. CIT (Appeals) insofar as levy of penalty on the amount in relation to claim for deduction of provision for bad and doubtful debts and provision for diminution in value of investments, is concerned.

 

6. As regards appeal of the Revenue on account cancellation of penalty on estimated disallowance of 1% of administrative expenses, we are of the opinion that levy of penalty of the aforesaid disallowance made by the AO @ 10% of the total expenses and reduced to 1% by the ld. CIT(A) is not justified. The provisions of sec. 271(1)(c) of the Act are not attracted in cases where the income of an assessee is assessed on estimate basis and additions are made therein.[CIT Vs. Sangrur Vanaspati Ltd.,303 ITR 53(Punjab & Haryana]. The decisions in the case of Sahyog Sahkar i Shram Samvida Samit i Ltd.(supra) and Raj Bans Singh(supra) support this view Therefore, we uphold the order of the ld. CIT(A) on this issue. Accordingly, ground nos. 1 to 3 in the appeal of the Revenue are rejected.

 

7. Ground nos. 4 & 5 in the appeal of the Revenue being general in nature, do not require any separate adjudication while no additional ground having been raised in terms of the residuary ground in the appeal of the assessee, all these grounds are dismissed.

 

8. In the result , both these appeals are dismissed. Order pronounced in the open court today on 31 -05-2010