TMI Blog2009 (9) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... nions. As per the AS-5 issued by the ICAI, extraordinary items are incomes or expenses that arise from events or transactions that are clearly distinct, from the ordinary activities of the enterprise and therefore, are not accepted to recur frequently or regularly. Hence, in the light of the aforesaid discussion whether the provision for doubtful debt on the facts of the case, can be said to be an extraordinary item warranting exclusion from operational cost is a debatable point. As noted that as against the sum owed to the assessee, the parent company had incurred larger amount in the formation of the assessee company which was to be cross-charged to the assessee. This sum was also cancelled along with the debt. If this sum was not cancelled against sums owed by the parent company, the assessee's cost would have been further loaded by a larger amount by the cross-charge for formation expenses. Thus there was a full disclosure by the assessee of all the relevant facts, we hold that the assessee's computation cannot be said to have been done, not in good faith and not with due diligence. Hence, no levy of penalty under s. 271(1)(c) is called for. As decided in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penalty proceedings were also initiated. 3.2 In the penalty proceedings the assessee explained that it had made full disclosure in the facts of the case and in the return filed and the provision of doubtful debts has been added back in the computation of income. Hence, there was no concealment or furnishing of inaccurate particulars. However these were not accepted and penalty under s. 271(1)(c) was leveled by holding that assessee has not fully and truly disclosed the real operating cost and the comparable profit margin on the same as required under s. 92C and this resulted in suppression of income as well as higher claim of loss. 4. Upon assessee's appeal the learned CIT(A) noted that assessee had made adjustment in the operational profit due excess capacities cost, start up cost and provision of doubtful debt. He further noted that the TPO while accepting the two adjustments of start up cost and unutilized capacity was not in favour of excluding the provision of doubtful debt from the computation of operation of cost. The learned CIT(A) referred to the provision of Expln. 7 of s. 271(1)(c) and several case laws. The learned CIT(A) observed that the facts relating to provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isallowed in computing the total income under sub-s. (4) of s. 92C, then, the amount so added or disallowed shall, for the purposes of cl. (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been furnished, unless the assessee proves to the satisfaction of the AO or the CIT(A) or the CIT that the price charged or paid in such transaction was computed in accordance with the provisions contained in s. 92C and in the manner prescribed under that section, in good faith and with due diligence." 6.3 A reading from the Expln. 7 makes it clear that any adjustment in the transfer pricing is done by the Revenue, then it will be deemed to represent income in respect of which particulars have been concealed or inaccurate particulars have been furnished unless the assessee proves to the satisfaction of the AO or the CIT(A) that the price charged or paid in such transactions was computed in accordance with provisions contained in s. 92C and in the manner prescribed under that section, in good faith and is due diligence. 6.4 Now let us examine what action the assessee has taken to compute the ALP in this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of above, we shall examine whether the exclusion of provision of doubtful debt in this case from the operating cost can be said to be an act not done in good faith and with due diligence. 6.7 The learned CIT(A) in his appellate order has noted that necessary facts relating to the provisions of doubtful debts were disclosed to the Revenue authorities in various forums. The facts relating the said provision were that 7C Ltd.,UK, owed a sum of GBP 3,07,810 to the assessee in respect of services rendered for providing call centre. However, on 30th Nov., 2002, 7C Holdings Ltd. and 7C Ltd., UK went into winding up, after being in debt to the assessee 7C Ltd., UK had also incurred an amount of GBP 5,29,000 with respect to the formation of the assessee (which had to be cross-charged to the assessee). As part of the negotiations, the administrator decided to cancel both the debts. Accordingly, the receivable of Rs. 2,28,57,524 was shown as a provision for bad and doubtful debt. Now under these circumstances, this provision for doubtful debt was not considered as a part of operation and cost. The CIT(A) has observed that treatment of this extraordinary item as not forming part of operatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act, or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute." We further place reliance upon the decision of the Hon'ble High Court of Delhi delivered in the case of CIT vs. Nath Bros. Exim International (2007) 208 CTR (Del) 326 : (2007) 288 ITR 670 (Del), where it was held that where there was no need of enquiry by AO there was only the need of application of law. And on legal position the AO was not satisfied and did not agree with the assessee, but that itself could not be a ground to invoke the penalty provision of the statute". 9. Hence in the background of the aforesaid discussion and precedents, in our considered opinion on the facts and circumstances of the case the assessee cannot be held liable for penalty under s. 271(1)(c) of the IT Act as his conduct ..... X X X X Extracts X X X X X X X X Extracts X X X X
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