TMI Blog1992 (5) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... y on the ground that the learned CIT(A) has not appreciated the fact that no adequate opportunity had been granted to the assessee to cross-examine the officials of M/s Aluminium Industries Ltd., from whom the Revenue had obtained confirmation as regards the amounts payable by the assessee to it and acted upon by the Revenue believing the statements received from M/s Aluminium Industries Ltd. without confronting it with the assessee. 3. Further the assessee is aggrieved by the confirmation of the penalty order without considering the fact that the Department itself has conceded the fact that the quality control fee as far as the year under consideration continues, but not the technical services fee which is itself an inconsistent stand. Therefore, the assessee pleads that the CIT(A) ought to have held that the agreement remained in force and/or it was the assessee's bona fide belief that the agreement was in force and had necessarily provided both the quality control fees and technical services fees, under the agreement. In support of the above plea the assessee submits that the Department had not imposed any penalty under s. 271(1)(c) of the Act in respect of other years, thoug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 271(1)(c) was issued, to which the assessee replied on the following lines: "The assessee had not concealed particulars of its income or had furnished inaccurate particulars thereof. In any case the assessee had not deliberately or wilfully done so. The penal provisions are proposed to be invoked presumably on the ground that out of quality control fee claimed as payable to Aluminium Industries a sum of Rs. 3,63,457 is not legally payable to them as the agreement to pay the quality control fee had expired after five years from the date of the execution i.e. on 10th July, 1971. It is true that the agreement was not renewed in writing. But there is a provision that it can be renewed after five years. The mere fact that by oversight or otherwise the agreement was not renewed does not and will not permit the inference that the assessee know that there was no legal liability to pay the fees. The assessee honestly believed that it had to pay the amount to Aluminium Industries. If at all it is a bona fide mistake. There was no mens rea which is one of the essential requisite for invoking the penal provisions. A wrong claim for an allowance by itself will not warrant the levy of pena ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt the claim without disclosing the correct facts and the objections was pursued through the course of s. 144B proceedings. It may also be mentioned that the assessee continued to make such claim even in the returns for the asst. yrs. 1982-83 and 1983-84. Steps are being taken to assessee the entire income concealed in the return for the asst. yr. 1981-82 to tax. Steps are also being taken to reassess expenses allowed on similar bogus claims for other assessment years." Aggrieved by the above order the assessee went in appeal before the first appellate authority. 8. Before the CIT(A) the assessee contended that having regard to the financial circumstances of the case, the ITO ought to have held that the agreement dt. 10th July, 1971 is still valid, for the said agreement has not been terminated by either of the parties to the agreement serving upon the other party a notice as stipulated in the agreement, and as such the ITO ought to have held that M/s ALIND was entitled to the technical services fee and quality control fee in respect of the turnover of the accounting year which ended on 31st March, 1981, and, therefore, the ITO ought to have held that the provision made by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e technical service fee and quality control fee was allowed for asst. yrs. 1978-79 to 1980-81, these assessments were also reopened and the claim was disallowed in the reassessments. Regarding the assessment for 1981-82, the provision made for the payment of technical service fee and quality control fee cannot be said to be under the bona fide belief that the amount was payable. There is nothing in the agreement to renew it beyond the period of five years. Even if it is a mistake, this could occur only in the sixth year. But this is the ninth assessment year from the commencement of the agreement. Therefore, there is every reason to believe that the claim made by the appellant is with the deliberate view of suppressing the income by making wrong claim of expenditure. In the Kerala High Court decision in the case of CIT vs. Gates Foam Rubber Co. (1973) 91 ITR 467 (Ker), it is sufficient if any assessee has furnished inaccurate particulars of his income in this manner. This decision applies to the facts of the appellant's case. The Supreme Court decision reported in Sir Shadilal Sugar General Mills Ltd. Am. vs. CIT (1987) 64 CTR (SC) 199 : (1987) 168 ITR 705 (SC) will not be of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt it was agreed by the ALIND to pay careful attention and do everything necessary regarding the design and manufacture of machinery and their layout; engineering, technical services and supervision of manufacture of the products during the initial stages so as to enable the plant to attain optimum efficiency in production. Vide cl. 5.2 of the agreement it was agreed that the ALIND shall be paid a lump sum of Rs. 1 lakh in four instalments for the technical services rendered. Vide cl. 5.3 of the agreement it was agreed that a technical service fee for rendering technical services for the manufacture and for engineering assistance for the marketing of the products shall be paid to ALIND by the assessee as under: (a) A technical service fee amounting to 5 per cent of ex-factory turnover value of the products manufactured by the firm in the first two years from the date of commencement of sales; and (b) A technical service fee amounting to 2 1/2per cent of ex-factory turnover value of the product manufactured by the assessee for the subsequent three years. Vide cl. 6.2 of the agreement it was agreed that wherever necessary ALIND shall test the samples of raw materials, intermedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10th July, 1971. The reply was negative. Further the learned ITO wanted to know technical services and quality control fees payable by the assessee for the period upto 31st March, 1981 and whether the payments were actually made or not. The reply as evidenced by the letter only says that an amount of Rs. 1,99,318.64 is due towards technical services fee and quality control fee upto 31st March, 1981. The learned counsel for the assessee also brought to our attention the letter dt. 20th Jan., 86 which is reproduced at page 31 of the paper book. This is a reply by ALIND to the letter No. 46-004-FV-2385/CHN/MAT(A) dt. the 15th Jan., 1986 with regard to the discussions, the inspector had with ALIND. This letter does not specifically say that the agreement came to an end as held by the ITO at the end of 5th year from the date of agreement. It only replies to the effect that there was no transaction with the assessee regarding the technical services and quality control fees after 31st March, 1977. It does not say that the agreement does not exist as per cl. 5. The ALIND only confirms that apart from Rs. 1,99,318.64 shown no further amount is receivable on 31st March, 1977, from the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quality control fee is not a correct appreciation of facts. The agreement was already with the Department. If the meaning of the words understood by the assessee differ from that of the Department it also means difference of appreciation of the meaning of the words. It is a question of interpretation. (b) The different view either by the Department or by ALIND does not amount to a fault that may lead to a proceeding under s. 271(1)(c). According to the assessee until 1985, the year in which the assessee gives a notice under cl. 14 of the agreement the agreement was in subsistence. (c) Though there is divergent understanding of the meaning between the parties concerned and the Department inter se the agreement is one and same. Therefore, it is absurd to say that as far as the quality control fee is concerned the agreement is still in force whereas the agreement with regard to the technical services fee and quality control fee does not continue. It should either continue for quality control fee and other fees or it ceases to exist on all fees concerned. In other words it should be good for both or bad for both, it cannot be good for some one and bad for some one else. (d) Un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the reopening of an assessment. Supporting the order of the Revenue authorities, the learned Departmental Representative submitted the following points : (a) The penalty proceedings are parallel proceedings. (b) Concealment of income or particulars of income is the basis for levying penalty; therefore, he submitted that K. Kesava Reddiar's decision does not apply in penalty proceedings. (c) Even the assessee himself has admitted the fact of omission on the part of the assessee, therefore, to that extent the order of the Revenue authorities is based on undisputed and uncontroversial facts and binding upon the assessee. (d) The assessee is claiming the disputed amount knowingly, deliberately with the intention to reduce the tax effects. Therefore, the penalty levied under s. 271(1)(c) is in accordance with law. (e) The interpretation of the cls. 5, 6 and 14 of the agreement by the assessee is without bona fide. It should be interpreted as any prudent man will interpret it. The agreement may continue, but not in entirety. The clauses dealing with the condition of remuneration cannot be interpreted in isolation. The stand of the assessee that the agreement should be go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision in that case will not help the assessee in any way. 21. Coming to the case of CIT vs. Saraf Trading Corpn. the learned Departmental Representative distinguished the case on the facts that in this case relied upon by the assessee the Hon'ble High Court held that levying of penalty and cancellation of the same was right on account of the fact that the assessee had discharged the burden of proving the failure to return the correct income did not arise from any act of commission or omission on the part of the assessee. This conclusion was arrived at by the Hon'ble High Court on the undisputed fact that the amount available with the assessee was also accepted by the Department and the investment made during the year and the cash balance and on the basis of the analysis of the facts that the assessee had discharged the initial burden of proving the onus cast upon the assessee. In the instant case of the assessee the facts are dramatically different and the assessee cannot claim that it has discharged the first burden of proving that the failure to return the correct income did not arise from any act of omission or commission on assessee's part. 22. Distinguishing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... real income was suppressed by spurious items of expenditure or deductions and it was held that to attract s. 271(1)(c) it is sufficient if an assessee has furnished inaccurate particulars of his income. This was a case where the assessee-firm having four partners and managing partners, while furnishing return disclosed payment of commission to another firm and on enquiry the ITO found out that the only partners of the agent firm, were the children of the managing partners. Under these circumstances it was held that the agency commission claimed was a bogus debit and the furnishing of inaccurate particulars of income spans to constitute all the ingredients to levy penalty under s. 271(1)(c). 26. In his rejoinder the learned counsel for the assessee stressed that there was no confrontation between the assessee and the ALIND and, therefore, the acceptance of the view of the ALIND in other words, the acceptance of the interpretation of the agreement as interpreted by ALIND is without justification and is in violation of natural justice. In all fairness the Department should have provided an opportunity to the assessee to controvert and to put its case before the finalisation which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cls. 5 and 6 either of the party gets the right to terminate this agreement. In other words before the lapse of 5 years none of the parties can terminate this agreement entered into between the ALIND and the assessee to the detriment of the other party. The word 'terminate' originates from the word 'terminus which is connected with 'Roman God' of boundaries. This literally means an end point. Therefore, the finality of the agreement starts from the issuance of the notice by either of the parties and the agreement will come to an end only after the lapse of six months notice period. Therefore, we are of the view that the agreement came to an end by the ultimate notice of Dec. 1985, given by the assessee. Therefore, the stand taken by the assessee that it was bound to make payment to ALIND even beyond 5 years is a genuine interpretation. Even if this interpretation ultimately does not survive there is every possibility and every circumstance that it is a possible interpretation. Under these circumstances the levy of penalty is not justified. 30. Secondly before the Department coming to a final conclusion that the agreement as interpreted by ALIND is genuine, an opportunity should ..... X X X X Extracts X X X X X X X X Extracts X X X X
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