TMI Blog2010 (5) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... disadvantage of the assessee. - The Court 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. - The explanation offered by the assessee company was not accepted either by the Assessing Officer or by the Commissioner of Income Tax(Appeals). The view of Income Tax Appellate Tribunal regarding admissibility of the deduction on account of written off of certain assets, under Section 32(1)(iii) of the Act is wholly erroneous – Penalty confirmed – ITAT order is not correct – decided in favor of revenue. - 07/2010 - - - Dated:- 24-5-2010 - Advocates who appeared in this case: For the Appellant: Mr Sanjeev Sabharwal For the Respondent: Mr Amit Dayal CORAM:- Hon'ble Mr Justice Badar Durrez Ahmed Hon'ble Mr Justice V.K. Jain 1. Whether Reporters of local papers may be allowed to see the judgment? Yes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e mistake committed by it could not be said to be bona fide. He, therefore, upheld the penalty imposed upon the assessee. 5. The Income Tax Appellate Tribunal accepted the contention of the assessee that due to oversight and bona fide mistake, the amount of income tax was not added back while filing Return of income and that no person would claim the amount of income tax as deduction, to evade payment of taxes. As regards the amount of Rs 13,24,539/- debited to Profit Loss Account on account of equipments that had been written off, having become unusable and discarded, the Tribunal was of the view that as per the provisions of Section 32(1)(iii) of Income Tax Act, the assessee could have claimed this amount as a deduction and merely because it had claimed the same as revenue deduction, which had been treated to be capital in nature by the Assessing Officer, could not be a basis to levy penalty under Section 271(1)(c) of the Act, when all the relevant materials relating to that issue were duly disclosed by the assessee in the course of the assessment proceedings. The Tribunal accordingly deleted both the penalties. 6. The following substantial question of law arises for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent it is relevant, provides for imposition of penalty in case the Assessing Officer, in the course of any proceedings under Act, is satisfied that any person had concealed particulars of his income or had furnished inaccurate particulars of such income. Explanation 1 to sub-Section (1) of Section 271 provides that where in respect of any facts material to the computation of the total income of any person, such person fails to offer an explanation or offers an explanation which is found to be false or he 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 total income of such person, as a result thereof, shall for the purpose of clause (c) be deemed to represent the income in respect of which particulars have been concealed. 11. Thus, in case of failure of the assessee to offer any explanation or the explanation furnished by him being found false, penalty may be imposed on him. However, if an explanation is offered by the assessee, mere failure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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. It was contended on behalf of the Revenue, before the Supreme Court, that only the amount of interest paid in respect of capital borrowed for the purposes of the business or profession could have been claimed under Section 36(1)(iii) of the Act and the case before the Court was not in respect of the capital borrowed by the assessee. It was further pointed out that under Section 14A of the Act, no deduction could be allowed in respect of the expenditure incurred by the assessee in relation to income which did not form part of the total income under this Act. The attention of the Court was also drawn to Section 10(33) to show that the income arising from the transfer of a capital asset could not be reckoned as an income which formed part of the total income. The contention thus was that the claim made by the assessee w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if the claim made by him is unsustainable 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. 17. The assessee before us is a company which declared an income of Rs.1,21,49,861/- and accounts of which are mandatorily subjected to audit. It is not the case of the assessee that it was advised that the amount of income tax paid by it could be claimed as a Revenue Expenditure. It is also not the case of the assessee that deduction of income tax paid by it was a debatable issue. In fact, in view of the specific provisions contained in Section 40(ii) of the Act, no such advice could be given by an Auditor or other Tax Expert. No such advice has been claimed by the assessee even with respect to the amount claimed as deduction on account of certain equipment having become useless and having been written off. As noticed earlier, the Tribunal was entirely wrong in saying that Section 32(1)(iii) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w is malafide, Explanation 1 to Section 271(1) would come into play and work to the disadvantage of the assessee. 20. The Court 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 licence 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, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors of the assessee company, we cannot accept the general view taken by the Tribunal. In our view, no such view could have reasonably been taken, on the facts and circumstances prevailing in this case and, therefore, the decision of the Tribunal in this regard suffers from the vice of perversity. We cannot accept the general proposition that no person would ever claim the amount of income tax as a deduction with a view to avoid payment of tax. No hard and fast rule in this regard can be laid down and every case will have to be decided considering the facts and circumstances in which such a deduction is claimed, coupled with as to whether the explanation offered by the assessee for making the claim, is shown to be bonafide or not. 24. For the reasons given in the preceding paragraphs, we answer the question of law framed in this case in favour of the revenue and against the assessee. The Income Tax Appellate Tribunal erred in law in deleting the penalty in respect of the amount of Rs.1 lakh claimed as deduction on account of payment of income tax and the amount of Rs.13,24,539/- debited under the head "equipment written off", in the Profit and Loss Account of the assessee. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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