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ITO, Ward-5 (1) Ahmedabad Versus N.K. Industries Ltd.

2016 (5) TMI 1142 - ITAT AHMEDABAD

Penalty levied under section 271(1)(c) - provision for bad and doubtful debts created - whether penalty order was time-barred? - Held that:- The assessee has raised this plea on the ground that the orders served upon the CIT-II is to be construed as sufficient service, because, taking of the order is an internal mechanism between different officials of the Department. As far as this proposition is concerned, we do not find any merit in the contentions of the ld.counsel for the assessee. The orde .....

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n was created on the strength of Hon’ble Gujarat High Court’s decision in the case of Sarangpura Cotton Mfg. Co. Ltd.Vs. CIT, (1982 (6) TMI 23 - GUJARAT High Court ). It has filed its return on 31.12.1999. The amendment was applied with retrospective effect. By operation of this amended law, the claim of the bad debts cannot be made by creating a provision for bad and doubtful debts. Accordingly, the claim of the assessee becomes untenable, and the claim was withdrawn during the course of assess .....

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ic allegation. The assessee has taken a specific plea to this effect before the ld.CIT(A). The ld.CIT(A) has recorded a finding that the claim of the assessee became untenable by virtue of retrospective operation of law, otherwise, the assessee could have demonstrated the allowance of its claim. According to us, the assessee has not furnished any inaccurate particulars, which can expose it to the penalty proceedings under section 271(1)(c) of the Act. The ld.CIT(A) has rightly deleted the penalt .....

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#8377; 12,42,50,000/- levied under section 271(1)(c) of the Income Tax Act, 1961. 3. Brief facts of the case are that the assessee company at the relevant time was engaged in the business of manufacturing non-edible oil and selling the same in the export/domestic market. It has filed its return on 31.12.1999 declaring total loss of ₹ 49,36,94,190/-. An assessment order was passed under section 143(3) on 27.3.2002. The AO has made five additions to the income of the assessee, which has redu .....

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rse of assessment proceedings, the ld.AO has confronted the assessee to explain as to how it has claimed bad debts of ₹ 35.50 crores in the account. The assessee has given the following reply to the AO in the assessment proceedings: "The company is engaged in the business of manufacturing of non-edible oil and selling the same in the export/domestic market. In the course of export sale, the company used to store the goods at Kandla in the tanks owned by Naranbhai P.Patel P.Ltd. (NPPL) .....

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sified as doubtful debts, the copy of account, of sales and NPPL for A. Y. 97-98 and A. Y. 98-99 are enclosed. The company has filed the case against NPPL for recovery of the amount, the case is pending before City Court Ahmedabad. Therefore, the Board of Directors of the company thought it fit to provide ₹ 35.50 crore (Rs. 35.23 crores of NPPL and ₹ 0.27 crore other doubtful debts as provision for doubtful debts. Accordingly, the provision of ₹ 35.50 crore was made in the acco .....

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year in which the amount is written off to P&L account." 5. During the course of penalty proceedings, it was contended by the assessee it has not furnished any inaccurate particulars of income. The provision was made with regard to bad and doubtful debts. Before the amendment carried out in section 36(i)(vii) by Finance Act, 2001 with retrospective effect from 1.4.1989, the assessee was entitled for the deduction. The ld.AO was of the opinion that prior to the amendment carried out in s .....

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6. Dissatisfied with the action of the AO, the assessee carried the matter in appeal. It has submitted written submissions which have been duly reproduced by the ld.CIT(A). The submissions made by the assessee read as under: 5. Now coming to the merits of appeal. In this connection, the relevant paras of the written submissions dated 15-07-2010 filed by the A. R. of the appellant are reproduced hereunder: The Id. A.O. has levied the penalty of ₹ 12,42,50,000/- under section 271(1)(c) on th .....

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t the provision for bad and doubtful debt is allowable as deduction. The Finance Act, 2001 amended Section 36(1)(vii) whereby the provision for bad and doubtful debt is not allowable as deduction with restrospective effect from 01-04-1989 and therefore at the time of assessment, the claim for provision for bad and doubtful debt was withdrawn as can be seen from para No. 4 of assessment order. It may please be noted that claim for provision of bad and doubtful debts was not agitated on merits. It .....

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w. The provisions is allowable u/s. 36(i)(vii); The SC in the case of Vijya Bank vs. CIT 323 ITR 168 has held that the provision for bad and doubtful debts is allowable as deduction in as much as what is necessary is to write off to P & L A/c and it is not necessary to credit the debtors account. In the present case the assessee has written off to P & L A/c. by making provision for bad and doubtful debts, therefore it is allowable as deduction. Of course, the assessee has withdrawn the c .....

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nnot be said that the assessee has furnished inaccurate particulars of income and therefore the penalty cannot be levied as held by SC decision in the case of CIT vs. Reliance Petro Products 322 ITR 128 SC. The penalty is imposed on the finding of assessment order. It is settled law that the penalty proceedings and assessment proceedings are separate. The penalty cannot be levied on the basis of the finding in the assessment order. In the present case, the AO while passing the order disallowed t .....

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claim since it was withdrawn on the ground of retrospective amendment. The A.O. has not discharged the burden. The penalty cannot be levied only on the basis of finding in the assessment order. He may take the assistance of the finding in the assessment order but he has to bring some material on record. In the absence of such material, the penalty order is bad in law as held by SC in the cases (i) Anantharam Versinghaiah & Co. vs. CIT 123 ITR 457 (SC) and (ii) CIT vs. Khoday Enwarsa & S .....

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inaccurate particulars of its income. I am satisfied that this a fit case for levy of penalty u/s. ,271(1)(c)of the Act." From the above it is seen that the penalty is levied for concealment of income and furnishing of inaccurate particulars of income. There has to be a specific charge. The AO has to hold that assessee either concealed the income or has furnished inaccurate particulars of income. In the absence of specific charges, the penalty order is bad in law as held by Gujarat High Cou .....

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same are reproduced hereunder :- The attention is drawn to the recent Delhi High Court judgment in the case of CIT vs. Zoom Communication (P) Ltd. 191 Taxman 179 (Del.). The Delhi High Court has held as under:- "It was held that so long as assessee has not concealed any material fact or any factual information given by him has not been found to be incorrect, he will not be liable to imposition of penalty u/s. 271(1)©, even if claim made by him is unsustainable in law, provided that he .....

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ssment, the case was withdrawn in view of restrospective amendment in Section 36(1 )(vii) by Finance Act, 2001 with effect from 1st April, 1989. It may please be noted that the ITAT Ahmedabad, Bench-D in the case of Sun Petrochemicals Pvt. Ltd. Vs. ITO - ITA No. 1010/Ahd/2009 dated 05-06-2009 held that no interest can be charged when there is restrospective amendment in the Act. If no interest can be charged then the question of levy of penalty does not arise in view of restrospective amendment. .....

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-1999. The assessee company claiamed the provision for bad and doubtful debts of ₹ 35.50 crore following the Gujarat High Court decision in the case of Sarangpur Cotton Mfg. Co. Ltd. Vs. CIT 143 ITR 166 as per section 36(1)(vii). Section 36(1)(vii) on the date of filing of the return i.e. on 31-12-199 as under :*• "36(1)(vii) subject to the provisions of sub-section (2), the amount of (any bad debt or part thereof which is written off as irrecoverable in the accounts of the asses .....

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ssee." From the above, it is seen that the Explanation provides that the provision for bad and doubtful debt is not allowable as deduction with restrospective effect from 01-04-1989. Accordingly, the claim was voluntarily withdrawn by writing a letter to the AO . When there is restrospective amendment, the interest cannot be charged as held by ITAT Ahmedabad, Bench-D in the case of Sun Petrochemicals Pvt. Ltd. Vs. ITO - ITA No.1010/Ahd/2009 dated 05-06-2009. If no interest can be charged wh .....

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nished inaccurate particulars of income. From the above para, it may please be seen that the satisfaction is to the effect that it is a fit case for levy of penalty. It does not state anything about concealment of income or furnishing of inaccurate particulars of income. Therefore, in the absence of adequate satisfaction, the penalty order is bade in law (Delip N. Shroff vs. JCIT 291 ITR 519 (SC). In the absence of any specific charge, the penalty order is bad in law as held in the following cas .....

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Vs. CIT V43 ITR 166 and that the claim was withdrawn in view of restrospective amendment. The explanation is bonafide, therefore the penalty cannot be levied. 7. The ld.CIT(A) has allowed the appeal of the assessee and deleted the penalty. 8. Before us, the ld.DR relied upon the order of the AO. He took us through the finding of the AO recorded during the course of assessment proceedings. He pointed out that search was conducted at premises of the assessee on 24.2.1999. Survey was carried out a .....

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CIT(A). As per section 275A, the AO was required to pass penalty order within six months. The ld.CIT-DR pointed out that jurisdiction over the assessee rests with the CIT-III, Ahmedabad. Order was served on CIT-II, Ahmedabad. The assessee has raised this plea on the ground that the orders served upon the CIT-II is to be construed as sufficient service, because, taking of the order is an internal mechanism between different officials of the Department. As far as this proposition is concerned, we .....

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. For the second fold of submissions, the ld.counsel for the assessee reiterated the contentions as were raised before the ld.CIT(A). In order to evaluate the submissions of both the sides, we deem it pertinent to take note of section 271(1)(c) of the Act. It reads as under: "271. Failure to furnish returns, comply with notices, concealment of income, etc.- (1) The Assessing Officer or the Commissioner (Appeals) or the CIT in the of course of any proceedings under this Act, is satisfied tha .....

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income or fringe benefit the furnishing of inaccurate particulars of such income or fringe benefits: 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 Commissioner (Appeals) or the CIT to be false, or (B) such person offers an explanation which he is not able to substantiate and fails to prove that such exp .....

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Assessing Officer or the Learned CIT(Appeals) during the course of any proceedings before them should be satisfied, that the assessee has; (i) concealed his income or furnished inaccurate particulars of income. As far as the quantification of the penalty is concerned, the penalty imposed under this section can range in between 100% to 300% of the tax sought to be evaded by the assessee, as a result of such concealment of income or furnishing inaccurate particulars. The other most important feat .....

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utation of the total income under the provisions of the Act, the assessee fails to offer an explanation or the explanation offered by the assessee is found to be false by the Assessing Officer or Learned CIT(Appeal); and, (b) where in respect of any fact, material to the computation of total income under the provisions of the Act, the assessee is not able to substantiate the explanation and the assessee fails, to prove that such explanation is bona fide and that the assessee had disclosed all th .....

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of the assessee to substantiate his explanation in respect of any fact material to the computation of total income and in addition to this the assessee is not able to prove that such explanation was given bona fide and all the facts relating to the same and material to the computation of the total income have been disclosed by the assessee. These two situations provided in Explanation 1 appended to section 271(1)(c) makes it clear that that when this deeming fiction comes into play in the above .....

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