2013 (12) TMI 196 - HC - Income Tax

Assessee's Deduction Claim Upheld, No Penalty Imposed under Income Tax Act

The High Court dismissed the Revenue's appeal, concurring with the Tribunal that the assessee's deduction claim for liquidated damages was made in good ... Penalty u/s 271(1)(c) - Held that:- There was delay in supply of material - There was no delay in installation as it was done within the date of final acceptance - The delay in supply occasioned due to the delay committed by them being delay in placement of orders, delay in approval material etc., and the sub-suppliers were no way responsible, liable or cause for the delay - The assessee voluntarily made provision in their books of accounts. The assessee had not concealed any particulars either in its accounts or in other particulars and the contract was made available before the Assessing Officer - HMIL did not invoke the provision of claiming damages for delay - The assessee took precaution and provided for the penalty, claimed the same as deduction at the earliest point of time being the assessment year 1998-99 - The precaution taken by the assessee could not be compared with concealment of income In its good faith, the assessee was claiming the deduction at the earlier point of time by furnishing all the details - 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 - The assessee's claim for deduction at the earliest point of time for the assessment year 1998-99, cannot be stated to be lacking in bonafides or with the malafide intention with intent to conceal in particulars of income for the purpose of avoiding payment of Tax - Decided against Revenue. Issues Involved:1. Whether the Tribunal was correct in holding that no penalty under Section 271(1)(c) of the Income Tax Act was leviable on the assessee for claiming a deduction of liquidated damages provided for in the contract, even though there was no claim against it for the same.Detailed Analysis:1. Facts of the Case:The respondent/assessee filed its return of income on 30.11.1998, which was processed under Section 143(1)(a) of the Income Tax Act. A notice under Section 148 was issued on 19.08.2002, proposing to reassess the income for the said assessment year. The assessment under Section 143(3) read with Section 147 was completed on 29.11.2002, disallowing the claim for provision for liquidated damages amounting to Rs.74,50,000/-. The Assessing Officer initiated proceedings under Section 271(1)(c) and imposed a penalty of Rs.26,50,000/-. The assessee appealed against the assessment and penalty orders, which were dismissed by the Commissioner of Income Tax (Appeals). The Tribunal later dismissed the quantum appeal but allowed the appeal against the penalty order. The Revenue then appealed to the High Court.2. Revenue's Contentions:The Revenue argued that the Tribunal erred in deleting the penalty and that the assessee had wrongly claimed deduction for liquidated damages when the contracting party had made no such claim. It was contended that the assessee chose to show the amount only in the year 2001-02, while claiming it as a deduction in the assessment year 1998-99, which was a clear case for penalty under Section 271(1)(c). The Revenue also referenced the contract clause stating that HMIL could claim penalty only after 01.05.1998, whereas the assessee calculated the damages as on 31.03.1998.3. Assessee's Contentions:The assessee argued that the contract was a composite contract requiring the purchase and erection of paint shop equipment. The delay in supply of equipment led the assessee to believe that HMIL would invoke the penalty clause. The assessee made a provision in its accounts for liquidated damages based on this belief. The delay was due to the assessee's actions, not the sub-suppliers. After it became clear that the provision for liquidated damages would not be payable, the assessee wrote back the provision and offered it to tax in the assessment year 2001-02, demonstrating no malafide intention of concealing income.4. Legal Analysis:Section 271(1)(c) deals with penalties for concealment of income. Explanation 1 to this section indicates that if a person fails to offer a bonafide explanation or substantiates it, the amount added or disallowed shall be deemed to represent the income in respect of which particulars have been concealed. The Supreme Court in Union of India vs. Dharmendra Textiles Processors held that the section indicates strict liability for concealment or giving inaccurate particulars. The case of Commissioner of Income Tax vs. Reliance Petroproducts Pvt. Ltd. emphasized that the conditions under Section 271(1)(c) must exist before imposing a penalty.5. Tribunal's Findings:The Tribunal found that the assessee had not concealed any particulars either in its accounts or other particulars. The contract allowed HMIL to claim liquidated damages, and the assessee, in good faith, made a provision for it. The Tribunal concluded that the assessee's precaution could not be compared with concealment of income, as there was no intention to avoid payment of tax.6. High Court's Conclusion:The High Court agreed with the Tribunal's findings, noting that the assessee's claim for deduction was bonafide and not made with the intention to conceal income. The Court emphasized that penalty should not be levied unless there is evidence of dishonest intention or gross negligence.Judgment:The High Court dismissed the Revenue's appeal, agreeing with the Tribunal that the assessee's actions were bonafide and did not warrant a penalty under Section 271(1)(c). The Court found no costs were applicable.