2016 (5) TMI 1142 - AT - Income Tax

Tribunal upholds deletion of penalty under Income Tax Act citing good faith provision withdrawal

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

The Tribunal upheld the CIT(A)'s decision to delete the penalty under section 271(1)(c) of the Income Tax Act, 1961, as the assessee's provision for bad ... 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 order of the ITAT ought to have been served on CIT-III who has jurisdiction over the AO having jurisdiction over the assessee. If the order was served to a different CIT, who did not have the jurisdiction over the assessee, then it could not be assumed that service was effected properly, and the limitation commence from the service of that order. The ld.CIT(A) has rightly rejected this contention of the assessee. The assessee had created provision for bad and doubtful debts. This provision 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 Accordingly, the claim of the assessee becomes untenable, and the claim was withdrawn during the course of assessment proceedings. In such situation, there cannot be any allegation against the assessee that it has furnished inaccurate particulars. The AO has not specified charge against the assessee either in the assessment order or in the penalty order, whether the assessee has furnished inaccurate particulars or concealed the income. For the purpose of reference, we have drawn an inference that impliedly it is furnishing of inaccurate particulars, otherwise, the AO has not charged he assessee with specific 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 penalty - Decided in favour of assessee. Issues Involved:1. Deletion of penalty under section 271(1)(c) of the Income Tax Act, 1961.2. Validity of the penalty order based on retrospective amendment.3. Specificity of the charge in the penalty order.4. Timeliness of the penalty order.Issue-Wise Detailed Analysis:1. Deletion of Penalty under Section 271(1)(c) of the Income Tax Act, 1961:The primary grievance of the Revenue was that the CIT(A) erred in deleting the penalty of Rs. 12,42,50,000/- levied under section 271(1)(c). The assessee had made a provision for bad and doubtful debts amounting to Rs. 35.50 crores, which was disallowed by the AO. The AO initiated penalty proceedings, asserting that the assessee attempted to conceal income by furnishing inaccurate particulars. However, the assessee argued that the provision was made based on judicial decisions and was withdrawn due to a retrospective amendment by the Finance Act, 2001. The CIT(A) accepted the assessee's explanation and deleted the penalty, stating that the claim was made in good faith and was tenable before the retrospective amendment.2. Validity of the Penalty Order Based on Retrospective Amendment:The assessee contended that the provision for bad and doubtful debts was allowable as per the Gujarat High Court decision in the case of Sarangpur Cotton Mfg. Co. Ltd. Vs. CIT 143 ITR 166. The Finance Act, 2001, amended Section 36(1)(vii) with retrospective effect from 01-04-1989, disallowing such provisions. The assessee voluntarily withdrew the claim during assessment proceedings due to this retrospective amendment. The Tribunal noted that the claim was initially tenable and only became untenable due to the retrospective amendment. Therefore, the penalty under section 271(1)(c) was not justified as the assessee did not furnish inaccurate particulars knowingly.3. Specificity of the Charge in the Penalty Order:The assessee argued that the AO did not specify whether the penalty was for concealment of income or furnishing inaccurate particulars. The Tribunal observed that the AO's penalty order lacked a specific charge and merely stated that the assessee concealed particulars of income and furnished inaccurate particulars. The Tribunal referenced several judicial precedents, including New Sorathia Engg. Co. vs. CIT 282 ITR 642 (Guj), which emphasized the need for a specific charge in penalty orders. The Tribunal concluded that the penalty order was bad in law due to the absence of a specific charge.4. Timeliness of the Penalty Order:The assessee also contended that the penalty order was time-barred, as it was not passed within six months from the date of the ITAT order received by the CIT(A). The Tribunal rejected this contention, stating that the limitation period should commence from the date the order was served on the CIT who had jurisdiction over the assessee. In this case, the order was served on CIT-III, Ahmedabad, who had jurisdiction over the AO handling the assessee's case. Therefore, the penalty order was deemed to be within the permissible time frame.Conclusion:The Tribunal upheld the CIT(A)'s decision to delete the penalty, concluding that the assessee did not furnish inaccurate particulars and that the penalty order lacked a specific charge. The appeal of the Revenue was dismissed. The order was pronounced in the Court on 2nd May, 2016, at Ahmedabad.