2009 (8) TMI 677 - HC - Income Tax

Appeal partly allowed, matter remitted for fresh penalty assessment; entertainment cut deemed valuation difference, s.35D claim penalized

HC partly allowed the appeal and remitted the matter to the AO to reassess penalty afresh. The HC held the reduction of entertainment expense from 50% to ... Penalty under section 271(1)(c) - concealment of income or for furnishing inaccurate particulars - claim made under section 35D of the Act was bogus or it was a bona fide claim - capital loss - Held that:- We find that action for penalty proceedings was initiated by the Assessing Officer on various grounds. The first ground was predicated on the claim made by the assessee for entertainment expenses. As against 50 per cent. amount claimed by the assessee on account of the employees' participation, the Assessing Officer reduced the same to 35 per cent. We are of the opinion that the Commissioner of Income-tax (Appeals) as well as the Tribunal rightly observed that there was no concealment of income or furnishing of inaccurate particulars. The addition was only on account of difference in estimate made by the assessee and the other estimate made by the Assessing Officer. Therefore, in so far as this claim is concerned, even if the Assessing Officer reduced the same from 50 per cent. to 35 per cent., that cannot attract the penalty. Relief under section 35D - We fail to understand as to how the chartered accountants who are supposed to be experts in tax laws, could give such an opinion having regard to the plain language of section 35D of the Act. when we find that it is not a case where two opinions about the applicability of section 35D were possible. Therefore, it cannot be a case of a bona fide error on the part of the assessee. As has been pointed out above, the relief available under section 35D of the Act to a finance company is ex facie inadmissible as that is confined only to the existing industrial undertaking for their extension or for setting up a new industrial unit. It was, thus, not a 'wrong claim' preferred by the assessee, but is a clear case of 'false claim'. In CIT v. Vidyagauri Natverlal [1998 (11) TMI 94 - GUJARAT HIGH COURT], the Gujarat High Court made a distinction between wrong claim as opposed to false claim and held that if the claim is found to be false, the same would attract penalty. We may also take note of the following observations of the Supreme Court in the case of Union of India v. Dharamendra Textile Processors [2008 (9) TMI 52 - SUPREME COURT]. In such a case it is difficult to accept the plea that error was bona fide. Claim of capital loss - Admittedly, it happened while the assessment proceedings were going on and the explanation furnished by the assessee before the Assessing Officer in those assessment proceedings was that there was an inadvertent error while computing such loss and as the indexed cost of investment had been reduced from profit on sales instead of sale consideration. Though there may an element of doubt as to whether it was an inadvertent error on the part of the assessee or he filed the revised return only after he was con-fronted with the same by the Assessing Officer, however, when we find that a finding of fact regarding 'inadvertent error' is recorded by the two authorities below, we are not interfering in the matter on this aspect. It is more so when we find that while imposing the penalty the Assessing Officer has nowhere contradicted that the aforesaid error was not inadvertent. The issue is, thus, decided in the aforesaid manner as a result of which appeal is partly allowed. In view thereof, matter is remitted back to the Assessing Officer for determining the penalty afresh attributing the con-duct relating to the claim under section 35D of the Act only as attracting penalty proceedings. Issues Involved:1. Legitimacy of penalty under section 271(1)(c) of the Income-tax Act, 1961.2. Claim of deduction under section 35D of the Act.3. Claim of entertainment expenses.4. Claim of capital loss.Issue-wise Analysis:1. Legitimacy of Penalty under Section 271(1)(c) of the Income-tax Act, 1961:The Tribunal upheld the decision of the Commissioner of Income-tax (Appeals) to delete the penalty imposed by the Assessing Officer. The Commissioner of Income-tax (Appeals) opined that the facts were duly disclosed by the assessee in the return of income, and there was no conscious concealment of income. The Tribunal also noted that the Assessing Officer had not recorded his satisfaction regarding the concealment of income or furnishing inaccurate particulars in the assessment order. However, due to the retrospective amendment to clause (1B) of section 271, this ground was no longer available, and the matter was argued on merits.2. Claim of Deduction under Section 35D of the Act:The assessee claimed a deduction of Rs. 21,02,228 under section 35D, which was disallowed by the Assessing Officer, treating the expenditure as capital in nature. The Commissioner of Income-tax (Appeals) and the Tribunal observed that the claim was based on the opinion of the chartered accountants and was mentioned in the prospectus for the public issue of shares. However, the court found that the claim under section 35D was ex facie inadmissible for a finance company, as the section applies to expenses incurred in connection with the expansion of industrial undertakings or setting up new industrial units. The court held that this was not a bona fide error but a false claim, thereby attracting penalty provisions.3. Claim of Entertainment Expenses:The assessee claimed 50% of the entertainment expenses as on account of employees' participation, which the Assessing Officer reduced to 35%. The Commissioner of Income-tax (Appeals) and the Tribunal found no concealment of income or furnishing of inaccurate particulars, as the difference was due to varying estimates. The court agreed that this difference in estimation did not attract penalty.4. Claim of Capital Loss:The assessee declared a long-term capital loss of Rs. 98,04,485 and a short-term capital gain of Rs. 17,52,855, which the Assessing Officer treated as business loss/business income and speculative loss/profit. The assessee submitted that there was an inadvertent error in computing the loss and gain and filed a revised computation. The Commissioner of Income-tax (Appeals) and the Tribunal accepted this explanation, noting that the error was corrected by the assessee during the assessment proceedings. The court upheld this finding, noting that the Assessing Officer did not contradict the claim of inadvertent error, and thus, this did not attract penalty.Conclusion:The appeal was partly allowed. The court remitted the matter back to the Assessing Officer to determine the penalty afresh, specifically for the false claim under section 35D of the Act. The claims related to entertainment expenses and capital loss were not considered as attracting penalty.