TaxTMI 
TaxTMI 
2018 (3) TMI 50
X X X X Extracts X X X X
X X X X Extracts X X X X
....e case and in law, the Ld. CIT(A) erred in reducing the penalty u/s. 271(1)(c) of the I.T. Act by Rs. 3,36,58,914/- when the assessee had made a false claim of deduction u/s. 80IC of the I.T Act suppressing the fact that it had not fulfilled the conditions prescribed for claiming such deduction." 2. The appellant craves to leave to add, to amend and/or to alter any of the grounds of appeal, if need be. 3. The appellant, therefore, prays that on the grounds stated above, the order of the CIT(A)-39, Mumbai may be set aside and that of the Assessing Officer restored." 3. The brief facts of the case are that there was a search & seizure action u/s. 132(1) carried out by Revenue in the case of Ankur Group on 26.04.2007 in which assessee was also covered. The assessee company is the main concern of the Ankur group and it is engaged in the manufacturing of pharmaceutical products. The assessee originally filed return of income with Revenue u/s. 139(1) on 27.11.2006 declaring total income of Rs. 3,81,37,586/-. Persuant to search u/s 132(1), notices u/s. 153A dated 08.10.2007 were issued by the AO and served on the assessee. The assessee in response thereof to the notic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....thcare Private Limited. 04) There is no undue or extra benefit of the scheme of provisions of Sec. 80IC on IT Act 1961. Vaibhav HealthcarePrivete Limited was also eligible for deduction under the provisions of sec. 80IC of IT Act, 1961. The assessee having manufacturing license for doing the manufacture at Baddi, Himachal Pradesh using the facilities at Vaibhav Healthcare Private Limited is also eligible for deduction u/s. 80IC of IT Act, 1961. 05) In this connection, the assessee relied on the following decisions: (i) Commissioner of Income Tax vs. Penwalt India Limited 196 ITR 813(Bom) held that:- An assessee would be said to be engaged in manufacturing activity if he is doing a part of the manufacturing activity-by himself and for the rest of it engages the services of somebody. else on a contract other then a contract of purchase. From the facts found by the Tribunal it is found that the assessee's manufacturing activity consisted of (i) canvassing of orders, (ii) preparing of designs and drawings on the basis of orders, (iii) placing orders for the manufacture of machinery with TH, (iv) to see that the manufacturing process is carried on....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y. It is not absolutely necessary that the assessee must depute the supervisory staff or exercise direct supervision over the manufacturing process. It is sufficient if, on an overall view of the matter, it is found that it was the assessee-company which was the real manufacture and the assessee had merely employed the agency of someone else through whom the goods were caused to be manufactured. It is also not necessary that the assessee must pay the wages of the workers employed in the manufacturing process." (iv) Sunrise Metal Industries vs. Income Tax Officer: (2004) 86 TTJ (Mumbai) Held that: "It is undisputed that assessee, as observed by the CIT CA), is engaged in the manufacturing of articles. Simply because the hot rolling activity was done from the outside parties, the assessee cannot be denied the deduction under sec. 80-IA particularly when the hot rolling activity which was done by the outside agencies was done under the direct supervision and control of the assessee and at the risk of the assessee. By exercising effective supervision, the assessee could ensure that the product coming out of the mills/factories of outside agencies is of the same metal ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ivity and the manufacturing licence though in the name of the assessee is for manufacturing at the unit of Vaibhav Healthcare Private Limited. The claim of deduction u/s 80IC w.r.t. the unit of the assessee at Baddi to the tune of Rs. 9,99,96,772/- was rejected by the AO, vide assessment order dated 31-12-2009 passed by the AO u/s 153A r.w.s. 143(3). The assessee did not filed any appeal with learned CIT(A) against the quantum additions made by the A.O vide assessment order dated 31-12-2009 passed by the AO u/s 143(3) r.w.s. 153A which attained finality. The AO initiated penalty proceedings u/s. 271(1)(c) for furnishing of inaccurate particulars of income which duly found mentioned in the assessment order dated 31-12-2009 passed by the AO u/s 143(3) r.w.s. 153A of the 1961 Act. Penalty notice u/s 274 r.w.s. 271(1)(c) of the 1961 Act, dated 31-12-2009 was issued by the AO which is placed in paper book/page 56. 4. During the course of penalty proceedings u/s 271(1)(c), the AO observed that the assessee had claimed deduction of Rs. 9,99,96,772/- u/s 80IC of the 1961 Act. The deduction had been claimed for the manufacturing activities carried out by unit at Baddi, Taluka : Nalagarh,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s was got done from the Vaibhav Healthcare Private Limited at its industrial undertaking at Baddi, Himachal Pradesh for which the job charges were paid by the assessee to Vaibhav Healthcare Private Limited on which Income Tax was deducted at source in accordance with provisions of the 1961 Act. It was also submitted that the goods were manufactured at Vaibhav's unit at assessee's risk and responsibility. It was also submitted that ultimately Vaibhav Healthcare Private Limited was merged with the assessee company effective from 01.04.2006 under the scheme of merger approved by Hon'ble Bombay High Court although it was earlier planned to merge the said company Vaibhav Healthcare Private Limited with assessee with effect from 01.01.2006 which was later changed to 01.04.2006 and the same was approved by Hon'ble Bombay High Court. It was submitted that manufacturing was done at Baddi, HP under its supervision and control at the said Vaibhav unit, the deduction u/s 80IC was claimed. It was submitted that assessee has relied upon audit report issued by chartered accountant which stipulated that deduction u/s. 80IC was available to the assessee with in the provisions of the 1961 Act and al....
X X X X Extracts X X X X
X X X X Extracts X X X X
....m 01.01.2006 to 01.04.2006 along with relevant portion of annual report. The assessee strongly contended before learned CIT(A) that the AO erred in imposing penalty u/s 271(1)(c) which is not justified on facts and in law. It was submitted that the complete details/information in respect of the claim for deduction u/s. 80IC were duly furnished along with return of income and none of the information was found to be false or wrong. It was only that the claim made by the assessee which was rejected by the A.O and in order to avoid litigation, the assessee chose not to file appeal against the addition made in quantum assessment. The details of the information and documents furnished during the appellate proceedings before learned CIT(A) by the assessee are as under: - i) Copy of Return of Income along with computation of income. ii) Copy of Annual Report for the relevant financial year i.e. 2005-06 iii) Copy of Audit Report u/s 80IC duly signed and sealed by the auditors. iv) Copy of the assessee's reply dated 11-12-2009 as submitted to ACIT during the assessment proceedings along with following documents:- a) Statement of total income ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... order, penalty order and the appellant's submissions. In this case the appellant was setting up a new manufacturing unit at Baddi Himachal Pradesh and this fact was mentioned in page 2 of the printed Annual Report 2005-06. The appellant has obtained the manufacturing Licence, purchased the raw materials and manufactured the goods using the manufacturing facility of M/s. Vaibhav Healthcare P. Ltd. (Vaibhav). The appellant and Vaibhav has entered into Manufacturing Agreement on 17.6.2005. From the agreement it is seen that the appellant has manufactured its pharma products using the manufacturing facility of Vaibhav. It is also mentioned in the agreement that ADPL shall provide VHPL with the necessary raw materials including packaging materials for the manufacture and packing of the said products under this agreement, and ADPL agrees to reimburse VHPL for the entry tax/octroi payable on the raw material and packing material as applicable for supply of these items to their said factory. It is also seen that Excise Duty and other taxes are to be borne by the appellant. The appellant has manufactured its products using the manufacturing facility of Vaibhav and claimed deduction u/s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....from assessment proceedings. The finding given in the assessment though is a good evidence but the same is not conclusive in penalty proceedings. In the instant case there is no dispute that the assessee has made the claim of deduction under s. 80-O of Rs. 14,12,642 on the basis of advice given by his tax consultant. This bona fide believe of the assessee was not controverted by the Revenue even at this stage. It is also not the case of the Revenue that the assessee has not disclosed complete particulars of his income or the claim made by the assessee is not supported by tax audit report. It is repeatedly held by the Courts that when the facts are clearly disclosed in the return of income penalty cannot be levied. Merely because an amount is not allowed or tax to income, it cannot be said that the assessee had filed inaccurate particulars or concealed any income chargeable to tax. Even if some deduction or benefit is claimed by the assessee wrongly but bonafidely and no mala fide can be attributed, the penalty would not be levied. This being so and keeping in view that the assessee's explanation that the claim of deduction under s. 80-O of Rs. 14,12,642 was claimed on the basis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uth or erroneous. In this case, there is no finding that any details supplied by the assessee in its return were found to be incorrect or erroneous or false. Such not being the case, there would be no question of inviting the penalty under s. 271 (1)(c). A mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such claim made in the return cannot amount to the inaccurate particulars. The assessee had furnished all the details of its expenditure as well as income in its return which details, in themselves, were not found to be inaccurate nor could be viewed as the concealment of income on its pan. It was up to the authorities to accept its claim in the return or not. Merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the revenue, that by itself would not attract the penalty under s. 271 (1)(c). If the contention of the Revenue is accepted then in case of every return where the claim is made is not accepted by AO for any reason, the assessee will invite penalty u/s. 271(1)(c). That is clearly not the intendment of the le....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lopment of law is a dynamic process which is affected by the innumerable factors, and it is always an ongoing exercise. In such circumstances, a bona fide legal claim by the assessee being visited with penal consequences only because it is has not been accepted thus far by the tax authorities or judicial authorities is an absurdity. In any event, the connotations of expression 'particulars of income' do not extent to the issues of interpretation of law and as such making a claim which is found to be unacceptable in law, cannot be treated as furnishing of inaccurate particulars of income. In this view of the matter, the case of the assessee cannot be said to be a case of furnishing of inaccurate particulars of income, in its natural sense, either. The penalty has been imposed only for concealment of particulars and it has not been the case of the Revenue at any stage that any factual particulars furnished by the assessee are false. The penalty has been imposed because of legal inadmissibility of the claim of deduction, which is rejected on the grounds of application of s. 74A. In view of these discussions, as also bearing in mind entirety of the case, it was indeed not a fit....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... said order of learned CIT(A) confirming the penalty on additions to the tune of Rs. 7 lacs. It was submitted by Ld. CIT-DR that there was a search operation u/s. 132(1) of the Act on 26.04.2007 carried on by the Revenue on Ankur Group and the assessee was also covered by the said searches conducted by Revenue u/s 132(1). It was submitted that return of income was filed by the assessee originally u/s. 139(1) on 27.11.2006 declaring income of Rs. 3,81,37,586/-. The assessee also filed return of income in pursuant to notice u/s. 153A on 19.06.2009 wherein the assessee declared income of Rs. 3,81,78,610/- and the assessee made a claim of deduction u/s 80IC to the tune of Rs. 9,99,96,772/- in the said return of income filed in pursuant to notice u/s 153A. The Ld. CIT-DR submitted that in the assessment framed u/s. 153A r.w.s 143(3) vide assessment order dated 31-12-2009, the claim of deduction u/s. 80IC to the tune of Rs. 9,99,96,772/- was disallowed by the Revenue as the assessee did not have its owned manufacturing unit at Baddi, Himachal Pradesh which was under installation during the relevant previous year and the assessee got manufacturing done at the unit of sister concern Vaibha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as only claimed depreciation of Rs. 44057/- w.r.t. its Baddi, HP unit during the impugned assessment year. Our attention was also drawn by learned CIT DR to page no. 42 to 43 wherein the loan licence to manufacturing the drugs bearing no. L/05/84 & 85-MNB dated 29.04.2005 at the unit of Vaibhav is placed, whereby the Drug Controller cum licensing authority allowed the assessee to manufacture drugs on loan licence basis at the premises of Vaibhav Healthcare Private Limited-unit Baddi, Himachal Pradesh from 29.04.2005 to 28.04.2010. Our attention was also drawn by learned CIT-DR to page no. 44 to page no. 55 wherein manufacturing agreement is placed to contend that the assessee is getting drugs/pharmaceutical products manufactured under a contract manufacturing agreement with Vaibhav Healthcare Private Limited and assessee did not had manufacturing unit of its own. It was also submitted by learned CIT DR by referring to page no. 54 that Shri. Giriraj Vijayvargiya had signed on behalf of Vaibhav Healthcare Private Limited who is also Director in the assessee company. Thus, it is claimed that both are sister concern. Our attention was also drawn to page no. 56 of the paper book wherein....
X X X X Extracts X X X X
X X X X Extracts X X X X
....relied upon the decision of Hon'ble Kerala High Court in the case of Kutookaran Machine Tools v. ACIT reported in (2009) 313 ITR 413(Ker.) to contend that penalty u/s 271(1)(c) is leviable when the claim is ex-facie bogus claim made by the assessee. The learned CIT DR also relied upon decision of Hon'ble Delhi High Court in the case of Kanchenjunga Advertising Private Limited v. CIT in ITA no. 944/2011. The learned CIT DR also relied on the decision of Hon'ble Delhi High Court in the case of CIT v. Zoom Communications Private Limited reported in (2010) 327 ITR 510(Del). The learned CIT DR also relied upon the decision of Hon'ble Karnataka High Court in the case of CIT v. Sree Valliappa Textiles reported in (2007) 294 ITR 322(Kar.) to contend that penalty is leviable even for omission and commission on the part of its counsel on which the assessee relied upon as the assessee is bound by counsels omission and commission. It was submitted by learned CIT DR that the assessee is a big company having turnover of more than Rs. 100 crores. It was submitted by learned CIT DR that it is not brought on record by the assessee as to what action was taken by the assessee against the counsel/CA w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hi in the case of Chadha Sugars Private Limited v. ACIT reported in (2012) 146 TTJ 112(Del-trib.). Thus in nutshell Ld. CIT-DR submitted that the finding of learned CIT-A while deleting penalty levied u/s 271(1)(c) was perverse which need to be reversed and penalty u/s 271(1)(c) as confirmed by learned AO needed to be confirmed. 8. The Ld. Counsel for the assessee on the other hand submitted that the claim of the assessee u/s. 80IC was disallowed while in the original return of income filed with the Revenue, the same was allowed. It was submitted that this denial of claim of deduction u/s. 80IC has nothing to do with the search carried out against the assessee by Revenue u/s. 132(1). It was submitted that the assessee has one manufacturing unit at Daman which was operational while manufacturing at Baddi,HP was entirely outsourced to Vaibhav Healthcare Private Limited, Baddi, HP which is also an associated/sister concern of the assessee for which job charges were paid to Vaibhav Healthcare Private Limited. It was submitted that assessee never claimed that manufacturing was done by the assessee so far as Baddi, HP unit was concerned. It was submitted that a legal claim is raised b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vate Limited was entitled for Section 80IC benefits and no undue advantage has been taken by the assessee. It was submitted that there was no incorrect statements made by the assessee and the manufacturing was infact done at the unit of Vaibhav Healthcare Private Limited at Baddi (Himachal Pradesh) under the control and supervision of assessee. It was submitted that no inaccurate particulars of income were furnished by the assessee. It was also submitted that penalty on additions of Rs. 7 lacs has no connection with the disallowance u/s 80IC of the 1961 Act. It was submitted that disallowance of claim u/s 80IC has nothing to do with search conducted by the Revenue u/s 132(1) and explanation 5 to Section 271(1)(c) has no relevance so far as disallowance u/s 80IC of the 1961 Act is concerned. It was submitted that no undue utilisation of deduction u/s 80IC was claimed as in any case sister concern Vaibhav Healthcare Private Limited was entitled for deduction u/s 80IC. It was submitted that in computation of income filed with the Revenue, it was clearly reflected that the deduction u/s 80IC to the tune of Rs. 9.99 crore was claimed. Our attention was also drawn to page no. 4 to 39 whe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cedents which did not found favour with the Revenue. It was submitted that it is not an appeal against the quantum assessment. It was submitted that since explanation was bona-fide and hence assessee should be granted relief in the penalty proceedings. The assessee relied upon decision in the case of CIT v. Reliance Petroproducts Private Limited (2010) 322 ITR 158 (SC) and claimed that the case of the assessee is squarely covered by the aforesaid decision of Hon'ble Supreme Court. The Bench at this stage directed the assessee to file proof that Vaibhav Healthcare Private Limited was entitled for deduction u/s. 80IC with respect to the Baddi unit. It was also directed by the Bench to the assessee to bring on record who is responsible for making excise payment to which the Ld. Counsel for the assessee submitted that assessee will be submitting written submissions in due course and copy will be marked and handed over to the Ld. CIT-DR for his perusal and records. The Ld. Counsel for the assessee also relied upon the decision of the Hon'ble Bombay High Court in the case of CIT v. Aditya Birla Novo Limited in ITA No. 3899 of 2010, judgment dated 14-08-2012. The ld. Counsel for the asses....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... relied upon by the learned CIT DR. 9. The Ld. CIT DR in rejoinder submitted that in the case of Penwalt India Limited(supra) some manufacturing activity was done by the taxpayer but in the instant case no manufacturing was done by assessee. It was submitted by learned CIT DR that it is claimed that there was an opinion taken by the assessee from professionals but no such opinion was brought on record as it was not filed before the authorities below and not even before the tribunal. It was also submitted that provisions of Section 10B and 80IC are different which operate in altogether different field wherein Section 80IC clearly requires manufacturing. Thus, learned CIT DR strongly supported the levying of penalty u/s 271(1)(c) of the 1961 Act and contended that the appellate order of learned CIT(A) is erroneous which needed to be reversed and penalty levied by the AO be confirmed. 10. The assessee during the course of hearing was directed by the Bench to file documents to prove that Baddi, HP unit of Vaibhav Healthcare Private Limited was entitled for deduction u/s. 80IC during relevant previous year under consideration. The assessee was also directed by the Bench to file co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rely outsourced by the assessee to the unit of associated/sister concern namely Vaibhav Healthcare Private Limited, Baddi, HP for which job charges to the tune of Rs. 3.87 crores were paid by the assessee to Vaibhav Healthcare Private Limited during the impugned assessment year. The assessee also deducted income-tax at source on the aforesaid job charges paid to the said Vaibhav which is not disputed by Revenue. The assessee achieved sales to the tune of Rs. 75.67 crores during relevant previous year under consideration w.r.t. pharma products manufactured at Vaibhav's Baddi unit. The assessee made disclosures in audited financial statement that its own manufacturing unit at Baddi, HP which was under installation will start functioning from financial year 2006-07.The assessee also made disclosure in the said audited financial statement that major production was out-sourced from Vaibhav's unit located at Baddi, HP. Thus, the Plant & Machinery of unit of the assessee at Baddi had not become operational till the end of relevant previous year as the same was under installation and all the manufacturing activities at Baddi, HP were outsourced to the unit of Vaibhav Healthcare Private Lim....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ecord by the assessee. There was a proposal underway to merge said sister/associate concern namely Vaibhav Healthcare Private Limited with the assessee w.e.f. 01-01-2006 which falls within the relevant previous year but later on the date of merger was advanced to 01-04-2006. These facts are borne from audited financial statement of the assessee placed on record for financial year 2005-06 in paper book filed with the tribunal. The said merger of Vaibhav with the assessee was done under a scheme approved by Hon'ble Bombay High Court. The assessee in the impugned assessment year filed claim for deduction u/s 80IC to the tune of Rs. 9,99,96,772/- w.r.t. manufacturing done at Vaibhav's unit at Baddi, HP which was disallowed by the AO. The said claim was based on audit report issued by the auditors as well it is claimed to be based on the basis of opinion obtained by the assessee from counsel. However, the copy of opinion is not placed before us but it is claimed that the said opinion was furnished duly before the authorities below. The assessee accepted quantum assessment wherein the AO had disallowed deduction u/s 80IC w.r.t. manufacturing done by the assessee at Vaibhav unit and the a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... is unable to offer any bonafide explanation to substantiate making of the said claim. In the instant case in our considered view, the assessee has been able to demonstrate that although claim for deduction u/s. 80IC as lodged by the assessee with the revenue was not tenable but the assessee made a bona-fide claim as the loan license issued by Licesning authority was held in the name of the assessee to manufacture pharma products at Vaibhav's unit at Baddi, HP, manufacturing was done under assessee's supervision and control to utilise the spare capacity of Vaibhav unit at Baddi, HP under contract manufacturing agreement, raw material and packing material was supplied by the assessee to Vaibhav and even sale orders were issued by it. Ultimately it was also proposed to merge the said sister/associated concern namely M/s Vaibhav with assessee under a scheme of merger approved by Hon'ble Bombay High Court w.e.f. 01-01-2006 which falls within the impugned assessment year, which date of merger was later advanced to 01-04-2006. It is also demonstrated by the assessee that Vaibhav unit at Baddi, HP was entitled for deduction u/s 80IC. Thus, it is a case where legal claim was raised by the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t by the tax-payer during the previous year relevant to the impugned assessment year as it had already sold all the assets to M/s Harvey Health Care Limited and on that ground the ITAT confirmed the penalty levied u/s 271|(1)(c). Similarly, the reliance on the case of SBI DFHI Limited(supra) by learned CIT DR is also of no help as the tax-payer in this case did not offer any bonafide explanation for lodging excessive claim of unabsorbed depreciation while computing book profits u/s 115JB while in the instant case, bonafide explanation is forthcoming from the assessee as to lodging of claim for deduction u/s 80IC w.r.t. manufacturing done at Vaibhav's unit under its supervision and control. Similarly, the reliance in the case of Chadha Sugars Private Limited(supra) by learned CIT DR is of no help as in this case the chartered accountant gave opinion for accounting expenditure in financial statements and not for the purposes of claiming the same as Revenue expenditure within the provisions of the 1961 Act, while the assessee claimed the said expenditure being ROC fee paid for increase in authorised capital as revenue expenditure which was directly infringing upon the decision of Hon'....
X X X X Extracts X X X X
X X X X Extracts X X X X
....which was ex-facie wrong claim lodged by the tax-payer which was contrary to provisions of Section 40(ii) of the 1961 Act and no such advice could have been given by the chartered accountants which was ex-facie wrong claim contrary to the provisions of the 1961 Act and hence penalty u/s 271(1)(c) was held to be exigible. The assessee also made an ex-facie wrong claim for depreciation which is contrary to provisions of the 1961 Act and under those circumstances penalty u/s 271(1)(c) was held exigible. The case law relied upon by the learned CIT DR in the case of Coromondal Indag Products Private Limited (supra) was again distinguishable as in that case, the tax-payer filed wrong claim for entire cost paid for property for claiming deduction u/s 35(1)(iv) while only part cost was paid, similarly wrong claim was filed to contend that the building was used for scientific research while the building was used onlu for administrative purposes and w.r.t. second property shown to be purchased by the tax-payer, the tax-payer had only paid advance to middleman who agreed to purchase land for the tax payers from adivasis and claim was made that property was purchased which was an ex-facie wron....