2004 (7) TMI 274 - AT - Income Tax

Initiation of penalty proceedings u/s 271(1)(c) - For Concealment Of Income - Examination of Explanation 1 to section 271(1)(c) - Disclosure of all material facts - tax evasion device - difference of opinion between the members - Third Member Order - whether on the fact and in the circumstances of the case a penalty could be validly levied for concealment u/s 271(1)(c) read with Explanation 1 thereto - HELD THAT - The learned JM - In the present case there was deliberate attempt to conceal income by furnishing inaccurate particulars of expenditure to reduce the income. Explanation 1 to section 271(1)(c) of the Act was fully applicable in this case and levy of penalty was justified. The burden was on the assessee to rebut the presumption and as there was no satisfactory explanation, the said burden was not discharged. The claim of deduction of interest @ Rs. 62 per debenture was neither bona fide nor genuine. The assessee was trying to reduce its tax liability by adopting a device.Thus, learned Judicial Member confirmed the levy of penalty. The learned Vice President (Accountant Member) - concluded that the assessee cannot be held guilty of concealment of income or furnishing inaccurate particulars of income thereof either under the main provision of section 271(1)(c) or under deeming provision of Explanation 1 thereto. In his opinion, the appeals were required to be allowed. Third Member - The revenue has justified disallowance of interest of Rs. 62 and levy of penalty as the assessee paid interest for six years when it could pay only for 7 days in the relevant period. It has been over emphasized by the revenue that interest for period other than 7 days, did not accrue to the assessee; the excess amount was paid as advance interest only on account of close relationship between the assessee and the recipients. In adopting the above approach the revenue has totally disregarded the agreement between the parties, which as noted in details was given effect to and implemented. Finding that the liability to pay interest other than for 7 days had not accrued is contrary to well-settled principle of law. A liability accrues under an agreement and is fastened with the obligation to be discharged. There is no dispute that under the agreement the assessee was obliged to pay Rs. 62 upfront on the date of issue of the debentures. Thus there was an accrued liability to pay whole of the interest and such a liability could legitimately be claimed as a deduction. I have already referred to the decision of the Hon'ble Supreme Court in the case of Calcutta Co. Ltd 1979 (8) TMI 23 - CALCUTTA HIGH COURT . and the learned VP in his proposed order, has referred to several other decisions to support the conclusion that the entire liability of @ Rs. 62 per debenture paid under agreement was accrued liability. The revenue authorities while holding to the contrary took into account the treatment given to the interest income by the receipts in their returns. They had shown interest only for 7 days and rest of the amount was claimed to be taxable in the subsequent years. Thus different treatment give to interest income by the payer and recipients and this had been taken in account to draw an adverse opinion against the assessee. In my considered opinion, action of the assessee was separate and distinct from that of recipients/directors or their relatives and two could not be combined. Moreover character of a receipt in the hands of recipient from the angle of taxability may be totally different from what it is in the hands of payer. The levy of penalty on presumption and assumption in my considered opinion, is not justified at all. The addition has been made and levy of penalty is justified on the basis of decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. 1997 (4) TMI 5 - SUPREME COURT . As already noted the aforesaid decision was not available at the time of filing of the return. It is settled law as elaborated by the learned VP that question of penalty has to be decided on the basis of law existing at the time of filing of the return. The assessee did not have the advantage of abovesaid decision in which it has been held that discount on debenture is to be spread over and allowed on proportionate basis. But even in the above decision, it has been accepted that discount, was a loss and it accrued in the year of account in the business. Thus, I am of the view that all the four cases before me are not fit cases for levy of any penalty u/s 271(1)(c) of the Income-tax Act. I fully agree with the view expressed by the learned VP. In view of the Majority decision, the penalties levied u/s 271(1)(c) of the IT Act, 1961 are deleted and the appeals are allowed .

Summary

Issues Involved:
1. Confirmation of penalties imposed u/s 271(1)(c) of the Act.
2. Applicability of the decision in Madras Industrial Investment Corporation Ltd. v. CIT.
3. Bona fide nature of the assessee's claim and disclosure of facts.
4. Application of Explanation 1 to section 271(1)(c) of the IT Act.

Summary Issue-Wise:

1. Confirmation of Penalties Imposed u/s 271(1)(c) of the Act:
The assessee companies belonging to the Mardia Group were penalized for claiming interest on debentures upfront for six years on the date of allotment. The Assessing Officer disallowed the major portion of the interest, allowing only for the period of seven days, and initiated penalty proceedings for furnishing inaccurate particulars of income. The CIT(A) confirmed the penalties, holding that the transactions were arranged to reduce tax liability and were within the closely-knit Mardia Group. The ITAT upheld the penalties, agreeing with the CIT(A) that the assessee had concealed income by making a wrongful claim of deductions.

2. Applicability of the Decision in Madras Industrial Investment Corporation Ltd. v. CIT:
The revenue authorities and the ITAT relied on the decision of the Supreme Court in Madras Industrial Investment Corporation Ltd. v. CIT, which held that liability for discount on debentures should be spread over the period of debentures. The assessee argued that this decision was rendered after the filing of their returns and, therefore, should not apply retrospectively. The CIT(A) and the ITAT rejected this argument, stating that the decision clarified the law as it always stood.

3. Bona Fide Nature of the Assessee's Claim and Disclosure of Facts:
The assessee contended that their claim for deduction was bona fide and based on the prevailing law at the time of filing the returns. They argued that they had disclosed all relevant facts in the return and the statement of accounts. The CIT(A) and the ITAT held that the explanation was not bona fide and that the transactions were colorable devices to reduce tax liability. The ITAT noted that the assessee failed to substantiate their claim and did not disclose all material facts.

4. Application of Explanation 1 to Section 271(1)(c) of the IT Act:
The CIT(A) and the ITAT applied Explanation 1 to section 271(1)(c), which shifts the burden to the assessee to prove that the explanation offered was bona fide and that all facts were disclosed. The ITAT held that the assessee failed to discharge this burden. The dissenting Vice-President argued that the assessee's explanation was bona fide and that all material facts were disclosed, thus exonerating the assessee from the penalty under Explanation 1. The majority decision, however, upheld the penalties, agreeing with the CIT(A) that the transactions were designed to evade tax and that the assessee had not provided a satisfactory explanation.