1994 (6) TMI 28 - AT - Income Tax

Summary

Issues Involved:
1. Levy of additional tax under Section 104 of the IT Act, 1961.
2. Levy of penalty under Section 271(1)(c) for assessment year 1978-79.

Detailed Analysis:

1. Levy of Additional Tax under Section 104 of the IT Act, 1961:

Computation of Distributable Income:
The Assessing Officer (A.O.) computed the distributable income for various companies by disallowing certain expenditures debited in the Profit & Loss (P&L) accounts. Common items of disallowance included commutation charges and interest payable under the IT Act. These disallowances were approved by the Tribunal.

Disallowance of Commutation Charges:
The A.O. observed that commutation charges debited in the P&L a/c were notional figures and not trade debits. The Tribunal confirmed that these charges were of a capital nature and not allowable as business losses under Sections 28, 37, 57(iii), or 45 of the IT Act. The CIT(A) upheld this view.

Interest Payable under IT Act:
Interest payable under the IT Act was disallowed as it was neither paid nor payable during the concerned year. The A.O. held that such liabilities were not covered under Section 109 of the IT Act.

Interest Receivable on Accrual Basis:
In cases like Dhaulgiri Inv., the A.O. added interest income on an accrual basis, which was confirmed by the Tribunal. The assessee's contention of taxing the same on a cash basis was not supported.

Carry Forward of Commutation Charges:
The A.O. did not allow the carry forward of commutation charges for computing distributable income in subsequent years, as these were not actual expenditures and were of a capital nature.

Arguments by Assessee:
The assessee argued that the commutation charges were debited in the P&L a/c under a bona fide belief that they were allowable deductions. The directors' decision not to declare dividends was based on these charges, and the matter was highly debatable, pending before the High Court. The proceedings under Section 104 were quasi-criminal, and the principles from Hindustan Steel Ltd. vs. State of Orissa and CIT vs. Anwar Ali should apply.

Tribunal's Findings:
The Tribunal held that the proceedings under Section 104 are penal in nature. The directors could have a bona fide belief in not declaring dividends due to losses from commutation charges. The amount of commutation charges should be deducted for computing distributable income. However, disallowances like professional charges and preliminary expenses were not contested seriously and were not deductible under Section 109.

Interest Payable under IT Act:
The Tribunal found no merit in the assessee's contention regarding interest payable under the IT Act, as it was neither paid nor payable during the concerned year and was not allowable for computing taxable income.

Interest Receivable on Accrual Basis:
The Tribunal considered the taxability of interest income on an accrual basis as debatable and directed that such additions should be deducted while computing distributable income for Section 104 purposes.

Subsequent Years' Carry Forward Losses:
The Tribunal directed that the unabsorbed commutation charges from earlier years should be considered for computing distributable income in subsequent years, potentially reducing or canceling additional tax under Section 104.

2. Levy of Penalty under Section 271(1)(c) for Assessment Year 1978-79:

Facts:
The ITO levied a penalty of Rs. 20,000 on Dhaulgiri Inv. P. Ltd. for concealing interest income of Rs. 29,200. The assessee maintained accounts on a mercantile basis but did not show this interest income on an accrual basis.

CIT(A)'s Decision:
The CIT(A) canceled the penalty, concluding that there was no justification for its levy.

Tribunal's Findings:
The Tribunal agreed with the CIT(A), noting that the interest income was disclosed on a cash basis in the subsequent year before any detection by the Department. The element of mens rea was absent, and contesting the taxability of interest income could not be treated as concealment or furnishing inaccurate particulars of income.

Conclusion:
The appeals by the assessee were partly allowed, and the Department's appeal in ITA No. 1047/Ahd/85 was dismissed.