2009 (5) TMI 126 - AT - Income Tax

Levy of penalty u/s.271 (1)(c) - Disallowance of Various Claims - Scope and effect of s. 271(1)(c) r/w Expln. 1 - CIT(A deleted the penalty levied by the AO - HELD THAT - Having regard to the provisions of s. 271(1)(c) r/w the Expln. 1 the following legal propositions in the context of provisions of s. 271(1)(c) r/w Expln. 1 thereto may be laid down (i) Where there is a difference between the returned income and assessed income the amount added or disallowed in computing the total income of an assessee shall for the purpose of s. 271(1)(c) be deemed to represent the income in respect of which particulars have been concealed. (ii) It is the burden of the assessee to rebut such an inference by offering an explanation. (iii) If the assessee fails to offer an explanation then the deeming provisions would come into the play and the amount added or disallowed in computing the total income shall be considered to be the income in respect of which particulars have been concealed for the purpose of imposing penalty under s. 271(1)(c). (iv) If the assessee offers the explanation but is found to be false by the AO or the learned CIT(A) or the CIT the penalty u/s. 271(1)(c) would be attracted. (v) If the assessee offers explanation which he has not been able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the computation of assessee s income have been disclosed by him then the penalty u/s. 271(1)(c) shall be attracted. (vi) Though the penalty provision contained in s. 271(1)(c) is civil liability and wilful concealment is not an essential ingredient for attracting this liability but still the penalty u/s. 271(1)(c) shall not be imposed if the assessee has been able to discharge his burden that lay upon him under Expln. 1 to s. 271(1)(c). (vii) Whether an explanation offered by the assessee is false or bona fide depends on the cumulative effect of all the facts and circumstances of a given case and no uniform or strait-jacket formula can be laid down for determining whether or not the explanation offered by the assessee is false or bona fide and whether the assessee has disclosed all the facts relating to the matter. In our considered opinion the mere fact that addition has been confirmed is that by itself cannot lead to a conclusion that penalty should also be confirmed. It is well settled that both the assessment and the penalty proceedings are independent of each other and in the penalty proceedings the assessee has a liberty to show and establish that the assessee s stand was bona fide and all the facts and materials relating to the computation of income were fully and duly disclosed as so provided in Expln. 1 to s. 271(1)(c) and if the assessee succeeds in discharging his said burden then no penalty would be levied. We shall now discuss the issue in hand with reference to each and every item of income in respect of which penalty was levied by the AO but deleted by the CIT(A). Disallowance being 25 per cent of foreign travelling expenses - Penalty levied u/s. 271(1)(c) - ITAT disallowance of foreign travelling expenditure sustained to the extent of 10 per cent by the CIT(A) was deleted. Hence basis for imposing the penalty u/s. 271(1)(c) does not survive any more - HELD THAT - We therefore hold that no penalty under s. 271(1)(c) is imposable in respect of foreign travelling expenditure. Disallowance on warranty liability - AO disallowed by treating the warranty liability to be of contingent in nature - CIT(A) had confirmed the AO s action - ITAT deleted the addition - Since the addition has been deleted by the Tribunal the penalty levied in respect of this addition on account of claim of warranty does not survive. Marketing expenditure incurred on cellular phone handsets issued to the dealers and employees by way of gift - disallowance was sustained by the CIT(A) on the ground that commercial gifts to dealers or to employees were not eligible as the deduction u/s 37(1) - ITAT confirmed the disallowance by CIT - AO therefore levied penalty u/s. 271(1)(c). HELD THAT - The assessee s claim has been rejected for want of corroborative evidences from the employees and dealers and not for the reason that no handsets were ever given by the assessee to dealers and employees but were falsely claimed in the accounts. The assessee is a private limited company and any expenditure incurred by the assessee on its employees or dealers cannot be prima facie said to be of inadmissible nature. We are of the considered view that the assessee has been able to prove and establish that the assessee s claim of expenses in question were bona fide and not a false claim. We therefore hold that assessee has discharged the burden that lay upon it under Expln. 1 to s. 271(1)(c) insofar as the assessee s claim on marketing expenses representing the gift of cellular phone handsets given to employees and dealers. Therefore the order of CIT(A) in deleting the penalty on this item of addition is upheld by us. Disallowance on marketing expenses - Products for own use - benefit of enduring nature - business expenditure - revenue or capital in nature - AO allowed the depreciation at the rate of 25 per cent - CIT(A) upheld the order of AO - HELD THAT - Merely because the assessee s view that these expenditures are to be allowed as admissible deduction as revenue expenditure has not been accepted by the Revenue that by itself cannot be a ground to say that an assessee has made a false claim and thus the assessee s stand to claim these expenses as revenue expenditure cannot be said to be mala fide and dishonest one. All the details and particulars thereof were submitted to the AO as AO himself has allowed the depreciation thereupon. Thus on this issue we are of the considered view that the assessee has been able to discharge its burden vide Expln. 1 to s. 271(1)(c) by giving a bona fide explanation and by furnishing all the facts relating to the issue. The order of CIT(A) in deleting the penalty on this count is thus upheld. Disallowance for obsolescence of inventory - levied the penalty u/s. 271(1)(c) - AO has disallowed 25 per cent of the claim on the ground that the old model could easily be sold in the market to the customers since the customers of this line also purchased old model even after launching new model in the market. This makes it clear that the assessee s claim has not been fully rejected. It is only on estimate that AO has disallowed the 25 per cent of the total claim. AO has not given any such finding that the assessee s claim was otherwise a false claim. The addition made by the AO could at best be considered due to difference of opinion between the assessee and Department but cannot be said to be a claim of such a nature which could be considered to be false and in respect of which the penalty u/s. 271(1)(c) is to be levied. We therefore uphold the order of CIT(A) in deleting the penalty on this item also. In terms of our order in the appeal for the AY 2000-01 which has been decided above by this common order we are inclined to confirm the order of CIT(A) in deleting the penalty. In the result both these appeals filed by the Revenue for the AY 2000-01 and 2001-02 are dismissed.

Summary

Issues Involved:
1. Deletion of penalty under section 271(1)(c) of the Income Tax Act for various additions or disallowances.
2. Disallowance of foreign travelling expenses.
3. Disallowance of provision for warranty.
4. Disallowance of marketing expenditure on cellular phone handsets given to dealers and employees.
5. Disallowance of marketing expenses for handsets given to dealers, employees, and AMCs.
6. Disallowance of provision for obsolescence of inventory.

Detailed Analysis:

1. Deletion of Penalty under Section 271(1)(c):
The main issue is whether the penalty under section 271(1)(c) was rightly levied by the AO for various additions or disallowances made in the assessment. Section 271(1)(c) stipulates that if a person has concealed the particulars of income or furnished inaccurate particulars, a penalty may be imposed. Explanation 1 to this section details the conditions under which the amount added or disallowed will be deemed to represent the income in respect of which particulars have been concealed.

2. Disallowance of Foreign Travelling Expenses:
The AO disallowed 25% of the total foreign travelling expenses claimed by the assessee, amounting to Rs. 1,91,95,931, based on a previous year's assessment. However, the Tribunal had deleted this disallowance in the appeal for the assessment year 1998-99. Consequently, the basis for imposing the penalty under section 271(1)(c) does not survive, and no penalty is imposable for foreign travelling expenditure.

3. Disallowance of Provision for Warranty:
The AO treated the warranty liability as contingent and disallowed Rs. 2,60,56,659. This disallowance was confirmed by the CIT(A) but later deleted by the Tribunal, referencing the Delhi High Court's decision in CIT Vs. Vinitec Corporation (P) Ltd. Since the addition was deleted, the penalty levied in respect of this addition does not survive.

4. Disallowance of Marketing Expenditure on Cellular Phone Handsets:
The AO disallowed marketing expenses of Rs. 4,68,497 for handsets given to dealers and Rs. 4,24,860 for handsets given to employees, which was sustained by the CIT(A). The Tribunal confirmed the disallowance, but the CIT(A) deleted the penalty, finding no mala fide intention or deliberate furnishing of false particulars. The Tribunal agreed, noting that the claim was rejected due to insufficient evidence rather than a false claim, thus upholding the deletion of the penalty.

5. Disallowance of Marketing Expenses for Handsets Given to Dealers, Employees, and AMCs:
The AO disallowed Rs. 51,86,602, treating the expenses as capital in nature but allowed depreciation. The CIT(A) and Tribunal upheld this disallowance. However, the CIT(A) deleted the penalty, reasoning that the expenses were incurred for business purposes and the assessee's claim was bona fide. The Tribunal upheld this deletion, noting that the assessee had provided all necessary details and the claim was not false or mala fide.

6. Disallowance of Provision for Obsolescence of Inventory:
The AO disallowed 25% of the provision for obsolescence of inventory, amounting to Rs. 12,36,664, due to insufficient documentary evidence. This disallowance was upheld by the CIT(A) and Tribunal. However, the CIT(A) deleted the penalty, finding no deliberate furnishing of false particulars. The Tribunal upheld this deletion, noting that the disallowance was based on an estimate and not a false claim.

Conclusion:
For the assessment years 2000-01 and 2001-02, the Tribunal upheld the CIT(A)'s orders deleting the penalties under section 271(1)(c) for various disallowances and additions. The Tribunal found that the assessee had provided bona fide explanations and all necessary details, and the claims were not false or made with mala fide intentions. Consequently, both appeals filed by the Revenue were dismissed.