2009 (9) TMI 82 - AT - Income Tax

Penalty u/s 271(1)(c) - TP Adjustment - assessee has not fully and truly disclosed the real operating cost and the comparable profit margin on the same as required u/s 92C and this resulted in suppression of income as well as higher claim of loss - whether the provision of doubtful debt on the facts of the case was an extraordinary item to be excluded from the operating cost? - CIT(A) in his appellate order has noted that necessary facts relating to the provisions of doubtful debts were disclosed to the Revenue authorities in various forums. HELD THAT - If the sums are owed by the parent company become bad the same cannot be conclusively said to be a matter falling in ordinary course of trade; The fact that the assessee has accepted the addition and not challenged the same will not change this aspect. In our considered opinion it is certainly a debatable point. A point on which admittedly there can be two opinions. As per the AS-5 issued by the ICAI extraordinary items are incomes or expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and therefore are not accepted to recur frequently or regularly. Hence in the light of the aforesaid discussion whether the provision for doubtful debt on the facts of the case can be said to be an extraordinary item warranting exclusion from operational cost is a debatable point. As noted that as against the sum owed to the assessee the parent company had incurred larger amount in the formation of the assessee company which was to be cross-charged to the assessee. This sum was also cancelled along with the debt. If this sum was not cancelled against sums owed by the parent company the assessee s cost would have been further loaded by a larger amount by the cross-charge for formation expenses. Thus there was a full disclosure by the assessee of all the relevant facts we hold that the assessee s computation cannot be said to have been done not in good faith and not with due diligence. Hence no levy of penalty under s. 271(1)(c) is called for. As decided in the case of Hindustan Steel Ltd. vs. State of Orissa 1969 (8) TMI 31 - SUPREME COURT whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed the authority competent to impose the penalty will be justified in refusing to impose penalty when there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute. Thus the case the assessee cannot be held liable for penalty under s. 271(1)(c)as his conduct is not mala fide or contumacious. Decided in favour of assessee.

Summary

Issues:
- Deletion of penalty under section 271(1)(c) by CIT(A)
- Treatment of provision for doubtful debts as an extraordinary item
- Whether exclusion of provision for doubtful debts from operating cost was done in good faith and with due diligence

Analysis:

1. Deletion of Penalty under Section 271(1)(c) by CIT(A):
The appeal by the Revenue challenged the deletion of the penalty amounting to Rs. 90,07,004 imposed by the Assessing Officer (AO) under section 271(1)(c). The AO had made the addition in the income of the assessee based on the Transfer Pricing Officer's (TPO) report, and penalty proceedings were initiated. The CIT(A) noted that the assessee had made adjustments in operational profit due to various factors, including excess capacities cost, start-up cost, and provision of doubtful debt. The CIT(A) concluded that the assessee had disclosed all relevant facts to the authorities and that there was a difference of opinion between the assessee and the TPO regarding the treatment of provision for doubtful debts. The CIT(A) held that it was not a fit case for the levy of penalty.

2. Treatment of Provision for Doubtful Debts as an Extraordinary Item:
The TPO did not accept the provision of doubtful debts as part of operating costs, leading to the addition in the income of the assessee. The Revenue contended that the provision of doubtful debt was not an extraordinary item and should not have been excluded from operating costs. However, the counsel for the assessee argued that all actions were taken in good faith and with due diligence, supported by the opinion of reputed consultants. The CIT(A) observed that the provision for doubtful debts was disclosed to the authorities and was treated as an extraordinary item not forming part of operational costs. The issue revolved around whether the provision for doubtful debt could be considered an extraordinary item warranting exclusion from operational costs.

3. Exclusion of Provision for Doubtful Debts from Operating Cost in Good Faith and with Due Diligence:
The Tribunal analyzed the facts and circumstances surrounding the provision for doubtful debts. The assessee had disclosed all relevant information, including the cancellation of debts owed by the parent company, which was considered an extraordinary item. The Tribunal held that the assessee's computation was done in good faith and with due diligence, as there was a full disclosure of relevant facts. Citing legal precedents, the Tribunal concluded that the assessee's conduct was not mala fide or contumacious, and therefore, no penalty under section 271(1)(c) was warranted. The Tribunal confirmed the order of the CIT(A) and dismissed the appeal filed by the Revenue.