MERE DISALLOWANCE OF THE CLAIM DID NOT AMOUNT TO CONCEALMENT OR FURNISHING OF INACCURATE PARTICULARS OF INCOME

[Mr. M. GOVINDARAJAN]

     Section 271(1)(C) of the Income Tax Act provides that if the Assessing Officer or the Commissioner of Income Tax (Appeals) of the Commissioner in the course of any proceedings under this Act is satisfied that any person has concealed the particulars of income or furnished inaccurate particulars of such income he may direct that such person shall pay by way of penalty which will not be less than, but which shall not exceed three times the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income.

     Explanation 1 to Sec. 271(1) provides that where in respect of any facts material to the computation of the total income of any person under this Act-

A)    such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner of Income Tax (Appeals) or the Commissioner to be false; or

B)     such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for this purposes be deemed to represent the income in respect of which particulars have been concealed.

In 'National Textiles V. Commissioner of Income tax' - (2000 -TMI - 14310 - GUJARAT High Court] the Gujarat High Court observed that in order to justify the levy of penalty, two factors must co-exist-

There must be some material or circumstances leading to the reasonable conclusion that the amount does represent the assessee's income.   It is not enough for the purpose of the penalty that the amount has been assessed as income; and

The circumstances must show that there was animus i.e., conscious concealment or act of furnishing of inaccurate particulars on the part of the assessee.

The explanation has no bearing on factor No.1 but it has a bearing only on factor No.2   The explanation does not make the assessment order conclusive evidence that the amount assessed was in fact the income of the assessee.   No penalty can be imposed if the facts and circumstances are equally consistent with the hypothesis that the amount does not represent concealed income with the hypothesis that it does.  If the assessee given an explanation which is unproved but not disproved, i.e., it is not accepted but circumstances do not lead to the reasonable and positive inference that the assessee's case is false, the reasonable and positive inference that the assessee's case is false, the explanation cannot help the Department because there will be no material to show that the amount in question was the income of the assessee.

     In 'Assistant Commissioner of Income Tax V. Raj Multiplex P. Limited' - (2010) 6 ITR (Trib) 76 (Ahmedabad) the assessee is a company which is running cinema theatre.  The assessee, for the year under consideration, furnished the return of the income declaring business loss of Rs.1,00,92,940/-.   The Assessing Officer determined the loss at Rs.63,31,606 after deducting excess claim of depreciation disallowed Rs.37,11,454 and deduction under Section 35D Rs.49,280/-.   The Assessing Officer also levied penalty under Sec. 271(1)(c) of the Act on the above addition/disallowance.  The assessee was held as guilty of concealment in respect of his claim.

     The assessee filed an appeal before the Commissioner of Income Tax (Appeals).   Before the appellate authority the assessee contended the following-

The claim of depreciation at 15% was a clerical error.   The written down value of building, furniture and fixtures was taken as single block and depreciation was claimed at 15% as against 10% allowance as per the Income tax rules;

In the earlier assessment year itself the depreciation was wrongly noted as 15% but the same was computed and claimed separately at 10%.  The rate column was erroneously left unrectified.   The rate of depreciation was not modified in the subsequent years but the same chart used for in the assessment year 2002-03 was taken into account in the present assessment year which resulted in an error in claiming deprecation;

Once the error was noticed the mistake was rectified in subsequent years by filing revised returns;

The company was running in heavy loses for the past years and it had accumulated unabsorbed losses and depreciation to the tune of over Rs.6 crores;

The company was also not having any taxable income as per Sec. 115.   As such the error was inadvertent and the company was not going to derive any material benefit on account of the error;

The deductions under Section 35D was relating to pre-operative expenses incurred in 1999-2000 and similar claims were made and allowed in earlier assessments;

There is no justification for holding that the appellant was guilty of concealment in respect of the claim.

The Commissioner of Income Tax (Appeals) held that the facts pointed out by the appellant had made a mistake in adopting the correct rate of depreciation.   This is a mistake apparent on record and the assessment order passed had only made the disallowance by correcting the mistake.   The mistake, which is bona fide, did not amount to concealment or furnishing of inaccurate particulars of income.   Clarification furnished by the appellant in this regard is found to be genuine and accordingly Explanation 1 to Section 271(1)(C) does not apply.   As regards the disallowance of the claim of deduction under Sec. 35 D, it is noticed that similar deduction in respect of the very same expenses was allowed in the earlier assessment years.   The Commissioner (Appeals) held that the mere disallowance of the claim did not amount to concealment or furnishing of inaccurate particulars of income.   The appellate authority thus held that the levy of penalty is found to be not justified. 

Aggrieved with the order of the appellate authority the Revenue filed appeal before the Tribunal.   The Tribunal after considering the findings of the lower authorities held that it did not find any infirmity in the order of the Commissioner of Income Tax (Appeals).   The reduction in the returned loss was mainly on account of reduction in the claim of depreciation.   The assessee had claimed in the depreciation on the cinema theatre at 15% which in fact allowance at 10%.   During the assessment proceedings, the assessee itself had furnished the revised chart and worked out that the depreciation claimed by it was higher by Rs.37,11,454.   The explanation of the assessee given before the Commissioner of Income Tax (Appeals) that the written down value of building, furniture and fixtures was taken as a single block by mistake and due to clerical error the depreciation was claimed at 15% seems plausible.  In the year under appeal, the assessee had a loss of more than rupees one crore and even after the disallowance made by the Assessing officer, assessed a loss of Rs.63.31 lakhs.   The assessee already had carried forward business loss and depreciation over Rs.6 crores.   In the above circumstances there could not be any motive to claim more depreciation.  The tribunal upheld the order of the Commissioner of Income Tax (Appeals).