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TMI Blog2009 (3) TMI 635X X X X Extracts X X X X X X X X Extracts X X X X ..... with reference to the addition made or confirmed in the quantum proceedings. If the assessee succeeds in explaining his case then no penalty can follow and vice versa . It is, therefore, amply clear that the confirmation of the addition by the Tribunal in quantum proceedings cannot mean that the penalty be automatically confirmed. If the contention of the ld. DR is taken to the logical conclusion then the penalty proceedings would require obliteration from the statute and the very act of making addition in quantum should entitle AO to impose penalty simultaneously. Section 271(1)( c ) provides that if AO or CIT (A) or the Commissioner, in the course of the proceedings in this Act, is satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty a sum which shall 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. Seven Explanations are there to section 271(1). The necessary elements for attracting this Explanation are three-fold. ( a )the person fails ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be deleted in the first appeal - There may be several situations when the money is not claimed or paid by one party to another within three years and thereafter the claim is made and honored by the other. So simply because a particular amount is outstanding for a period of more than three years, that does not constitute income u/s 41(1). The act of the assessee in agreeing for the inclusion of such amount in the total income during the course of assessment, subject to the condition that the deduction will be claimed as and when the amount is paid to the third parties, manifests that the assessee had not concealed its income or furnished inaccurate particulars of its income for which he could be visited with the penalty. The discussion made supra qua the confirmation of deletion of penalty on deduction claimed by the assessee u/s 35 holds good here also. Thus we approve the view taken by CIT(A). Penalty u/s 271(1)( c ) - reduction in deduction u/s 80HHC - AO found that the assessee had claimed higher deduction u/s 80HHC in respect of AY's 1997-98 and 1998-99 for Rs. 79,331 in total, because of the bad debts claimed as deduction in this year as relating to those years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,43,948 by estimating such expenses at 5 per cent of the dividend income received during the year. When the matter finally came up before the Tribunal in quantum proceedings, the said addition was deleted having been made on the basis of estimation of expenses. Copy of the order passed by the Tribunal in ITA Nos. 3877/Mum./2004 and 5036/Mum./2004 has been placed at page 24 onwards of the paper book. The relevant discussion is made in para 3 by which such disallowance has been deleted. In view of the fact that the addition for which the penalty was imposed by the Assessing Officer does not stand, in our considered opinion, the very foundation for the penalty ceases to exist. We, therefore, uphold the impugned order on this issue. 4. The second aspect of this ground is against the deletion of penalty on the claim made by the assessee under section 80HHC in respect of interest income. The learned Counsel for the assessee submitted that the similar penalty imposed under section 271(1)( c ) with reference to claim of deduction under section 80HHC on gross or net interest was deleted by the Tribunal in assessment year 1999-2000. He placed on record a copy of the order passed in ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s judgment inasmuch as now the penalty can be levied when the assessee claims deduction by disclosing the correct particulars of his income but still the addition is made. He further stated that with the confirmation of the addition by the Tribunal in the quantum proceedings, it has become crystal clear that the assessee had wrongly claimed the deduction for which the penalty must be imposed. In the opposition the ld. AR submitted that the ld. CIT(A) was right in deleting the penalty on this item because the assessee had made proper disclosure in the return of income when it claimed deduction at hundred per cent of the cost of the car, which was purchased and used in connection with the work relating to Research and development. 8. We have heard the rival submissions and perused the relevant material on record. A great deal of emphasis had been laid by the ld. DR on the fact that since the addition has been upheld by the Tribunal, then the penalty should also be confirmed. In our considered opinion the mere fact of confirmation of addition cannot per se lead to the confirmation of the penalty. It is obvious that both the quantum and the penalty proceedings are independent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry elements for attracting this Explanation are three-fold. ( a )the person fails to offer the explanation, or ( b )he offers the explanation which is found by the authorities to be false, or ( c )the person offers 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 have been disclosed by him. If the case falls in any of these three ingredients, then the deeming provision comes into play and the amount added or disallowed in computing the total income is considered as the income in respect of which particulars have been concealed for the purposes of clause ( c ) of section 271(1) and the penalty follows. If the assessee successfully comes out of the above three constituents then he cannot be deemed to have concealed the particulars of his income with reference to the amount added or disallowed in computation of total income. 10. With this background in mind, now we will proceed to test the facts of our case on the touchstone of the above referred three ingredients of Explanation 1 to section 271(1) one by one. It is vivid that the first element is not satisfied because t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ti car for the R D staff. The Assessing Officer allowed the deduction under section 35 in entirety except for disallowing 80 per cent of Rs. 3.23 lakhs by treating it as not used for R D activity. The facts that the assessee had carried out R D activity and the car was also purchased by it for the use by the R D staff have not been denied by the Assessing Officer. The explanation of the assessee for claiming full deduction under section 35 cannot be said to be fanciful. Further the assessee disclosed all the facts relating to its claim by way of Statement No. 6 annexed to the Audit report, which forms part and parcel of the return of income, in which it has been specifically mentioned about the R D expenses debited to the P L account (including depreciation) . Hence the case of the assessee cannot be covered in the third category also. Under these circumstances it is patent that the necessary conditions for invoking Explanation 1 to section 271(1)( c ) are lacking. 11. The Hon ble Supreme Court in Dharmendra Textiles Processor s case ( supra ) has held that the penalty under section 271(1)( c ) is a civil liability and the "wilful concealment is not an essential ingredient ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aving earned interest income from the tenth bank account. But in a case where a genuine claim is made for deduction which is not accepted by the revenue but all the necessary particulars are declared by the assessee in the return of income, it cannot be said by any stretch of imagination that the assessee has concealed his income or furnished inaccurate particulars of income in respect of the claim of deduction which stands repelled by the authorities. If penalty is imposed under such circumstances also then probably there will remain no course open to the assessee for genuinely claiming a deduction which in his opinion is admissible, because the fear of such claim being rejected in eventuality will expose him to the rigor of penalty. Obviously such a proposition is beyond any recognized canon of law. 12. We have noted above that the penalty proceedings are distinct from the assessment proceedings and hence it becomes amply clear that any addition made does not automatically lead to the imposition of penalty under section 271(1)( c ). In the penalty proceedings the assessee is given a chance to explain his case. If he successfully explains his position and is not trapped within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deleted in the first appeal. 15. Having heard the rival submissions and perused the relevant material on record we again notice that there is no concealment of income by the assessee on this issue. Strictly speaking section 41(1) is attracted when there is cessation or remission of a trading liability. Simply because a period of three years has expired and the creditor cannot lawfully enforce his claim, it does not mean that there is a cessation or remission of liability. Suppose in the fourth year or thereafter the creditor demands the money and the assessee agrees to pay, which is otherwise rightfully payable to him based on a genuine and existing liability, can it be said that the assessee should be prevented from making the payment because the lawfully enforceable right vested in the creditor does not exist? In our considered opinion the answer is in negative. There may be several situations when the money is not claimed or paid by one party to another within three years and thereafter the claim is made and honored by the other. So simply because a particular amount is outstanding for a period of more than three years, that does not constitute income under section 41(1). T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the instant year. In other words he proceeded to reduce the claim of deduction in this year instead of the right course available to him for rectifying orders for the earlier two assessment years in which deduction under section 80HHC was found to have been over claimed. Be that as it may there is no dispute that the amount of bad debts was deductible in entirety as having been written off in the books of account for this year itself. How penalty under section 271(1)( c ) can be imposed in this year qua the reduction of claim for deduction under section 80HHC in respect of earlier assessment years is beyond our comprehension. The learned CIT(A) too mechanically upheld the penalty on this aspect without applying his mind to the real controversy. If the claim for deduction in an earlier years is found to be untenable, the proper course available to the Assessing Officer is to make rectification of such earlier years orders and consider the imposition or otherwise of the penalty in those years. The Assessing Officer committed primary mistake by reducing the claim of bad debts in this year by Rs. 79,331 and then again the mistake was repeated by imposing penalty under section 271 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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