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TMI Blog2010 (2) TMI 644X X X X Extracts X X X X X X X X Extracts X X X X ..... alty cancelled - Decided in favor of assessee. - IT APPEAL NOS. 60 & 93 (PNJ) OF 2009 - - - Dated:- 9-2-2010 - D. MANMOHAN, VICE-PRESIDENT J, AND P.M. JAGTAP, ACCOUNTANT MEMBER J, R.N. Bajoria and Binayak Datta for the Appellant. M.L. Karmaker and Dhri Manoj Joshi for the Respondent. ORDER P.M. Jagtap, A.M. These two appeals, one filed by the assessee being ITA No. 60/PNJ/09 and other filed by the Revenue being ITA No. 93/PNJ/09, are cross appeals which are directed against the order of ld. CIT(A), Panaji, Goa dated 30.3.09 whereby he partly sustained the penalty imposed by the A.O. u/s. 271(l)(c). 2. The relevant facts of the case giving rise to these appeals are that the assessee is a company which filed its return of income for the year under consideration on 28.10.04 declaring a loss of Rs. 14,70,90,290/-. In the P L Account filed along with the said return, a sum of Rs. 18,08,35,000/- was debited by the assessee company on account of management service fees. During the course of assessment proceedings, it was noticed by the A.O. that only the income from interest on fixed deposits amounting to Rs. 3.65 crores was credited by the assessee compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laries of deputed people and out of pocket expenses actually incurred for travel and stay of personnel rendering services under this MOU. (4) However, we draw your attention to Clause F of the MOU which is as under: This MOU shall be subject to approval of the Board of Directors of the Company (PPL). (5) The company (PPL) is yet to obtain the approval of their Board. (6) In view of the above mentioned Clause, the assessee company (ZMPL) has not accrued the income in its books. The income will be accrued in the books as and when there is an approval of the Board of Directors of PPL for the MOU and the MOU translates into an agreement. (7) Tax deducted at source on Management Service Fees payable to Zuari Industries Limited and Maroc Phosphates Ltd., S.A. for the above mentioned previous year has already been deposited in the Government Treasury before the due date, (please refer to the details available on your records). (8) We would also like to bring to your attention the case law wherein it was held that Income has been said to accrue when there is a right to payment and when there is unconditional liability on behalf of the payer to pay it to the tax payer to pay i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s incurred and claimed by the assessee thus had not been approved by the Board of Directors of PPL and the said expenditure incurred by the assessee company on managerial services rendered without the approval of the other party was not an allowable expenditure. In this regard, he made a direct enquiry from PPL who confirmed that even though it had signed the MOU with the assessee company for availing managerial services, no remuneration for the same was given to the assessee company for want of conversion of MOU into an agreement. It was also stated by the PPL that though the MOU was valid, it would become operational only on approval of its Board of Directors. The A.O, therefore, held that the expenditure claimed by the assessee on managerial services was not an allowable expenditure as the same was claimed on the strength of MOU which had not become operational in the year under consideration. The said expenditure, therefore, was disallowed by him subject however with the concession that the assessee may claim the same in the year in which the corresponding income is received or accrued to it from PPL in accordance with law. 5. During the year under consideration, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore the A.O. that there was no concealment of particulars of income by it nor the furnishing of inaccurate particulars of such income so as to warrant levy of penalty u/s. 271(1)(c). This explanation of the assessee was found to be very vague by the A.O. and in the absence of any specific explanation offered by it, he held that the assessee was guilty of furnishing of in accurate particulars of its income to the extent of Rs. 19,16,50,016/-. The basis given by the A.O. for drawing such inference in the penalty order is as under:- Regarding management service fees: - The MOU is entered with retrospective effect for rendering services to the loss making company. Generally, the services for improving capacity utilization, efficiencies, profitability etc. can be achieved only if the planning is done in advance. So it is an after though done with the purpose of avoiding tax liability. - If services rendered are as per MOU then, it is not clear why income was not accounted similarly. - The MOU is not effective, the said expenditure cannot be said for the purpose of business. - The tax audit report is silent on the expenditure on management service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The primary commercial objective of the appellant was to revive PPL and to make it profitable. This is made clear by the shareholders agreement dated 28.2.02 entered into between the appellant, PPL, ZIL, MPSA and the Government where it has been provided that the obligation of the appellant is to implement a detailed Technical Proposal for the revival of PPL. To give further effect to the said Technical Proposal of 2002, the appellant entered into a Memorandum of Understanding with PPL. Though the MOU is dated 7.5.04, it is made clear that its Effective Date was 1.4.03. Though work in full earnest had started earlier from 2002, the execution of the MOU was delayed partly because of the approvals that PPL had to obtain. The service agreement dated 7.5.2004 between the appellant and ZIL was necessitated in order to obtain managerial and other expertise for the day to day running of PPL s business. The agreement imposed upon ZIL the obligation to provide services to PPL. Pursuant to the agreements referred to above, the appellant made the following payments to ZIL and MPSA and full tax has been deducted at source thereon:- Party Gross Amount Tax deducted a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the end of the year. The necessary evidence to support this including the bank statements are at pages of the paper book. PPL has confirmed vide letter dated 5.9.06 that the entirety of the refund has been received by it (see page 150). Thus the appellant has in fact not kept any part of the excess interest received from PPL. The bulk of it was paid over before the close of the year. At a hearing held on 3.8.06, the CIT(A) asked the appellant to furnish details of interest received from PPL to submit the copy of account and details of refund of interest income made during the year. The hearing was concluded and no specific date was given to the appellant to furnish the details. After collecting the details, the appellant filed a detailed letter dated 23.08.06 before the CIT(A). The appellant emphasized that the bulk of the interest had been refunded to PPL before the end of the year. The bank statements which evidence the fact of repayment were also attached. The CIT(A) however passed the order on 21.8.06 and the appellant s letter dated 23.8.06 was not considered by the CIT(A). Decision to reduce the rate of interest was taken on 5.12.03 which is very much within the year. The As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctive effect from 01.4.2003 and the Assessing Officer has held it to be an afterthought, for had the assessee company known about this expenditure, it would not have paid advance tax and self assessment tax without taking this expenditure into account. There is also merit in the assertion of the Assessing Officer that milestones like capacity utilization, profitability, productivity etc. can be achieved with advance planning and not by entering into MOU s with retrospective effect. The appellant has entered into a service agreement with its sister concern and an associate and based on that has prepared an MOU recognizing management service fees and this is submitted to PPL for consideration. The PPL Board has not yet (even to this date) approved this and the matter has not as yet acquired a finality in regard to the quantum of management service fee claimed. The appellant himself was not certain both in regard to the finality of the terms of MOU as also of the legitimacy of claim of such a deduction and therefore advance tax and self assessment tax was paid without taking such a deduction into account. However, while filing the return the appellant evidently decided to take a chanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fective the expenditure cannot be said to be for the purpose of business. It is clear that the MOU had not become an agreement and was not ratified by the board which is the reason cited by the appellant for not showing the receipts. If the MOU does not get approved by PPL as indeed it has not been approved till date, then the services rendered by PPL cannot be considered as valid services eligible for remuneration and in that event the related expenditure cannot be said to have been incurred for the purpose of business for when expenditure does not have the sanction of an agreement of the business it cannot be said to have been incurred for the purpose of business. On this logic also the expenditure has been wrongly claimed. Claiming of wrong or excessive deduction also amounts to concealment of income. Falsity in accounts can take either of two forms; either an item of receipt may be suppressed fraudulently or an item of expenditure may be falsely (or in an exaggerated amount) claimed. Both types attempt to reduce the taxable income. Penalty may be imposed for either or both such attempts. This is brought out in the following decisions:- CIT v. India Sea Foods (1976) 105 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a 10(a) of audit report, where it was statutorily required to mention transactions covered u/s. 40A(2)(b), is the expenditure per se mentioned. Neither the notes to accounts, schedules or annexures makes mention of this or the fact of non-observance of the prescribed accounting standards where there is debit or expenditure without corresponding accounting of income. Besides, the appellant had also not suo-moto brought out anywhere in the return the fact of debit of management service fees expenditure without booking of the corresponding income. Neither the auditors nor the appellant had brought out in the return or its various enclosures a single line comment on this discrepancy involving an amount of Rs. 18 crores. It is also significant to note that against this disallowance made by the assessing Officer in the assessment order, the appellant did not prefer any appeal. 5.2. We are an era where Government is reposing trust in tax payers and as a result very few returns are selected for scrutiny within the frame work of policy which is announced by the CBDT,New Delhi every year. In view of this, if this case had not been selected scrutiny, the aspect which is the subject matt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n ble Supreme Court in the case of K.P. Madhusudhanan v. CIT as reported in 251 ITR 99 that notice u/s. 271(1)(c) puts the assesse on notice regarding applicability of Explanation 1 . Explanation 1 automatically comes into operation when in respect of materials on facts to computation of total income of any person there is failure to offer an Explanation or the Explanation offered is found to be false by the Assessing Officer or the Explanation offered is not substantiated and proved to be bonafide . In such a case the amount added or disallowed in computation of total income is deemed to represent the income in respect of which particulars have been concealed. Explanation 1 enables the rule of evidence whereby the burden is on the assessee and if he fails to discharge the burden, the presumption of furnishing inaccurate particulars of income can be drawn. 6.3 From the perusal of provisions of law and precedents on the subject, the law on the subject can be spelt out in the following propositions: (1) whenever there is a difference between the returned and assessed income, there is an inference of concealment as per (Rule of Law contained in Explanation 1 to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of deduction is based on a MOU which is made retrospectively operative to cover the period of the present assessment year. Also this claim of deduction was not in sync with the advance tax and self assessment tax calculation made earlier by the appellant. The appellant therefore has consciously furnished inaccurate particulars both by debiting the said inadmissible expenditure and in setting it off against interest income which has been consistently assessed under the head other sources and held so in appeal from the time returns have been filed. 6.7 In view of the foregoing discussion, I am of the considered view that appellant s case comes within the purview of clause (B) of Explanation 1 to section 271(1)(c) since the appellant has failed to rebut the presumption contained in the Explanation and there was gross and wilful neglect of filing inaccurate particulars of income. As per this the penalty imposed by the Assessing Officer on the issue of wrong deduction claimed for management service fees is upheld. In upholding this penalty I have also taken into account that there was no requirement in law to prove mens rea and as held by the Three judge Bench of the hon ble Suprem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l the relevant facts in greater details so as to explain the background of Zuari Group, how the assessee company came to be established by the said group as a special purpose vehicle to acquire the shares in PPL, the role it was expected to perform in turning around PPL, the business plan that was sought to be implemented etc. In this context, he invited our attention to the copy of the shareholders agreement placed at page Nos. 35 to 53 of the paper book and took us through the relevant clauses thereof. He contended that the agreement between the assessee company and PPL was a sort of technical collaboration in addition to its role to make investment of 74% in the shares of PPL. According to him, that is why the assessee company was referred to the said agreement as strategic partner and not merely as an investor . He submitted that it was the reason why the technical and market establishment background of the Zuari group was highlighted in the shareholders agreement. He contended that a specific role thus was expected to be performed by the assessee company in the effective management of PPL and while performing this role, managerial services were availed by the assessee comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per book and pointed out that all the relevant details furnished therein actually supported the stand of the assessee as regards its claim for deduction on account of fees for managerial services. He then invited our attention to the observation recorded by the A.O. on page No. 7 of his order agreeing to allow the claim of the assessee for expenditure on account of managerial services fees in the year in which the corresponding income is received or accrued to it from PPL. He contended that since the allowance of the said expenditure in the subsequent year in which corresponding income was to be received by the assessee company was beneficial to it, the assessee company did not choose to prefer any appeal before the Tribunal on this issue which the A.O. has held against the assessee in the penalty matter. He contended that the observations recorded by the A.O. in fact, was sufficient to show that the expenditure on account of managerial services fees was held to be allowable and the dispute was only about the year in which the same was allowable. He contended that no penalty u/s. 271(1)(c) in respect of the said disallowance thus was justified as the dispute was only regarding the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... levy of penalty u/s. 271(l)(c). He contended that as rightly held by the A.O. as well as the ld. CIT(A), the claim made by the assessee for deduction on account of managerial fees on the basis of MOU was clearly an afterthought in order to avoid payment of tax on interest income. 16. In the rejoinder, the learned counsel for the assessee submitted that what is to be seen in the context of levy of penalty u/s. 271(l)(c) is whether the assessee s claim is bona-fide from the allowability angle. He contended that penalty proceedings and assessment proceedings are separate and distinct and the inference drawn in the assessment proceedings is not conclusive to impose penalty u/s. 271(l)(c). He submitted that all the relevant particulars relating to its claim for deduction on account of managerial services fees were fully furnished by the assessee and keeping in view that the entire tax was paid by it on interest income well in advance even before the date of MOU, it cannot be said that the claim made on the basis of MOU was an afterthought of the assessee to avoid or evade the payment of tax on interest income. 17. We have considered the rival submissions and also perused the rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use the activities to revive PPL had already commenced in the year 2002 itself in which the assessee company as well as the service providers were actively involved. It is also pertinent to note that the MOU between the assessee company and PPL was subject to the approval of the Board of Directors because of the involvement of the Government in PPL albeit, the service agreements between the assessee company and the service providers requiring no such approval had already become operational and enforceable. As per the said service agreements, managerial fees of Rs. 15,06,60,360 and Rs. 3,01,75,000 was payable by the assessee company to ZIL and MPSA respectively for the services rendered during the year under consideration and the same was also paid by the assessee company after deducting tax at source. The liability for the said managerial fees, according to the assessee, thus had accrued in the year under consideration and the deduction for the same was claimed by it in that year following mercantile system of accounting claiming that the expenses on account of managerial fees were incurred wholly and exclusively for the purpose of its business being revival of PPL. In the assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. The income arising from the MOU thus had not accrued to the assessee company for want of necessary approval to the MOU and this position was confirmed even by the PPL in its letter dated 25.10.05 sent to the A.O. It appears that this position, however, was not appreciated by the authorities below in the right perspective and the same was taken as basis to disallow the claim of the assessee for deduction on account of managerial fees without considering that these two issues are required to be dealt with independently. 21. The third objection raised by the A.O. is that the MOU between the assessee company and PPL being not effective for want of approval of Board of Directors of PPL, the claim of the assessee for deduction on account of managerial fees was not sustainable being premature. It appears to us that the very material fact which was ignored by the A.O. is that the service agreement between the assessee company on the one hand and ZIL and MPSA on the other hand, had become operative as the same did not require any further approval and since the managerial fees was payable by the assesee company to the service providers as per the said service agreements and no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee on this issue in the year under consideration, the following observation was made by the A.O. in his assessment order; the assessee may claim this expenditure in the year in which the corresponding income is received with this view the assessee s . As explained by the learned counsel for the assessee, it was beneficial to the assessee company to claim the expenditure on account of managerial fees in the year in which the corresponding income was expected to be received than to get deduction for the same in the year under consideration. The order of the A.O. on this issue thus was in favour of the assessee and this was the reason why no appeal was filed by the assessee before the ld. CIT(A) on the said issue. In any case, the aforesaid observation of the A.O. as recorded in the assessment order is sufficient to show that the allowability of managerial fees as business expenditure of the assessee company was accepted by him and the only dispute raised by him in this context was the year in which the same was allowable. 24. Keeping in view all the facts of the case as discussed above, we are of the view that the claim of the assessee company for deduction on account of man ..... X X X X Extracts X X X X X X X X Extracts X X X X
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