9911796707
TMI Blog2012 (6) TMI 648X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 271(1)(c) - bona fide explanation - held that:- A claim shall lack bona fide if the facts are manufactured to give a colour of genuineness to the deduction; or if there is not even a far-flung possibility of forming a legally sustainable opinion about the deduction either because of the facts prevailing in a particular case or because no judicial precedent in favour of allowability of such deduction or if an issue is still virgin and had not received attention of the Courts so far, then simple and plain interpretation of the provision leaves no chance to a reasonably prudent person to form an opinion that such a deduction is allowable. These are only some of the instances in which a claim for deduction shall be short of bona fide. - by no standard the claim of the assessee for deduction of 33.63 crores can be categorized as not bona fide in any manner. Penalty under section 271(1)(c) - proper disclosure - held that:- when the disclosure made by the assessee in its Profit and loss account and by way of Note in the Balance sheet is considered in the backdrop of ongoing litigation of the assessee with the Department for last three years on the same point, no hesitation in co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the ITAT (S.B) [2008] 111 ITD 1, insofar as the amounts involved in that appeal were held to be for use and occupation of the premises and not under family settlement, and as such a different view on the same transaction, in law, is not permitted in the appellant's penalty proceedings. Yours appellant craves leave to add to, alter, amend or delete all or any of the grounds of appeal on or before the date of hearing." 2. Brief facts of the case are that during the relevant year the assessee had made a claim for an amount of ₹ 33,62,85,024/- the break up of which was as under: Damages ₹ 33,47,01,137/- Discount ₹ 16,84,487/- This payment was made to Narang Overseas Private Limited [for short NOPL] by the assessee company i.e. Narang International Hotels Private Limited [for short NIHPL]. The assessee company has taken the premises owned by NOPL viz., flat Nos.3, 3A, 4, 5, 6 and 7 in the ground floor of Beach View Co-Op. Hsg. Society at Warden Road Mumbai (for short said premises) on license basis to carry on business in fast food, particularly, for sale of pastries etc., under the brand name "Croissants". For this, assessee was not requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate suit for specific performance and implementation of family settlement agreement. In this suit, following prayers were made: (a) "to handover forthwith quiet, peaceful and vacant possession of shop premises; (b) to pay arrears of commission with interest; (c) to pay the appellant mesne profits/damages of ₹ 1000000/- per month along with interest thereon for use and occupation of the shop premises; and (d) to withdraw forthwith the first appeal No. 591/1993 filed before the Bombay High Court arising out of Bombay City Civil Court's order in Suit No. 8079 of 1990". 5. There were other litigations also going on between the family members and ultimately Shri Rajesh Narang filed a suit for contempt of court against his father Shri Rama Narang in the Hon'ble Supreme Court. Eventually the Hon'ble Supreme Court decreed the suit vide order dated 8-1-2002 in terms of the consent terms reached on 12-12-2001 through which a sum of ₹ 34,57,01,137/- was agreed to be paid. The Board of Directors of NIHPL passed the following resolution, i.e. the assessee company, on 31-12-2001 to give effect to the provisions of consent. The resolution reads as under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee. Further, he observed that according to the assessee itself the payments were in the nature of damages for wrongful use of the premises even after termination of the license. 7. On appeal, the Id. CIT[A] discussed the issue in detail and referred to the various family settlement agreements as well as court orders and confirmed the action of the AO. Aggrieved by the order of the CIT[A] assessee filed an appeal before the Tribunal through which even the Tribunal confirmed the addition. 8. On the basis of the above addition, penalty proceedings u/s.271[l][c] were initiated and show cause notice u/s.274 was issued. During penalty proceedings, again assessee made detailed submissions, which have been summarized by the AO in para-4 of the penalty order, which are as under: "4. The explanation of the assessee was given thorough consideration in the light of the facts involved in the matter and various judicial pronouncement. The basic pleas of the assessee that it is not liable for penalty u/s. 271[1][c] are- i. It did not conceal the particulars of income or furnished inaccurate particulars of such income. ii. In the profit & loss account it has clearly and separately sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld not be called a true disclosure and such disclosure would not absolve the assessee from penal liability and in this regard he placed reliance on the decision of the Hon'ble Gujarat High Court in the case of CIT v. Vidyagauri Natverlal [1999] 238 ITR 91. He also referred to the decision of the Hon'ble Delhi High Court in the case of CIT v. Nath Bros. Exim International Ltd. [2007] 288 ITR 670, wherein it was observed that disclosure of fact relating to the issue and material to the computation of the total income should be such that no enquiry is required to be made by the AO before concluding whether assessee has furnished inaccurate or false particulars of income. It was observed that in the case before him the disclosure could not be called proper disclosure. In these circumstances, AO levied a penalty at the maximum of 300% of the tax sought to be evaded. 10. On appeal, the penalty has been confirmed by the ld. CIT[A]. 11. Before us, Ld. counsel of the assessee carried us through the order of the CIT[A] dated 27-11-2009 through which penalty has been confirmed and made detailed submissions which can be summarized as under: (1) (i) He emphasised the fact that paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f CIT v. Harshvardhan Chemicals & Minerals Ltd. [2003] 259 ITR 212/133 Taxman 320. (iii) Then he referred to pages 68 to 72 of the paper book, which is a copy of the original agreement through which the said premises were taken on lease and licence basis. He submitted that as per Clause 11, the assessee company had agreed to pay the owner of the premises on the basis of percentage of commission on the sale. He pointed out that as per Clause 13, assessee had an option to continue the licence. He submitted that during subsistence of this agreement Shri Rajesh Narang threatened the employees of the assessee and that is why the assessee company had to go to the City Civil Court with a prayer that Shri Rajesh Narang should be restrained from creating trouble in the smooth running of the business. The said City Civil Court directed the assessee company to hand over the peaceful possession of the premises to the owner. Assessee went to Hon'ble Bombay High Court against this order and the operation of the order was stayed subject to payment of ₹ 10 lakhs towards arrears of commission and further deposit of ₹ 1.25 lakhs p.m. Against this order, Shri Rajesh Narang approache ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fect of this decree is the same as that of any other binding order of the Court. As has been pointed out by the appellant, it has been held by the Hon'ble Bombay High Court in Anant Chunilal Kate v. ITO [2004] 187 (TR (Bom) 93 : (2004) 267 ITR 482 (Bom) that a decree in terms of the settlement arrived at by the parties before the Court has the same binding force as any other decree." He also referred to the observations of the Tribunal in this case wherein while adverting to the issue of taxability of mesne profits it was observed that there was conflict in the decisions of various High Courts. In this background he ultimately argued that the expenditure was incurred in terms of the court decree and when there is conflict in the decisions of various High Courts, then the issue is really rendered as debatable and, therefore, penalty could not have been imposed on such a debatable issue. (iv) He submitted that sufficient disclosure was made in the return of income. In this regard he referred to pages 5 and 7 of the paper book, which is a copy of the balance sheet and profit & loss account and pointed out that this expenditure was included under the head 'administrati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e hands of the recipient as revenue in nature which means the stand of the department was that it was a revenue receipt in the hands of the recipient, therefore, it should have been treated as revenue expenditure in the hands of the assessee. He submitted that during assessment proceedings assessee had relied on various case laws which clearly show that the claim of this expenditure was bona fide and was made on the basis of certain judicial decisions. Once a claim is of bona fide nature, then no penalty can be imposed and this situation has been made very clear by the Hon'ble Supreme Court in the case of CIT v. Reliance Petroproducts (P.) Ltd. [2010] 322 ITR 158/189 Taxman 322. (v) He also submitted that the AO had initiated penalty proceedings on the main issue of taxability of expenses incurred by the assessee company. The Tribunal had also confirmed the addition in quantum appeal by relying on the decision of the Special Bench in the case of recipient i.e. Narang Overseas (P.) Ltd. (supra) and had held that as amounts were capital receipts in the hands of the recipient, the payment was also of capital nature in the hands of the payee. However, while imposing the penalty t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jail. 16. On the other hand, Ld.DR carried us through various paras of the assessment order, and CIT(A)'s order in quantum proceedings particularly the portion reproduced by the Tribunal in quantum proceedings, penalty order, some paras of Special Bench in the case of recipient i.e. Narang Overseas (P.) Ltd. (supra), and made detailed submissions which can be summarized as under: (1) His first submission that it is not correct that similar expenditure was allowed in earlier year. What was allowed in earlier year was the commission which was payable for use of the premises and when the premises were not vacated the compensation which was ordered by the Hon'ble Bombay High Court to be paid, was allowed. In fact, the Tribunal has already dealt with this issue in quantum appeal in paras 16 & 17 of the order and clearly pointed out that the nature of expenses allowed was different and for this he strongly relied on the order of the Tribunal. In fact this argument and the argument that the claim was made on the basis of the opinion of the Chartered Accountants has been also dealt and rebutted by the CIT(A) vide para-8 of his order through which it has been clearly pointed out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been disclosed, even if it takes out the case from the purview of non-disclosure, cannot by itself take out the case from the purview of furnishing inaccurate particulars. 17. In respect of initiation of penalty, he referred to the assessment order and submitted that penalty has been initiated in a very general term by observing that "initiate penalty proceedings u/s. 271B and u/s.271[l][c] of the Act." First of all, there is no requirement in law that at the initiation stage detailed finding should be given in respect of the issue on which penalty has been initiated. AO has initiated the penalty in general terms and has not restricted the scope of the same. Therefore, penalty proceedings were initiated for the disallowance of expenditure and the scope of the same would include everything because of which such penalty has been initiated. 18. He submitted that there is no force in the contention that assessee had not taken a chance because assessee's case was in the Central Circle where all cases are selected for scrutiny. This is so, because even in Central Circle all cases are not selected for scrutiny and the case of the assessee may move out of the Central Circl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered Shri Rama Narang as contemptener, a settlement was reached and, therefore, by consent terms Shri Rajesh Narang was paid the compensation. This finding has been recorded by the Tribunal in the Special Bench decision in the case of recipient. This clearly shows that a family settlement was reached and it is not clear whether assessee also got its property vacated, but in any case that is not the scope of this appeal. The fact remains that the compensation was paid on account of family settlement and only a colour was given that this payment was towards mesne profit. 20. He further submitted that from the above, it becomes clear that the claim of the assessee was not bona fide because the payment was clearly made towards family settlement, whereas the expenditure was shown to have been paid for business purposes. It further becomes clear that Shri Rajesh Narang had claimed damages of ₹ 10 lakhs p.m. plus interest if the premises were not vacated before the Hon'ble Bombay High Court against the normal commission payable and at that point of time it would have come to ₹ 1 to 1.25 lakhs. If assessee was apprehensive that it had to pay such a huge compensation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant. The issue in the present ground of appeal is whether the payment of ₹ 33.63 Crores made to NOPL is to be allowed as deduction or not. The appellant is claiming that since the expenditure was incurred during the course of business, it is to be allowed as deduction. 1.9.1 Before deciding the issue in appeal, it is necessary to take into account the factual background leading to the payment of ₹ 33.63 Crores by the appellant to M/s. NOPL. It is necessary to take into consideration the dispute going on among the family members, herein after to be referred as "Narang family" who are the shareholders of the appellant as well as NOPL, and have interest in various other concerns and firms belonging to this family. 1.9.2 All the members of this family are descendents of Shri Sewaram Narang who had three sons by the name Manu Narang, Rama Narang and Omi Narang. The family owns various companies and partnership concerns which carries on the business of hotel, construction and garments. The appellant company runs a five star hotel known by the name "Ambassador Hotel". It is also carrying on pastry business under the brand name "Croissants Etc" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom M/s. United Corporation. (iii) To retire from M/s. Narang Enterprises. (iv) To transfer the shares of Fashion Footwear Pvt. Ltd. to Rama Narang. (v) To transfer shares in Bull worker Pvt. Ltd. to Manu Narang Group. 1.9.3 There were disputes about implementation of the family settlement deed dated 12.07.1990. As per this family settlement Shri Rajesh Narang wanted appellant company to hand over peaceful and vacant possession of the said premises to NOPL, which was given to NIHPL on leave and license basis. After waiting for the implementation of the first family settlement dated 12.7.90, Shri Ramesh Narang, who was to get the NOPL company along with all the assets of the said company, started raising objection to the business activities carried out by the appellant from the said premises. Appellant filed a suit in the Bombay Civil Court (8079 of 1990) seeking permanent injunction against Shri Rajesh Narang from interfering with the occupation and profession of said premises by NIHPL. During the pendancy of the Suit, a supplementary family settlement agreement was entered on 03.07.1991 between various members of Narang family. In this settlement agreement, the entitlement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ishing security to the satisfaction of the Trial Court." 1.9.7 On 02.07.1994, Shri Rajesh Narang, Director of the NOPL filed suit No. 3578 of 1994 in the Bombay High Court seeking specific performance and implementation by Shri Rama Narang for family settlement agreements. In this case, Shri Rajesh Narang, Director of NOPL made a following prayer: - (a) "to handover forthwith quiet, peaceful and vacant possession of shop premises; (b) to pay arrears of commission with interest; (c) to pay the appellant mesne profits/damages of ₹ 10,00,000/- per month along with interest thereon for use and occupation of the shop premises; and (d) to withdraw forthwith the first appeal No. 591/1993 filed before the Bombay High Court arising out of Bombay City Civil Court's order in Suit No. 8079 of 1990." 1.9.8 There are other litigations going on between the family members and ultimately Shri Rajesh Narang and his brother Shri Ramesh Narang filed a suit of contempt of court against their father Shri Rama Narang in the Supreme Court of India. Eventually. Supreme Court vide its order dated 08.01.2002 decreed all the suits including the suit of Shri Rajesh Narang f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that such details were not prepared. On going through the details of sale made by the appellant company from these business premises, it is seen that average gross sale of the appellant company per year are around ₹ 1,00,00,000/-only. These are the gross sales. The appellant has not furnished the details of profits made on the ground that it has not kept such details. Even if gross profit of 10% is estimated on the sale made, the appellant has at the best made a profit of ₹ 10,00,000/- per year from the business premises. 1.9.12 The above fact shows that transaction of leave and license between NOPL and NIHPL, are not between two independent companies. When the premises were taken by the appellant on leave and license basis, Narang family was controlling both the companies and there were no disputes between members of the "Narang family". These transactions were between to companies belonging to the same group. Therefore, there cannot be any dispute regarding interpretation of any part of the leave agreement dated 13.02.1990. However position was not the same after disputes arose between family members after this agreement. As per first family settlement da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ajesh Narang was holding only 10 shares in NOPL before the first family settlement dated 12.7.90 and he was holding 7711 equity shares of NIHPL at that time. As per family settlement agreement dated 12.7.90, Shri Rajesh Narang or his nominee will get all the shareholdings of NOPL. These fact shows that Shri Rama Narang and his family did not transfer the peaceful and vacant possession of the said get the business premises as agreed to in the family settlement agreement dated 12.7.90. When as per leave license agreement, Shri Rajesh Narang is to get all the shares and interest in NOPL, it is not understood why Shri Manu Narang wrote a letter to the appellant on 29.10.1990 and again on 02.11.1990 allegedly allowing the appellant to carry the business from the said premises and extended the leave and license agreement for the period of 12 years and making it irrevocable on 13.11.90. In fact in the letter dated 29.10.1990 it was claimed that Shri Rajesh Narang is holding only 10 shares and the conduct of Shri Rajesh Narang in interfering with the business of the appellant at the said premises is completely illegal, mischievous and without any authority (refer page 564 of the paper book ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Accordingly, the agreement was no more in existence. After the termination of the said agreement, neither the assessee could legally recover from NIHPL nor the NIHPL was liable to pay any amount to the assessee under the terms of the said agreement. What the assessee was entitled to was the compensation as per civil law against unlawful possession by NIHPL. Since the agreement ceased to exist, in our humble opinion, no part of the sun of ₹ 34,57,01,137/- can be said to arise from the said agreement. Consequently, the contention of the learned Sr. D.R. that the aforesaid disputed amount received by assessee represented business receipt chargeable to tax under the terms of the agreement cannot be accepted." 1.9.14 The Special bench has also held that NIHPL was occupying and using the premises at Beach View CHS unauthorizedly. The payment of ₹ 10 lakh per month was on account of damages for depriving the rightful owner (i.e. NOPL) of use and occupation of its premises. It also held that the receipt was capital in nature not exigible to tax. The relevant observations of the ITAT appear in para 49 which are as under: - "49. In the present case, after the term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the said premises on time. In its written submission filed on 23.05.2008, the only reason given by the appellant was that it was the business wisdom of the director. This contention of the appellant is far from truth. Shri Rajesh Narang, who is also a director of the appellant and is also owner of the NOPL as per family settlement dated 12.7.90 would never have agreed to such a decision. No documentary evidence has been field which shows that directors of the appellant company has exercised their "business wisdom" and decided not to vacate the premises. 1.9.17 Further as held by ITAT in the case of NOPL in 111 ITD 1, the occupation by the appellant of the business premises, after the expiry of leave and license agreement was unlawful and unauthorized (refer para-35 of the order). Therefore, any payment made by the appellant for such unauthorized and unlawful possession cannot be called as compensation for breach of contract. It is only compensation for breach of contract during the course of business that is allowable as deduction. In the present case, not only the breach of contract was not during the course of business but possession of the premises was also unlaw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sting on this date of filing of return of income is what is required to be looked into. In the present facts of the case, the return of income was filed on October 30, 2002. And, in this return of income, appellant specifically put up the claim for the expenditure under consideration by including the expenditure in the broad head of Administrative and Other Expenses as also by giving a note which has been elaborated by the Assessing Officer in the order of penalty. The two contentions, one of the First Appellate Authority orders and second that of opinion of the Chartered Accountant have to be therefore analyzed with reference to the cut-off date of October 30, 2002, being the date of filing the return of income. I find that the appellate order for A.Y 1999-2000, a copy of which has been filed by appellant in the penalty proceedings before me, was passed by the Appellate Commissioner on September 10, 2004. This date is subsequent to the date of filing of the return of income and is in fact much beyond that date. Consequently when the return of income was filed by appellant and the claim of expenditure was put up in the return of income, appellant could not have had the benefit of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest thereon was at ₹ 14,22,000/- also cannot be allowed as an expenditure of the year as the same was arising out of the non-payment of commission of earlier year which was withheld for non-business purpose and accordingly the interest amount also cannot be considered as expenditure of the year under consideration, With reference to mesne profit quantified at ₹ 11,70,00,000/- from 01.04.1992 to 31.12.2001 since they are not based on assessee's business done from the premises or on the profits earned from the premises and as they are mutually agreed amounts considering the total family dispute, even though apparently on the various claims and counter claims, the vacation of the said premises can be considered as one of the contentious issues, consequent to the findings of the Hon'ble Special Bench (supra) the amount can be considered only as capital expenditure being mesne profit paid for unauthorised occupation of the said premises. Incidentally as stated above (at SI. No. 2 in para 13 in the chart), the assessee is the only licensee of the said premises and not a tenant or owner of the premises, hence the amount cannot be considered as business expenditure. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elf, are in the nature of damages for wrongful use of the premises even after the termination of licence and also on account of penal interest on the arrears of commission. Thus, in other words these are the payments made on account of the contravention or violation of the terms of agreements and as such these are not allowable expenditure." Further, as pointed by the Ld. DR even Tribunal has confirmed this disallowance vide para-22 of its order which reads as under: "22. Considering the various case laws on the issue and particularly since the CIT (A) has given his findings on the basis of the findings of the Special Bench in the case of Narang Overseas Ltd. 111 ITD 1, the same principles will equally apply here also. Since the factual findings are given by the Special bench, respectively following the same we are of the opinion that the amounts cannot be held as revenue expenditure under section 37(1). It could be concluded that amounts in question were not a revenue expenditure but in view of fact and case law these were to be treated as capital expenditure. Apart from it the amounts in question was not given for any business expediency nor wholly and exclusively la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'ble High Court as under: "Held, affirming the decision of the Tribunal that no penalty was leviable in view of the findings of the Tribunal that when the assessee had claimed some amount though that was debatable, it could not be said that the assessee had concealed any income or furnished inaccurate particulars for evasion of the tax. In view of the findings of the Tribunal, no case is made out for interference by this Court." Thus, from the above it is clear that penalty was deleted because the issue regarding allowance of deduction u/s.80HH and 80I was debatable. In those days laws was not settled and decisions were clearly available on both sides. Moreover assessee had paid tax of ₹ 6,90,000/- and original return filed was for ₹ 10,99,950/-. But later on assessee revised the same and declared Nil income after claiming deductions u/s.80HH and 80I. Therefore, this decision is clearly distinguishable. Moreover, as we shall see later in the case before us, there is hardly any debate whether expenditure related to business or not. 27. As far as the decision of the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd (supra) the Hon'ble Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pending on the turnover of sale and that is why the expenditure claimed in earlier year was allowed. But later on because of the family settlement, the premises were allotted to Shri Rajesh Narang because NOPL who is the owner of the premises was allotted to Shri Rajesh Narang who wanted these premises to be vacated. The City Civil Court in view of the family settlement agreement ordered that assessee company i.e. NIHPL should vacate these premises and hand over the peaceful possession of the same to Shri Rajesh Narang. Only at that point of time Shri Rajesh Narang wanted the Hon'ble Bombay High Court to settle the family dispute by filing a specific performance suit. In that suit he had claimed damages of ₹ 10 lakhs if the premises were not vacated. At that point of time the turnover of the assessee company from the business of selling pastries from Warden Road premises was less than ₹ 1 crore. If it was a business decision, assessee would have vacated the premises because no businessman would pay the lease money which is more than the turn over. This means that at that point of time the assessee thought that either court will not sanction that kind of damages or i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g inaccurate particulars of income under s. 271(l)(c) of the Act vide order dt. 30th Sept., 2004 and a penalty of ₹ 1,33,03,000 was imposed on it. A perusal of the order of the AO shows that penalty was imposed on the assessee in respect of disallowances made by the AO in the relevant assessment year and also as because assessee had filed revised return of income deleting some of the losses/expenditure. The assessee in the revised return had deleted the following expenditures: "A. Items in respect of which the assessee revised its return of income: (i) Advertisement and brand promotion expenses ₹ 48,30,927 (ii) Compensation paid to Gemini Distilleries (P) Ltd. ₹ 10,80,000 (iii) Depreciation on vehicles, plant etc. ₹ 42,418 (iv) Foreign exchange loss ₹ 83,81,000" The assessee had claimed an expenditure of ₹ 2 crores in the relevant year as it had paid a compensation of ₹ 2 crores to M/s GDL for not entering into a similar agreement with any other party, for a period of 8 years. The Assessing Officer considered that since the benefits of this expenditure were going to be for 8 years the expenditure has to be evenly distri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, this decision is clearly distinguishable because the proposition is that if assessee has good bona fide, then penalty cannot be levied. There is no such proposition and merely because the assessee has disclosed the particulars, penalty cannot be levied. 32. In the next decision relied on by the Ld. Counsel of the assessee in Textile & General Trading Co. (supra), the assessee in return of income had claimed interest payable on loans taken from the bank. During assessment proceedings it was noticed by the AO that in the suit filed by the bank for recovery of loans the assessee had denied its liability and had also taken a stand that the claim was barred by limitation. On these facts penalty u/s. 271(l)(c) was levied for furnishing inaccurate particulars of income by making wrong claim of loss. On these facts the Hon'ble Delhi High Court held as under: "Held, that it was clearly stated by the assessee in a note filed with the return of income that the business loss had arisen mainly on account of interest on the amount due to the bank, who had already instituted a suit for the recovery of the loan amount. Merely because the assessee was contesting the suit filed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me and the law was also amended later on retrospectively. Again in this decision the ratio cannot be construed as that merely because assessee filed a note in this respect and, therefore, penalty was deleted. 35. The last decision relied in this respect is in the case of Reya R. Mama (supra). In this case assessee filed a return and along with the return a copy of the summary of the bank account was also filed. This summary depicted the following deposits: Directors sitting fees ₹ 28,000.00 Sale of shares ₹ 776,601.55 Miscellaneous income ₹ 4,422.00 However, the above items were not offered to tax. A notice u/s. 148 was issued. In response to that notice assessee included the said items in the income and paid taxes accordingly. However, AO levied penalty u/s. 271(l)(c). The penalty has been deleted by the Tribunal by observing that it was a bona fide error while filing the return because if the intention of the assessee was to conceal particulars of income, assessee would not have filed the summary of bank account. Again from the above decision, it is clear that penalty was deleted because the Tribunal was of the view that it was a bona fide omission to in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y looking at the return. That would negative and render otiose the very provisions of the statute. As per rule of evidence there is distinction between set of facts "not proved". Benefit of the principle that mere non-satisfactory nature of explanation furnished cannot amount to proof of falsity of explanation furnished can apply in case the fact-finding authority reaches to a stage where it can only conclude that the fact alleged is "not proved" which would mean that except rejection of the explanation furnished by the assessee, there is no material to sustain the plea of concealment. But on the other hand, if the state of affairs reveals a stage where one can positively reach a conclusion that the fact alleged is proved or disproved, the principle that mere rejection of explanation cannot result in levy of penalty will have no application. To reach this stage also, inquiry will have to be undertaken of the disclosure made in the return or in the statement annexed to the return. In the first case, it would be a positive case of no concealment, in the second stage, it would be a positive case of concealment and in the third case, benefit of doubt will go in favo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disclosure as such. Therefore, we reject this submission that since assessee has disclosed particulars, therefore, penalty should not be levied. 38. The next submission that penalty has been levied on the reason that compensation was paid qua family settlement, whereas penalty proceedings were initiated on the main issue of taxability of expenses incurred by the assessee. On this aspect, Ld. Counsel of the assessee has mainly argued that penalty has been levied on a different reason than the reasoning for initiation of penalty proceedings. This is not correct because penalty has been initiated in the assessment order by the following expression: "Initiate penalty proceedings u/s. 271B and 271(1)(c) of the I.T. Act." As pointed out by the Id. DR, penalty has been initiated in a very general term. Further at the time of initiation, AO is not required to make full proof case. In any case, even while initiating the penalty, the satisfaction of the AO is necessary which has generally taken to be as 'state of mind'. If we read the assessment order carefully, we find that most of the discussion in the assessment order revolved around the family dispute and family sett ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he payment of ₹ 33,47,01,137/- is not admissible because the expenses was also not incurred in the course of assessee's business of conducting fast food in the premises referred to above. These payments are also not made wholly and exclusively for the purpose of business and are not also incidental to the business of the assessee. Besides, the payments made, according to the assessee itself, are in the nature of damages for wrongful use of the premises even after the termination of licence and also on account of penal interest on the arrears of commission. Thus, in other words these are the payments made on account of the contravention or violation of the terms of agreements and as such these are not allowable expenditure." The above clearly shows that AO was very clear in mind that while making the addition in the assessment order that the compensation was mainly paid for sorting out the family disputes and that is why it has been concluded that the expenditure was not incurred for the purpose of business. Further, it is settled position of law that assessment order would merge in the appellate order because of the doctrine of merge. The CIT(A) in quantum proceedin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding to the truth or erroneous. Where there is no finding that any details supplied by the assessee in its return were found to be incorrect or erroneous or false. Such not being the case, there would be no question of inviting the penalty under s. 271(1)(c) of the Act. A mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such claim made in the return cannot amount to the inaccurate particulars." From the above observations it is clear that penalty can be levied only when there is concealment of particulars of income or furnishing of inaccurate particulars of income. The court has also very clearly observed that everything would depend upon the return filed by the assessee that is particular of facts of the case. In case before the Hon'ble Supreme Court, the assessee had claimed interest u/s. 36(l)(iii) of the Income Tax Act. A similar deduction was claimed in earlier years also and the same was allowed by way of deduction by the CIT(A), while the Tribunal had restored the matter back to the file of the AO. Since no dividend was earned, interest was disallowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss policies. However, the assessee did not earn any income by way of dividend from those shares. It was submitted before the Supreme Court that the assessee company was an investment company and that in its own case for the Assessment Year 2000-01 the Commissioner (Appeals) had deleted the disallowance of interest made by the Assessment Officer and the Tribunal had also confirmed the stand of the Commissioner (Appeals) for that year and it was on the basis of this that the expenditure was claimed. The Income tax Appellate Tribunal had, however, restored the issue back to the Assessing Officer. In the appeal arising out of penalty proceedings, the Tribunal, in these circumstances, was of the view that the confirmation of disallowance by the Tribunal did not mean that the assessee had concealed the income or had filed inaccurate particulars thereof. Noticing that the assessee had given an explanation vide its letter dated March 22, 2006 giving reasons for claiming the interest as a deduction, the Tribunal was of the view that the onus shifted on the revenue to prove that the explanation offered by the assessee was false. The Tribunal felt that the bona fides of the explanation were c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ean the details supplied in the return which are not accurate, not exact or correct, not according to truth, or erroneous. It was held that making a claim which is not sustainable in law, cannot, by itself, amount to giving inaccurate particulars. It was contended before the Supreme Court that since the assessee had claimed deduction knowing that they were incorrect, it amounted to concealment of income since the falsehood in accounts can take either of the two forms; (i) an item of receipt may be suppressed fraudulently; (ii) an item of expenditure may be falsely claimed or an exaggerated amount, could be claimed and since attempts of both the types reduces taxable income, both amount to concealment of particulars of one's income as well as to furnishing of inaccurate particulars of income. The contention was rejected by the Court. The proposition of law which emerges from this case, when considered in the backdrop of the facts of the case before the Court, is that so long as the assessee has not concealed any material fact or the factual information given by him has not been found to be incorrect, he will not be liable to imposition of penalty under Section 271(1)(c) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e computation of income. In the case of Reliance Petro Products Private Limited (supra), the addition made by the Assessing Officer in respect of the interest claimed as a deduction under Section 36(l)(iii) of the Act was deleted by the Commissioner of Income Tax (Appeals) though it was later restored, by the Tribunal, to the Assessing Officer. The appeal filed by the assessee against the order of the Tribunal was admitted by the High Court. It was, in these circumstances, that the Tribunal came to the conclusion that the assessee had neither concealed the income nor filed inaccurate particulars thereof. In recording this finding, the Tribunal felt that if two views of the claim of the assessee were possible, the explanation offered by it could not be said to be false. This, however, is not the factual position in the case before us. The facts of the present case thus are clearly distinguishable. It is true that mere submitting a claim which is incorrect in law would not amount to giving inaccurate particulars of the income of the assessee, but it cannot be disputed that the claim made by the assessee needs to be bona fide. If the claim besides being incorrect in law is mala fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer or by the Commissioner of Income Tax (Appeals). The view of Income fax Appellate Tribunal regarding admissibility of the deduction on account of written off of certain assets, under Section 32(l)(iii) of the Act is wholly erroneous. The Tribunal has not recorded a finding that the explanation furnished by the assessee in respect of the deduction due to certain assets being written off was a bona fide explanation. The Tribunal has nowhere held that it was due to oversight that the amount of this deduction could not be added while computing the income of the assessee company. As regards deduction on account of income tax paid by the assessee, the Tribunal felt that since no person would claim the same as deduction, to evade payment of tax, the claim made by the assessee was not mala fide. In the absence of the assessee company telling the Assessing Officer as to who committed the oversight resulting in failure to add this amount while computing the income of the assessee, under what circumstances the oversight occurred and why it was not detected by those who checked the Income Tax Return before it was filed and later by the auditors of the assessee company, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n is given, the burden placed on him will be discharged and presumption rebutted. It is not the law, and perhaps hardly can be, that any and every explanation of the assessee must be accepted. In my view, the explanation of the assessee for avoidance of penalty must be an acceptable explanation. He may not prove what he assets to the hilt positively, but at least material brought on record must show that what he says is reasonably valid. " 16. The above views were approved by the Hon'ble Supreme Court in the case of CIT v. Mussadilal Ram Bharose [1987] 165 ITR 14. Referring the judgment of Hon'ble Patna High Court, Their Lordships observed as follows: "The Patna High Court emphasised that as to the nature of the explanation to be rendered by the assessee, it was plain on principle that it was not the law that the moment any fantastic or unacceptable explanation was given, the burden placed upon him would be discharged and the presumption rebutted. We agree. We further agree that it is not the law that any and every explanation by the assessee must be accepted. It must be acceptable explanation, acceptable to a fact-finding body." Therefore, from the abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elate to other family matters. The Special Bench of the Tribunal while adjudicating the issue of the receipt in the hands of the recipient i.e. in the case of Narang Overseas (P.) Ltd. (supra) had observed at para 24.(h) as under: "'24. (h) Besides the above litigation, several other proceedings were pending before various other authorities and Courts. Litigations reached a stage where Shri Rajesh Narang and Shri Ramesh Narang had to bring suit of contempt of Court against their father Shri Rama Narang. As a result of the contempt petition, the Hon'ble Supreme Court considered Shri Rama Narang as contemnor and issued a notice for award of punishment. However, soon after being held as contemnor, Shri Rama Narang decided to implement the family settlements and also to have all suits decreed by a consent decree, including the suit filed by Rajesh Narang before the Bombay High "Court (Suit No. 3578 of 1994), Eventually, the Hon'ble Supreme Court vide order dt. 8th Jan., 2002 decreed all the suits, including the suit filed by Shri Rajesh Narang on 2nd July, 1994, i.e. Suit No. 3578 of 1994, in terms of the minutes of the consent order. In meeting of the board of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he premises bearing Flat Nos. 3, 3A, 4,5, 6 and 7 on the ground floor of premises known as Beach View Co-operative Housing Society Ltd., bearing No. 93, Warden Road,. Bombay-400 007, hereinafter referred to as "the Property". On 13-2-1990, NOPL gave the property on leave and license basis to NIHPL, the Assessee for a period of 11 months. NIHPL was to use the premises so given on leave and license-basis for the purpose of carrying on business of selling fast food under the name "Croissants". The consideration payable by NIHPL to NOPL for occupation of the premises was percentages of sales which are described as commission under the leave and license agreement, vide clause-11 of the leave and license agreement. 48. Disputes arose between the members of the Narang family which were referred to the sole arbitration of Mr. D.M. Harish by a writing dated 2-1-1990. The members of the family entered into a family settlement dated 13th January, 1990 and a subsequent family settlement dated 12-7-1990. An award was also made dated 30-8-1990. To give effect to and finally and fully implement the said family settlement dated 12-7-1990 and to put to an end to all disputes an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se and further directed NIHPL to deliver vacant possession and further directed that NIHPL will continue to pay commission as agreed under the leave and license agreement till delivery of possession. 51. NIHPL filed an appeal being Appeal No. 591 of 1993 before the Hon'ble Bombay High Court, Bombay, against the order of the Bombay City Civil Court, Bombay referred to above and obtained an order of stay of operation of the decree till disposal of the appeal subject to the condition that NIHPL shall pay a sum of ₹ 10 lacs towards arrears and continue to deposit a sum of ₹ 1.25 lacs every month with effect from 1-8-1993. This order was passed on 24-8-1993. 52. Aggrieved by the above order, NOPL company along with its Director Shri Rajesh Narang filed a Letter Patent Appeal praying for payment of arrears and commission as well as payment of mesne profits. On NOPLs prayer for permission to withdraw the amounts so paid by NIHPL, the Hon'ble High Court passed the following order on 21st March, 1994: "Amount deposited by respondent in pursuance of the order dated 24th August 1993, in of order of Chavan J. in first appeal No. 591 of 1993 be paid over to the peti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt No. 6 company to withdraw first appeal No. 591 of 1993 filed by him in this Hon'ble Court arising from Bombay City Civil Court Suit No. 8079 of 1990 forthwith unconditionally. Para-49(j) of the Plaint contained the following prayer: (j) that pending the hearing and final disposal of this suit, this Hon'ble Court be pleased to order Defendant No.6 company to pay to the Plaintiff and Defendant No. 9 a sum of ₹ 10,00,000/- per month as and by way of mesne profit at the rate of Rs. ... per month for use, occupation and enjoyment of the premises being Flat Nos. 3, 3A, 4,5,6 and 7 on the ground floor of Beach View Co-operative Housing Society, Warden Road, Bombay-400 007 from the date of filing of this suit till actual handing over the possession thereof" The working of the figures as set out in prayer (ii) and (iii) is as follows: Exhibit 'T' I. Up to March 1991: Debit Credit Remarks Commission receivable 4,85,667.00 Debit notes admitted 9,168.30 Commission received 96,687.00 Amount receivable 3,79,911.70 Add: Debit note wrongly Issued by Defendant No. 1 17,44,000.00 As amount not deductible. 21.23.911.70 II. APRIL 1991 TO MAR. 1992 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and that the company agrees and undertakes to simultaneously pay to Narang Overseas Pvt. Ltd. ₹ 2,61, 745/-(rounded off) being arrears of commission for occupation of the said 'premises till 31st March, 1992 along with interest @ 21%per annum till 31st December, 2001 amounting to Rs. l6,84,487/-and further agrees and undertakes to simultaneously pay damages and mesne profits for wrongful use and occupation of the said premises at the rate of Rs. l0,00,000/-per month from 1992 till 31st December, 2001 along with interest at the rate of 21% per annum amounting to ₹ 34,57,01,137 (less amount already paid through the Court of ₹ 10,00,000/-)" 56. Accordingly, NOPL was given vacant possession of the property and was paid ₹ 33,47 01,137/- on 21st December, 2001 ( as ₹ 1,10,00,000/-had been received over the years pursuant to interim order of Bombay High Court, as per details set out in para-57 infra). "In the annual accounts of the appellant Company for the Y.E. 31.3.2002, in the Profit and Loss Account the net payment of ₹ 33,63,85,624/- was shown separately and distinctly under the head Administrative & Other Expenses as "NOPL pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the documentation regarding the payment was available to the AO in the earlier year's records and that there were no change in the facts as it prevailed in the earlier year and there was no reason for making the impugned disallowance. This order of the CIT(A) was accepted by the Department and no appeal was preferred before the ITAT. Similar disallowance in Assessment year 2000-01 and 01-02 made by the AO were deleted by the CIT(A) and no appeal was filed by the Revenue before the ITAT for these years. 59. The recipient of the payment from the Assessee viz., NOPL claimed that the receipt in question is mesne profits and therefore it is capital receipt in its hands and therefore not chargeable to tax. The Revenue has been taking a stand in those proceedings that the receipt is a revenue receipt chargeable to tax. Ultimately, a 5 member Special Bench of ITAT in the case of Narange Overseas (P.) Ltd. (supra) had held that the receipt in question in the hands of NOPL is capital receipt not chargeable to tax. 60. In Assessment year 2002-03, this is the assessment year with which we are concerned in this appeal, the AO examined the claim of the Assessee for deduction of the sum of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year and the maximum profit (assumed 10% G.P.) that NIHPL could make was ₹ 10 lakhs per year. The decision of NIHPL to continue to occupy the property at the risk of having to pay huge amounts to NOPL was a bad business decision not guided by "Business Wisdom" not guided by commercial expediency. (b) NIHPL did not deliver possession of the property only because Rajesh Narang did not vacate the premises at Pali Hills which as per the family arrangement he had to vacate and hand over to Rama Narang group. (c) Therefore the payment in question was a payment in the course of settlement of family disputes and not a payment made by NIHPL in the course of its business. (d) The receipt of the sum of ₹ 33,63,85,624 in the hands of NOPL came up for consideration before the ITAT and the ITAT had taken a view that the receipt in the hands of NOPL was mesne profits and the receipt was capital receipt not chargeable to tax as it was paid for unauthorized occupation of the property. Since the payment has been held by ITAT to be for unauthorized occupation of the property, it is not payment during the course of business and is penal in nature and had to be disallowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mind of the ITAT while confirming the addition in the quantum proceedings was the fact that in the hands of NOPL the recipient of this payment the ITAT Special Bench has held that the same is capital in nature and taxable as income. It was submitted that as far as the Assessee is concerned, the character of payment cannot be judged based on the treatment given in the hands of the recipient of the payment from the Assessee and in this regard reliance was placed on the decision of the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. (supra). It was pointed out that as far as the Assessee is concerned, the payment was made for use and occupation of the property for its business though it may be treated as damages for use and occupation. The expenditure was clearly revenue expenditure and ought to have been allowed as deduction. For the purpose of levying a charge of furnishing inaccurate particulars, it cannot be said that the view entertained by the Assessee on the basis of legal advice was free from doubt. In this regard, we may also mention that the Special Bench of the ITAT (consisting of 5 members) while dealing the character of the payment in the hands of the recipi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits were paid for unauthorized occupation of the property. Such payment cannot be said to be payment made in the usual course of business wholly and exclusively for the purpose of business. (g) The payment was only towards settlement of family disputes. (h) In the quantum proceedings the amount in question was held to be not revenue expenditure and was only capital expenditure. (i) The Assessee failed to substantiate its explanation with regard to claim for deduction of the disputed sum and therefore Expln. 1 to sec. 271(1)(c) would apply. (j) The disclosure made by the Assessee was not a complete disclosure because the Assessee did not give the details like nature of payment, subject matter of suit etc. The Assessee should have given a note disclosing the nature and purpose of payment. 66. For all the above reasons, the AO held, that the Assessee by making a patently incorrect claim for deduction has definitely guilty of having furnished inaccurate particulars of income. The Assessee is also guilty of concealing particulars of income. 67. On appeal by the Assessee, the CIT(A) held as follows: (a) The Assessee had reiterated its plea that similar payment were allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r consideration has not been shown as an independent item of the profit and loss account. This is an extremely crucial factor. The quantum here is substantial and if the intention of appellant was bona fide, this expenditure ought to have been shown as an independent item of the profit and loss account which has not been done. The amount has been clubbed under the broad head of "Administrative and Other Expenses". On the issue of allowability of expenditure under consideration as revenue expense, the disclosure conveys nothing at all. If the intention of appellant was clear, a detailed note on the nature of the expenditure and the contention that it is an allowable expenditure, according to appellant, ought to have been mentioned in the note. This has not been done. The absence of these detailed specifications goes to suggest that appellant has taken a chance, chance of the limited scrutiny system being allowed by the Income-tax Department, that the matter may not get picked up for scrutiny for the assessment year under consideration and they may escape consideration of the expenditure under consideration by the Assessing Officer. This factor has been adequately dealt wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of penalty cannot be on different grounds. In the Assessment Order the A.O initiated the penalty proceedings on the main issue of admissibility of expenses incurred by the appellant in the course of its business and on the issue of whether the payments were made wholly and exclusively for the purpose of business. The Tribunal in the quantum appeal of the appellant relied upon the Special Bench decision in the case of Narang Overseas (P.) Ltd. (supra) and held that as the amounts were capital receipt in the hands of the recipient, the payments made by the appellant is therefore capital expenditure. The initiation of the penalty has taken place totally on different ground not qua family settlement. This is not permitted in law as held in the following judicial pronouncements: - Gujarat Credit Corpn. Ltd. v. Asstt. CIT [2008] 113 ITD 133 (Ahd.) (SB) - Addl. CIT v. Nihalchand Badrilal [1982] 135 ITR 519 (MP) - Addl. CIT v. Kejriwal Iron Stores [1987] 168 ITR 715/31 Taxman 331 (Raj.) - CIT v. Lakhdhir Lalji [1972] 85 ITR 77 (Guj.) 2. Penalty cannot be imposed for mere rejection of a claim: Reliance was placed on the decision of the Hon'ble Supreme Court in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. (supra) was followed. 70. The learned D.R. submitted that Mesne Profits as per Sec. 2(12) of the Code of Civil Procedure, 1908, are those profits which the person in wrongful possession of such property actually received or might with ordinary diligence have received therefrom, together with interest on such profits, but shall not include profits due to improvements made by the person in wrongful possession. According to him the Special Bench has already held in the case of the recipient of the sum from the Assessee as capital receipt and therefore it was no longer necessary to discuss the question of deductibility of the sum in the hands of the Assessee. It was submitted by him that the sum in question cannot be capital in the hands of the recipient and Revenue in the hands of the person paying it. The sum in question being of a capital nature ought not to have been claimed as a deduction. The learned D.R. submitted that the family dispute was the reason why the Assessee did not vacate the premises. There was no business exigency to incur such a huge liability which was disproportionate to the revenue generated by occupying the property. He also submitted that there were no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en a detailed note on the nature of the expenditure. Had the case not been selected for scrutiny, the claim of the Assessee would have been allowed without enquiry. In my view the conclusion of the CIT(A) cannot be sustained. The law does not contemplate any particular mode of disclosure. The Assessee in my view has brought on record all primary facts as to how the income has been arrived at by enclosing the profit and loss account. It is for the AO to make necessary investigation, which he had done in the present case. It was submitted in the course of hearing that the AO assessing the Assessee as well as NOPL is one and the same person. Moreover, the background of the pending dispute is already in the knowledge of the department, since the issue of deduction of ₹ 1.25 lakhs per month, (which is an interim payment made by the Assessee pursuant to orders of Hon'ble High Court) which was claimed as deduction by the Assessee for AY 1993-94 and allowed upto AY 1998-99 and which was disallowed by AO in AY 1999-2000 to 2001-02 and allowed by CIT(A) in those years, are all part of record of the Assessee available with the AO. I would therefore tend to agree with the contention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his order has observed that the documentation regarding the payment was available to the AO in the earlier year's records and that there were no change in the facts as it prevailed in the earlier year and there was no reason for making the impugned disallowance. This order of the CIT(A) was accepted by the Department and no appeal was preferred before the ITAT. Similar disallowance in AY 2000-01 and 2001-02 made by the AO were deleted by the CIT(A) and no appeal was filed by the Revenue before the ITAT for these years. In AY 2002-03, this is the assessment year with which we are concerned in this appeal, the AO examined the claim of the Assessee for deduction of the sum of ₹ 33,63,85,624. The character of this payment is not different from the payments made from AY 1995-96 to AY 2001-02 which has already been allowed by the Revenue in the assessment of the Assessee for those years. The only difference being the payment in the earlier years was an interim payment subject to the result of the appeal/suit, whereas the payment in AY 2002-03 is after the decree in the suit. Will this circumstance not be sufficient to hold that the Assessees claim for deduction as made in the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exclusively for the purpose of business and that it was a payment for settlement of family disputes. The findings in this regard in the quantum proceedings are required to be stated. The family members of Narang family owned various firms and companies and carried on business of hotels, construction and garments. The family through NIHPL carried on pastry business in the property under the brand name of "Croissants". NIHPL took the property on lease w.e.f. 13-2-1990. NIHPL carried on business in the property at all material times i.e., from 1990 till delivery of vacant possession in the year 2001. The average sales were Re. l crore per year and the maximum profit (assumed 10% G.P.) that NIHPL could make was ₹ 10 lacs per year. The decision of NIHPL to continue to occupy the property at the risk of having to pay huge amounts to NOPL was a bad business decision not guided by "Business Wisdom" not guided by commercial expediency. NIHPL did not deliver possession of the property only because Rajesh Narang did not vacate the premises at Pali Hills which as per the family arrangement he had to vacate and hand over to Rama Narang group. Therefore the payment in q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and not for use and occupation of the property by the Assessee. It cannot therefore be said that the payment is made for the purpose of settlement of family disputes. 80. The next aspect which, one needs to see is applicability of Expln. 1 to Sec. 271(1)(c) of the Act. One of the factors that weighed in the mind of the ITAT while confirming the addition in the quantum proceedings was the fact that in the hands of NOPL the recipient of this payment the ITAT Special Bench has held that the same is capital in nature and taxable as income. It was submitted that as far as the Assessee is concerned, the character of payment cannot be judged based on the treatment given in the hands of the recipient of the payment from the Assessee and in this regard reliance was placed on the decision of the Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. (supra). It was pointed out that as far as the Assessee is concerned, the payment was made for use and occupation of the property for its business though it may be treated as damages for use and occupation. The expenditure was clearly revenue expenditure and ought to have been allowed as deduction. For the purpose of levying a charge of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alty u/s 271(1)(c). That is clearly not the intendment of the Legislature. THIRD MEMBER ORDER R.S. Syal, Accountant Member (As A Third Member) - The following point of difference has been referred to me by the Hon'ble President u/s. 255(4) of the Income-tax Act, 1961 :- "Whether on the facts and circumstances of the case, the penalty u/s. 271(1)(c) was leviable?" 2. The facts of the case have been elaborately set out by my learned Brothers in their respective opinions. To recapitulate, I am recording the facts, very briefly, as under:- (i) The assessee, Narangs International Hotels Private Limited (hereinafter called "NIHPL"), entered into a license agreement with Narang Overseas Private Limited (hereinafter called "NOPL") on 13.02.1990 by which the assessee was permitted to enter the premises of NOPL for 11 months. As per the terms of the agreement, the assessee was to pay commission at a specified rate of sales from such premises to NOPL. Here it is important to mention that the shareholding of the assessee-company as well as NOPL comprises of certain members of Narang family and some dispute, on the distribution of properties, was going o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.01.2002, the Hon'ble Supreme Court passed the order transferring of pending suits including suit no. 3578 to the Hon'ble Supreme Court. As per the terms of consent qua suit no. 3578, the assessee-company paid a sum of ₹ 33.47 crores to NOPL. It vacated the premises and handed over is possession to NOPL accordingly. (viii) The dispute between the members of Narang family was not fully resolved despite the consent. On 25.01.2005, the Hon'ble Supreme Court has recorded that although the dispute was not resolved between the parties, yet there was possibility of finding out a solution to the disputes. (ix) It is a matter of record that the dispute is still going on and the next date of hearing before the Hon'ble Supreme Court, as stated by the learned A.R., is on 29.03.2011. 3. For giving effect to the consent order, the Board of Directors of the assessee-company passed resolution on 31.12.2001 resolving that it would pay a sum of ₹ 34.57 crores for the user of the premises for the intervening period and also to hand over the vacant possession of the premises to NOPL. Payment to be made to NOPL was determined as under:- ₹ 2,61,745 For arrears o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to attain finality. From this factual backdrop, it becomes apparent that from assessment year 1995-96 up to assessment year 2001-2002, the assessee's claim for deduction towards payments made to NOPL was finally accepted. 7. In the previous year relevant to the assessment year under consideration, the assessee paid remaining amount of ₹ 33.63 crores as per the terms of consent and claimed deduction accordingly. The Assessing Officer refused deduction in assessment framed u/s. 143(3). The first appeal before the ld. CIT(A) and the second appeal before the tribunal also could not change the fortune of the assessee. Pursuant to the order passed by the Tribunal on 11.05.2009 confirming the sustenance of disallowance of ₹ 33.63 crores, the Assessing Officer passed penalty order u/s. 271(1)(c) imposing penalty of ₹ 15 crores. The assessee remained unsuccessful before the learned CIT(A) as well. When the appeal of the assessee against the confirmation of penalty came up before the Tribunal, the learned Accountant Member agreed with the view taken by the first appellate authority confirming the imposition of penalty. However, the learned Judicial Member, through his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany paid such substantial sum, which was in the nature of family settlement. He took support from the order of the Tribunal passed in quantum proceedings of the assessee sustaining the disallowance of the said sum, by stating that the tribunal has also recorded a categorical finding that it was not for the use of business premises but for extraneous considerations. The sum and substance of his submissions was that the amount in question was not given for any business expediency but was on account of settlement of family disputes and hence the act of the assessee in claiming deduction for the said amount was wrong, which fact has been recorded by the tribunal also. 10. Before I proceed to determine the true nature of payment of ₹ 33.63 crores made by the assessee, it would be relevant to note that the controversy about the taxability of this very amount arose in the hands of the recipient, being NOPL. Whereas NOPL claimed this amount to be a capital receipt, the Assessing Officer treated it as revenue receipt chargeable to tax. When the matter finally came up before the Tribunal, a special bench consisting of five Members was constituted, which has decided the controversy i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of damages for deprivation of use and occupation of property. The nutshell of the conclusion of the Special Bench is that NOPL received a sum of ₹ 33.63 crores from the assessee as mesne profits on account of damages for deprivation of use and occupation of the property. There is no reference whatsoever in the finding of the Tribunal in Special Bench that any part, of this amount related to family settlement. The simple and plain finding is that this amount was paid by NIHPL to NOPL as damages for deprivation of use and occupation of the premises. 12. Now I come to the order passed by the Tribunal in quantum proceedings against the claim of the assessee for deduction of ₹ 33.63 crores. The observations of the tribunal in para 5 of the order dated 11th May, 2009 are that : "The A.O. disallowed the claim holding that the aforesaid payment was for unauthorized and unlawful occupation of that premises The payment was penal in nature and cannot be held as a deduction under section 37(1)." The importance of afore-noted para no. 49 of the Special bench order can be gauged from this fact alone that the same has been reproduced thrice in the order passed by the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de whether the amount in question was deductible or not, which has been answered in negative. 14. This point can be examined from another angle as well. Payment of ₹ 33.63 crores was made by the assessee company to NOPL after passing Board resolution on 31.12.2001. The Board resolution was passed pursuant to the Consent decree awarded by the Apex Court as per terms dated 12.12.2001. The consent was arrived at amongst the members of Narang family to settle the on-going dispute amongst them for several properties. This dispute is manifest due to eightsuits/petitions filed by the members on each other as have been taken note of by the Hon'ble Supreme Court in its order. It is thus evident that when consent was arrived at on 12.12.2001, several controversies were on amongst the members on the distribution of family properties. One of such suits is No. 3578, which was filed by Sh. Rajesh Narang, who as per the earlier family settlement dated 12.07.1990, was allotted the property in question. This suit was filed way back in 1994 for having the vacant possession of the property and also for the mesne profits for its illegal use by the assessee company as per prayer clause no. 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emise that the payment at the rate of ₹ 10.00 lakh per month with interest was highly excessive when seen in the light of ₹ 1.25 lakhs p.m. determined by the Hon'ble Court in 1993. I am not inclined to accept this argument. It needs to be noted that Sh. Rajesh Narang was not satisfied with the verdict of the Hon'ble Court delivered in 1993, both in terms of the allowing the user of the premises to the assessee company and the interim amount fixed by the Court pending final decision on the appeal filed by the assessee. That is why he filed suit in 1994 claiming the vacant possession of the premises and compensation for deprivation of property at the rate of ₹ 10.00 lakhs per month with interest. If the payment finally made by the assessee company had some hidden element towards the family settlement, then the amount paid would have been on higher side vis-a-vis the amount claimed as per suit no. 3578 in 1994. As the amount ultimately paid by the assessee is identical to the manner of claim as per the suit filed so many years back, no part of it can be attributed to any other purpose except for the illegal use of property by the assessee. These facts indicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). The reason is that the mere fact of making or confirming the addition in quantum cannot ipso facto lead to the inference that there has been concealment of income or furnishing of inaccurate particulars of such income by the assessee. The factum of concealment or furnishing of inaccurate particulars of income needs to be distinctly made out It is neither automatic nor natural corollary of the addition made or confirmed. It, therefore, transpires that though the findings given in the quantum proceedings are quite relevant in the penalty proceedings and deserve to be given due weight, but are not conclusive in themselves. The facts are required to be examined afresh in the penalty proceedings with a view to determine as to whether the assessee is caught within the mischief of section 271(1)(c). If the assessee were not to be allowed an opportunity of making out a case of non-concealment of income or non-furnishing of accurate particulars of such income in the penalty proceedings, then there would have been no need to have any separate penalty proceedings. In such a hypothetical situation, which is not existing legally, the Assessing Officer would have been empowered to impose pena ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the imposition of penalty under this section. These two expressions have not been defined in the Act. Albeit these are different in their connotation, ambit and purview, yet their consequence is one i.e. the withholding of income by the assessee. First expression, that is, concealment of particulars of income contemplates that some income earned has not been offered for taxation. It is a direct attempt to hide an item of income or a portion thereof. It may reflect a situation like the assessee making sale or earning some income but not showing it in the return of income. Thus it would apply only qua the items of income and not of expenses. On the other hand the second expression, being the furnishing of inaccurate particulars of such income envisages that though the income earned was offered for taxation but some other means were employed by the assessee which resulted into withholding of income. It is the indirect way of keeping back some part of income. It may take place under different circumstances, such as making a wrong claim of expenses or deduction or exemptions etc. In such a situation although the income earned is properly reflected but by adopting certain other measures, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Central Excise Act has been set aside and the matter remitted to the Tribunal for fresh consideration in accordance with law. On going through the above referred judgments rendered by the Hon'ble Supreme Court it is vivid that penalty u/s.271(1)(c) would depend upon the existence of conditions specifically stated in this section. It is only when these conditions are satisfied that the penalty will follow and vice versa. 22. Coming back to the facts of the instant case and testing them on the touchstone of the main provision of section 271(1)(c), it is seen that the assessee claimed deduction for a particular sum, which was not allowed. Obviously it cannot be a case of concealment of income. Furnishing of inaccurate particulars of income in the context of claim for expenses pre-supposes the knowledge of the assessee about its inadmissibility. It can happen in two situations, viz., where either the assessee has intentionally made a bogus claim for expenses without incurring them or such expenses have been genuinely incurred but there is no possibility of their acceptance. If the expenditure genuinely incurred is of such a nature as to possibly qualify for deduction, then makin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on is valid and that all the facts relating to same have been disclosed by him. Whereas the above (a) and (b) are covered within clause (A) of the Explanation, (c) is enclosed in clause (B). 25. If the case falls in any of these three categories, then the deeming provision is activated and the amount added or disallowed in computing the total income is considered as the income in respect of which particulars have been concealed as per clause (c) of section 271(1). Only in such circumstances the penalty follows. If however the assessee succeeds in proving that none of these three conditions are satisfied in his case, then obviously the addition made by the Assessing Officer shall not constitute income in respect of which particulars have been concealed for the purposes of section 271(1)(c). 26. I will proceed to examine the facts of this case to determine as to whether it is failing in any of these three categories. First category consists of cases where the assessee fails to offer an explanation in respect of the addition made. Obviously it is not the situation here inasmuch as the assessee has furnished complete justification for its claim of deduction before the Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt paid to NOPL for use and occupation of the property. The claim was made on actual payment and the assessee did offer the explanation in support of the claim. If the claim had been not been genuine or the assessee had not offered any explanation, the case would have been covered in clause (A) of Expl. 1 itself. The Assessing Officer was not convinced with the claim and disallowed the deduction. It shows that the assessee offered an explanation about the claim of deduction but could not satisfy the Assessing Officer as to its allowability. First condition is that the assessee offers an explanation, which he is not able to substantiate or prove. It divulges that condition (i) is satisfied in this case. Bona fide explanation 30. The second condition has further two elements viz., (iia) bona fide explanation and (iib) adequate disclosure of all the material facts. I shall examine element (iia) first as to whether the explanation of the assessee for claim of deduction was bona fide or not. In simple words, the term bona fide means : in good faith or without fraud or deception and honestly as distinguished from bad faith. In an earlier para, I have come to the conclusion that the pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sible as the Assessing Officer disallowed the deduction for the first time for assessment year 1999-2000 by way of his order dated 28.03.2002 and when the assessee filed its return on 30.10.2002 it was very much in the knowledge of the assessee that its claim was not accepted. In the opinion of the learned Departmental Representative the argument of bona fide claim made by the assessee stood contradicted by the very fact that the relief was allowed by the learned CIT(A) for assessment year 1999-2000 after around two years from the date of filing of the return. 32. I am not convinced with this line of reasoning. It is obvious that the bona fide of the claim has to be considered on the facts and circumstances prevailing at the time when the return is filed claiming the deduction. It is no doubt true that on the date of filing of the return for the year in question, the assessee's claim for deduction already stood rejected by the Assessing Officer for the assessment year 1999-2000. At the same time it also needs to be kept in mind that the said claim was allowed by the Assessing Officer himself from assessment years 1995-96 to assessment year 1997-98. Although the claim was rejec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the provision leaves no chance to a reasonably prudent person to form an opinion that such a deduction is allowable. These are only some of the instances in which a claim for deduction shall be short of bona fide. 34. At this stage it would be relevant to consider the judgment of the Hon'ble Supreme Court in the case of Reliance Petro Products (P) Ltd. (supra). In this case the assessee claimed deduction for interest expenditure on the loans incurred by it by which the assessee purchased some shares. The A.O. made disallowance of interest and also imposed penalty on such disallowance. When the matter eventually came up before the Supreme Court, the said penalty was deleted by observing that simply because deduction of expenditure has not been accepted by the Revenue, penalty u/s.271(1)(c) is not attracted. It has further been observed that mere making of the claim which is not sustainable in law by itself will not amount to furnishing inaccurate particulars regarding the income of the assessee. When we consider the facts of the instant case in juxtaposition to the judgment in the case of Reliance Petro Products (P.) Ltd. (supra) it becomes obvious that by no standard t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in unequivocal terms that NOPL was paid ₹ 33.63 crores under suit No. 3578. Further fact relating to details leading to such payment, being implementation of consent order passed by the Hon'ble Supreme Court, Minutes of board meeting etc. were clearly set out. Any Assessing Officer verifying the return, on the perusal of such details, would come to know that the payment was made by the assessee under some suit. One more fact, which can't be ignored is that the Assessing Officer was continuously making disallowance of payment made under the same suit in the immediately preceding three years. Primarily, there can be no doubt that it is the duty of the assessee to make a proper disclosure from which the Assessing Officer can ascertain the relevant facts. However when the disclosure made by the assessee in its Profit and loss account and by way of Note in the Balance sheet is considered in the backdrop of ongoing litigation of the assessee with the Department for last three years on the same point, I have no hesitation in coming to the conclusion that the assessee made a proper disclosure of the facts material to this claim. 38. It is, therefore, evident that though the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Tribunal given in the quantum proceedings should not be construed to have been commented upon or interfered in any manner in the present order as the scope of instant proceedings is restricted in considering as to whether, by claiming this expenditure as deductible, the assessee concealed the income or furnished inaccurate particulars of his income as per the provisions of section 271(1)(c) of the Act. This question has been answered in negative that by claiming this deduction, which has been held by the Tribunal to be not allowable for the reasons given in the order, the assessee has not violated the provisions of section 271(1)(c). 42. For the foregoing reasons I agree with the view expressed by the learned Judicial Member. The Registry of the Tribunal is directed to list this matter before the division bench for passing an order in accordance with majority view. ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 There was a difference of opinion between the members who heard the above appeal filed by the Assessee against the order of the CIT(A) confirming the order of the AO imposing penalty on the Assessee u/s. 271(1)(c) of the Act. The following deduction was ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f proceedings it was legal and proper as also pragmatic to grant1, the request to block the proceedings and to adjourn the matter awaiting decision of the Hon'ble Supreme Court. - 4. We have considered the submission of the learned D.R. and are of the view that the same are without any merit. Firstly, u/s.255(4) of the Act, if the members of a Bench differ in opinion on any point, the point shall be decided according to the opinion of the majority, if there is a majority, but is the members are equally divided, they shall state the point or points on which they differ, and the case shall be referred , by the President of the Appellate Tribunal for hearing on such point or points by one or more of the other members of the Appellate Tribunal, and such point or points shall be decided according to the opinion of the majority of the members of the Appellate Tribunal who have heard the case, including those who first heard it. Therefore we have no other option but to pass an order in accordance with the opinion of the majority of members. Secondly, the Hon'ble Third member in the miscellaneous application filed by the Revenue against his order has held that an application for r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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