Commissioner Of Income Tax, Chennai v. M/S.carborandum Universal Ltd.,Parry House43 Moore Street,Chennai-600 001

In the High Court of Judicature at Madras Dated: 4.12.2007 The Honourable Mr.Justice K.Raviraja PandianandThe Honourable Mrs.Justice Chitra Venkataraman Commissioner of Income Tax, Chennai.. Appellant/Appellant vs. M/s.Carborandum Universal Ltd.,Parry House43 Moore Street,Chennai-600 001. .. Respondent/Respondent Tax Case (Appeal) against the order of the Income Tax AppellateTribunal "A" Bench, Chennai, dated 11.1.2007 in I.T.A.No.779/Mds/2005against the order of the Commissioner of Income Tax (Appeals) VIII,Chennai dated 24.12.2004 in ITA TR No.146/2004-2005 for theAssessment Year of 1991-92 GI No.AAACC 2474B and against the order ofDeputy Commissioner of Income Tax Company Circle I(3) Chennai-34,dated 28.11.2003 for the years of 1991-92 and the Commissioner ofAppeals V Madras-34 ITA No.437/93-94, dt.17.1.95 PA GIR No. 47-066CX-3335 and ITA No.340/93-94/ DC-SR.VI, dt. 31.1.94 against DeputyCommissioner of Income Tax, Special Range VI, Madras-34 dated30.11.93 for the Assessment Year 1991-92. For appellant : Mr.J.Naresh Kumar (The Judgment of the Court was delivered by K.Raviraja Pandian,J) 2. The assessee (respondent) is a Company in which the publicare substantially interested. The respondent-Company is manufacturingand selling abrasives, refractors, grinding wheels, etc. In respectof assessment year 1991-1992, the assessee filed return and claimeddeduction under Section 35-AB of the Income Tax Act (hereinafterreferred to as 'the Act') being 1/5 of the technical know-how fee anddepreciation under Section 32 of the Act on the technical know-how by https://hcservices.ecourts.gov.in/hcservices/ including it in the cost of plant. 3. The depreciation was disallowed by the assessing officer onthe opinion that it would amount to double deduction and the assesseeis not entitled to double deduction. 4. Consequent to that order, penal proceedings under Section 271(1)(c) of the Act was initiated and penalty was levied, as theassessee had made excess claim, giving inaccurate particulars inorder to evade tax. 5. Aggrieved by the order of the imposition of penalty by theassessing officer, the assessee filed appeal before the Commissionerof Income Tax (Appeals), who held that the assessee was under thebona-fide impression that he was entitled to double deduction andclaimed the same. He further recorded a factual finding that at thetime of filing of the return, the issue as to the claim of doublededuction was not settled, rather it was in favour of the assesseein the sense that the assessee could claim double deduction. However,the Supreme Court, in the case of Escorts Ltd. vs. Union of India[ (1993) 199 ITR 43), held that the double claim of benefit againstthe same item was prohibited. The said judgment was delivered on22.10.1992. Hence, the claim of the assessee for double deductioncould not be regarded as filing an incorrect and inaccurate return soas to attract the penal provision under Section 271(1)(c) of the Act. 7. The Revenue, not satisfied with the order of the Commissionerof Income Tax (Appeals), carried on the matter on appeal to theTribunal and the Tribunal dismissed the appeal on the same reasoningsgiven by the Commissioner of Income Tax (Appeals), and thecorrectness of the same is now canvassed before us in this appeal byformulating the following substantial question of law: "Whether in the facts and circumstances ofthe case, the Tribunal was right in deleting thepenalty under Section 271(1)(c) of the Act leviedon the assessee?" 8. Heard the argument of the learned Standing Counsel appearingfor the appellant-Revenue and perused the materials available onrecord. 7. The Revenue, not satisfied with the order of the Commissionerof Income Tax (Appeals), carried on the matter on appeal to theTribunal and the Tribunal dismissed the appeal on the same reasoningsgiven by the Commissioner of Income Tax (Appeals), and thecorrectness of the same is now canvassed before us in this appeal byformulating the following substantial question of law: "Whether in the facts and circumstances ofthe case, the Tribunal was right in deleting thepenalty under Section 271(1)(c) of the Act leviedon the assessee?" 8. Heard the argument of the learned Standing Counsel appearingfor the appellant-Revenue and perused the materials available onrecord. 9. The Tribunal, after hearing the parties and taking intoaccount the materials available on record, held that even doublededuction was allowable in view of various decisions of Courts,particularly the decision of the Bombay High Court reported in [1991]187 ITR 517 (C.I.T. vs. Mico Products Pvt. Ltd.) and the decision ofthe Supreme Court reported in [1993] 199 ITR 43 (cited supra)delivered by the Apex Court on 22.10.1992, by which the law has been settled to the effect that the benefit of double deduction in respectof the same item was prohibited. 10. From the materials available on record, the Tribunalrecorded a finding that it was clear that the assessee-Company hadbona-fide belief that it was entitled for two claims, in respect ofthe same item under Section 35-AB as well as Section 32 of the Act.The action of the assessee in claiming the benefit under the abovesaid provisions, cannot be regarded as false claim or furnishinginaccurate particulars. 11. In the decision of the Supreme Court reported in [ {2007}292 ITR 11 (SC) ] (T.Ashok Pai vs. CIT), the Supreme Court held asfollows: "It is therefore, trite that if anexplanation given by the assessee with regard tothe mistake committed by him has been treated tobe bona fide and it has been found as of factthat he had acted on the basis of wrong legaladvice, the question of his failure to dischargehis burden in terms of the Explanation appendedto section 271(1)(c) of the Income-tax Act wouldnot arise.In Dilip N. Shroff v. Joint CIT (Civilappeal arising out of SLP (C) No.26831/2004)delivered today (2007) 291 ITR 519 (SC), thisCourt observed (see page 546 of 291 ITR):"The expression 'conceal' is of greatimportance. According to Law Lexicon, the word'conceal' means:'to hide or keep secret. The word'conceal' is con+celare which implies tohide. It means to hide or withdraw fromobservation; to cover or keep from sight; toprevent the discovery of; to withholdknowledge of. The offence of concealment is,thus, a direct attempt to hide an item ofincome or a portion thereof from theknowledge of the income-tax authorities.'In Webster's Dictionary, 'inaccurate'has been defined as:'not accurate', not exact or correct;not according to truth;; erroneous; as aninaccurate statement, copy or transcript." It signifies a deliberate act or omission onthe part of the assessee. Such deliberate actmust be either for the purpose of concealment of income or furnishing of inaccurate particulars. It signifies a deliberate act or omission onthe part of the assessee. Such deliberate actmust be either for the purpose of concealment of income or furnishing of inaccurate particulars. The term "inaccurate particulars" is notdefined. Furnishing of an assessment of value ofthe property may not by itself be furnishing ofinaccurate particulars. Even if the explanationsare taken recourse to, a finding has to bearrived at having regard to clause (A) ofExplanation 1 that the Assessing Officer isrequired to arrive at a finding that theexplanation offered by an assessee, in the eventhe offers one was false. He must be found to havefailed to prove that such explanation is not onlynot bona fide but all the facts relating to thesame and material to the income were notdisclosed by him. Thus, apart from hisexplanation being not bona fide, it should havebeen found as of fact that he has not disclosedall the facts which were material to thecomputation of his income.The explanation having regard to thedecisions of this court, must be preceded by afinding as to how and in what manner he furnishedthe particulars of his income. It is beyond anydoubt or dispute that for the said purpose theIncome-tax Officer must arrive at hissatisfaction in this behalf. (See CIT v. RamCommercial Enterprises Ltd. [2000] 246 ITR 568(Delhi) and Diwan Enterprises v. CIT [2000] 246ITR 571 (Delhi)).The order imposing penalty is quasi-criminalin nature and, thus, the burden lies on theDepartment to establish that the assessee hadconcealed his income. Since the burden of proofin penalty proceedings varies from that in theassessment proceeding, a finding in an assessmentproceeding that a particular receipt is incomecannot automatically be adopted, though a findingin the assessment proceeding constitutes goodevidence in the penalty proceeding. In thepenalty proceedings, thus, the authorities mustconsider the matter afresh as the question has tobe considered from a different angle. It is now a well-settled principle of lawthat the more stringent the law, the more stricta construction thereof would be necessary. Evenwhen the burden is required to be discharged byan assessee, it would not be as heavy as theprosecution. (See P.N.Krishna Lal v. Government of Kerala [1995] Supp 2 SCC 187). The omission of the word "deliberate", thus,may not be of much significance. Section 271(1)(c) remains a penal statute.The rule of strict construction shall applythereto. The ingredients for imposing penaltyremain the same. The purpose of the Legislaturethat it is meant to be a deterrent to tax evasionis evidenced by the increase in the quantum ofpenalty, from 20 per cent. under the 1922 Act to300 per cent in 1985. "Concealment of income" and "furnishing ofinaccurateparticulars"carrydifferentconnotations. Concealment refers to a deliberateact on the part of the assessee. A mere omissionor negligence would not constitute a deliberateact of suppressio veri or suggestio falsi. We may notice that in Addl. CIT v. JeevanLal Sah [1994] 205 ITR 244 this Court dealt withthe amendment of section 271(1)(c) made in theyear 1964 to hold (page 248):"Even after the amendment of 1964,the penalty proceedings, it is evident,continue to be penal proceedings.Similarly, the question whether theassessee has concealed the particulars ofhis income or has furnished inaccurateparticulars of his income continues toremain a question of fact. Whether theExplanation has made a difference is —while deciding the said question of factthe presumption created by it has to beapplied, which has the effect of shiftingthe burden of proof. The entire materialon record has to be considered keeping inmind the said presumption and a findingrecorded." We may notice that in Addl. CIT v. JeevanLal Sah [1994] 205 ITR 244 this Court dealt withthe amendment of section 271(1)(c) made in theyear 1964 to hold (page 248):"Even after the amendment of 1964,the penalty proceedings, it is evident,continue to be penal proceedings.Similarly, the question whether theassessee has concealed the particulars ofhis income or has furnished inaccurateparticulars of his income continues toremain a question of fact. Whether theExplanation has made a difference is —while deciding the said question of factthe presumption created by it has to beapplied, which has the effect of shiftingthe burden of proof. The entire materialon record has to be considered keeping inmind the said presumption and a findingrecorded." The question came for consideration of thiscourt yet again in K.C.Builders v. Asst. CIT[2004] 265 ITR 562; [2004] 2 SCC 731 wherein itwas held (page 569):"One of the amendments made to theabovementioned provisions is the omissionof the word 'deliberately' from theexpression'deliberatelyfurnishedinaccurate particulars of such income'. Itis implicit in the word 'concealed' that there has been a deliberate act on thepart of the assessee. The meaning of theword 'concealment' as found in ShorterOxford English Dictionary, third edition,Volume I, is as follows: 'In law, the intentional suppressionof truth or fact known, to the injury orprejudice of another.' The word 'concealment' inherentlycarried with it the element of mens rea.Therefore, the mere fact that some figureor some particulars have been disclosed byitself, even if it takes out the case fromthe purview of non-disclosure, it cannotby itself take out the case from thepurviewoffurnishinginaccurateparticulars. Mere omission from the returnof an item of receipt does neither amountto concealment nor deliberate furnishingof inaccurate particulars of income unlessand until there is some evidence to showor some circumstances found from which itcan be gathered that the omission wasattributable to an intention or desire onthe part of the assessee to hide orconceal the income so as to avoid theimposition of tax thereon. In order that apenalty under section 271(1)(iii) may beimposed, it has to be proved that theassessee has consciously made theconcealment or furnished inaccurateparticulars of his income." The said principle has been reiterated inVirtual Soft Systems Ltd. v. CIT [2007] 2 Scale612 (SC) : (2007) 289 ITR 83 (SC), where it washeld (see page 97 of 289 ITR):"24. Section 271 of the Act is apenal provision and there are wellestablishedprinciplesfortheinterpretation of such a penal provision.Such a provision has to be construedstrictly and narrowly and not widely orwith the object of advancing the objectand intention of the Legislature." Referring to a large number of decisions, itwas furthermore observed: (see page 98 of 289ITR): https://hcservices.ecourts.gov.in/hcservices/ "27. Every statutory provision forimposition of penalty has two distinctcomponents: (i) That which lays down theconditions for imposition of penalty. (ii) That which provides forcomputation of the quantum of penalty.Section 271(1)(c) and clause (iii) relateto the conditions for imposition ofpenalty, whereas, on the other hand,Explanation 4 to section 271(1)(c) relatesto the computation of the quantum ofpenalty. Referring to a large number of decisions, itwas furthermore observed: (see page 98 of 289ITR): https://hcservices.ecourts.gov.in/hcservices/ "27. Every statutory provision forimposition of penalty has two distinctcomponents: (i) That which lays down theconditions for imposition of penalty. (ii) That which provides forcomputation of the quantum of penalty.Section 271(1)(c) and clause (iii) relateto the conditions for imposition ofpenalty, whereas, on the other hand,Explanation 4 to section 271(1)(c) relatesto the computation of the quantum ofpenalty. 28. The provisions of section 271(1)(c)(iii) prior to April 1, 1976, and afterits amendment by the Taxation Laws(Amendment) Act, 1975 with effect fromApril 1, 1976, the later provisions beingapplicable to the assessment year inquestion, are substantially the sameexcept that in place of the word 'income'in sub-clause (iii) to clause (c) ofsection 271 prior to its amendment by theTaxation Laws (Amendment) Act, 1975, theexpression 'amount of tax sought to beevaded' have been substituted. Explanation4 inserted for the purpose of clause(iii) where the expression 'the amount oftax sought to be evaded', was inserted hadin fact made no difference in so far asthe main criteria, namely, absence of taxcontinued to exist, prior to or afterApril 1, 1976, changing only the measureor the scale as to the working of thepenalty which earlier was with referenceto the 'income' and after the amendmentrelated to the 'tax sought to be evaded'.The sine qua non which was there prior toor after the amendment on April 1, 1976,was the fact that there must be a positiveincome resulting in tax before any penaltycould be levied continued to exist. Thepenalty imposed was in 'addition to anytax'. If there was no tax, no penaltycould be levied. The return fileddeclaring loss and assessment made at areduced loss did not warrant any levy ofpenalty within the meaning of section 271 12. In the light of the exposition of law of the Apex Court,this appeal of the Revenue, is dismissed. Sd/Asst.Registrar /true copy/ cs Sub Asst.Registrar To 1. Commissioner of Income Tax (Appeals) (V), 121, Mahatma Gandhi Road, Chennai-600 034. 2. Commissioner of Income Tax (Appeals) (VIII), 121, Mahatma Gandhi Road, Chennai-600 034. 3. The Assistant Registrar, Income Tax Appellate Tribunal, "A" Bench, III Floor, Rajaji Bhavan, Besant Nagar, Chennai-600 090. 3a.Deputy Commissioner of Income Tax,Special Range VI, Madras -34. 3b.Deputy Commissioner of Income Tax,Company Circle I (3), Chennai-34. 4. The Secretary, Central Board of Direct Taxes, New Delhi. 5. The Commissioner of Income Tax, Chennai. +1cc to Mr.Pushya Sitaraman, Advocate Sr 71343 NSM (CO)km/19.12. Tax Case (Appeal) No.1474 of 2007 https://hcservices.ecourts.gov.in/hcservices/