The Commissioner Of Income Tax, Tamil Nadu v. Coromandel Indag Products P.ltd., Madras

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 31/12/2002 CORAM The Hon'ble Mr.Justice N.V.BALASUBRAMANIANANDThe Hon'ble Mr.Justice K.RAVIRAJA PANDIAN Tax Case No. 170 of 1999 and Tax case No. 171 of 1999 The Commissioner of Income Tax,Tamil Nadu. .. Applicant -Vs- Coromandel Indag Products P.Ltd.,Madras. .. Respondent These tax cases are filed under Section 256(1) of the Income Tax Act,1961 as against the order dated 23.09.1993 passed in ITA Nos.150 & 151/Mds/89on the file of the Income Tax Appellate Tribunal. In both cases: !For Applicant : M/s. Pushya Sitaraman.Sr.Standing Counsel (I.T.) ^For Respondent : Mr.P.P.S.Janardhana Raja. :J U D G M E N T N.V.BALASUBRAMANIAN,J. The assessee is a private limited company. The assessmentyear involved is 1983-84 and the relevant previous year ended on 30.6.1982.In this reference, the question of validity of levy of penalty under sections271(1)(c) and 273(2)(a) of the Income-tax Act, 1961 ( hereinafter referred toas 'the Act') is the subject matter of consideration. 2. The assessing officer levied penalty under section271(1)(c) as well as under section 273(2)(a) of the Act on the ground that theassessee has made a false claim for deduction of certain amounts under section35(1)(iv) of the Act. Section 35 deals with the expenditure on scientificresearch, and section 35(1)(iv) of the Act deals with the grant of deductionof any expenditure of a capital nature on scientific research relating to thebusiness carried on by the assessee and the deduction to be granted isregulated by the provisions of subsection (2) of section 35 of the Act. Undersection 35(2)(ia) of the Act, where the assessee has incurred capitalexpenditure after 31.3.1 967, the whole of such capital expenditure incurred in any previous year shall be deducted for that previous year and the provisoregulates the grant of deduction for the expenditure on the acquisition of anyland incurred after 29.2.1984 with which we are not concerned. We are alsonot concerned with the Explanation-2 to section 35(2)(ia) of the Act as thesaid Explanation was introduced only from 1.4.1984. 3. The assessee claimed certain deductions by way of capital expenditure for the purchase of properties, one at Chennai and another atGujarat. In so far as Chennai property is concerned, the assessee claimed asum of Rs.59,88,893/- to be allowed as deduction under section 35(1)(iv) ofthe Act. The assessing officer, during the course of assessment proceedings,found that the deed of sale for Chennai property was registered only on26.6.1982 which was four days prior to the closing of the accounting period,viz., 30.6.1982. The assessing officer also found that the assessee had paidonly a sum of Rs.12.60,00 0/- towards sale consideration for the purchase ofthe property during the relevant previous year and other instalments have beenpaid by the assessee beyond the previous year. The assessing officer alsofound that apart from the purchase price, the assessee claimed a sum ofRs.2,63,308/- being the interest payable on such instalments of purchaseconsideration. The assessing officer also found that the sale deed alsoshowed that a part of the building was meant for administrative purpose and noportion was used for research purposes and it was admitted by the assessee'srepresentative at the time of finalisation of assessment proceedings that eventhe portion purchased which was meant for scientific research purposes was notreally put to use for that purpose. The assessing officer also found that infour days available, the property could not have been modified for the purposeof scientific research project and he rejected the claim of deduction forscientific research purposes amounting to Rs.59,88,893/- on the ground thatthe expenditure did not qualify for deduction. 4. In so far as Gujarat property is concerned, the assessee 4. In so far as Gujarat property is concerned, the assessee claimed a sum of Rs.42,67,054/- being the total purchase consideration for 100acres of land from various farmers of Amrutpura village in Gujarat State. Theassessing officer found that the assessee had merely entered into a memorandumof understanding with another company and the said company agreed to procurethe land in the form of sale agreements from the respective farmers. It wasalso stipulated in the said agreement that the sale agreement with the farmerswould be registered in the form of sale deed in favour of the assessee companyon or before 30.6.1982. It was found that the agreements with the farmerscould not be registered before 30.6.1982. It was found that an expenditure ofa sum of Rs.6,75,000/- was said to have been incurred by the assessee for thedevelopment work carried on by the other company. It was found that theactual registration took place only on 23.3.1984 , but it was claimed that thepossession was taken. The assessing officer found that as per the memorandumof understanding, the land was procured not only for scientific researchpurposes, but also for putting up of manufacturing facilities and the assesseedid not produce any proof for scientific research that was alleged to havebeen carried on. Hence, he rejected the claim of deduction towards scientificresearch expenditure of a sum of Rs.42,67,054/-. 5. In so far as assessment proceedings are concerned, the Commissioner of Income-tax (Appeals) upheld the order of the assessing officerin not granting deduction under section 35(1)(iv) of the Act, The Income-taxAppellate Tribunal, in the appeal preferred by the assessee against the order of assessment, also held that the assessee has not established that the assetswere maintained for scientific research purposes. The Appellate Tribunal alsofound that the mere intention of the assessee to carry on scientific researchwould not be sufficient to treat the property as the provision to facilitateresearch. The Appellate Tribunal also observed that if there was already alaboratory in existence, the purchase of any asset for utilisation in thatlaboratory would fulfil the criterion, even if such purchase was at the end ofthe year as an asset intended for scientific research, but where no suchlaboratory was in existence and the land was just purchased, the intention toset up the laboratory was not sufficient to hold that the amount spent waseligible for deduction as the intention may not be effectuated. 6. As far as the Gujarat property is concerned, the Appellate Tribunal was of the view that it would be quite possible to hold that therewas an oral agency agreement as prior negotiation for the purchase of the landwas not disputed and the statement made in the letter dated 29.6.1982 couldnot be rejected as false. The Appellate Tribunal also found that there was noregistered sale deed executed in the previous year to accept the actualacquisition of the property by the assessee. The Appellate Tribunal also heldthat it was not open to the assessee to claim deduction on the basis ofpossession and part performance of the agreement. The Appellate Tribunalfurther held that the mere intention to set up a research unit was notsufficient and the claim has to be regarded as pre-mature, and rejected theclaim of the assessee. It is stated that the order of the Appellate Tribunalupholding the disallowance of deduction claimed by the assessee has becomefinal. 7. The assessing officer, while completing the assessment proceedings, also initiated the penalty proceedings under section 271(1)(c) aswell as 273(2)(a) of the Act. After giving an opportunity to the assessee andafter hearing the assessee, the assessing officer passed two orders one undersection 271(1)(c) of the Act levying minimum penalty under that section andalso levied penalty under section 273(2)( a) of the Act. 8. In so far as Chennai property is concerned, the assessing 7. The assessing officer, while completing the assessment proceedings, also initiated the penalty proceedings under section 271(1)(c) aswell as 273(2)(a) of the Act. After giving an opportunity to the assessee andafter hearing the assessee, the assessing officer passed two orders one undersection 271(1)(c) of the Act levying minimum penalty under that section andalso levied penalty under section 273(2)( a) of the Act. 8. In so far as Chennai property is concerned, the assessing officer found that there was absolutely no evidence to show that the buildingwas used for scientific research purposes and there was no evidence to showthat the building was fit to be used for the research purposes. He also foundthat under the sale deed a part of the property purchased was meant foradministrative purpose, but the assessee claimed the entire purchase price asif the entire building was put into use for scientific research purposes. Theassessing officer also found that even the portion purchased for scientificresearch purpose was not put to use for the said purpose and the assessee knewvery well that the building was not put to use for scientific purposes. Healso found that the expenditure actually incurred was only a sum ofRs.12,60,000/-, but the assessee claimed the entire amount of Rs.59,88,8 93/-along with interest on deferred payments. On the above facts, the assessingofficer came to the conclusion that the assessee deliberately and fraudulentlyfurnished false particulars and attempted to defraud the department by makingfalse claim that there was a scientific research as there was absolutely noproof for that. 9. As far as Gujarat property is concerned, the assessing officer found that the assessee did not become the owner of the land and didnot even spend any money, but claimed a sum of Rs.42,67,054/- as capital 9. As far as Gujarat property is concerned, the assessing officer found that the assessee did not become the owner of the land and didnot even spend any money, but claimed a sum of Rs.42,67,054/- as capital expenditure for scientific research purposes. He held that there was noagreement with the owners of the land for the purchase of the property and noadvance was paid and on the basis of the unregistered and undated agreementwith the middleman agreeing to procure the land, the assessee claimed thededuction. He therefore held that the claim of the assessee was false. Healso found that the agreement with the middleman showed that the land was tobe used for industrial activities and manufacturing facilities and only a sumof Rs.6,75,000/- was paid to the middleman for levelling purpose, but theassessee claimed that amount also as scientific research expenditure. Hetherefore held that the assessee has furnished false particulars andaccordingly, levied penalty under section 271(1)(c) of the Act.10. In the order passed under section 273(2)(a) of the Act,the assessing officer found that the assessee filed an estimate showing niltax payable, whereas the assessee's total income was a positive figureexceeding a sum of Rs.1.9 crores. He held that the claim of the assessee fordeduction of capital expenditure was a false claim and the assessee knew verywell of the same while filing the 'nil' estimate. He therefore held thatpenalty for filing such an estimate was exigible and accordingly, leviedpenalty under section 273(2)(a) of the Act also. 11. Theassessee carried the matter before the Commissioner of Income-tax (Appeals)challenging the orders of penalty. The Commissioner of Income-tax (Appeals)confirmed the orders of penalty. The assessee carried the matter in furtherappeal before the Appellate Tribunal. The Appellate Tribunal held that theassessee had material honestly, though erroneously, to believe that it couldmake a legitimate claim of deduction in respect of the purchase of assetsintended for scientific research unit to be set up in the near future.According to the Appellate Tribunal, the claim was only a debatable issue andwas not a false claim and following the decision of the Calcutta High Court inBURMAH-SHELL OIL STORAGE AND DISTRIBUTING CO. OF INDIA LTD. Vs. ITO (112ITR 592), it held that a legal contention bona fide was raised by the assesseeand whether it was ultimately accepted or rejected would not tantamount to anact of fraud or gross or wilful negligence and the assessee cannot be deemedto have concealed the particulars of income within the meaning of Section271(1)(c) of the Act. The Tribunal also cancelled the penalty levied underSection 2 73(2)(a) of the Act on the basis that the assessee could not haveanticipated the rejection of the bona fide claim so as to attract theliability to file an enhanced estimate of income. In this view of the matter,the Tribunal cancelled the penalty under Section 273(2)( a) of the Act.12. At the instance of the Revenue, the Appellate Tribunalhas stated a case and referred the following questions of law for ourconsideration under section 256(1) of the Act:- 1.Whether, on the facts and in the circumstances of the case, the AppellateTribunal was justified in cancelling the penalty levied under Section271(1)(c) of the Act ? 2.Whether, on the facts and in the circumstances of the case, theAppellate Tribunal was justified in cancelling the penalty levied underSection 273(2)(a) of the Act ? 13. Mrs.Pushya Sitharaman, learned Senior Standing Counsel for the 1.Whether, on the facts and in the circumstances of the case, the AppellateTribunal was justified in cancelling the penalty levied under Section271(1)(c) of the Act ? 2.Whether, on the facts and in the circumstances of the case, theAppellate Tribunal was justified in cancelling the penalty levied underSection 273(2)(a) of the Act ? 13. Mrs.Pushya Sitharaman, learned Senior Standing Counsel for the Revenue submitted that the Tribunal was not correct in holding that theassessee had not made a false case. According to her, the facts clearlyestablish that the assessee had claimed deduction under Section 35(1)(iv) ofthe Act knowing fully well that it was a false claim and none of theconditions prescribed in section 35(1)(iv) of the Act was fulfilled. Shereferred to the order of the Tribunal for the assessment under appeal whereinthe Tribunal found that no laboratory was in existence as the land waspurchased just four days before the close of the relevant previous year andthe intention of the assessee to set up the laboratory would not be sufficientto hold that the claim was eligible for deduction and further, the intentionwas not effectuated. She further submitted that there is absolutely nomaterial to establish the intention on the part of the assessee. Shetherefore submitted that the claim for deduction under Section 35(1)(iv) ofthe Act was a false claim. Learned senior standing counsel submitted that thepenalty under Section 273(2)(a) of the Act is attracted as the assessee filedan estimate knowing fully well that it was an untrue estimate and the assesseehad not even purchased the property at the time of the last date of filing ofthe estimate of advance tax and the property was purchased subsequently, justfour days prior to the end of the previous year. So far as the Gujaratproperty is concerned she submitted that the assessee has not even purchasedthe property before the end of the previous year and the assessee has filed afalse and untrue estimate of advance tax. 14. Mr.P.P.S.Janardhana Raja, learned counsel appearing for the assessee on the other hand submitted that the Tribunal has found that theclaim of the assessee was pre-mature and after taking note of the purchase ofthe property at Chetpet, Chennai and the agreement entered into by theassessee, the Tribunal has come to the conclusion that the assessee hadmaterial honestly, though erroneously, to believe that it could legitimatelyclaim deduction in respect of the purchase of assets intended for scientificresearch even though such research units were to be set up only in the future.The learned counsel therefore submitted that the Tribunal found that the claimof the assessee was not a false claim but only a pre-mature claim. Accordingto him, the assessee had not committed any act of fraud or gross negligence inmaking the claim under Section 35(1)(iv) of the Act. The learned counseltherefore submitted that the Tribunal has found on facts that there was nocase for the levy of penalty and this Court may not interfere with the findingof fact. Learned counsel also submitted that the penalty levied under Section271(1)(c) of the Act was not proper and in support of his submission he reliedupon the following decisions: (1) BURMAH-SHELL OIL STORAGE AND DISTRIBUTINGCO. OF INDIA LTD. Vs. I.T.O. (112 I.T.R. 592), (2) BADAL RAM LAXMI NARAINVs. C.I.T. (191 I.T.R. 296); (3) C.I.T. Vs. CELLULOSE PRODUCTS OF INDIALTD. (192 I.T.R. 155); and (4) C.I.T. Vs. INDIAN METALS & FERRO ALLOYSLTD. (211 I.T.R. 35). 15. We have carefully considered the submissions of the learnedcounsel for the Revenue and the learned counsel for the assessee. We findthat the Income Tax Officer while levying the penalty under Section 271(1)(c)as well as under Section 273(2)(a) of the Act, has found that in so far as theclaim for expenditure on Chennai property is concerned, the assessee claimedthe expenditure of purchase of the said property, but the said property waspurchased four days prior to the close of the previous year and the assessee 15. We have carefully considered the submissions of the learnedcounsel for the Revenue and the learned counsel for the assessee. We findthat the Income Tax Officer while levying the penalty under Section 271(1)(c)as well as under Section 273(2)(a) of the Act, has found that in so far as theclaim for expenditure on Chennai property is concerned, the assessee claimedthe expenditure of purchase of the said property, but the said property waspurchased four days prior to the close of the previous year and the assessee had claimed that it was put to use for scientific research, but actually itwas not done so. The Income Tax Officer found that there was no proof at allthat the building was put to use for any scientific research. He also foundthat the sale deed showed a part of the property was purchased for theadministrative purpose, and the assessee claimed the entire purchaseconsideration as if the entire property was put to use for the purpose ofscientific research. He found that no portion of the property was used forthe purpose of scientific research. He also found that the expenditureincurred during the previous year was only Rs.12,60 ,000/-, but the assesseeclaimed full amount of Rs.59,88,893/- and also interest for the deferredpayments amounting to Rs.2,63,308/- and on the above basis, he found that theassessee has deliberately made false a claim. 16. As far as the property at Gujarat is concerned, the assessee was not even the owner of the property at the end of the previousyear, but the assessee claimed a deduction of Rs.42,67,054/- as capitalexpenditure for scientific research. He found that there was not even anagreement with the erstwhile owners of the property and the assessee had notproduced any proof of evidence for the use of the property for scientificresearch. He also found that there was only an agreement entered into withthe middleman to procure the land from the owners. He further found that asum of Rs.6,75,000/- was paid for levelling the land, and the assessee claimeda sum of Rs.42,67,054/- as expenditure incurred on scientific research. Underthese circumstances, the assessing officer held that the assessee hadfurnished false particulars and the assessee made a false claim as if theexpenditure was incurred for scientific research, without there being no proofat all even for the intention for the said use. The Commissioner of IncomeTax Appeals also confirmed the findings of the Assessing Officer. He alsofound that the claim made by the assessee was false claim and it was found tobe false as the property was not put to use for scientific research, but wasused as a tennis court and for administrative purpose. He therefore held thatso far as the claim regarding Chennai property is concerned, the explanationof the assessee was false and unsubstantiated. He also found that withreference to the Gujarat property the assessee had not even produced the saleagreement entered into between the assessee and the owners and there was onlyan agreement entered into with a middleman to procure the land for theassessee from the owners and there is no evidence to show that the assesseehad acquired the land. He also found that subsequently the land was not putto use for scientific research purposes. In this view he confirmed the orderregarding the levy of penalty. 17. We hold that the Appellate Tribunal, without examining 17. We hold that the Appellate Tribunal, without examining the materials, merely held that the claim of the assessee was pre-mature. TheTribunal also noticed in its order passed in the assessment appeal that mereintention to set up a research laboratory would not be sufficient to hold thatthe assessee would be entitled to the claim. However, in the penalty appealthe Tribunal held that the assessee had material honestly, though erroneously,to believe that it could legitimately claim deduction in respect of thepurchase of assets intended for scientific research even though such researchunits were to be set up only in the future. We are of the view that the aboveobservation of the Appellate Tribunal is quite contrary to its own finding.It was found by the assessing officer as well as by the Commissioner of IncomeTax (Appeals) that the assessee has not even produced any material to show that it had intention to purchase the property for scientific research. In sofar as the property that was purchased at Chennai is concerned the purchasewas just four days prior to the end of the previous year and it was found thatthe assessee has paid only Rs.12,60,000/-, but claimed the entire amount ofRs.59,88,893/- and also claimed interest of a sum of Rs.2,63,308/-. It wasalso found that the assessee had not used the building for any scientificresearch and even at the time of purchase the sale deed showed that part of itwas used only for administrative purpose, but the assessee claimed the entireexpenditure as scientific research expenditure. 18. As far as the Gujarat property is concerned, the assessee has not even produced any agreement. There is no evidence to show that therewas any oral agreement in this regard. The only evidence that was producedwas for the payment of Rs.6,75,000/- and that amount was paid for levellingthe land. The Tribunal proceeded on the basis that it was possible that therewas an oral agreement in respect of the land. The assessee has not let in anyevidence regarding the oral agreement or the terms of such oral agreementbefore the assessing officer or before the Commissioner of Income-tax(Appeals) or even before the Appellate Tribunal, but the Tribunal drew its ownimagination and held that probably there was an oral agreement for thepurchase of the property at Gujarat. The assessee claimed a sum ofRs.42,66,054/- as if the assessee had incurred expenditure for scientificresearch. The Assessing Officer has found that there was absolutely noevidence for the entering into an agreement for the purchase of the land atGujarat. The assessee had produced only an undated agreement entered intowith a middle man, who agreed to purchase the land from some Adhivasies. TheAppellate Tribunal has overlooked all the materials and without consideringthe orders of the assessing officer and the Commissioner of Income-tax(Appeals), cancelled the penalty only on the ground that the claim of theassessee was pre-mature. We are of the view that the assessee has notproduced any material before the Appellate Tribunal and substantiated itsexplanation. We hold that the Appellate Tribunal was not correct in holdingthat the claim of the assessee was not a false claim. 19. As far as the decision of the Calcutta High Court in BURMAHSHELL OIL STORAGE AND DISTRIBUTING CO. OF INDIA LTD. Vs. I.T.O. (112I.T.R. 592) is concerned, it has been held that merely because the contentionraised by the assessee was ultimately turned down, it cannot be said that thesaid contention could be characterised as frivolous, dishonest or mala fide.On the other hand it was found by the assessing officer in the penaltyproceedings that the claim of the assessee was false and therefore, thedecision of the Calcutta High Court referred to above is not applicable to thecase on hand. 20. As far as the decisions of the Supreme Court in BADAL RAM 19. As far as the decision of the Calcutta High Court in BURMAHSHELL OIL STORAGE AND DISTRIBUTING CO. OF INDIA LTD. Vs. I.T.O. (112I.T.R. 592) is concerned, it has been held that merely because the contentionraised by the assessee was ultimately turned down, it cannot be said that thesaid contention could be characterised as frivolous, dishonest or mala fide.On the other hand it was found by the assessing officer in the penaltyproceedings that the claim of the assessee was false and therefore, thedecision of the Calcutta High Court referred to above is not applicable to thecase on hand. 20. As far as the decisions of the Supreme Court in BADAL RAM LAXMI NARAIN Vs. C.I.T. (191 I.T.R. 296) and C.I.T. Vs. CELLULOSEPRODUCTS OF INDIA LTD. (192 I.T.R. 155) are concerned, it is axiomatic thatthe High Court should not interfere with the Tribunal's finding of fact evenif another view is possible. The Supreme Court has also held that the HighCourt hearing a reference under the Income-Tax Act does not exercise theappellate or revisional or supervisory jurisdiction over the AppellateTribunal and that it acts in a purely advisory capacity. We are of the viewthat if the Tribunal, after considering the evidence produced before it on aquestion of fact, records a finding, this Court will not interfere such a finding unless the said finding is not supported by any evidence or perverseor patently unreasonable. In our view, the finding of the Tribunal in thepenalty appeal is not based on any evidence and it is perverse and it ispatently erroneous and unreasonable as it has overlooked the materialsproduced before the Assessing Officer and in the absence of any material, theAppellate Tribunal has come to an erroneous conclusion. Hence, both thedecisions referred to above do not support the case of the assessee. finding unless the said finding is not supported by any evidence or perverseor patently unreasonable. In our view, the finding of the Tribunal in thepenalty appeal is not based on any evidence and it is perverse and it ispatently erroneous and unreasonable as it has overlooked the materialsproduced before the Assessing Officer and in the absence of any material, theAppellate Tribunal has come to an erroneous conclusion. Hence, both thedecisions referred to above do not support the case of the assessee. 21. As far as the decision reported in C.I.T. Vs. INDIANMETALS & FERRO ALLOYS LTD. (211 I.T.R. 35) is concerned, the Orissa HighCourt held that the finding of fact arrived at by the Tribunal will not bedisturbed unless it is based on no material or is perverse or is based onirrelevant, extraneous or inadmissible considerations or is arrived at by theapplication of wrong principles of law. We hold that the above decision alsodoes not support the case of the assessee as the Tribunal has arrived at thefinding without any material on record as the order of the assessing officershows that the assessee had made a false claim. The assessee has also notproduced any evidence to show that it has intended to use the property forscientific and research purposes. The available evidence clearly shows thatthe sale deed produced by the assessee for the purchase of the Chennaiproperty that part of the property was meant for administrative purpose, yetthe assessee claimed not only the entire amount paid but also the futureamount payable and the interest also as if the assessee had incurred theexpenditure towards scientific research. As far as the Gujarat property isconcerned, there is absolutely no evidence at all even for the agreement ofsale and there was an agreement entered into with a middleman to procure theland for the assessee from some Adivasies. It was also found that theassessee had not put the land for scientific research. The Tribunal hascompletely overlooked all the materials and held that the claim was onlypre-mature. We hold that the Tribunal was not correct in holding that theclaim of the assessee is not false, and the assessee has not deliberatelyfurnished inaccurate particulars. Therefore, we hold that the conclusionarrived at by the Appellate Tribunal in cancelling the penalty under Section271(1)(c) of the Act is not correct. Accordingly, we hold that thecancellation of penalty under Section 271(1)(c) is not sustainable in law.For the same reasons, the order of the Appellate Tribunal cancelling thepenalty levied under section 273(2)(a) of the Act is also not sustainable.22. Accordingly, the questions referred to us are answered inthe negative, in favour of the revenue and against the assessee. However,under the circumstances of the case, there will be no order as to costs. Index-Yes.Internet-Yes.Sk/na To 1.The Assistant Registrar,Income Tax Appellate Tribunal,Rajaji Bhavan, Besant Nagar,Chennai-600 090 (Five Copies with records) 2.The Secretary,Central Board of Direct Taxes,New Delhi (Three copies) 3.The Commissioner of Income-Tax,Tamil Nadu-I,Madras. 4.The Commissioner of Income-Tax(Appeal-V), Madras-34. 5.The Inspecting Assistant Commissionerof Income-Tax,(Assessment) Range-I,Madras-34.�