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Penalty proceedings and assessment proceedings are two distinct and independent proceedings

Diganta Paul ,
  14 December 2013       Share Bookmark

Court :
Brief :
In brief the facts are that in this case return of income was filed by the assessee declaring a loss of Rs. 19,906/-. The assessment was completed by the A.O. u/s 143(3) of the I.T.Act at an income of Rs. 12,42,412/- by making following disallowance/additions.
Citation :
M/s Narain Cold Storage & Allied Industries P.Ltd. 26 C, Lawrence road New Delhi 110 035 (Appellant) Vs. ITO, Ward 13(1) New Delhi (Respondent)







ITA No. 852/Del/2009

A.Y. 1998-99


M/s Narain Cold Storage & Allied

Industries P.Ltd.

26 C, Lawrence road

New Delhi 110 035





ITO, Ward 13(1)

New Delhi



Appellant by: Sh. Ashok M.Acik, FCA

Respondent by: Sh. HK Lal, Sr.D.R.






The assesee has filed this appeal against the order of CIT(A) passed in appeal no. 46/2007-08 dated 9.1.2009 for A.Y. 1998-99 on following ground.


“The ldCIT(A) has grossly erred on the facts of the case and in law in upholding the penalty of Rs. 4,38,844/- imposed by the A.O.”


2. In brief the facts are that in this case return of income was filed by the assessee declaring a loss of Rs. 19,906/-. The assessment was completed by the A.O. u/s 143(3) of the I.T.Act at an income of Rs.  12,42,412/- by making following disallowance/additions.


Increase in other liabilities Rs. 5,86,980/-

On account of nonproduction of Expenses vouchers Rs.1,00,000/-

Disallowance of commission expenses Rs. 5,75,338/-


3. The appeals preferred by the assesee against the above disallowances were dismissed by the CIT(A) as well as by the Income Tax Tribunal (copy placed on record).


4. The A.O. initiated the penalty proceedings against the assessee u/s 271(1)(c ) of the Act and levied the impugned penalty amounting to Rs. 4,38,844/- on the above disallowances/additions treating them as concealment of income by the assesee.


5. On appeal the CIT(A) also confirmed the impugned penalty amount levied by the A.O. u/s 271(1)(c ) of the I.T.Act.


6. First we shall deal with the issue relating to imposition of penalty levied u/s 271(1)(c ) by the A.O. and sustained by the CIT(A) on account of disallowance of commission expenses of Rs. 5,75,348/-.


7. We have considered the rival contentions of both the parties, perused the record and carefully gone through the orders of tax authorities below.


8. In brief the facts are that the assessee claimed commission expenditure of Rs. 5,75,348/- paid to related concern, namely M/s HPL Export Overseas (P) Ltd. for introduction of new parties. It remained uncontroverted that the claim of the assessee of having made payment of

commission for introduction of new parties was not correct because it was not disputed that the said new parties were only those parties with whom the assessee was already having transactions and, therefore, there was no question of parties being introduced as new parties for which the assesee paid commission to M/s HPL Export Overseas P.Ltd. From the facts it is clear that the alleged payment of the commission by the assessee does not stand justified, more so, when rendering of any service by the group concern was not proved by the assesee before the tax authorities below. It can further be deduced from the facts that the assessee deliberately claimed commission payments to the related concerns which it knew to be non genuine expenditure and tried to mislead the tax authorities by stating that the commission was paid for introduction of certain new parties, on the contrary the assessee was already having business transactions with the said parties. From the facts discussed above, it is clear that it was a deliberate act on the part of the assessee to conceal its income, by diverting a part of the projects to its group concern in the guise of commission payments. Thus, it is a fit case where in view of explanation 1 to S.271(1)(c ) the penalty u./s 271(1)(c) on the alleged commission expenditure to the tune of Rs. 4 5,75,348/-, has been rightly levied/sustained by the tax authorities below. In this view we find support from the recent decision of Apex Court in the case of Union of India and others vs Dharmender Textile Processors and others, 306 ITR 277 (SC), wherein their Lordships having reversed their earlier decision in the case of Dilip and Sharoff vs JCIT, 291 ITR 519, held as under.


“The Explanations appended to S.271(1) of the I.T.Act, 1961, indicate the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing the return. The object behind the enactment of S.271(1)(c ) read with the Explanations indicates that the section has been enacted to provide for a remedy for loss of revenue. The penalty under that provision is a civil liability. Willful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution u/s 276.”


8.1 Similar issue regarding levy of penalty imposed by the Assessing Officer under section 271(1)(c) relating to disallowance of expenses etc. by the Assessing Officer, came up for consideration before their Lordships of jurisdictional High Court of Delhi in an unreported case in CIT vs. Escorts Finance Ltd delivered on 24.8.2009 in ITA 1005/2008 (copy supplied by the learned DR for the revenue) wherein their Lordships held that penalty under section 271(1)(c) was leviable because the assessee’s claim was not bonafide while observing in paras 13, 14 & 15 of their order as under :


“13. We are inclined to agree with the aforesaid submission of learned counsel for the Revenue. Even if there is no concealment of income or furnishing of inaccurate particulars, but on the basis thereof the claim which is made is ex facie bogus, it may still attract penalty provision. Cases of bogus hundi loans or bogus sales or purchases have been treated as that of concealment or inaccuracy in particulars of income, by the judicial pronouncements (See Krishna v. C1T, 217 ITR 645, Raiaram v. CIT, 193 ITR 614 and Beena Metals, 240 ITR 222).


14. In the present case, we have to examine as to whether the claim made under Section 35D of the Act was bogus or it was a bona fide claim. The assessee pleaded bona fide, as according to it, it was based on the opinion of the Chartered Accountant. Learned counsel for  the Revenue, however, submitted that a bare reading of Section35D would reveal even to a layman that there was no scope for getting benefit of those provisions in respect of expenses incurred in connection with the public issue of shares such as underwriting commission, brokerage and other charges etc. inasmuch as certain expenses are allowable only when they are incurred with the expansion of assessee's industrial undertakings or in connection with his setting up of a new industrial undertaking or industrial unit whereas the assessee is a finance company.


15. We are in agreement with the aforesaid submission of learned counsel for the Revenue. We fail to understand as to how the Chartered Accountants who are supposed to be expert in tax laws, could give such an opinion having regard to the plain language of Section 35D of the Act. It would be important to note that assessee has nowhere pleaded that return was filed claiming benefit of Section 35D of the Act on the basis of the said opinion. What was stated was that in the prospectus it was mentioned that as per the opinion given by the Chartered Accountants, the company would be entitled for relief under Section 35D of the Act. Therefore, it is not the case of the assessee that while filing the return it got assistance from the Chartered Accountants who opined that the aforesaid expenses qualify for amortization over a period of 10 years under Section 35D of the Act. That apart, when we find that it is not a case where two opinions about the applicability of Section 35D were possible. Therefore, it cannot be a case of a bona fide error on the part of the assessee. As has been pointed out above, the relief available under Section 35D of the Act to a finance company is ex facie inadmissible as that is confined only the existing industrial undertaking for their extension or for setting up a new industrial unit. It was, thus, not a 'wrong claim' preferred by the assessee, but is a clear case of 'false claim'. In Commissioner of Income-Tax v. Vidvaqauri Natverlal and others, [1999] 238 ITR 91, Gujarat High Court made a distinction between wrong claim as opposed to false claim and held that if the claim is found to be false, the same would attract penalty. We may also take note of the following observations of the Supreme Court in the case of Union of India and Others v. Dharmendra Textile Processors and Others, (2008) 13 SCC 369=306 ITR 277 (SC). In such a case it is difficult to accept the plea that error was bona fide.”


9. Accordingly, the order of CIT(A) in confirming the impugned penalty u/s 271(1)(c) imposed by the AO on the payment of commission of Rs. 5,75,348/- is upheld.


10. Now, we shall deal with the other two issues which relate to imposition of penalty u/s 271(1)(c) on account of disallowance/deduction with regard to 1) increase in other liabilities, 2) on account of non production of vouchers for the claimed expenses amounting to Rs. 5,86,980/- and Rs. 1 lakh, respectively.


11. Briefly, the facts relating to the issues are that during the assessment proceedings the A.O. noticed that there was increase in the current liabilities to the tune of Rs. 5,86,980/- during the year under consideration. The assesee did not file any details/supporting evidence/account books for the increase for the reason that the assesee’s office was sealed by DFC in pursuance of Court’s order. The AO disallowed the expenditure for want of evidence on the reasoning that from the copy of notice of DFC sufficient time was given to the assessee to vacate the premises before the sealing.


12. The AO further disallowed lumpsum disallowance of Rs. 1 lakh out of the total expenses amounting to Rs. 10.75 lakhs relating to operating expenses and Rs. 3.97 lakhs relating to personal expenses. Later, on these very disallowances by initiating penalty proceedings u/s 271(1)(c) and on considering the explanation of the assesee the AO imposed the penalty u/s 271(1)(c), which on appeal was confirmed by the CIT(A).


13. We have considered the submissions of both the parties, perused the record and carefully gone through the orders of tax authorities below.


14. The only argument advanced by the ldAR for the assessee on the above mentioned issues pertaining to penalty u/s 271(1)(c) is that the penalty proceedings and quantum additions are two different and distinct proceedings. In case during the quantum proceedings the assessee could not file sufficient evidence to justify the increase in liability and the claim of the expenses by furnishing books of accounts along with other relevant evidence, for which it suffered the additions even up to the level of ITAT, but was, however, able to produce the relevant material during the penalty proceedings before the AO and before the CIT(A) to show that the claim of the assessee was bonafide and also in view of explanation 1 to section 271(1)(c) the tax authorities below were not justified in refusing to consider the same merely because the same was not filed before the tax authorities below during assessment proceedings/first appellate proceedings and further because now the same additions were confirmed by the ITAT.


15. We find force in the contention of ld.AR for the assessee as now it is a settled preposition of law by various judicial authorities that penalty proceedings and assessment proceedings are two distinct and independent proceedings. It means that in case the assesee due to circumstances beyond its control could not file evidence/books of accounts and is able to file the same during the course of penalty proceedings/appellate proceedings to justify that its claim made in the return was bonafide and, therefore, the penalty in view of explanation 1 to Sec. u/s 271(1)(c) was not exigible in its case, it should not be barred from filing the same before the tax authorities concerned during the penalty proceedings. Only thereafter, considering the same, the tax authorities below should decide whether or not penalty u/s 271(1)(c) was leviable against the assessee on the two issues under consideration, Hence, in the circumstances, as discussed hereinabove, in order to meet ends of justice to both the parties, we consider it appropriate to set aside the order of AO in imposing the penalty and the order of CIT(A) in confirming it on both the above two issues to the file of AO to decide the imposition of penalty u/s 271(1)(c) after considering the evidence produced before him only for the purposes of levy of penalty u/s 10 271(1)(c). Accordingly, setting aside the orders of tax authorities below on these two issues in levying penalty u/s 271(1)(c), we restore the same to the file of A.O. for compliance, of course, after affording reasonable opportunity of being heard to the assesee and it is enjoined upon the assesee, for expeditious disposal of the matter, to fully cooperate with the AO and not seek unnecessary adjournments. Consequently, the ground of appeal taken by the assesee stands allowed in part for statistical purposes.


16. In the result the appeal filed by the assesee is partly allowed for statistical purposes.


Order pronounced in the Open Court on November, 2009.







Copy of the Order forwarded to:


1. Appellant;

2. Respondent;

3. CIT;

4. CIT(A);

5. DR

6. Guard File


// True copy //


By Order


Dy. Registrar

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