ITA No. 1126/JP/2011, ITA No. 1140/JP/2011

Shri R. P. Tolani And Shri T. R. Meena,JJ.

ORDER

R. P. Tolani, JM-These are the cross appeals against the order of the ld. CIT(A), Kota dated 28-10-2011 for the assessment year 2002-03 allowing part relief in penalty imposed u/s 271(1) (c ) of the Act wherein both the parties are aggrieved as under:-

(i) The assessee for retention of penalty at Rs. 3,93,37,909/- from Rs. 8,64,76,559/- u/s 271(1)(c ) of the Act.

(ii) The Revenue has raised following grounds in its appeal.
''On the facts and in the circumstances of the case, the ld. CIT(A), Kota has erred in:-
(i) deleting penalty u/s 271(1) (c ) of I.T. Act, 1961 on the addition of Rs. 37.38 crores on account of downward impact of retention price subsidy.
(ii) deleting penalty u/s 271(1) (c ) of I.T. Act , 1961 on the addition of Rs. 11.62 lacs on account of consultant's fee paid for drafting of shareholders agreement.

(iii) holding that penalty u/s 271(1) (c ) is levibale in respect of addition made on account of provision for deferred taxation to the extent of Rs. 4215.03 lacs only as against addition of Rs. 6624.20 lacs made by AO and confirmed by Hon'ble ITAT, Jaipur Bench, Jaipur '' 2.0 The brief facts of the case are that the assessee is a Public Limited Company which is engaged in the manufacture and sale of Fertilizers, Textile, Software, Food Processing and also trading of DAP and allied products at its industrial units at Gadepan (Distt. Kota), Baddi, Chennai & Sonepat. The assessee filed its return of income on 29-10-2002 which was processed u/s 143(1) of the Act on 10-02-2003. Thereafter the assessee filed a revised return of income u/s 139(5) on 30-03-2004 along with statement of reasons necessitating the revised return being depreciation loss of Rs. 4,01,43,383/-. Minimum Alternate Tax u/s 115J of the Act was worked out at Rs. 6,73,10,934/- i.e. 7.65% of book profit of Rs. 87,98,81,489/-.

3.0 On the basis of the revised return, the AO, Kota made various disallowances/additions and completed the assessment u/s 143(3) vide his order dated 29-03-2005. Aggrieved assesse preferred first appeal on merits of additions.

4.0 Ld. CIT(A) passed order on 14-12-2006 partly allowing the assessee's appeal. After giving the appeal effect, the income was determined at Rs. 33,62,71,496/- and book profit was worked out at Rs. 2,01,06,05,781/- resulting in tax liability of Rs. 15,38,1,343/-, as against the liability calculated by the assessee by way of revised return at Rs. 6,73,10,934/-.

5.0 Aggrieved, both the parties preferred second appeals. ITAT Jaipur Bench vide its consolidate order dated 22-10-2010 passed the order in which both the appeals were partly allowed.

6.0 In the meanwhile, the AO issued penalty notice u/s 271(1) ( c ) of the Act and the assessee in response thereto filed the written reply on 28- 02-2008. Assessee's reply did not find favor with AO who imposed the penalty of Rs. 8,64,76,559/- u/s 271(1) © of the Act on the basis of ld. CIT(A)'s order on merits. The ITAT order on merit is passed subsequently, therefore, ld. CIT(A) passed the impugned order after considering ITAT order and reduced the penalty against which both the parties are before us.

7.0 In the backdrop of these facts, the ld. Counsel for the assessee contends that it was worthwhile to mention that the AO imposed the penalty after the ld. CIT(A)'s order. Whereas the ld. CIT(A)'s impugned penalty order is passed after considering the order dated 22-1-2010 of ITAT on merits. The ITAT order resulted in the following additions to the income of the assessee in respect of book profits and income.

Ld. CIT (A) charted out the above additions which were confirmed by the ITAT and proceeded to deal with penalty qua separate issue which were retained by the ITAT.

A Issues on which penalty is confirmed by ld. CIT(A)
(1) Diminution in value of shares Rs. 9,17,90,000/-
The ld. CIT(A) referred to AS-13, Accounting Policy and dealt with following cases cited by the assessee in support of its contention.

1. Sutlej Cotton Mills Ltd. vs. ACIT, 45 ITD 222 (Cal.)
2. Vijay Solvex vs. ACIT, 92 ITD 24 (JP)
3. Rajasthan Spinning & Weaving Mills Ltd. vs. DCIT, 199 CTR 305 (Raj.)
4. Peerles General Finance & Investments Co. Ltd. vs. ACIT, 10t TTJ 186 (Kol.)
Thereafter the penalty qua this issue was confirmed by ld CIT(A) by following observations.

''From the above discussion, it is clear that capital gain on sale of shares is not part of book profits as the expression 'book profit' is intended to be confined to business profits and not intended to include profit on realization of any asset. The ratio laid down by the Hon"ble High Court equally applies in the case of loss also. In the case of assessee, the provision for reduction in value of shares by the same logic cannot be part of book profits and has to be excluded from computation of book profits.

The assessee's case is on a weaker footing then the cases referred above as by following the ratio of Hon'ble 1TAT, even actual loss has to be excluded from computation of book profits whereas in the case of assessee it was only notional loss as the shares were not sold during the year but only re-valued.

The assessee's claim that the value of shares was permanently written down is also not correct as the value of shares keep on varying from time to time and this fluctuation cannot be treated as permanent. The examples of permanent reduction can be as under :-

a). Reduction in share, capital (due to heavy losses).
b). Liquidation of company resulting in reduction in value of share.
The assessee's case does not fall in any of the above category or in a category which can be considered as a case where value can be treated as reduced permanently.
It is also seen that the value of the same shares was much lower than their purchase price in earlier years also but assessee has not made any such provision in earlier year.

In view of the above, it is held that the treatment given by assessee is neither as per the accounting policies of the company nor as per the accounting standards prescribed by the Institute of Chartered Accountants.

The other case laws quoted by assessee are in relation to additions made during the course of assessment whereas we are dealing with penalty u/s 271(l)(c) w.r.t. confirmed additions and therefore, these case laws are not relevant. What is relevant is the fact whether the action of assessee to claim these expenditures was bonafide or not.

The assessee's plea, that the auditors' have examined this issue, is also not worth accepting in view of the factual and legal position mentioned above.

In view of the above, it is held that the conduct of assessee cannot be treated as bonafide and penalty u/s 271(1)(c) is held to be leviable.
(2) Provisions for deferred taxation:
Ld. CIT(A) partly upheld the penalty by following observations:
''The assessee submitted that prior to amendment in the section 115JB, provision for deferred taxes was allowable in view of various court judgments and no penalty is leviable in the case of assessee on the basis of retrospective amendment.

I agree with the view of the assessee that if an amount becomes taxable only due to retrospective amendment then no penalty should be levied.

However, to find out the claim of assessee the undersigned examined the accounting standard AS-22 which was claimed to have been followed by assessee In my view, penalty may not be leviable in respect of any provision made as per these accounting standard, however, if the assessee has not followed these accounting standards then the issue of penalty has to be considered on merits.

As per AS-22, an enterprise has to provide for the time effect. In common men's language we can understand it as difference between tax on income as computed as per provisions of company law and tax on income as computed as per Income Tax Act. For example -

Profit as per Company Act  Rs. 100/-
Tax on this Rs. 40/-
Income as per I.T. Act Rs. 50/-
Tax on this income Rs. 20/-
Provision for taxation Rs. 10/-
Provision for deferred tax (Rs.40-20-10) Rs. 10/-

In AS-22, certain examples were also given for illustration, however the assessee's case does not fit into any of these for the reason that assessee has already made provision for part of the income tax. The case of assessee can be illustrated by following examples:-

Profit as per Company Act Rs. 100
Tax on this Rs. 40
Income as per Income Tax Act Rs. 50/-
Tax on this income Rs. 20
Provision for taxation Rs. 20/- Rs. 10.
Provision for deferred tax 10/- (Rs. 40-20-10)
Following the above illustration, the provision for deferred tax in the case of assessee is computed as under (enclosed Annexure-A for detailed working):-
Profit as per Company Act Rs. 15438.37 lacs
Tax on this @ 36.75% Rs. 5673.60 lacs
Income as per Income Tax Act Rs. 5665.63 lacs
Tax on this income Rs. 2082.12 lacs
Provision for taxation as per(annual report) Rs. 1181.71 lacs
Provision for deferred tax  Rs. 2409.77 lacs
(Rs. 5673.60 - 2082.12 - 1181.71  = 2409.77)

From the above, it can be seen that maximum liability for payment of tax (treating the entire profit as per company law as taxable) comes to Rs. 5673.60 lacs. As against tax on income computed as per I.T. Act comes to Rs. 2082.12 lacs. The difference comes to Rs. 3591.48 lacs out of this assessee has already made provision for taxation amounting to Rs. 11,81,71,000/- and to take care of timing difference the assessee was required to provide for at the most Rs. 2409.17 lacs as provision for deferred tax. As against this, the assessee has made provision for deferred taxation amounting to Rs. 6624.20 lacs.

Thus assessee has made excess provision of Rs. 4215.03 lacs (Rs. 6624.20 lacs - 2409.17 lacs) which was not required at all.

The difference between the assessee's computation and my computation is due to the following reasons:-

i) The assessee has not taken into account provision of taxation amounting to Rs. 11,81,71,000/-.
ii) The assessee has not taken into account tax on it's income as per I.T. Act.
It is humbly submitted that the complicated working given by assessee is not at all required. What we have to find out is the amount of difference in tax as per income computed as per Company Law provisions and as per provisions of Income Tax Act.

In view of the above discussions, the conduct of assessee cannot be treated as bonafide w.r.t. excess provision of Rs. 4215.03 lacs which was not at all required.

I therefore held that the assessee has made excess provision for deferred tax liability with a view to reduce its tax burden. It is therefore, held that penalty u/s 271(1)(c) is leviable with respect to this amount of Rs. 4215.03 lacs (3) Receipt from IMACID: Ld CIT(A) confirmed the penalty by following observations:

"The AO levied the penalty in this behalf observing as under:-
"During the course of assessment proceedings, the AO noted that the assessee company has assisted its Morocco based joint venture company IMACID by providing various services in the form of technically trained staff etc. For the services so rendered, the joint venture company paid service charges to the assessee company and also deducted tax at source from service charges. While accounting the service charges, the assessee company credited the P&L account by the net amounts of the service charges i.e. after deducting TDS of Rs. 7,80,018/- made by the IMACID. The A.O. in view of provision of section 50 of the IT Act took the gross receipts of service charges and made an addition of Rs. 7,80,018/- to the total income as well as for computing the book profits.

In the appeal, the Id. CIT(A) upheld the action of AO. During the appellate proceedings, it has also been pointed out to the CIT(A) that the amount of TDS which was not included in the total income was Rs. 9,28,030/- instead of Rs. 7,80,018/-. Hence, the CIT(A) directed to take the figure of TDS at Rs. 9,28,030/- and therefore, amount of concealment of income on this account is taken at Rs. 9,28,030/~. For this penalty for concealment / furnishing inaccurate particulars is also initiated u/s 271(l)(c) of the IT Act, 1961".

The assessee did not offer any explanation w.r.t. levy of penalty on this amount. Accordingly, it is held that penalty in respect to this amount is leviable.' Thus to sum up, the ld. CIT(A) held that penalty is leviable with respect to following additions only:

8.0 Aggrieved, both the parties are before us.

9.0 Ld. Counsel for the assessee Shri P J Pardiwala Sr Advocate reiterated the facts about the issue of diminution in value of shares as explained before the authorities below. It is contended that the assessee while calculating the book profits u/s 115JB of the Act claimed deduction of Rs. 197.90 lacs attributable to diminution in the investments of following shares .

''While calculating the book profits u/s 115JB, the assessee company had provided for deduction of Rs. 917.90 lakhs on account of diminution in the value of investments as follows:-

(a) IDBI Scheme Rs. 698.86 lakhs
(b) BOB Shares Rs. 172.73 lakhs
(c) UTI Shares / Units Rs. 46.32 lakhs
Total Rs. 917.90 lakhs

The AO disallowed the above amount treating it to be a provision for meeting liabilities other than ascertained in view of clause (c) of explanation to Section 115JB. Alternatively he has also held that if the diminution in the value of investment is treated as reserve then also it is disallowable in view of clause (b) of explanation.

In first appeal ld. CIT (A) has also upheld the above disallowance. the assessee vide letter dated 29-04-2011 contended that prior to amendment vide Finance Act, 2009 with retrospective effect from 01-04-2001, no addition on account of such debits can be made.'' Thus it is very clear that disallowance became effective after retrospective amendment by Finance Act, 2009 wef 1-4-2001, by which a fetter was put for availing of claim in respect of diminution of shares. At the relevant there was no such express provision. Rather case laws as mentioned above existed which supported the view of the assesse.

10. It is a trite law that no penalty can be imposed on the assesse qua an addition which is occasioned by the operation of a retrospective legislation. Assessee cannot be penalized for a purported wrong which did not exist on statute book at the time the assessee made a claim at the time of filing its return or completion of assessment. It is only at the ITAT level that the retrospective amendment was passed by which ITAT confirmed the addition. Therefore, there is no justification in the order of the ld. CIT(A) holding that in his view without even retrospective amendment, the assessee could not have made this claim. The ld. Counsel vehemently countered this proposition on the pleading that if the provision was so clear there was no need for the legislature to pass the retrospective amendment. Besides no case laws as mentioned above would have been passed. Thus in any case there existed a judicial debate on such claim, besides all the relevant details were disclosed along with the return by way of audited account statements and certificates. The assessee is following a consistent method of accounting on mercantile basis. There is no adverse qualification by the auditors either on accounting policies or consistency in method of accounting. Reliance is placed on the decision of Hon'ble Apex Court in the case of Apollo Tyres vs. CIT, 255 ITR 273. It is settled law now that while computing the book profits, revenue authorities cannot interfere in audited accounts. In this legal position no penalty can be levied.

11. The ld. CIT(A) despite considering the legislative retrospective amendment has presumed that penalty was leviable. In any case, the consistent method of accounting followed is supported by various judgments like Sutlej Cotton Mills vs. ACIT (Cal.), Rajasthan Spinning & Weaving Mills Ltd. vs. DCIT (Raj.) and other judgments (supra) cited in this behalf.

12. Apropos the provision for deferred taxation, the ld. CIT(A) has clearly agreed that this amount became taxable due to retrospective amendment only. Despite this finding ld. CIT(A) somehow or other has distinguished the case laws cited by the assessee and split the amount of deferred taxation and held that penalty was leviable qua part of it and not leviable qua for another part by following observations:

''Thus assessee has made excess provision of Rs. 4215.03 lacs (Rs.6624.20 lacs - Rs. 2409.17 lacs) which was not required at all.
The difference between the assessee's computation and my computation is due to the following reasons:-

(i) The assessee has not taken into account provision of taxation amounting to Rs. 1,81,71,000/-.
(ii) The assessee has not taken into account tax on its income as per I.T. Act.

It is humbly submitted that the complicated working given by assessee is not at all required. What we have to find out is the amount of difference in tax as per income computed as per Company Law provisions and as per provisions of Income Tax Act.

In view of the above discussion, the conduct of assessee cannot be treated as bona fide w.r.t. excess provision of Rs. 4215.03 lacs which was not all required.

I therefore, hold that the assessee has made excess provision for deferred tax liability with a view to reduce its tax burden.

It is therefore, held that penalty u/s 271(1)( c) is leviable with respect to this amount of Rs. 4215.03 lacs.'' The amount accounted for as deferred taxation is based on the same audit report which was provided based on consistent method of accounting policy and it has been accepted so by the C.A. and statutory auditors. The ld. CIT(A) arbitrary held that part of it was liable for penalty. Reliance is again placed on the decision of Hon'ble Supreme Court in the case of Apollo Tyres vs. CIT (supra) for the proposition that once the assessee's accounts are audited and book profits are computed according to the audit report then the Revenue authority cannot interfere with the audited figures.

13. Apropos 3rd issue i.e. in respect of IMACID deposit, the ld. Counsel for the assessee contends that the ld. CIT(A) has observed as under:-

''The assessee did not offer any explanation w.r.t. levy of penalty on this amount. Accordingly, it is held that penalty in respect of this amount is levaiable'' It is pleaded that the observation of the ld. CIT(A) is not correct inasmuch as before lower authorities the assessee submitted the following submissions .

1. That according to the DTAA between India and the Kingdom of Moroco in the case of India double taxation is to be eliminated as follows:-

"Where a resident of India derives income which, in accordance with the provision of this Convention, may be taxed in Morocco, India shall allow as a deduction from the tax on the income of that resident as deduction at source. Such amount shall not, however, exceed that part of income tax, as computed before the deduction is given, which is attributable to the income, which may be taxed in Morocco.''

2. Further , the said DTAA is silent on the point as to whether the net income or gross income is to be taken as taxable income.

3. As regards the claim of TDS beyond the prescribed one year but during the course of assessment proceedings u/s 143(3) i.e. before the completion of the assessment proceedings for the relevant assessment year we wish to draw your kind attention to the conclusion in the case of DCIT vs. Lab India Instruments (P) Ltd. reported in 94 TTJ 113 wherein it has been held that claim during the assessment year by way of time barred revised return has to be entertained. Rather it is the duty of the Assessing Officer to apprise the assessee about the provisions of law.

In the agreement between the assessee and the Moroccan Joint- Venture partner condition no. 9.7 reads as follows:-

''The TDS (deducted at source) at the rate of 10% on VAT and on technical assistance services shall be to CFCL account. Certificates of such deductions shall be furnished by CFCL by IMACID.'' The TDS deducted by IMACID & OCP has not been received in India and, therefore, TDS amount cannot form part of income.

The view is also supported by the following judgements.
1. CIT Vs. Nadir Rashid & Anr. Reported in 227 ITR page 227 (MP )
2. CIT Vs. Amba Lal Kela Chand reported 210 ITR page 844 (Bom. ).
3. CIT Vs. Yawar Rashid & Ors. Reported in 218 ITR 699 ( M.P.).
4. CIT Vs. YNS Hobbs reported in 116 ITR page 20 (Ker.)

By a consistent accounting method & policy while calculating for service charges, the assessee was crediting the net amount after reduction of TDS amount which was credited separately. Proper explanation has been filed, in these facts and circumstances there was no justification for ld. CIT(A) in holding that no explanation was furnished. Thus the imposition of penalty is untenable for this omission of fact, besides all the relevant particulars were filed along with return of income in the form of statement of audited accounts and TDS certificates. Thus the entire information emanated from the assessee's accounts and return only.

14. The ld. Counsel for the assessee on these facts and circumstances vehemently relied on the Hon'ble Supreme Court judgment in the case of CIT vs. Reliance Petro Products (P) Ltd. 322 ITR 158, for the proposition that when all the particulars of income are explained and filed the return of income, the mere fact that the claim is not allowed or partially allowed will entail into penalty u/s 271(1)( c) of the Act. It is pleaded that this proposition is squarely applicable to the above issue. The ld. Counsel for the assessee further relied on the following case laws to support his arguments:-

1. CIT vs. Yokogawa India Ltd., 204 Taxman 306 (Ker.)
2. DCIT vs. Escorts Construction Equip. 36 CCH 124 (Del)
3. CIT vs. Petals Engineers (P) Ltd. 42 Taxman 433 (Bombay)
15. The ld. DR relied on the order of the AO and further relied on the following case laws.
1. CIT vs. Gold Coin Health Food (P) Ltd.304 ITR 308 (SC)
2. CIT vs. Moser Baer India Ltd., 315 ITR 460 (SC)

16 Apropos Revenue's appeal, the ld. Counsel for the assessee pointed out that Ground No. 1 and 2 of the Revenue are infructuous inasmuch as quantum addition in this behalf have been deleted by ITAT which is recorded by the ld. CIT(A) in his order.

17. Apropos Ground No. 3rd issue, the same is interconnected with the assessee's appeal on the issue of provision for deferred taxation.

18. We have heard the rival contentions and perused the materials available on record. It is clear that two of the additions i.e.' diminution in value of equity shares' and 'provisions for deferred taxation" were made originally and contested by the assessee in appeal. By the time the appeal reached the ITAT level a retrospective amendment was introduced by Finance Act, 2009 wef 1-4-2001 which retrospectively covers the impugned assessment year i.e. 2002-03. The ITAT Jaipur Bench upheld the addition keeping in view the retrospective amendment. In these facts and circumstances we are of the view that the assessee cannot be penalized for claims which were not disallowable by any express provision on the statute book at the relevant time. The decision of Hon'ble Supreme Court in the case of CIT vs. Apollo Tyres (supra) lays down the proposition that once the book profits are computed on the basis of the audited accounts then the AO cannot interfere in the book profits calculations. Besides, we find merit in the arguments of the ld. Counsel for the assessee that the decision of Hon'ble Supreme Court in the case of CIT vs. Reliance Petro Products (P) Ltd. (supra) is applicable to the assessee's case as all the relevant facts and information were filed along with return of income. It lays down that penalty is impossible on the basis of information furnished the return. If the assesse has furnished all the relevant details and information along with the return, then disallowance of any claim by assessing officer is not exigible to penalty. Besides a judicial debate existed on the issue about AO's power to interfere with audit statement in calculating book profits under sec. 115J. The reliance in the cases of DCIT vs. Escorts Construction Equipment 36 CCH 124 (Del. Tribunal) and CIT vs. Petals Engineers (P) Ltd. 42 Taxman 433 (Bombay) also support the assesses propositions.

19. Apropos addition on account of IMACID deposit, we find that the assessee had given proper explanation in this behalf, which has been overlooked by ld. CIT(A). The mistake is bonafide, the entries were made as per regular accounting policy in this behalf. Besides all the relevant particulars for this accountimng of IMACD having been filed along with return of income, the judgment of Hon'ble Supreme Court in the case of CIT vs. Reliance Petroproducts (P) Ltd. (supra) is squarely applicable to this issue. In view thereof, we delete the penalty retained by the ld. CIT(A). Thus the appeal of the assessee is allowed. Apropos the Revenue's appeal Ground No. 1 and 2 does not arise at all and Ground No. 3 is a part of 2nd ground i.e. provision for deferred taxation qua which we have hold that penalty is not leviable.

20. In the result assessee's appeal is allowed and revenue's appeal is dismissed.