Tapuriah Jain & Associates

CHANDIGARH TRIBUNAL - ITO VS. QUIXOTIC HEALTHCARE - THURSDAY, 06 AUGUST 2015

Summarised Judgement (Scroll for Complete Judgement)

Gist

1. Penalty u/s 271(1)(c) can not be levied when full disclosure has been made

2. penalty cannot ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation

3. Penalty cannot also be imposed merely because it is lawful to do so

4. Section 271(1)(c) is to be exercised judicially and on a consideration of all the relevant circumstances

5. Disallowance of the claim in the assessment proceedings could not be the sole basis for levying of penalty under Section 271(1)(c)

Facts

1. Assessee is a partnership firm having four partners

2. These four partners are shareholders of 85.79% shares in Preet Remedies P. Ltd.

3. Preet Remedies had advanced a loan of Rs. 13 lacs to the assessee

4. A.O. treated same as deemed income u/s 2(22)(e) and made addition of Rs. 13 lacs

5. Assessee went ot CIT(A) who confirmed the addition

6. Penalty proceedings initiated u/s 271(1)(c)

7. Assessee argued that there was no concealment of income

8. A.O. rejected the explanation and levied penalty u/s 271(1)(c)

9. Assessee filed appeal before the CIT(A) who deleted the penalty u/s 271(1)(c)

10. Revenue moved to the Tribunal

11. Tribunal confirmed the views of the CIT(A) and deleted/cancelled the penalty u/s 271(1)(c)

Adjudication

The Apex Court in Hindustan Steel vs. State of Orissa in 83 ITR 26 has held that : “An order imposing penalty for failure to carry out a statutory obligation is the result of a quasicriminal proceedings, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act, or where the breach flows from a  bonafide belief that the offender is not liable to act in the manner prescribed by the statute.” Moreover, Hon’ble Supreme court in CIT Vs. Reliance Petroproducts Pvt. Ltd. (SLP(C) No. 27161 of 2008) has held that disallowance of the claim in the assessment proceedings could not be the sole basis for levying of penalty under Section 271(1)(c) of the Act. We therefore concur with the view of the CIT(A) and are satisfied that no penalty is exigible in the present case under section 271(1)(c) of the Act. The findings given shall have no bearing on quantum addition.

In result we uphold the cancellation of penalty of Rs.4,61,465/ by the CIT(A). Accordingly the Department appeal is dismissed.

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Complete Judgement

INCOME TAX APPELLATE TRIBUNAL – CHANDIGARH

QUIXOTIC HEALTHCARE, CHANDIGARH VS DEPARTMENT OF INCOME TAX ON 6 AUGUST, 2015

IN THE INCOME TAX APPELLATE TRIBUNAL

DIVISION BENCH, CHANDIGARH

BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND

SHRI T.R. SOOD, ACCOUNTANT MEMBER

ITA No.163/Chd/2015

Assessment Year: 2007-08

The I TO                        Vs.            M/s Quixotic Healthcare

Ward 1(2)                                      # 784, I ndl. Area

Chandigarh                                     Phase 2, Chandigarh

PAN No. AAAFQ1947N

(Appellant)                                                   (Respondent)

Appellant By                  : Dr. Amarveer Singh

Respondent By                 : Sh. Tej M ohan Singh

Date of hearing   : 29/07/2015

Date of Pronouncement : 06/08/2015

ORDER

PER BHAVNESH SAINI, J.M.

The appeal by the Revenue is directed against the order dated 11/11/2014 passed by the CI T(A), Chandigarh.

2. In this appeal Revenue has raised the following ground:

1. The order of the learned CIT(A) is erroneous & contrary to facts & law.

2. Whether on facts and circumstances the Ld. CIT(A) is justified in deleting the penalty levied u/s 271(1)(c) of the Act, by holding that the assessee had declared all the material facts of borrowing in its balance sheet, without appreciating the fact that the true particulars of income were not furnished by the assessee in its return. .

3. Whether on facts and circumstances the Ld. CIT(A) is justified in deleting the penalty levied u/s 271(1)(c) of the Act, when the assessee, being a corporate entity having access to expert advice should have included the deemed income in its ITR as the provisions of section 2(22)(e) are very clear in this regard and by not doing so the assessee has furnished inaccurate particulars of its income.

4. Whether on facts and circumstances the Ld. CIT(A) is justified in deleting the penalty levied u/s 271(1)(c) of the Act, by holding that the assessee had declared all the material facts of borrowing in its balance sheet, without appreciating that the mere inclusion of a loan transaction in the balance sheet does not absolve the assessee of the liability to pay tax on the corresponding deemed income which the assessee should have included in its income suo motu.

3. The only effective ground of appeal in this case is against the deletion of penalty of Rs. 4,61,465/- levied under section 271(1)(c) of the Income Tax Act, 1961.

4. Brief facts of the case are that ,the assesse is a partnership concern of four partners ,Sanjeev Singal, Harpreet Singh, Himjyoti Dhir and Satish Kumar .These four persons are also shareholders of 85.79% shares in M/s Preet Remedies (P) Ltd..For the year under reference it was noticed that M/s Preet Remedies (P) Ltd. had advanced a loan amounting to Rs. 13 Lacs to the assessee i.e.; M/s Quixotic Healthcare. The AO treating the same as deemed dividend under section 2(22)(e) of the Income Tax Act, 1961, made an addition of Rs. 13 Lacs in the hands of the assesse. Aggrieved with the order of the AO the assessee preferred an appeal before the Ld. CIT(A) who vide his order dt. 01/09/2011 in the Appeal No. 482/2009-10, confirmed the addition of Rs. 13 Lacs made by the AO against which the assessee did not prefer any further appeal before the ITAT.

5. Penalty proceedings were initiated under section 271(1)(c) of the Act on this addition. In the penalty proceedings the assesse argued that there was no concealment of income.The assesse further stated that since it was not a registered shareholder or beneficial shareholder in M/s Preet Remedies Pvt. Ltd. the deemed dividend could not be assessed in its hands. The AO ,in his penalty order, held that the assesse had not given a convincing and plausible reason in support of its contention that there was no concealment of income. Interpreting the provisions of section 2(22)(e) he held that dividend includes any payment by a company ,not being a company in which the public are substantially interested,by way of loan or advance to any concern in which a shareholder of the company ,holding substantial interest, is a partner and in which also he has substantial interest. Therefore as per the AO the advance given by the company to the firm squarely qualified as deemed dividend under section 2(22)(e) of the Act.The assesse having not returned the same in his return of income had furnished inaccurate particulars of income and was therefore liable to penalty u/s 271(1)© of the Act .The A.O. levied a penalty of Rs. 4,61,465/- under section 271(1)(c) of the Act.

6. The Ld. CIT(A) cancelled the penalty vide his order dated 11/11/2014 on the ground that the assessee had disclosed the fact of borrowing in its balance sheet and had not concealed any material facts. The Ld. CIT(A) further held that the factual information given by the assessee had not been found to be incorrect. He further relied on the view taken by Hon'ble ITAT, Mumbai in the case of ITO - 9(2)(4) Mumbai Vs. M/s Paramount Apparels Pvt. Ltd., Mumbai vide order dt. 31/01/2012 in ITA No. 2539/Mum/2011 and Hon'ble ITAT, Delhi vide order dt. 22/11/2013 in ITA No. 2691/Del/2013, and accordingly cancelled the penalty .

7. Aggrieved against the aforesaid order the Revenue has filed this present appeal.

8. Before us the AR repeated his arguments made before the AO and relied upon the order of the Ld. CIT(A). The AR argued that there was no concealment of income.The AR further stated that since the assessee was not a registered shareholder or beneficial shareholder in M/s Preet Remedies Pvt. Ltd. the deemed dividend could not be assessed in its hands.The AR placed reliance on the judgement of the ITAT Mumbai Bench in the case of ACIT vs V. Bhaumik Colour (P) ltd.313 ITR 146 (Mum)(SB) in this regard.The AR further argued that since the addition made was solely on account of difference of view taken on the same set of facts,it had nothing to do with the concealment of income or furnishing of inaccurate particulars of income.The AR argued that the addition to income was made under the deeming provisions of the Act and as such penalty was not leviable as held by the ITAT Mumbai G Bench in the case of Rajesh L Durgani vs ACIT -Circle 18(3) Mumbai .Relying upon the decision of the Apex court in Reliance Petro products the AR argued that penalty could not be levied for a mere disallowance of a claim in the assessment proceedings .The Revenue on the other hand placed reliance on the order of the AO.

9. We have heard the rival submissions and perused the documents placed before us as well as the orders of the lower authorities.

10. The only issue before us is whether not treating the advance received by the assesse of Rs.13 lacs from M/s Preet Remedies Pvt. Ltd. as income in the nature of deemed dividend, would attract penalty under section 271(1)© and also whether the CIT(A) has rightly cancelled the same.

11. That the assesse, a partnership concern, has received an advance of Rs. 13 Lacs from M/s Preet Remedies Pvt. Ltd., a company in which the public is not substantially interested ,is an undisputed fact. That the assesse is not a shareholder in M/s Preet Remedies Pvt. Ltd is also an undisputed fact.Further it is also undisputed that the factum of receiving the advance of Rs.13 lacs was duly disclosed in the Balance sheet of the assesse firm. In the light of the above facts the issue of levy of penalty and its cancellation thereafter has to be adjudicated upon.

12. Penalty u/s 271(1)© is levied for concealing or furnishing inaccurate particulars of income. Expl 1 to section 271(1)© further clarifies that where in respect of any facts material to the computation of total income ,any person either fails to offer an explanation or offers an explanation which is found to be false or is unable to substantiate an explanation ,then the addition or disallowance made to his total income as a result thereof shall be treated as income whose particulars have been concealed.

13. In the present case it is evident that the assesse has made full disclosure of the advance of Rs. 13 lacs received from M/s Preet Remedies Pvt. Ltd. The same has been duly disclosed in the balance sheet of the assesse ,as has been stated by the CIT(A) at para -5 of his order wherein he states ;

"The fact of loan taken by the appellant company from M/s Preet Remedies (P) Ltd. came to the knowledge of the assessing officer from the balance sheet filed by the appellant"

It has now to be seen whether the assesse has displaced the presumption raised against it by the Expl to section 271(1)© of the Act.It is the case of the assesse that he was under a bonafide impression that since it(partnership firm--m/s Quixotic Healthcare)was not a shareholder in M/s Preet Remedies Pvt. Ltd,the advance given by M/s Preet Remedies Pvt. Ltd, could not be treated as deemed dividend in its hands u/s 2(22)(e) of the Act..This belief was based on decisions of the ITAT in the case of ACIT vs V. Bhaumik Colour (P) ltd 313 ITR 146 (Mum)(SB).In our view this submission offered by the assesse had considerable force since there were also decisions by the Delhi High Court in the case of CIT Vs. Ankitech P. Ltd. 340 ITR 14 and the Rajasthan High Court in the case of CIT Vs. Hotel Hilltop, 313 ITR 116 which held that to bring to tax any amount as deemed dividend as per the provisions of section 2(22)(e) ,it is essential that the recipient of the amount must be a shareholder of the company. Moreover the AO has not stated as to why the ratio promulgated in the case referred to by the assesse would not apply to the him. We are therefore satisfied that the assesses explanation in regard to taxability of this amount in its hands is probable and true.

It is the argument of the Revenue that the assesse should have disclosed this amount in his return of income.This argument is untenable in view of the legal position prevailing at that time as laid down by the Delhi High Court and the Rajasthan High court referred to above.We therefore hold that the explanation of the assesse that he had no intention to either conceal or furnish inaccurate particulars of income is quite probable and true in the state of law set out above. The assesse has ,therefore, discharged his onus of proof under Explanation 1 to section 271(1)© of the Act and shown that there was no willful or gross neglect on his part in returning the correct income.We are also satisfied that the assesse had disclosed all relevant particulars relating to his income and there was neither any concealment of income nor furnishing of inaccurate particulars of income. Addition made applying deeming provisions would not disclose it to be a case of filing inaccurate particulars of income.

14. In any case ,without prejudice to what has been stated above, the displacement of presumption raised against the assesse by the Expl. 1 to section 271(1)© amounts to concealing particulars of income. The AO in the present case has levied penalty for furnishing inaccurate particulars of income . The AO therefore is apparently satisfied that the Expl 1 to section 271(1)© is not attracted in the assesses case for the levy of penalty.

15. Further,The Apex Court in Hindustan Steel vs. State of Orissa in 83 ITR 26 has held that :

"An order imposing penalty for failure to carry out a statutory obligation is the result of a quasi-criminal proceedings, and penalty will not ordinarily be imposed unless the party obliged either acted deliberately in defiance of law or was guilty of conduct contumacious or dishonest, or acted in conscious disregard of its obligation. Penalty will not also be imposed merely because it is lawful to do so. Whether penalty should be imposed for failure to perform a statutory obligation is a matter of discretion of the authority to be exercised judicially and on a consideration of all the relevant circumstances. Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty, when there is a technical or venial breach of the provisions of the Act, or where the breach flows from a bonafide belief that the offender is not liable to act in the manner prescribed by the statute." Moreover, Hon'ble Supreme court in CIT Vs. Reliance Petroproducts Pvt. Ltd. (SLP(C) No. 27161 of 2008) has held that disallowance of the claim in the assessment proceedings could not be the sole basis for levying of penalty under Section 271(1)(c) of the Act.

16. We therefore concur with the view of the CIT(A) and are satisfied that no penalty is exigible in the present case under section 271(1)(c) of the Act. The findings given shall have no bearing on quantum addition. In result we uphold the cancellation of penalty of Rs.4,61,465/ by the CIT(A). Accordingly the Department appeal is dismissed.

Order pronounced in the Open Court on 06/08/2015.