Penalty under section 271 cannot be imposed on debatable issues

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH : B : NEW DELHI

BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER

AND

SHRI T.S. KAPOOR, ACCOUNTANT MEMBER

ITA No.1728/Del/2012

Assessment Year: 2006-07

Federal Mogul Automotive

Products India Pvt. Ltd.,

7870-77, F-1, Roshnara Plaza

Building,

Roshnara Road,

New Delhi.

PAN: AAACF4128M

(Appellant)

Vs.

ITO,

Ward 11 (2),

New Delhi.

 (Respondent)

Assessee by: Shri Pradeep Dinodia, CA

Revenue by: Shri Vikas K. Suryawanshi, Sr.DR

ORDER

PER A.D. JAIN, JUDICIAL MEMBER

This is an appeal filed by the assessee for Assessment Year 2006-07 against the order dated 14.02.2012 passed by the CIT (A)-XIII, New Delhi. The grounds of appeal read as under:-

“1. That the Commissioner of Income Tax (Appeals) has erred in law on the facts and circumstances of the assessee’s case in confirming the penalty of Rs.2,10,000/- under section 271 (1)(c) levied by the ld. A.O.

2. That the order passed by Commissioner of Income Tax (Appeals) is bad in law.

3. That the CIT (A) has grossly erred in holding that assessee has furnished inaccurate particulars while claiming software expenses as revenue in nature.

4. That the ld. CIT (A) failed to appreciate that the issue as to whether software expenses are revenue or of capital nature was highly debatable issue and penalty u/s 271 (1)(c) could not be levied on such debatable issue.

5. That the CIT (A) has erred in law and on the facts and in circumstances of the assessee’s case in holding that the intention of the appellant was to defraud the interest of the revenue.”

2. The brief facts of the case are that vide assessment order dated 29.12.2009, passed u/s 143 (3) of the IT Act, the income of the assessee was assessed at nil after adjusting brought forward losses. The Assessing Officer observed that the assessee had claimed Exact Globe-2003 Software purchase expenses of ` 15,15,140/- as revenue expenditure. The Assessing Officer disallowed the assessee’s claim holding the expenses to be capital in nature.

3. Against the aforesaid disallowance, no appeal was preferred by the assessee.

4. In the penalty order, the Assessing Officer observed that there was express provisions of allowability of depreciation @ 60% on software; that the assessee had made claim of such expenses in the Profit & Loss Account, disregarding the said provisions of the Act, thereby the assessee had furnished inaccurate particulars of its income and had concealed a part of its income; and that also, the assessee had not filed any appeal against the disallowance made in the assessment.

5. By virtue of the impugned order, the Ld. CIT (A) confirmed the levy of penalty.

6. Aggrieved, the assessee is in appeal.

7. Challenging the impugned order, the learned counsel for the assessee has contended that in the return of income filed, the assessee had declared nil income after adjusting the brought forward losses; that the Assessing Officer, in the assessment proceedings, disallowed the assessee’s claim of expenditure on purchase/upgradation of computer software amounting to ` 15,15,140/-, as capital expenditure; that the Assessing Officer, however, allowed depreciation @ 60% being the rate applicable to computer hardware, which resulted into a net addition of ` 6,06,056/-; that in spite thereof, the taxable income was determined at nil and the tax was held to be payable under the provisions of MAT, u/s 115JB of the Act; that the amount involved being small and it representing a shift in the timing of allowability of expenditure incurred by the assessee, as it was to be allowed over a period of 3 to 4 years through depreciation, instead of allowing the claim in the year under consideration, and considering , besides the tax effect involved, the high cost of litigation, it was decided not to file any appeal in the quantum proceedings; that the assessee has paid the tax on book profits u/s 115JB of the Act; that the disallowance of the software expenses was under the normal provisions of the Act, having no effect on the taxes paid by the assessee; that the assessee having so paid the tax, there remains no tax ‘sought to be evaded’ due to which the provisions of Section 271 (1)(c) are not attracted; that undeniably, no addition was made to the book profits of the assessee and therefore, there is no difference between the returned book profits and the assessed book profits; that this being so, the addition made by the Assessing Officer does not give rise to any tax differential, clearly indicating that there was no willful act or deliberateness on the part of the assessee to evade payment of tax; that in this regard, reliance was being placed on “CIT vs. Nalwa Sons Investments Ltd.”, 327 ITR 543 (Del), “CIT vs. Central Warehousing Corporation”, 2012-TIOL-312-HCITA No.1728/Del/2012 Del-IT (copy placed on record along with the synopsis filed) and “S.V.Kalyanam”, 327 ITR 477 (Mad); that the issue as to whether a particular item of expenditure is capital expenditure or revenue expenditure has always been a debatable one; that it was in “Amway India Enterprises vs. DCIT”, 114 TTJ 476 (Del) (SB) that various tests for determining the nature of software expenses have been laid down, holding that this issue should be decided from the practical and businessmen point of view in accordance with the sound accountancy principles keeping in consideration the tests of enduring benefit, ownership and functionality test; in “Amway India Enterprises” (supra), it has been laid down that if the tests of enduring benefit are satisfied, the question as to whether the expenditure on computer software is capital or revenue has to be seen from the point of view of its utility to a business man and as to how important an economic or functional role it plays in the business and that in each case the Assessing Officer will have to consider the nature of the software and its functional use to the assessee and then decide whether the expenditure is capital or revenue; that this very view has also been taken by the Hon’ble jurisdictional High Court in the case of “CIT vs. Krishna Maurti Ltd.” 2011-TIOL-13-HC-DEL-IT; that it is on the basis of functional aspect of the software involved, that the assessee treated the software expenses as revenue in nature, in its books of account; that this view find support from “CIT vs. Asahi India Safety Glass Ltd.”, 2011-TIOL-705-HC-IT and “CIT vs. Raychem RPG Ltd.”, 2011 (7) TMI 953 (HC) rendered by the Hon’ble Bombay High Court; and that the Ld. CIT (A) has failed to appreciate this aspect of the matter and has wrongly upheld the levy of penalty.

8. The ld. counsel of the assessee has further sought to place reliance on:

 (i) “CIT vs. Reliance Petroproducts Pvt. Ltd.”, 2010-TIOL-21- SC; and

(ii) “CIT vs. Brahmaputra Consortium Ltd.”, 2011-TIOL-470- HC-DEL-IT

9. Then, for the proposition that concealment penalty cannot be levied merely on the ground that the claim of the assessee has been negated by the Assessing Officer, reliance has been placed on the following case laws:-

1. “DCIT vs. Saraya Industry Ltd.”, 101 TTJ 213 (Del);

2. “ITO vs. Kuldeep Sood Enterprises”, 103 TTJ 573 (Ch.);

3. “CIT vs. Honeywell Dace India Ltd.”, 292 ITR 169 (Del);

4. “CIT vs. International Audio Visual Co.”, 288 ITR 570 (Del);

5. “CIT vs. Nath Bros. Exim International Ltd.”, 288 ITR 670 (Del);

6. “CIT vs. Eicon International Pvt. Ltd.”, 166 ITR 12 (Del); and

7. “CIT vs. Videon”, 301 ITR 260 (Del)

10. The ld. DR, on the other hand, has placed strong reliance on the impugned order, contending that the assessee had claimed an expenditure which was not allowable as a revenue expenditure, since the same was in the nature of capital expenditure; that the stand taken by the assessee regarding non-filing of appeal in the quantum proceedings has rightly been negated by the Ld. CIT (A), since undeniably, there was no ground available to the assessee to file the appeal, as the software expenses stand clearly defined as a capital expenditure in the Act and depreciation thereon has been provided @ 60% and the assessee did not even have any explanation to offer for having claimed such expenses in the Profit & Loss Account and merely maintaining that no penalty is called for on some additions; that the Ld. CIT (A) has correctly held that since the assessee remains unable to explain the reasons for making the wrong claim, the addition made on the basis of such wrong claim definitely attracts penalty; that “Reliance Petroproducts” (supra), as rightly noted by the Ld. CIT (A) does not help the case of the assessee, its claim being ab initio wrong and contrary to the provisions of law, about which, no two opinions exist; that the expenditure claimed, i.e., software expenses is not a routine disallowance and the assessee’s claim that no penalty can be levied for routine disallowances, has rightly been rejected; that in “Union of India vs. Dharmendra Textile Processors”, 306 ITR 277 (SC), it has been held that the object behind the enactment of Section 271 (1) (c) of the Act read with its explanations, indicates that the said section has been enacted to provide for a remedy for loss of revenue, that the penalty u/s 271(1)(c) is a civil liability and that willful concealment is not an essential ingredient for attracting civil liability; that in the present case, by wrongly claiming the software expenses as revenue expenditure, the assessee caused loss to the revenue and so, the concealment penalty was rightly levied and upheld; that in “CIT vs. Zoom Communications Pvt. Ltd.”, 191 Taxman 179 (Del), it has been held that if the assessee made a claim not only incorrect in law, but also without any basis and the explanation furnished by the assessee was not found to be bona fide, Explanation 1 to Section 271 (1)(c) of the Act would come into play and the assessee would be liable for penalty; that this decision is squarely applicable to the present case and has rightly been applied by the Ld. CIT (A); that the explanation of the assessee has rightly been held not to be a bona fide explanation and it has rightly been held that the claim made by the assessee was with the intention to defraud the interest of the revenue and had the case of the assessee not been selected for scrutiny, the claim of the assessee would have gone unnoticed and the assessee would have succeeded in evading the tax; and that therefore, no fault whatsoever can be found with the order of the Ld. CIT (A), which be upheld dismissing the appeal filed by the assessee.

11. We have heard the parties and have perused the material on record. Firstly, it is seen that as rightly contended on behalf of the assessee, there is no difference between the returned income and the assessed income. In “Nalwa Sons Investments Ltd.” (supra), it has been held that where the total income computed under the regular provisions of the Act is less than the book profits, and the assessment is made u/s 115JB of the Act, concealment penalty cannot be levied.

12. Then, in “Asahi India Safety Glass Ltd.” (supra), it has been held by the Hon’ble jurisdictional High Court that the expenditure incurred on account of application software is a revenue expenditure, allowable in the computation of income.

13. Then, the claim of the assessee has not been shown to be a false claim. The view of the assessee is a plausible view, on which, two opinions might be held.

14. Further, in “Krishna Maurti Ltd” (supra), it was held that the claim made by the assessee that expenses incurred were revenue in nature, was debatable and therefore, it could not attract penalty.

15. In view of the above, we do not find ourselves in agreement with the order of the ld. CIT (A) and the same is hereby cancelled.

Accordingly, the penalty levied on the assessee is deleted.

16. In the result, the appeal filed by the assessee is allowed.

The order pronounced in the open court on 24.08.2012.

                                                          Sd/-                                Sd/-

                                                [T.S. KAPOOR]               [A.D. JAIN]

                                      ACCOUNTANT MEMBER JUDICIAL MEMBER

Dated, 24.08.2012.

dk

Copy forwarded to: -

1. Appellant

2. Respondent

3. CIT

4. CIT (A)

5. DR, ITAT

TRUE COPY

By Order,

Deputy Registrar,

ITAT, Delhi Benches