Tara Health Foods Limited , Sangrur vs Assessee

PER BHAVNESH SAINI,JM

This appeal by assessee is directed against the order of ld.

CIT(Appeals)-I, Ludhiana dated 29.10.2014 for assessment year

2011-12 challenging the levy of penalty under section 271AAA of

the Income Tax Act.

2. Briefly, the facts of the case are that the Assessing Officer

while passing the assessment order under section 143(3) read

with Section 153B(1)(b) and 153A of the Income Tax Act dated

25.03.2013 made two additions i.e. the disallowance under

section 80IC stands reduced by a sum of Rs.1,39,86,343/- and

another disallowance of Rs.7.50,000/-. The Assessing Officer,

on these disallowances levied the penalty of Rs. 14,73,634/-

under section 271AAA of the Act.

2

3. The assessee aggrieved against the levy of penalty,

challenged the penalty order before ld. CI T(Appeals). The ld.

CIT(Appeals) noted in the impugned order that the Assessing

Officer has brought on record the fact that search under section

132 of Income Tax Act, 1961 was conducted at the business

premises of assessee on 12.10.2010 and return in response to

notice under section 153A was filed at returned income of

Rs.29,83,39,450/-. The assessment had been completed on a

total income of Rs.31,30,75,790/- on account of two additions.

The assessee had claimed deduction under section 80IC and the

calculation thereof had been challenged by the Assessing Officer

during the course of assessment proceedings. The Assessing

Officer confronted the method of accounting of assessee wherein

various expenses like gratuity, bonus, leave with wages,

Director's remuneration, festival expenses, printing and

stationery, traveling, audit fees, fees and taxes, IPO expenses,

professional charges, web site expenses had been debited only in

the non 80IC eligible units. The assessee had submitted before

the Assessing Officer that the impugned expenses did not

pertain to the unit eligible for deduction under section 80IC and

hence had not been debited in that units Profit & Loss account.

It was submitted that no interference in the method of

accounting adopted by the assessee to work out eligible profits

was called for. The Assessing Officer, however held that the

expenses like gratuity, bonus, leave with wages, festival

expenses, printing and stationery, traveling, audit fees, fees and

taxes, IPO expenses, professional charges, web site expenses

were clearly pertaining to the business of the undertaking and 3

could not be exclusively attributable to non eligible 80IC units

as they were clearly common in nature and the benefits arising

out of such expenses had to be apportioned amongst various

units on the basis of their turnover. This was to ensure that

correct profits in respect of each unit of business undertaking

could be arrived at regardless of the fact whether the said unit

was eligible for deduction under section 80IC or not. The correct

apportionment/allocation of such expenses lead to reduction in

claim of 801C to the tune of Rs. 1,39,86,343/- which meant that

taxable income got increased by the same amount. Similarly, the

assessee debited Rs.7,50,000/- under the head fees paid to

registrar of companies for increase in share capital of the

company and such expenditure had been claimed as revenue.

Even though, it was clearly in the nature of capital expenditure.

The Assessing Officer during the course of appellate

proceedings confronted the said issue to the assessee vide notice

under section 271AAA read with section 274 dated 25.03.2013

but no compliance to the same was made. Another opportunity

was granted by the Assessing Officer vide show cause notice

dated 31.07.2013 which also remained un-complied. The

assessee finally submitted his reply on 04.09.2013 stating that

penalty proceedings were not attracted in the facts and

circumstances of the case.

4. The assessee while challenging the levy of penalty before

ld. CIT(Appeals) submitted the following arguments :

"A search has been carried out under section 132 of Income Tax Act 1961. Assessment proceedings have been finalized vide order dated 25.03.2013 under section 143(3) read with section 153B (1) (b)/153A of Income Tax Act 1961. The assessee 4

company derived its income from units situated in state of Punjab and Uttrakhand.

The books of accounts have been separately maintained for the units of Punjab as well as Uttrakhand. The purchases as well as sales and expenses made by the units of Punjab as well as Uttrakhand have been accounted for in their respective books of accounts. The accounts of Punjab as well as Uttrakhand units have been audited by the chartered accountant. The statements of accounts of Uttrakhand units, duly audited by the chartered accountant, were furnished at the time of assessment proceedings.

The assessee company claimed deduction under section 80IC of Income Tax Act, 1961 in respect of its profits from unit in the state of Uttrakhand on the basis of facts and figures given in this audit report in Form 19B by the chartered accountant. The assessee company filed its return of income and paid due tax u/s 115JB of Income Tax Act, 1961.

The assessment proceedings have been finalized vide order dated 25.03.2013. While finalizing assessment proceedings, the learned Assessing Officer observed in the assessment order that there some expenses such as gratuity, bonus, leave with wages, festival expenses, printing and stationery, travelling, audit fees, fees and taxes, IPO expenses, professional charges, web site expenses which have been debited in the profit and loss account of Jitwal-Kalan unit (Punjab) but should have been proportionately reduced with a corresponding increase in expenses in the profit and loss account of Sitarganj unit (Uttrakhand) as a result of which the claim of the assessee company under sections 80IC shall stand reduced to the extent of increase in expenses.

The assessee made submissions in the assessment proceedings that expense like gratuity, bonus, leave with wages, festival expenses, printing and stationery expenses, travelling expenses, professional charges, director's remuneration and web site expenses have been incurred and borne by the unit of Jitwal Kalan (Punjab) as a result of which these are allowable expenses in the profit and loss account of Jitwal Kalan unit. These expenses have not been incurred and borne by the unit at Sitarganj (Uttrakhand). Further it was also explained that the expenses like gratuity, bonus, leave with wages, festival expenses, printing and stationery expenses, professional charges, travelling expense etc. are directly related to the business activities of the units in Punjab. It was further explained that gratuity leave with wages and festival expenses 5

are the benefits which have been given to the employees working in the units at Jitwal Kalan. Similarly the printing and stationery expenses have been incurred in respect of the stationery used for and by the units at Jitwal Kalan (Punjab). Therefore, these expenses cannot be termed as common expenses and thus should not be proportionately reduced from the profit and loss account expenses of units at Jitwal Kalan and there should not be any corresponding increase in the expenses of unit at Sitarganj (Uttrakhand) and thereby the deduction u/s 80IC should not be reduced in light of these submissions.

The learned Assessing Officer, however, did not accept the submissions of the assessee company and thus reduced the exemption under section 80IC to the extent of expenses proportionately increased in the profit and loss account of its unit at Sitarganj (Uttrakhand).

The learned Assessing Officer, while finalizing assessment proceedings in the above noted case disallowed expenses worth Rs. 750000.00 debited under the head 'fees and taxes' by treating the same as capital expenditure.

These two disallowances have been made the basis for levy of penalty proceedings under section 271AAA of Income Tax Act, 1961.

The appellant assessee respectfully submits that penalty proceedings are not attracted in the facts and circumstances of the case. Section 271AAA lays down certain pre-conditions for levy of penalty. The provisions of section 271AAA have been reproduced hereunder. It is respectfully submitted that the provisions are applicable on undisclosed income of the specified previous year. Undisclosed income is the condition precedent for initiation of provisions of section 271AAA. The word "undisclosed income" is defined in Explanation to sub section (4) of Section 271AAA. As per this definition undisclosed income means :

(i) Any income of the specified previous year represented, either wholly or partly, by any money, bullion, jewellery or other valueable article or thing or any entry in the books of accounts or other documents or transactions found in the course of a search u/s 132,

(A) Which has not been recorded on or before the date of search in the books of accounts or other documents maintained in the normal course relating to such previous year or (B) Otherwise not been disclosed to the Chief 6

Commissioner or Commissioner before the date of search

(ii) Any income of the specified previous year represented, either wholly or partly, by an entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating to the specified previous year which is found to be false and would not have been found to be so had the search not been conduced;

Sir, the provisions 271AAA is not attracted in the facts and circumstances of the case. In the course of search, firstly no money, bullion, jewellery or other value able article or other value able article or thing or any entry in the books of accounts or other documents or transactions have been found which has not been recorded on or before the date of search in the books of accounts or other documents maintained in the normal course relating to such previous year or otherwise not been disclosed to the Chief Commissioner or Commissioner before the date of search. Secondly, no false entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating to the specified previous year has been found in the course of search

Mere disallowance of an expenditure on estimate basis does not attract provisions of section 271AAA. The assessee, therefore, respectfully prays that the disallowance of expenditure of expenditure of Rs. 750000.00 as well as reduction of claim of deduction under section 80IC of Income Tax Act, 1961 does not come within the preview of "Undisclosed Income" defined in Explanation to sub section 4 of section 271AAA. It is therefore prayed that penalty proceedings u/s 271AAA are not attracted and therefore the same deserves to be deleted."

5. The ld. CI T(Appeals), however, did not agree with

submission of the assessee and dismissed appeal of the

assessee. His findings in para 5 & 6 of the appellate order are

reproduced as under :

"5. I have considered the basis of penalty imposed by the Assessing Officer and the arguments of the AR on the issue. The main argument of the appellant is that the addition made by the Assessing Officer does not fall under the category of unaccounted/undisclosed income as defined in Explanation to 7

sub section 4 of section 271AAA. The AR has highlighted the following clause as under:-

"Any income of the specified previous year represented, either wholly or partly, by an entry in respect of an expense recorded in the books of account or other documents maintained in the normal course relating to the specified previous year which is found to be false and not have been found to be so had the search not been conduced."

6. I do not agree with the submission of the appellant on the issue word 'false entry' recorded in the books of accounts had been clearly established by the Assessing Officer in re- allocating the expenses attributable to eligible/non eligible units of undertaking u/s 80IC. The assessee while filing its return of income was required to work out the correct income attributable to eligible/ineligible undertaking under section 80IC. The non allocation of common expenses to the tune of Rs. 1,39,86,343/- to the eligible unit cannot be said to be on account of a bonafide mistake on the part of the appellant and to that extent the entries made in the Profit & Loss account in the eligible unit have to be termed as false/untrue. It is not a case of mere disallowance of an expense which was debatable in nature but a positive intervention after detailed examination of accounts by the Assessing Officer that the impugned addition had been made. The entries with regard to the allocation of expenses to eligible unit as well as ineligible unit have been found to be false and have come to the focus on account of search undertaken in case of appellant leading to consequential assessment under section 153A.

Secondly, the disallowance of expenditure of Rs.7,50,000/- which was clearly and undoubtedly in the nature of capital expenditure as held by various Courts and is a settled issue also falls in the same category. As such the action of the Assessing Officer in imposing the penalty under section 271AAA is confirmed.

In the result, appeal is dismissed."

6. We have heard ld. Representatives of both the parties. The

ld. counsel for the assessee reiterated the submissions made

before authorities below and submitted that assessee made 8

claim under section 80IC on the basis of the report of the

Chartered Accountant. Copy of the Audit Report is filed on

record. He has relied upon decision of the Hon'ble Punjab &

Haryana High Court in the case of CIT Vs Deep Tools Pvt. Ltd.

274 I TR 603 in which it was held as under :

"Held, dismissing the appeal that there was nothing to show that the mistake by the chartered accountant was not bona fide and mere fact that the certificate issued by the chartered accountant was not in accordance with s. 80HHC(4) of the Act, was not enough to hold that the mistake was not bona fide. At any rate, as far as the assessee was concerned, no mala fides could be attributed to it as the claim for deduction was based on the certificate of the chartered accountant with whom no collusion had been proved. In view of the findings recorded by the Tribunal that the error of the chartered accountant was inadvertent and did not lack bona fides, cancellation of the order of penalty was clearly justified."

7. He has also relied upon decision of the Delhi High Court in

the case of CIT Vs Hindustan Times Ltd. 275 I TR 203. However,

this judgement is not on the point in issue.

8. On the other hand, ld. DR relied upon orders of the

authorities below.

9. We have considered rival submissions. The ld. counsel for

the assessee referred to Explanation to Section 271AAA(4) sub-

clause (a)(ii) and submitted that the expenses claimed for

deduction under section 80IC were properly recorded in the

books of account and could not be termed as false. He has,

therefore, submitted that since the same could not fall within

definition of 'undisclosed income', therefore, no penalty under

section 271AAA of the Act is leviable. We find from the

assessment order that Assessing Officer has recorded that plea 9

of assessee cannot be accepted that there are no common

expenses and certain expenses have to be considered for

calculation under section 80IC on proportionate basis. The

Assessing Officer, accordingly, divided these expenses in the

ratio of the turnover of units. The Assessing Officer,

accordingly, made disallowance by reducing the deduction under

section 80IC by Rs.1,39,86,343/-. These facts would therefore,

show that Assessing Officer on estimated basis and following

ratio of the turnover of units, proportionately made the addition

by reducing the deduction under section 80IC of the Act. No

further findings have been given against the assessee. The

assessee, however, maintained that impugned expenses did not

pertain to the unit eligible for deduction under section 80IC and

hence, had not been debited in that unit's Profit & Loss Account.

Therefore, it may be a difference in opinion of the Assessing

Officer as well as the assessee and the claim of the assessee

could not be held to be false so as to levy the penalty under

section 271AAA of the Act. Therefore, on mere disallowance of

expenditure for reducing the deduction under section 80IC, in

our view, penalty may not be leviable against the assessee. We,

therefore, set aside the orders of authorities below to the extent

that penalty shall not be leviable on the addition of Rs.

1,39,86,343/-. The appeal of assessee to that extent stands

allowed.

10. However, with regard to the addition of Rs. 7,50,000/- is

concerned, it is noticed by the Assessing Officer that assessee

had debited this amount under the head 'Fees & Tax' which has

been paid to Registrar of Companies for increasing in share 10

capital of the company. The Assessing Officer, therefore, found

this expenditure to be capital in nature and made the addition

on which penalty was also levied.

11. The ld. CIT(Appeals) also held that the expenditure is

undoubtedly in the nature of capital expenditure as is held by

the various courts. The assessee is situated in the State of

Punjab. The Hon'ble Supreme Court in the case of Punjab State

Industrial Development Corporation Ltd. V CI T 225 ITR 792 vide

judgement dated 04.12.1996 in the case of company situated in

Punjab held that "The fees paid to Registrar of Companies f or

enhancement of the capital is capital expenditure." Similarly,

Hon'ble Supreme Court in another judgement in the case of

Brooke Bond India Ltd. V CI T 225 ITR 798 vide judgement dated

27.02.1997 held that, "Expenditure in connection with additional

issue of shares- Expenditure directly related to expansion of

capital base - Is capital expenditure."

12. The above judgements of the Apex Court clearly held that

the fees paid to Registrar of Companies for enhancement of

capital is capital expenditure and one of the case of Punjab

State Industrial Development Corporation Ltd. (supra) pertained

to the State of Punjab as of the case of the assessee. Therefore,

there is no question of believing the report of the Chartered

Accountant as is contended by ld. counsel for the assessee. The

law is settled on this issue, therefore, the entries in the books of

account of the assessee are false as well as the Audit Report of

the Chartered Accountant is false certifying the claim of

deduction under section 80IC of the Act on the entire amount.

There has been, thus no basis for the assessee to rely upon the 11

report of the Chartered Accountant Shri Jitender Kumar for M/s

Jitender Kumar & Co. Chartered Accountants. The claim of

assessee or its Chartered Accountant thus, could not be treated

as bonafide and it is wholly intentional and with malafide

intentions when false Audit Report is prepared to make a claim

of deduction under section 80IC of the Act against the

judgement of the Hon'ble Supreme Court referred to above.

Thus, there were no basis for the assessee to contend that the

assessee bonafidely believed the report of the Chartered

Accountant. The claim of assessee is thus, rejected and the case

of the assessee is squarely fall within the definition of

'Undisclosed Income' as is provided in Explanation (a)(ii) of

Section 271AAA(4) of the Act. In case the search is not

conducted in the case of assessee, the above false entry and

false claim of the assessee could not have been found by the

Revenue Authorities. The Hon'ble Delhi High Court in the case

of CI T Vs. Zoom Communication P. Ltd. 327 I TR 510 held as

under :

"Held, that admittedly, in view of the provisions contained in section 40(a)(ii) of the Act, the amount of income-tax could not have been claimed as a deduction while computing income of the assessee. As regards the amount claimed on account of unusable and discarded assets, the Tribunal, was entirely incorrect in taking the view that the deduction claimed by the assessee was admissible to it under section 32(l)(iii). Clause (i) of sub-section (1) of Section 32 relates to assets of an undertaking engaged in generation and/or distribution of power. Admittedly, the assessee-company was not engaged in generation and for distribution of power, during the relevant year. Thus, the provisions of clause (i) of sub-section (1) of section 32 would not apply in respect of the assets claimed to have become unusable and written off. Therefore, the assessee had no justification to claim this amount of Rs. 13,24,539/- as a revenue expenditure. In fact, the assessee did not claim, either before the Assessing Officer or before the Commissioner (Appeals) that such a deduction was permissible under section 32(l)(iii). It was also not the case of 12

the assessee that it was under a bona fide belief that these two amounts could be claimed as revenue expenditure. The assessee was a company which must be having professional assistance in computation of its income, and its accounts were compulsorily subjected to audit. The Tribunal erred in law in deleting the penalty in respect of the amount of Rs. 1 lakh claimed as deduction on account of payment of income-tax and the amount of Rs. 13,24,539 debited under the head "equipment written off", in the profit and loss account of the assessee."

13. Considering the above discussion and the facts of the case,

it is clear that the decision in the case of CIT Vs Deep Tools Pvt.

Ltd. (supra) would not support the case of the assessee.

14. Considering the facts of the case in the light of the above

discussion, it is clear that penalty is leviable under section

271AAA of the Act on the addition of Rs. 7,50,000/-. The orders

of the authorities below are thus, maintained and Assessing

Officer is directed to re-calculate the penalty on the aforesaid

addition.

15. In the result, part of the appeal of the assessee on this

addition is dismissed.

16. In the result, appeal of the assessee is partly allowed.

Order pronounced in the Open Court on 4 t h June,2015.

Sd/- Sd/- (T.R.SOOD) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 4 t h June,2015. 'Poonam' Copy to:

The Appellant, The Respondent, The CIT(A), The CIT,DR

Assistant Registrar, ITA T Chandigarh