Mere fact of confirmation of addition cannot per se lead to confirmation of penalty U/s. 271(1)(c) of IT Act

CASE LAW DETAILS
Decided by:. ITAT, MUMBAI BENCH `A’, MUMBAI
In The case of: ACIT v. VIP Industries Ltd.
Appeal No. : ITA No. 4524/Mum/2006
Decided on: March 20, 2009
SUMMARY OF CASE LAW
Where an assessee genuinely makes claim for a particular deduction by disclosing all the necessary facts relating to the same, that will not amount to concealment even if the assessee’s claim is rejected.
RELEVENT PARAGRAPH

8. We have heard the rival submissions and perused the relevant material on record. A great deal of emphasis had been laid by he Id. DR on the fact that since the addition has been upheld by the tribunal, then the penalty should also be confirmed. In our considered opinion the mere fact of confirmation of addition cannot per se lead to the confirmation of the penalty. It is obvious that both the quantum and the penalty proceedings are independent of each other. In the penalty proceedings the assessee is given chance to show that why the penalty be not imposed with reference to the addition made or confirmed in the quantum proceedings. If the assessee succeeds in explaining his case then no penalty with follow and vice versa. It is, therefore, amply clear that the confirmation of the addition by the Tribunal in quantum proceedings cannot mean that the penalty be automatically confirmed. If the contention of the Id. DR is taken to the logical conclusion then the penalty proceedings would require obliteration from the statute and the very act of making addition in quantum should entitled the AO to impose penalty simultaneously.
9. Section 271(1)(c) provides that if the Assessing Officer or the Commissioner (Appeals) or the Commissioner, in the course of the proceedings in this Act, in satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty a sum which shall not be less than but which shall not exceed three times the amount of tax sought to be evaded by reason of the concealment of particulars of his income. Seven Explanations are there to section 271(1). Explanation (1) states that where in respect of any facts material to the computation of the total income of any person under this Act, such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the Commissioner to be false, or such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed. The effect of this Explanation is that if the necessary ingredients as staled herein are satisfied then the amount disallowed in computing the total income shall for the purposes of clause (c) of this section, be deemed to represent the income in respect of which the particulars have been concealed. The necessary elements for attracting this Explanation are three-fold.
(a) the person fails to offer the explanation, or
(b) he offers the explanation which is found by the authorities to be false, or
(c) the person offers explanation which he is not able to substantiate and fails to prove that such explanation is bonafide and that all the facts relating to the same have been disclosed by him.
If the case falls in any of these three ingredients, then the deeming provision comes into play and the amount added or disallowed in computing the total income is considered as the income in respect of which particulars have been concealed for the purposes of clause (c) of section 271(1) and the penalty follows. If the assessee successfully comes out of the above three constituents then he cannot be deemed to have concealed the particulars of his income with reference to the amount added or disallowed in computation of total income.
Undisputedly engaged in the R&D activity, for which deduction u/s.35 was claimed at Rs.47.40 lakhs, which included a sum of Rs.3.23 lakhs towards purchase of Maruti car for the R&D staff. The Assessing Officer allowed the deduction u/s.35 in entirety except for disallowing 80% of Rs.3.23 lakhs by treating it as not used for R&D activity. The facts that the assessee had carried out R&D activity and the car was also purchased by it for the use by the R&D staff have not been denied by the AO. The explanation of the assessee for claiming full deduction u/s.35 cannot be said to be fanciful. Further the assessee disclosed all the facts relating to its claim by way of Statement No. 6 annexed to the Audit report, which forms part and parcel of the return of income, in which it has been specifically mentioned about the R&D expenses debited to the P&L account “(including depreciation) ‘. Hence the case of the assessee cannot be covered in the third category also. Under these circumstances it is patent that the necessary conditions for invoking Explanation 1 to section 271(1 )(c) are lacking.
11. The Hon’ble Supreme Court in Dharmendra Textiles Processors and Ors. (supra) has held that the penalty u/s.271(l)(c) is a civil liability and the “willful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution u/s.276C of the Income-tax Act.” It has further been held that the mens rea is not an essential ingredient for imposing penalty under this section. On the circumspection of this case we find that it has been laid down that willful concealment is not necessary and hence mens rea (guilty mind) is not essential for invoking provisions of section 271(l)(c). The Hon’ble Summit Court has not held that in all cases where addition is confirmed, the penalty shall mechanically follow. The ratio decidendi of the judgement is confined to treating the willful concealment as not vital for imposing penalty u/s.271(l)(c) . It is austere from the language of section 271(l)(c) that the penalty is imposable for the concealment of the particulars of income or furnishing of inaccurate particulars of such income. The literal meaning of the word “conceal’ is ‘to hide’. Be that as it may, in order to be covered within the mischief of this section, the act (intentional or unintentional) of the assessee should result into the concealment of income. Where an assessee genuinely makes claim for a particular deduction by disclosing all the necessary facts relating to the same, that will not amount to concealment even if the assessee’s claim is rejected. There may be a situation in which the assessee earns income but unintentionally fails to disclose the same in the return. Such types of cases are covered by the judgment in Dharamendra Textiles (supra). So the scope of this judgment extends to roping in the cases of concealment of income even if the assessee did not have the guilty mind but still there is failure to disclose the income. For example an assessee may have ten bank accounts from which interest income is received. The assessee files a return by declaring interest income from nine bank accounts but omits to include such interest income from the tenth bank account and further this omission is and not willful. Such would be the cases caught within the sweep of the ratio laid down in the case of Dhannendra Textiles Processors and Ors. (supra). In this case the concealment of income by not offering the interest income for taxation from the tenth bank account is there, even though inadvertently, and the penalty will follow notwithstanding the fact that the assessee was not aware of having earned interest income from the tenth bank account. But in a case where a genuine claim is made for deduction which is not accepted by the Revenue but all the necessary particulars are declared by the assessee in the return of income, it cannot be said by-any stretch of imagination that the assessee has concealed his income or furnished inaccurate particulars of income in respect of the claim of deduction which stands repelled by the authorities. If penalty is imposed under such circumstances also then probably there will remain no course open to the assessee for genuinely claiming a deduction which in his opinion is admissible, because the fear of such claim being rejected in eventuality will expose him to the rigor of penalty. Obviously such a proposition is beyond any recognized canon of law.
12. We have noted above that the penalty proceedings are distinct from the ” assessment proceedings and hence it becomes amply clear that any addition made does not automatically lead to the imposition of penalty u/s.271(l)(c) . In the penalty proceedings the assessee is given a chance to explain his case. If he successfully explains his position and is not trapped within the parameters of clause (c) of section 271(1) along with the Explanations deeming the concealment of income, the penalty cannot be imposed. Adverting to the facts of the instant case we find that the assessee had bonafldely made a claim for deduction u/s. 35 in respect of cost of car purchased for the purpose of R&D activity by disclosing all the necessary particulars in the audit report. The facts that the car was purchased by the assessee and also used for the. purpose of the business have not been controverted by the AO. Further the granting of depreciation at 20% instead of hundred percent deduction claimed by the assessee shows that there was a genuine difference of opinion between the assessee and the AO on this aspect of the matter. It cannot be said that the assessee, under such circumstances, has concealed his income and is caught within the from corners of section 271(l)(c), We, therefore, hold that the learned CIT(A) has rightly not imposed penalty on this addition.