Commissioner of Income Tax vs Mehta Engineers Ltd.

Satish Kumar Mittal, J.—This order shall dispose of I.T.A. Nos. 600 and 599 of 2007 which have been filed by the Revenue against the order dated May 18, 2007, passed by the income tax Appellate Tribunal (hereinafter referred to as "the ITAT"), in I.T.A. Nos. 739/Chandi/2004 and 213/ Chandi/2006 in the case of the respondent-assessee for the assessment years 1996-97 and 1997-98, respectively. In this case, the assessee filed the return of income for the assessment years 1996-97 and 1997-98 in which it had claimed a certain amount as business expenditure incurred by it on studies of Shri Varun Mehta son of a director of the company on the ground that under the agreement between the company and the said Varun, he was to serve the company for at least three years after finishing his studies abroad.

The Assessing Officer disallowed the said expenditure and the same was added towards the income. On appeals by the assessee, the said order become final up to the income tax Appellate Tribunal. Thereafter, the Department started proceedings u/s 271(1)(c) of the income tax Act, 1961 (hereinafter referred to as referred to as "the Act"), against the respondent for imposing penalty on the ground that the assessee claimed wrong deduction in its return. vide order dated October 15, 2001, the Deputy Commissioner of income tax, Ludhiana imposed a penalty of Rs. 2,75,451 equivalent to 100 per cent, of the tax sought to be evaded.

Feeling aggrieved against the above order, the assessee filed an appeal before the Commissioner of income tax (Appeals), who, vide order dated March 30, 2004, deleted the penalty imposed by the Assessing Officer u/s 271(1)(c) of the Act while coming to the conclusion that the case was not fit for imposition of penalty for concealment u/s 271(1)(c). Against the said order of the Commissioner of income tax (Appeals), the Revenue filed two separate appeals before the income tax Appellate Tribunal, who, vide order dated May 18, 2007, dismissed the same while observing as under :

"...The disallowance has been sustained for the reason that the assessee failed to justify that the expenditure incurred was for furtherance of the purposes of its business. In so far as the proceedings u/s 271(1)(c) is concerned, it is a trite law that the same stand on an altogether different footing than the assessment proceeding. The findings of the Revenue authorities in the assessment proceedings may be relevant but cannot be considered as conclusive for justifying the imposition of penalty u/s 271(1)(c) of the Act.

In the instant case, there is no allegation by the Assessing Officer that the assessee did not disclose the full particulars of the claim. The deduction claimed by the assessee by way of a debit in the profit and loss account cannot be said to be bereft of bonafides. This is for the reason that the assessee incurred expenditure as an obligation under the agreement by way of which the beneficiary was to serve with the assessee-company for a stipulated period after finishing his studies in abroad. It is, of course, a different matter that the claim of the assessee has not ultimately found favour with the Revenue authorities but that by itself does not justify an inference that it was lacking in bona fide s. It is well-settled legal proposition that mere disallowance of expenditure claimed cannot ipso facto be considered to be giving rise to penal action u/s 271(1)(c) of the Act unless it is demonstrated that the claim was made as a result of a wilful omission or neglect on the part of the assessee. No such inference is justifiable in the instant case for the reason that the Revenue has not brought on record any material to support the same. A gainful reference can be made to the decision of our co-ordinate Bench of the case of Sai Builders (supra) and Harcharan Singh (supra) in this regard. We may also refer to the judgment of the Delhi High Court in the case of Commissioner of Income Tax Vs. Bacardi Martini India Limited, wherein it has been held that merely because there is a difference of opinion between the assessee and the Assessing Officer, for allowing or disallowing an expenditure, it cannot ipso facto be said that the assessee had intention to conceal its income or for furnishing inaccurate particulars of its income. In the instant case, we find that the assessee had made the claim on the basis of a credible material and also furnished necessary explanations in the course of assessment proceedings. The reasoning advanced by the assessee has been found to be unsatisfactory and thus rejected by the Assessing Officer. However, the explanations furnished by the assessee were neither found to be false and nor is there any finding by the Assessing Officer either in the order of assessment or even during the penalty proceedings that the assessee did not offer complete particulars or details of the expenditure whenever considered necessary by the Assessing Officer. Therefore, considering the totality of the circumstances and the fact position in the instant case, we do not find it a fit case for imposition of penalty u/s 271(1)(c) of the Act. Hence, we hereby affirm the decision of the Commissioner of income tax (Appeals) on this aspect."

We have heard counsel for the appellant and perused the impugned order. Undisputedly, in this case, the assessee had only claimed certain expenditure incurred on the education of Mr. Varun Mehta on the basis of a written agreement, according to which, he as to serve the company for at least three years after finishing his studies abroad. It is neither the case of the Revenue nor there is any material to this effect available on the record that the said agreement was false and fabricated document. Moreover, there is no such finding recorded by any adjudicating authority. Therefore, in view of the said fact and the finding of fact recorded by the income tax Appellate Tribunal as reproduced above, we are of the opinion that the Commissioner of income tax (Appeals) has rightly deleted the penalty while coming to the conclusion that it is not the case where the assessee had claimed intentionally and deliberately the expenditure in order to evade the tax liability. Thus, we do not find any ground to interfere in the finding of fact recorded by the income tax Appellate Tribunal. No substantial question of law is involved in both the appeals and the same are hereby dismissed.