ITR/59/1991 1/40 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No. 59 of 1991 For Approval and Signature: HONOURABLE MR.JUSTICE ANIL R. DAVE HONOURABLE MR.JUSTICE K.A.PUJ ================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================= BTX CHEMICAL PVT LTD - Applicant(s) Versus COMMISSIONER OF INCOME TAX - Respondent(s) ================================================= Appearance : MR RK PATEL for Applicant(s) : 1, MR MANISH R BHATT for Respondent(s) : 1, M/S.VYAS ASSOCIATES for Respondent(s) : 1, ITR/59/1991 2/40 JUDGMENT ================================================= CORAM : HONOURABLE MR.JUSTICE ANIL R. DAVE and HONOURABLE MR.JUSTICE K.A.PUJ Date : 28/07/2006 ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE K. A. PUJ) 1. This Income-tax Reference is arising out of the order of Income-tax Appellate Tribunal dated 20.9.1990 in R.A.No.413/Ahd/1989 and R.A.No.443/Ahd/1989, both for assessment year 1980-81. R.A. No.413/Ahd/1989 is filed by the assessee and at the instance of the assessee, the tribunal has referred to the following question of law for the opinion of this Court :- (a) Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in confirming the levy of penalty under Section 271(1)(c) of the I.T.Act, 1961 to the extent of ITR/59/1991 3/40 JUDGMENT the claim relatable to an amount of Rs.1,83,492/- ? 2. R.A. No.443/Ahd/1989 is filed by the Revenue and at the instance of the Revenue, following question of law is referred to for the opinion of this Court. (a) Whether, the appellate Tribunal is right in law and on facts in cancelling the penalty referable to income of Rs.1,00,112/-? The brief facts giving rise to the present reference are as under :- 3. The assessee is a private limited company carrying on the business of manufacturing and selling chemicals, Sodium Benzoate and Benzoate and Benzoic Acid at Baroda. The assessment year involved is 1980-81 for which the accounting period ended on 30.6.1979. Before few days from the close of its accounting period on 30.6.1979 a fire broke ITR/59/1991 4/40 JUDGMENT out in assessee's factory resulting in destruction of and/or substantial damage to its building, plant and machinery and finished or semi-finished goods, all insured. The assessee claimed (i) a sum of Rs.1,83,492/- from the Insurance Company on account of loss and damage to its plant and machinery on replacement cost basis and (ii) a sum of Rs.1,00,112/- on account of loss to its finished or semi-finished goods. The Insurance Company, however, paid, in the month of November/December, 1979, a sum of Rs.84,462/- in respect of the former claim and and a sum of Rs.56,173/- in respect of the latter. 4. The assessee filed its return of income for the year under consideration on 30.6.1980 declaring a loss of Rs.75,605/-. In its said return the assessee had claimed loss of Rs.1,83,492/- in respect of destruction of and/or damage to its plant and machineries. ITR/59/1991 5/40 JUDGMENT The Income-tax Officer, however, noted that the written down value of the building plant and machinery and the electric installations lost in fire was only Rs.74,349/- against which the assessee had received Rs.84,462/- from the Insurance Company. He, therefore, instead of allowing balancing depreciation, worked out profit under Section 41(2) of the Act at Rs.10,112/- (Rs.84,462 – Rs.74,350) and added the same to the income of the assessee. Consequently, loss claimed by the assessee on account of destruction of damage to plant and machinery was disallowed. In appeal, the learned CIT(A) upheld disallowance of Rs.1,83,492/- as being loss of capital nature. But with regard to addition of Rs.10,112/- on account of terminal allowance or profit under Section 41(2) of the Act, the learned CIT(A) directed the I.T.O to consider for taxation the amount of Rs.84,462/- received from Insurance Company for loss of capital asset, in the ITR/59/1991 6/40 JUDGMENT immediately succeeding year. 5. The assessee had further claimed an amount of Rs.1,00,112/- on account of loss of stock due to fire. The I.T.O noted that on physical verification of the stock, made after the incident, the assessee had valued its stock at Rs.2,46,545/- and had submitted the same valuation, as on 30.6.1979, to the bank also. The I.T.O., however, further noted that the assessee had claimed double deduction of this amount of Rs.1,00,112/-. In the first place, the said amount was debited to consumption of raw material account and in the second the same amount was also debited to the “P & L A/c.” under the head of “goods lost in fire”. The I.T.O., therefore, added the amount of Rs.1,00,112/- to the income of the assessee. In appeal, the learned CIT(A) confirmed the addition with the remarks that the appellant had tried to make its claim in this behalf twice. ITR/59/1991 7/40 JUDGMENT 6. During the course of assessment proceedings the I.T.O initiated penalty proceedings under Section 27(1)(c) of the Act for assessee's furnishing inaccurate particulars of its income and thus concealing its income in respect of the two amounts of Rs.1,83,492/- and Rs.1,00,112/-, as stated above. The assessee contested the notice with the contention that the difference in income as returned by it and as finally assessed arose from the wrong interpretation of the effect of loss of assets in fire, given in assessee's books of accounts, and resulted from circumstances beyond the control of the assessee. It denied the presence of any fraud or any gross or willful neglect on its part in furnishing the particulars of its income in the return and further contended that it entertained a bonafide belief that the loss in fire, caused to its assets and stock, would be admissible ITR/59/1991 8/40 JUDGMENT in law. In support of such explanation the assessee had mainly relied upon the Supreme Court decision in the case of Anwar Ali (76 ITR 696). The I.T.O did not feel satisfied with this explanation and rejecting the same, he held that the assessee had unsuccessfully attempted to conceal the particulars of its true income and had furnished inaccurate particulars thereof. In his opinion, the decision of the Supreme Court in the case of Anwar Ali (Supra) did not help the assessee, instead the decision of the Punjab and Haryana High Court in the case of Vishwakarma Industries Vs. C.I.T. (135 ITR 652) clearly justified the levy of penalty in the facts and circumstances of the instant case. He, therefore, levied penalty of Rs.1,50,000/- under Section 271(1)(c) of the Act. 7. In appeal, the learned CIT(A) confirmed the penalty levied by the I.T.O by holding that in the instant case, the assessee had falsely ITR/59/1991 9/40 JUDGMENT claimed deduction of capital loss in the Profit & Loss A/c and had also further fraudulently suppressed its closing stock by claiming double deduction in the trading account. In the opinion of the learned CIT(A), the assessee had attempted to reduce its taxable income and both the steps of the assessee, as mentioned above, amounted to concealment of particulars of income as well as furnishing of inaccurate particulars of its income with an intention to evade tax. While confirming the penalty the learned CIT(A) followed the decision of the Kerala High Court in the case of CIT Vs. India Sea Foods (1976) 105 ITR 708. 8. Being aggrieved by the said order of the learned CIT(A) the assessee preferred second appeal before the Tribunal and contended that the assessee-company had acted in good faith and in all bonafide in estimating its loss at Rs.1,83,492/- in ITR/59/1991 10/40 JUDGMENT respect of Plant and Machinery and at Rs.1,00,112/- for loss to its goods. It was emphasized that it was due to assessee's Chartered Accountant that loss to the goods was doubly shown in the books of the assessee. It was urged that the double claim could not have been suppressed by the assessee-company as the same was to affect the opening stock of the succeeding year and the mistake could have very well been detected. It was also pointed out that there had been no deliberate attempt on the part of the assessee to conceal its income. On behalf of the Revenue, it was highlighted that knowing very well that the fire had destroyed the capital assets of the assessee- company and it had lodged its claim with the Insurance Company for reimbursement of Plant and Machinery damaged by the fire on “replacement cost basis”,the assessee-company had not only chosen to claim deduction of Rs.1,83,492/- but had also insisted upon such ITR/59/1991 11/40 JUDGMENT a claim at the assessment and appellate stages of the proceedings knowing or having reasons to believe its claim to be untrue. In respect of the penalty referable to Rs.1,00,112/- i.e the amount of loss sustained by the assessee-company to its stock by fire, it was submitted on behalf of the Revenue that the claim for double deduction was deliberate and had not resulted from any clerical mistake or oversight on the part of the Chartered Accountant of the assessee-company. 9. The Tribunal, after considering the argument of the respective parties, came to the conclusion that the provisions of Explanation to Sec.271(1)(c) were not applicable to the instant case as they have not been applied by the Income-tax authorities. The Tribunal, therefore, proceeded on the footing that the burden to prove that the conduct of the assessee ITR/59/1991 12/40 JUDGMENT company was contumacious or dishonest and it had acted on defiance of law in the discharge of its obligation and had accordingly, concealed its income or had furnished inaccurate particulars of its income was on Revenue. With regard to penalty referable to the amount of Rs.1,83,492/- which had been claimed by the assessee-company as loss caused by fire to its plant and machinery, the Tribunal pointed out that the plant and machinery were capital assets of the assessee-company and it was getting depreciation upon them. The Tribunal further pointed out that the Insurance company had been moved by the assessee-company for replacement of the damaged plant and machinery on cost basis. The Tribunal, therefore, finally held that penalty referable to the aforesaid amount regarding capital loss but dishonestly claimed as trading loss in Profit & Loss A/c was well justified. This part of the Tribunal's ITR/59/1991 13/40 JUDGMENT findings has given rise to the assessee's prayer for reference on a question proposed by it. 10. With regard to penalty referable to Rs.1,00,112/- claimed as loss to the stock, the Tribunal held that the double claim for that amount had been made due to some bonafide mistake on the part of the assessee- company. The Tribunal observed that the said loss was to affect the opening stock in the next year and, therefore, could have been found out and would have not resulted in any advantage to the assessee. For these reasons, the Tribunal cancelled the penalty proportionately referable to the amount of Rs.1,00,112/-. This part of the Tribunal's order has given rise to the prayer for reference on the question proposed by the revenue. 11. Mr.R.K.Patel, learned advocate appearing ITR/59/1991 14/40 JUDGMENT for the assessee has submitted that the assessee has been in the business of chemical manufacture since 1969-70 and during the last about 10 years its record of performance has been absolutely clean and no major disallowances were ever made in past. He has further submitted that at the time of filing its return on 30.6.1980, the assessee had not been able to relieve itself of the shock of its life which had come in the form of a disastrous fire, burning assessee's capital assets and finished or semi-finished goods. It is further submitted that the fire had broken out on 17.6.1979 and soon thereafter the assessee had lodged its claim for reimbursement by the Insurance Company at Rs.1,83,492/- in respect of loss of plant and machineries and at Rs.1,00,112/- for loss of its goods. Under the given circumstances, the assessee had acted in good faith and in all bonafides in estimating its loss at those figures and could have, therefore, ITR/59/1991 15/40 JUDGMENT legitimately claimed these amounts as deductions. He has further submitted that the Chartered Accountant has audited and certified the loss in fire to the extent of Rs.1,83,492/- for the loss of plant and machineries, building, electrical installation etc, and a sum of Rs.1,00,112/- on account of loss of stock of finished goods in fire during the year ending 30.6.1979. He has further submitted that under the advice of Chartered Accountant the said loss has been adjusted in the books of account by giving necessary effects and the same to Profit and Loss Account and Balance Sheet. He has further submitted that there was nothing malafide in all that on the part of the assessee. He has further submitted that even in quantum appeal, the learned CIT(A) had deleted the addition, as made by the Income-tax Officer on account of terminal allowance or profit under Section 41(2) and had further directed the I.T.O to consider ITR/59/1991 16/40 JUDGMENT the amount of Rs.90,259/- as the written down value of the destroyed capital assets and not to charge any tax on Rs.84,362/-, the amount received by the assessee from the Insurance Company. 12. Mr.Patel has further submitted that at the time when the return was filed claiming the revenue loss, the legal position was not clear. This Court in the case of CIT vs. Vania Silk Mills P.Ltd., 107 ITR 300 has taken the view that the money received towards insurance claim on account of the damage or destruction of the capital assets is so received on account of the transfer within the meaning of Section 45 read with 2(47) of the Act and therefore chargeable to capital gains tax under the said Section. This decision has been challenged by that assessee before the Hon'ble Supreme Court and while reversing the judgment of this Court in the case of Vania Silk Mills P.Ltd vs. CIT, ITR/59/1991 17/40 JUDGMENT 191 ITR 647 (Supreme Court), the Hon'ble Supreme Court has observed that capital gains tax was attracted under Section 45 by transfer and not merely by extinguishment of rights howsoever brought about. Whatever the mode by which the transfer was brought about, the existence of the asset during the process of transfer was a precondition : unless the asset existed in fact, there could not be a transfer of it. The extinguishment of a right or rights should in any case be on account of its or their transfer in order to attract the provisions of Section-45. If it was not, and was on account of the destruction or loss of the asset, it was not a transfer and did not attract the provisions of Section 45 which related to transfer and not to mere extinguishment of a right. Hence, an extinghisuhment of right not brought by transfer was outside the purview of Section-45. The Court further held that in the case of damage, partial or complete, ITR/59/1991 18/40 JUDGMENT or destruction or loss of the property, there was no transfer of it in favour of a third party. The money received under the insurance policy in such cases was by way of indemnity or compensation for the damage, loss or destruction of the property. It was not in consideration of the transfer of the property or the transfer of any right in it in favour of the insurance company. It was by virtue of the contract of insurance or of indemnity, and in terms of the conditions of the contract. The Court further held that while paying for the total loss of or damage to the property, the insurance company took over such property or whatever was left of it, did not change the nature of the insurance claim which was indemnity or compensation for the loss. The payment by the insurance company was not in consideration of the property taken over by the insurance company. The Court therefore held that the amount received from the ITR/59/1991 19/40 JUDGMENT insurance company was not capital gains and was not chargeable to tax under Section-45. 13. Mr.Patel has further submitted that the decision of Vania Silk Mills P.Ltd vs. CIT (Supra) has come up for consideration before the Hon'ble Supreme Court in the case of CIT vs. Mrs.Grace Colli's and others, 248 ITR 323, wherein it is held that the definition of “transfer” in Section 2(47) clearly contemplates the extinguishment of rights in a capital asset distinct from and independent of such extinguishment consequent upon the transfer thereof. It is not correct to view the expression “ extinguishment of any rights therein” as not extending to mean the extinguishment of rights independent of or otherwise than on account of transfer. To read so is to render the expression ineffective and its use meaningless. The expression includes the extinguishment of rights in a capital asset independent of and ITR/59/1991 20/40 JUDGMENT otherwise than on account of transfer. The Court therefore disapproved the observation made by the earlier Bench of Hon'ble Supreme Court in the case of Vania Silk Mills P.Ltd vs. CIT (Supra). 14. Mr.Patel has, however, drawn the attention of the Court to the decision of the Madras High Court in the case of Neelamalai Agro Industries Ltd., vs. CIT, 259 IT 651, wherein it is held that in the case of Mrs.Grace Colli's (2001) 248 ITR 323(SC), the Court did not have occasion to go into the question as to whether the destruction of a capital asset which as a consequence brings about the extinguishment of the rights of the assessee-owner in such asset, would amount to transfer. The Court did not hold that Vania Silk Mills P.Ltd's case 191) ITR 647 (SC) was wrongly decided, or that the definition of “transfer” in Section 2(47), particularly, the use of the words “extinguishment of any ITR/59/1991 21/40 JUDGMENT rights therein” would cover cases of destruction of the capital asset. Cases such as the destruction of the capital asset in a fire, or its complete loss as in the case of sinking of a vessel in the sea, cannot be regarded as having been brought within the fold of definition of “transfer” in Section 2(47) by reason of what has been said and laid down in the case of Mrs.Grace Colli's (2001) 248 ITR 323(SC). The Court therefore held that the law laid down in Vania Silk Mills P.Ltd's case (1991) 191 ITR 647 (SC), that extinguishment of rights in a capital asset as a necessary consequence of destruction of the asset does not amount to transfer, has not been overruled by the Apex Court in the case of Mrs.Grace Colli's (2001)248 ITR 323. 15. Based on the aforesaid legal position Mr.Patel has strongly urged that there is no justification in arriving at the conclusion ITR/59/1991 22/40 JUDGMENT that “knowing very well that the fire had destroyed the capital assets of the assessee- company and it had lodged its claim with the Insurance Company for reimbursement of Plant and Machinery damaged by the fire on “replacement cost basis”, the assessee- company had not only chosen to claim deduction of Rs.1,83,492/- but had also insisted upon such a claim at the assessment and appellate stage of the proceedings knowing or having reasons to believe the same to be untrue.” 16. Mr.Patel has further relied on the decision of this Court in the case of National Textiles vs. CIT, 249 ITR 125, wherein it is held that in order to justify the levy of penalty, two factors must co- exist, (i) there must be some material or circumstances leading to the reasonable conclusion that the amount does represent the assessee's income. It is not enough for the ITR/59/1991 23/40 JUDGMENT purpose of penalty that the amount has been assessed as income, and (ii) the circumstances must show that there was animus, i.e conscious concealment or act of furnishing of inaccurate particulars on the part of the assessee. The Court further held that where the circumstances do not lead to the reasonable and positive inference that the assessee's case is false, the assessee must be held to have proved that there was no means rea or guilty mind on his part. Even in this view of the matter the explanation alone cannot justify levy of penalty. Absence of proof acceptable to the Department can not be equated with fraud or willful default. 17. Mr.Patel has further relied on the decision of this Court in the case of Sarabhai Chemicals Pvt. Ltd., vs. CIT, 257 ITR 355, wherein it is held that deeming fiction contained in Explanation 1 to Section ITR/59/1991 24/40 JUDGMENT 271(1)(c) of the Income-tax Act, 1961, that the added/disallowed amounts represent the income in respect of which particulars have been concealed will not apply if the explanation that was given by the assessee in the quantum proceedings which he could not substantiate in those proceedings was (i) bona fide and(ii) if he had disclosed all the facts relating to the same and material to the computation of his total income. 18. Mr.Patel further invited the Court attention to para-61.8 of Circular No.204, dated July 24, 1976 being the Explanatory notes on the provision of the Taxation Laws (Amendment) Act, 1975 effective from 1.4.1976 and 1.4.1977. This circular is reported in 110 ITR (Statute) page-21. It says that new explanation 1 provides that where in respect of any facts material to the computation of his total income, an assessee fails to offer an explanation or is unable to substantiate ITR/59/1991 25/40 JUDGMENT an explanation offered by him or offers an explanation which is found to be false, the amount added or disallowed in computing the total income of such person as a result thereof will be treated as his concealed income. If, however, the explanation offered by the assessee is bona fide and all the facts relating to the explanation and material to the computation of total income have been disclosed by the assessee, Explanation 1 will not be applicable. Precisely for this reason, the Income-tax Officer has not applied Explanation-1 to the facts of the assessee's case. 19. With regard to the levy of penalty relatable to the sum of Rs.1,00,112/- for which the revenue is in reference, Mr.Patel has submitted hat it was a bona fide mistake of assessee's Chartered Accountant that the said amount was doubly claimed by the assessee. He has further submitted that the ITR/59/1991 26/40 JUDGMENT penalty should not be levied for bona fide mistake and for those mistakes which were quite apparent from the record and could have never been suppressed by the assessee, even if it had so desire. The double claim was to affect the opening stock in the succeeding year and mistake could have very well been known. In this connection Mr.Patel has relied on the decision of this Court in the assessee's own case, namely, B.T.X. Chemicals (P) Ltd., and others vs. Suraj Bhan and another, 177 ITR 425, wherein it is held that an assessee can be prosecuted only if it is shown that he had a malafide intention or mens rea for committing the particular crime. A bona fide mistake made by the assessee while filing in his income-tax return would not necessarily amount to an intention to commit a crime punishable under Section 276C of the Income-tax Act, 1961. This Court has held that the return that was filed on June 30, 1980, pertained to the accounting period ITR/59/1991 27/40 JUDGMENT which ended on June 30, 1979. It would, therefore, reflect the picture of the company's finance and the company's affairs between the period July 1, 1978, and June 30, 1979. A thing which transpired in December, 1979, namely, reimbursement by the insurance company would not be reflected in such a return because it was an event which had taken