I.T.A. Nos.410 to 412 of 2009 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH I.T.A. Nos.410 to 412 of 2009 DATE OF DECISION: NOVEMBER 19, 2009 Commissioner of Income Tax-II, Ludhiana .....APPELLANT Versus M/s Arisudana Spinning Mills Ltd., Ludhiana ....RESPONDENT CORAM: HON'BLE MR.JUSTICE SATISH KUMAR MITTAL HON'BLE MR.JUSTICE MEHINDER SINGH SULLAR --- Present: Mr. Rajesh Sethi, Advocate, for the appellant. .. SATISH KUMAR MITTAL, J. This order shall dispose of three appeals bearing ITA Nos.410, 411 and 412 of 2009, filed by the revenue under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as `the Act'), which are arising from the common order dated 28.11.2008 passed by the Income Tax Appellate Tribunal (hereinafter referred to as `the ITAT') in case of the assessee pertaining to three Assessment Years i.e. 2000-01, 1998-99 and 1997-98, respectively, whereby three appeals preferred by the revenue against the common order of the CIT(A) deleting the levy of penalty imposed upon the assessee under Section 271(1)(c) of the Act, have been dismissed. In the present case, the assessee is engaged in the business of manufacturing of yarn and trading in wool. In its return of income, the I.T.A. Nos.410 to 412 of 2009 -2- assessee claimed deduction under Section 80 IA of the Act in respect of profits derived from trading turnover i.e. trading in the raw wool and knitted cloth. The return of income filed by the assessee was accompanied by Audited Balance Sheet, Profit & Loss Account and an Audit Report in Form No.10CCB relating to the claim of deduction under Section 80 IA of the Act. The Assessing Officer denied the said deduction to the assessee while coming to the conclusion that deduction under Section 80 IA was allowable only in respect of income derived from manufacturing of goods and not from trading in the raw wool and knitted cloth. The Assessing Officer also initiated the penalty proceedings under Section 271(1)(c) of the Act for furnishing inaccurate particulars of income in its return with an intention to evade tax. The order of the Assessing Officer for not allowing the aforesaid deduction was set aside by the CIT(A), but the ITAT while setting aside the order of the CIT(A) confirmed the order of the Assessing Officer by relying upon the decision dated 17.8.2006 given by this Court in M/s. Liberty India v. Commissioner of Income-Tax, (2007) 293 ITR 520. After the decision of the ITAT, the penalty proceedings were finalized and penalties (Rs.1,50,000/-, Rs.5,50,000/- and Rs.8,00,000/-) under Section 271(1)(c) of the Act were imposed upon the assessee. Aggrieved against the orders of penalties, the assessee preferred appeals before the CIT(A), who vide consolidated order dated 3.4.2008 deleted the penalties imposed under Section 271(1)(c) of the Act. Against the orders of the CIT(A), the revenue preferred appeals, which have been dismissed by the ITAT by a common order dated 28.11.2008 while confirming the order of deletion of penalty passed by the CIT(A). Against the said order, the revenue filed the instant I.T.A. Nos.410 to 412 of 2009 -3- appeals raising the following substantial questions of law:- “(i) Whether on the facts and in law the ITAT was justified in deleting the penalty u/s 271(1(c) amounting to Rs.1.50 lakhs imposed by the Assessing Officer ignoring the fact that the assessee violated the provisions of Section 80 IA of the Income-tax Act, 1961 which attracted penalty under section 271(1)(c) of the Income-tax Act, 1961? (ii) Whether on the facts and in law the ITAT was justified in deleting the penalty u/s 271(1(c) amounting to Rs.5.50 lakhs imposed by the Assessing Officer ignoring the fact that the assessee violated the provisions of Section 80 IA of the Income-tax Act, 1961 which attracted penalty under section 271(1)(c) of the Income-tax Act, 1961? (iii) Whether on the facts and in law the ITAT was justified in deleting the penalty u/s 271(1(c) amounting to Rs.8 lakhs imposed by the Assessing Officer ignoring the fact that the assessee violated the provisions of Section 80 IA of the Income-tax Act, 1961 which attracted penalty under section 271(1)(c) of the Income-tax Act, 1961? We have heard the counsel for the appellant and gone through the orders of the ITAT. Learned counsel for the appellant argued that the assessee patently made a wrong claim of deduction of profits earned from trading activities under Section 80 IA of the Act, whereas it was not entitled for the said benefit as per the law laid down by this Court in M/s Liberty India's case (supra) which has been upheld by the Supreme Court in M/s Liberty India vs. Commissioner of Income-Tax, (2009) 317 ITR 218. In these facts, the assessee could not justify the bona-fideness of the claim of deduction I.T.A. Nos.410 to 412 of 2009 -4- under Section 80 IA in its return of income. Learned counsel further argued that the burden was on the assessee to prove that failure to return the correct income was for bona fide consideration, but the said burden was not discharged by the assessee. Learned counsel argued that the observations made by the CIT(A) that mens rea is required to be proved for levy of such penalty, is contrary to the recent decision of the Supreme Court in Union of India & Ors. vs. Dharamendra Textile Processors & Ors., (2008) 306 ITR 277. Therefore, the ITA was not justified in confirming the order of payment of penalty imposed under Section 271(1)(c) of the Act. After considering the submissions made by the learned counsel for the appellant, we do not find any merit in these appeals. In our opinion, the ITAT has deleted the penalty imposed under Section 271(1)(c) on the assessee after recording a finding of fact that the assessee in its return of income adequately disclosed all the relevant facts by accompanying the relevant documents. In this regard, the following finding has been recorded by the ITAT:- “.....In this connection, a salient feature which is evident from the record is that the claim of the assessee made in the return of income, though not found acceptable, did not suffer from the vice of non disclosure. We find that the return of income filed by the assessee was accompanied by audited Balance-sheet, Profit and Loss Account and also an Audit Report in Form No.10CCB relating to the claim of deduction u/s 80IA of the Act. Though the Assessing Officer has noted in the assessment order that the assessee had not filed separate trading, profit and loss account for the manufacturing and trading activities, yet the factum of the assessee having claimed deduction u/s 80 IA was evident from the audit report in form No.10CCB filed along with I.T.A. Nos.410 to 412 of 2009 -5- the return of income. In the assessment order there is no charge against the assessee that it had not disclosed any information or material required to compute the income for the year under consideration. Therefore, it would not be wrong to deduce that so far as the claim of the assessee for deduction u/s 80 IA was concerned, the same was adequately disclosed in the return of income and the accompanying documents.” In view of the aforesaid finding, the ITAT while relying upon the decision of the Supreme Court in T.Ashok Pal vs. CIT, 292 ITR 11 (S.C.), held that the penalty under Section 271(1)(c) was not allowable where the claim of the assessee was based on the report of the expert. Since the return of income was accompanied by the duly audit report required under Section 80 IA, the penalty cannot be imposed, particularly when there is nothing on record to suggest that the report of the auditor was collusive. The ITAT has further recorded a finding that the assessee bona fidely claimed the deduction under Section 80 IA with regard to the profits from trading in the raw wool and knitted cloth. In this regard, the following finding has been recorded by the ITAT:- “....Firstly, as noticed earlier, the claim of the assessee was adequately disclosed in the return of income and the accompanying documents. Secondly, the assessee when called upon to justify the claim during the assessment proceedings, referred to the judgment of Madras High Court in the case of CIT v. Ashok Leyland Ltd., 130 ITR 900 to contend that even with regard to the profit on sale of raw wool and knitted cloth, it was eligible for deduction u/s 80 IA. In the case before the Hon'ble Madras High Court, the issue related to an assessee which was manufacturing automobile trucks, the profits from sale of imported spare I.T.A. Nos.410 to 412 of 2009 -6- parts to the purchasers of trucks for servicing the vehicles was sought to be claimed as eligible for 80I benefits. The Hon'ble High Court accepted the stand of the assessee in that case. On the strength of the reasoning adopted by the Hon'ble Madras High Court as above, the assessee canvassed before the Assessing Officer that the profits in question were eligible for 80 IA benefits. Though the subsequent development in the case of the assessee show that the said view has not found favour with the Income-tax authorities. However, to say that the claim of the assessee made in the return of income was fanciful or was completely untenable, would be a misnomer. Therefore, in our considered opinion, the claim of the assessee made in the return of income could be said to have rested on a bona fide consideration.” The aforesaid finding of fact arrived at by the ITAT cannot be said to be perverse or against the material available on the record. When the returns of income were filed, the issue with regard to entitlement of deduction under Section 80 IA on the profits derived from trading turnover i.e. trading in the raw wool and knitted cloth, was debatable, and this issue was settled with the judgment of this Court in M/s Liberty India Ltd. (supra) which has been upheld by the Supreme Court in M/s Liberty India (supra). Therefore, the ITAT has rightly come to the conclusion that the assessee did not deliberately or consciously concealed the true particulars of income or furnished inaccurate particulars of income. The judgment cited by the counsel for the appellant is not applicable in the facts and circumstances of the case, where the penalty has been deleted on the basis of aforesaid finding of fact. In view of the aforesaid finding of fact, in our opinion, no I.T.A. Nos.410 to 412 of 2009 -7- substantial question of law is arising out of the order of the ITAT. Hence, these appeals are dismissed. (SATISH KUMAR MITTAL) JUDGE November 19, 2009 (MEHINDER SINGH SULLAR) vkg JUDGE