Source: https://taxcaselaw.com/income_tax_case_laws/section-162/delhi-h-c-assessee-was-engaged-in-business-of-providing-consultancy-services-to-foreign-clients-from-whom-it-earned-foreign-exchange/
Timestamp: 2019-04-19 21:22:40+00:00

Document:
A.K. Sikri And Siddharth Mridul, JJ.
3. The order of the Assessing Officer was upheld by the CIT(A) as well as Tribunal.
(a) The issue whether Indian expenses were to be taken into account for purposes of calculation of deduction, at the time of the filing of the return of income, was debatable.
(b) No satisfaction was recorded in the assessment order while initiating proceedings under section 271(1)(c) of the Act.
(c) The Assessing Officer having allocated/apportioned Indian expenses on estimate basis, the same could not constitute ground for levying penalty.
9. The Tribunal by a combined order deleted the penalty levied for the assessment years 1994-95 to 1996-97 on the grounds that (a) no satisfaction for initiation of penalty proceedings was discernible from the reading of the assessment orders; (b) the short allowance of deduction under section 80-O of the Act being made on estimate, the assessee could not be penalized by way of levy of penalty for furnishing inaccurate particulars of income. The Tribunal did not, however, accept the other submission of the assessee viz. since the issue whether Indian expenses would enter the computation of deduction under section 80-O of the Act was debatable, at the time when the return of income was filed, no penalty was exigible. According to the Tribunal the matter stood conclusively settled against the assessee by the jurisdictional High Court decision in the case of CIT v. Marketing Research Corpn.  61 CTR (Delhi) 204.
8. The Revenue has come up in appeal against the order of the Tribunal deleting the penalty levied under section 271(1)(c) of the Act. The assessee had also filed cross appeals bearing Appeal Nos. 1248, 1258 and 1308 of 2008. The appeals preferred by the assessee were dismissed vide order dated 26-10-2009 on the ground that the same shall be regarded as cross-objections in the appeals filed by the Revenue and that the averments made in those appeals would be considered in appeals filed by the revenue.
(i ) Section 271(1B) of the Act is not violative of article 14 of the Constitution.
(ii) The position of law both pre and post-amendment is similar, inasmuch, the Assessing Officer will have to arrive at a prima facie satisfaction during the course of proceedings with regard to the assessee having concealed particulars of income or furnished inaccurate particulars, before he initiates penalty proceedings.
(iii) ‘Prima facie’ satisfaction of the Assessing Officer that the case may deserve the imposition of penalty should be discernible from the order passed during the course of the proceedings. Obviously, the Assessing Officer would arrive at a decision, i.e., a final conclusion only after hearing the assessee.
(iv) At the stage of initiation of penalty proceeding the order passed by the Assessing Officer need not reflect satisfaction vis-a-vis each and every item of addition or disallowance if overall sense gathered from the order is that a further prognosis is called for.
(v ) However, this would not debar an assessee from furnishing evidence to rebut the prima facie satisfaction of the Assessing Officer; since penalty proceeding are not a continuation of assessment proceedings. See Jain Brothers v. Union of India  77 ITR 107(SC).
(vi) Due compliance would be required to be made in respect of the provisions of sections 274 and 275 of the Act.
(vii) The proceedings for initiation of penalty proceeding cannot be set aside only on the ground that the assessment order states ‘penalty proceedings are initiated separately’ if otherwise, it conforms to the parameters set out herein above are met.
According to him, in these circumstances, the only alternative was to arrive at the net foreign income was to estimate such expenditure in the ratio of proportion of foreign income to the total income, which was Rs. 12.27 per cent. Thereafter, he calculated the eligible deduction under section 80-O, arrived at the taxable income, and observed that the penalty under section 271(1)(c) of the Act had been initiated.
It becomes clear from the reading of the assessment order in its entirety that the Assessing Officer has been influenced by the consideration that not only the assessee had interpreted the law wrongly, but also did not furnish the details of expenditure attributable to such foreign income because of which penalty proceedings under section 271(1)(c) were initiated by him. Thus, his prima facie satisfaction about non-furnishing of particulars/inaccurate particulars is clearly discernible.
(iii) Harigopal Singh v. CIT  258 ITR 85 (Punj. & Har.).
In the aforesaid cases, it was held that where the assessee’s returned his income on estimate basis but the Assessing Officer as well as the CIT(A) admitted the different estimate, it was a case of difference of opinion and on estimation of disallowance, no penalty under section 271(1)(c) can be made. No doubt, in those cases where there would be difference of opinion as regards estimate, it cannot be said that the assessee had concealed the particulars of income. However, that is not the position in the instant case. We are of the opinion that the Tribunal had wrongly placed reliance on the judgments, which have no bearing on the issue. The matter in issue in the present case is entirely different. The assessee, for claiming deduction under section 80-O of the Act, wanted the same at the rate of 50 per cent of the gross income received in convertible foreign exchange in India provided by it to foreign clients. The Assessing Officer, however, was of the view that on correct interpretation under section 80-O, deduction is restricted to the net income and, therefore, expenditure incurred in India for earning the foreign exchange had to be deducted. The Assessing Officer, therefore, wanted the assessee to furnish the details of expenses. As the assessee failed to do the needful in respect of various particulars demanded, the Assessing Officer was left with no alternative but to estimate such expenditure in the ratio of proportion of foreign income to the total income.
We are, therefore, of the opinion that the Tribunal is not correct in holding that since the expenditure was arrived at on the estimation, the penalty cannot be imposed. Things would have been different, had the assessee furnished the details, but for some reason, the Assessing Officer had adopted another yardstick. That is not the situation here.
(c) Re: Cross-objection – As pointed out earlier, the assessee had also raised one more ground before the Tribunal, viz., the issue relating to the adjustment of expenses and entitlement of deduction under section 80-O on the gross income or net income was a debatable issue at that time, as there were conflicting judicial opinions of different Courts/Benches of Tribunal. The Tribunal, however, has opined that there was no cleavage of judicial opinion on the question of availability of deduction under section 80-O of the Act on gross or net income. The Tribunal has relied upon the decision of the Supreme Court in the case of Distributors (Baroda) (P.) Ltd. v. Union of India  155 ITR 120 and the decision of this Court in the case of Marketing Research Corpn. (supra) in support of its conclusion that on the date of filing of return, the controversy was well-settled, viz., the deduction under section 80-O of the Act had to be allowed on net income.
In the cross-objections filed by the assessee, this finding of the Tribunal is assailed. The argument advanced by the assessee, in this behalf, has two limbs. In the first place, it is argued that the Tribunal has completely missed the import/merit of appellant’s arguments. The controversy raised by the appellant was not whether the deduction under section 80-O had to be allowed on gross or net income. It is the settled proposition of law that deduction under section 80-O had to be allowed only on net income. The controversy in dispute was whether expenses incurred in India could be apportioned to the earning of foreign consultancy income for purposes of allowing deduction under the said section was admissible at the rate of 50 per cent of the income in convertible foreign exchange. The section does not refer to the expenditure incurred in India. The decision of this Court in Marketing Research Corpn. (supra) relied upon by the Tribunal was in the context of provisions of section 80-O, as it stood prior to the amendment by the Finance Act, 1974. The same had no application in the context of the provisions of the said section as applicable to the year under appeal. It was argued that despite this decision, the matter was referred to Division Bench by this Court in CIT v. Chemical & Metallurgical Design Co. Ltd.  111 Taxman 392. The judgment of the Full Bench in that case, which is reported as CIT v. Chemical & Metallurgical Design Co. Ltd.  247 ITR 749 (Delhi), rendered on 15-12-2000 that the issue was finally determined holding that in view of section 80AB of the Act, deduction under section 80-O of the Act had to be allowed on the net income after taking into account expenses incurred, including in India. Other limb of the argument is that even if the deduction was allowed on the net amount of foreign exchange after deducting the expenditure incurred in India, the same would not give rise of penalty for concealment of income or furnishing inaccurate particulars thereafter, as the assessee was able to demonstrate that claim made was bona fide and material particulars relating to were duly disclosed.
9. It is clear from the aforesaid arguments that the learned counsel for the assessee accepts that there was no controversy at least to the extent that deduction under section 80-O had to be allowed only on net income. According to him, however, in the process of arriving at net income, whether expenditure incurred even in India was to be deducted or not was in the realm of controversy on which no authoritative pronouncement was there. Therefore, while preferring the claim of deduction under section 80-O of the Act, if the assessee had not adjusted the expenses incurred in India that was a bona fide move since the issue was debatable for want of authoritative pronouncement. This contention based on artificial distinction made between expenditure incurred abroad and in India does not appeal to us. Way back in the year 1985, the Supreme Court had interpreted these provisions in the case of Distributors (Baroda) (P.) Ltd. (supra). The categorical view of the Supreme Court was that the deduction required to be allowed was available only with respect to net amount as computed for the purpose of assessment to tax and not actual amount received. The Court was concerned, in that case, with the provision of section 80M of the Act relating to the deduction in respect of income from dividend. Legislative history of this provision along with sections 80A(2) and 80AA was taken note of along with various earlier pronouncements. Relying upon this judgment, this Court in Marketing Research Corpn.’s case (supra), which pertains to section 80-O of the Act reiterated that the deduction had to be computed not on the basis of gross income, but on the basis of net income. This judgment of the jurisdictional Court was binding on all the authorities including Assessing Officer, CIT(A) as well as ITAT. Reason for referring the matter to a Larger Bench was that the decision of Division Bench in Marketing Research Corpn.’s case (supra) was ex parte and it was also argued that there was material difference in the language of sections 80-O and 80M and, therefore, ratio of the Supreme Court in Distributors (Baroda) (P.) Ltd.’s case (supra) was not applicable while interpreting the provision of section 80-O of the Act, which is clear from the reading of Paras 3 to 5 of the order of Division Bench in Chemical & Metallurgical Design Co. Ltd.’s case (supra) referring the matter of Larger Bench. However, it would be interesting to note that this reference was made on 14-3-2000. In the present case, returns were filed and the assessment orders were made much prior to that, therefore, the assessee cannot take advantage of this reference order as he could not have foreseen that there would be a reference to a Larger Bench in future on such an issue. Moreover, merely because the matter was referred to the Larger Bench would not mean that the effect of the Division Bench’s order in Marketing Research Corpn.’s case (supra), which the Full Bench on that date and was binding on the authorities below was nullified. When this was a binding legal position prevailing at relevant time, in view of the aforesaid judgment of jurisdictional Court, the learned counsel for the assessee cannot be allowed to create the confusion or artificial controversy by referring to the decisions of the various Benches of the Tribunal.
10. We are, thus, of the opinion that the Tribunal was right in holding that there was no cleavage of opinion. Once the principle was laid down that the deduction under section 80-O had to be allowed only on net income, it was but obvious that expenditure incurred in India had also to be deducted to arrive at such a “net income”.
12. The upshot of the aforesaid discussion would be to hold that the penalty was rightly imposed by the Assessing Officer and confirmed by the CIT(A). We accordingly decide the question of law framed in favour of the revenue and against the assessee and thereby set aside the order of the Tribunal and restore the penalty orders passed by the Assessing Officer.
13. We, however, leave the parties without any costs.
This entry was posted in Section 162 and tagged 336 ITR, Delhi High Court, In favour of Revenue, penalty for furnishing inaccurate particulars of income, penalty u/s 271(1)(c).

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