M/s. S.K.Dynamics Pvt. Ltd., New Delhi V. ACIT, Dehradun

ITA 136/DEL/2010

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 3617 (ITAT-DELHI)
• Duration Of Justice: 5 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-06-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Next Hearing Date: 21-06-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 11-01-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Bonafide belief; Wrong claim; Benefit of exemption; Set aside
• Section: 271(1)(c); 143(3); 80IB; 274; 80HH; 27

Judgement Text

ITA NO. 136/DEL/2010 A.Y. 2005-06 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH G NEW DELHI BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER I.T.A. NO. 136/DEL/2010 A.Y. : 2005-06 M/S. S.K. DYNAMICS PVT. LTD. VS. ASSTT. COMMISSIO NER OF INCOME TAX, C/O YOGESH K. JAGIA, CIRCLE-1, DEHRADUN ADVOCATE, 110-B, HUMAYUNPUR, SAFDARJUNG ENCLAVE, NEW DELHI 110 029 (PAN: AAKCS1322G ) [APPELLANT] (RESPONDENT) ASSESSEE BY : SHRI YOGESH KUMAR JAGIA, ADVOCATE DEPARTMENT BY : MRS. LEENA SRIVATAVA, DR PER SHAMIM YAHYA: AM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE LD. COMMISSIONERS OF INCOME TAX (APPEALS) DATED 17.11.2 009 PERTAINING TO ASSESSMENT YEAR 2005-06. 2. THE ISSUE RAISED IS THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFIRMING THE LEVY OF PENALTY U/S 271(1)(C) OF THE IT ACT. 3. THE ASSESSEE IN THIS CASE WAS CARRYING ON SCIEN TIFIC RESEARCH DEVELOPMENT BUSINESS. THE INCOME EARNED WAS CLAIMED FOR EXEMP TION U/S 80IB. ASSESSING OFFICER NOTED THAT THE DURING THE YEAR UNDER CONSI DERATION ASSESSEE HAS RECEIVED INTEREST ACCRUED ON FDR OF RS. 30,44,710/- AND TH E SAME HAS ALSO BEEN CLAIMED AS BUSINESS INCOME. ASSESSING OFFICER WAS OF TH E OPINION THAT THE SAID INTEREST ITA NO. 136/DEL/2010 A.Y. 2005-06 2 ON FDR NEEDED TO BE TAXED AS INCOME FROM OTHER SOUR CES. THE ASSESSEE SUBMITTED THE FOLLOWING EXPLANATIONS:- THE INTEREST FROM BANK FDRS WAS BETWEEN 5.75% TO 10% IN THAT YEAR, WHILE THE INFLATION WAS ALMOST 4%. THIS SHOWS THAT MAJOR PART OF THE BANK INTEREST ON FDRS IS JUST COMPENSATING THE INFLATION. MOST OF THE FDRS CAN BE SPLITED INTO TWO CATEGORIES. FIRST CATEGORY FDRS AR E HAVING MATURITY ON FIRST WEEK OF EVERY MONTH TO SUPPORT MONTHLY RUNNING EXPE NDITURE OF R&D. SECOND TYPE OF LONG TERM FDRS AND INTEREST IS PAID QUARTERLY AND CONVERTED INTO NEW FDRS AFTER MATURITY. SINCE 1995, THE ASSESSEE COMPANY IS RECOGNIZED DSIR AS AN IN HOUSE R&D UNIT. MAIN BUSINESS OF THE ASSESSEE WAS TO CONDUCT R&D AND EARN FROM THAT. THE AMOUNT KEPT IN BANK DEPOSIT WAS EARNED FR OM R&D ONLY AND IS USED IN R&D ONLY. THE R&D CYCLE IS LONG TERM FROM 3 TO 5 YEARS. NO F INANCIAL INSTITUTION/ BANK / VENTURE CAPITAL INVESTOR PUT ANY FUND IN R&D BECA USE OF VERY HIGH RISK OF RETURNS. THEREFORE, OWN RESERVES ARE REQUIRED WHI CH ARE KEPT IN THE BANK IN THE FORM OF FDR. HENCE, FDR ARE THE INTEGRAL PAR T OF OUR R&D BUSINESS. MOST OF THE INVESTMENT IN R&D BUSINESS IS RUNNING E XPENDITURE AND INTELLECTUAL PROPERTY OF EMPLOYEES. INFRASTRUCTRUR E IS IMPORTANT BUT IT IS A ONE TIME CAPITAL INVESTMENT. CONSUMPTION OF RAW MAT ERIAL IS VERY LESS AND UNCERTAIN WHILE IT IS WELL RAW MATERIAL OF R&D COMP ANY. THE DETAILS OF FDR ACCOUNT (ALREADY SUBMITTED) CLEARLY SHOW THAT THIS MONEY IS USED AS MONTHLY RUNNING EXPENSE TO CONTINUE R&D. IT IS AL SO CLEAR THAT THE RECEIPTS OF THAT YEAR ARE USED AGAIN IN FDRS FOR FUTURE YEAR S. THIS IS THE ONLY WAY TO RUN AN R&D COMPANY WITHOUT THE GRANT FROM GOVERNMEN T. MOST OF THE R&D PROJECTS ARE SELF FUNDED BY ASSESSEE. THEREFORE , THE FDRS IN BANK DEPOSIT IN AN INTEGRAL PART OF R&D BUSINESS. HERE THE ASSESSEE WANT TO MENTION THE EXTRACT AS UN DER:- WHERE ASSESSEE ELECTRICITY DISTRIBUTING COMPANY HAD TO DEPOSIT CONTINGENCY RESERVE AS STIPULATED IN THE ELECTRICIT Y (SUPPLY) ACT IN SECURITIES AUTHORISED UNDER THE INDIAN TRUSTS ACT, ASSESSEE WA S ENTITLED TO DEDUCTION IN RESPECT OF INTEREST EARNED FROM INVESTMENT IN SE CURITIES THERE BEING DIRECT AND PROXIMATE CONNECTION BETWEEN CARRYING ON BUSINESS AS LICENSE ITA NO. 136/DEL/2010 A.Y. 2005-06 3 UNDER THE ELECTRICITY (SUPPLY) ACT AND INCOME DERIV ED BY WAY OF INTEREST FROM INVESTMENT IN SECURITIES. - VELLOR ELECTRIC CORP LTD. VS. C.I.T. (1997) 93 TAXM AN 401/227 ITR 557 (SC). AS THE FDRS IN BANK DEPOSIT HAS DIRECT AND PROXIMA TE CONNECTION WITH THIS R&D BUSINESS, THE ASSESSEE BELIEVES THAT THE BANK INTEREST IS PART OF R&D BUSINESS AND IS CLAIMED IN DEDUCTION U/S 80-IB(8A). 3.1 ASSESSING OFFICER DID NOT FIND THE ASSESSEES SUBMISSION SATISFACTORY. HE REFERRED THE DECISION OF THE HONBLE APEX COURT R ENDERED IN THE CASE OF PANDIAN CHEMICALS LTD. VS. C.I.T. 262 ITR 278. HE HELD TH AT THOUGH THIS DECISION WAS RENDERED IN THE CONTEXT OF SECTION 80HH, THE RATIO OF THIS DECISION IS SQUARELY APPLICABLE IN THE CASE OF THE ASSESSEE. REFERRING TO SOME OTHER CASE LAWS ASSESSING OFFICER HELD AS UNDER:- THUS FROM ABOVE DISCUSSION THIS IS CLEAR THAT : A) TO OBTAIN THE BENEFIT OF DEDUCTION, THE ASSESSEE H AD TO ESTABLISH THAT THE PROFITS AND GAINS WERE DERIVED FROM ITS INDUSTR IAL UNDERTAKING AND IT IS JUST NOT SUFFICIENT THAT A COMMERCIAL CONNECTION WAS ESTABLISHED BETWEEN THE PROFITS EARNED AND THE INDUSTRIAL UNDER TAKING. THE INDUSTRIAL UNDERTAKING ITSELF HAD TO BE THE SOURCE OF THE PROFIT. THE BUSINESS OF THE INDUSTRIAL UNDERTAKING HAD DIRECTLY TO YIELD THAT PROFIT. THE INDUSTRIAL UNDERTAKING HAD THE DIRECT SOURCE OF THAT PROFIT AND NOT A MEANS TO EARN ANY OTHER PROFIT. B) THERE MUST, BE FOR THE APPLICATION OF THE WORDS DE RIVED FROM, A DIRECT NEXUS BETWEEN THE PROFITS AND GAINS AND THE INDUSTR IAL UNDERTAKING. THE NEXUS HAS TO BE DIRECT AND NOT JUST INCIDENTAL. HENCE THE INTEREST INCOME OF RS. 3044710.05 IS CONS IDERED AS INCOME FROM OTHER SOURCES. PENALTY PROCEEDINGS U/S 271(1) (C) ARE INITIATED SEPARATELY FOR FURNISHING INACCURATE PARTICULARS AN D THEREBY CONCEALING THE INCOME. ITA NO. 136/DEL/2010 A.Y. 2005-06 4 3.2 IN THE PENALTY PROCEEDINGS THE ASSESSING OFFIC ER WAS OF THE OPINION THAT THE ASSESSEE AND HIS CHARTERED ACCOUNTANTS HAVE DE LIBERATELY TRIED TO INCLUDE THE INCOME FROM OTHER SOURCES UNDER THE HEAD PROFI T AND GAIN WHICH IS EXEMPTED U/S 80IB OF THE IT ACT. HE CONCLUDED AS UNDER:- FROM THE FACTS OF CASE, IT IS APPARENT THAT THE AS SESSEE HAS MISUSED THE PROVISION OF EXEMPTION BY MIXING HIS INCOME EARNE D UNDER THE HEAD INCOME FROM OTHER SOURCES INTO THE PROFIT AND GAI N HEAD. MOREOVER, IN THEIR AUDITED REPORT AT SCHEDULE NO. 12 THE ASESSEE HAS RIGHTLY PLACED THE INTEREST INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES. SECONDLY THE ASSESSEE HIMSELF HAS ADMITTED BY NOT CONTESTING ADD ITION OF RS. 86596/- ON ACCOUNT OF INTEREST RECEIVED FROM INCOME TAX DEPART MENT AS INCOME FROM OTHER SOURCES BEFORE THE C.I.T.(A). FROM THE ABOV E DISCUSSION, IT CAN BE CLEARLY NOTICED THAT THE ASSESSEE HAS MISUSED THE P ROVISION OF EXEMPTION BY TREATING THE INCOME FROM OTHER SOURCES AS INCOME FROM PROFIT AND GAIN FROM BUSINESS. THE INCOME TAX ACT BLINDLY REPOSE FAITH ON THE ASSESSEE AND ACCEPTS ALL RETURN U/S 143(1). SAMPLE CHECKINGS ARE CARRIED OUT U/S 143(3) OR BY ANY OTHER PROVISION. HAD THIS CASE NO T BEEN SELECTED FOR SCRUTINY THE EVADED INCOME BY THE ASSESSEE WOULD HA VE GONE UNTAXED. THERE MAY BE THOUSANDS PLEA FOR ONES PROTECTION AN D DEFENCE BUT A SIMPLE ISSUE I.E. INCOME FROM PROFIT AND GAIN FROM BUSINESS AND INCOME FROM OTHER SOURCES CAN EASILY BE DIFFERENTIATED BY A QUALIFIED CHARTERED ACCOUNTANT AND A BUSINESSMAN WHO WAS CARRYING BUSIN ESS OF R&D SINCE 1994. IN THE LIGHT OF ABOVE DISCUSSION, ASSESSING OFFICER S ORDER AND LD. C.I.T. (A)S ORDER, THE REPLIES FILLED BY THE ASSES SEE ARE NOT TENABLE FOR NON IMPOSING OF PENALTY U/S 271(1)(C) ON THE SIMPLE REA SON IN THIS CASE I.E. DISTINGUISHING OF INCOME FROM PROFIT AND GAINS AND INCOME FROM OTHER SOURCES. OUT OF THE ABOVE TWO HEADS THE FIRST ONE IS QUALIFIED FOR DEDUCTION U/S 80IB(8A) AND THE SECOND ONE DOES NOT QUALITY THE DEDUCTION U/S 80IB(8A). THEREFORE, THE ASSESSEE DELIBERATELY , FILED INACCURATE PARTICULARS OF INCOME BY MIXING TWO ABOVE MENTIONED HEADS OF INCOME TO TAKE BENEFIT OF EXEMPTION CLAUSE IN TOTALITY. TH E ASSESSEE ASSISTED BY CHARTERED ACCOUNTANTS HAS VIOLATED THE PROVISION OF 271(1)(C) AND ITS EXPLANATIONS, THEREFORE, RENDERED HIMSELF LIABLE FO R IMPOSITION OF PENALTY U/S 271(1)(C) OF THE INCOME TAX ACT, 1961. ON THE BASIS OF ABOVE DISCUSSION I HAVE ARRIVED TO THE CONCLUSION THAT THE ASSESSEE HAS WILLFULLY FILED ITA NO. 136/DEL/2010 A.Y. 2005-06 5 INACCURATE PARTICULARS TO EVADE TAX IN THE DISGUISE OF DEDUCTION U/S 80IB(8A) OF THE I.T. ACT, 1961. 3.3 ACCORDINGLY, PENALTY OF RS. 1145822/- WAS IMPOS ED. 4. ASSESSEE APPEALED BEFORE THE LD. COMMISSIONER OF INCOME TAX (APPEALS). THE LD. COMMISSIONER OF INCOME TAX (APPEALS) ALSO REFERRED TO THE ASSESSING OFFICER S ORDER AND OBSERVED THAT THE WORD DERIVE D FROM SECTION 80IB HAS TO BE UNDERSTOOD SOMETHING WHICH HAS DIRECT OR IMMEDIATE NEXUS WITH THE ASSESSEES UNDERTAKING. HE ALSO REFERRED TO HONBLE APEX CO URT DECISION RENDERED IN THE CASE OF PANDIAN CHEMICALS (SUPRA). ACCORDINGLY, HE HELD THAT THE INTEREST ON FDR CAN NEVER BE THE BUSINESS OF SCIENTIFIC AND RESEARC H AND DEVELOPMENT CARRIED ON BY THE ASSESSEE. HE FURTHER HELD THAT THERE WAS NO SCOPE FOR IGNORANCE OF THE PARTY WHO ARE PROFESSIONALLY CHARTERED ACCOUNTANTS. LD. COMMISSIONER OF INCOME TAX (APPEALS) CONCLUDED AS UNDER:- EVEN, I HAVE NO HESITATION TO COMMENT THAT THERE I S NO BONAFIDE REASON IN CLUBBING THE INCOME BY WAY OF INTEREST ON FDRS INTO THE BUSINESS INCOME OF THE APPELLANT COMPANY AND, THEREFORE, STRICTLY WITH IN THE MEANING OF CLAUSE (B) OF EXPLANATION 1 AS AFORESAID, THE APPELLANT HA S FILED INACCURATE PARTICULARS OF INCOME OR HAS CONCEALED SUCH PARTICU LARS OF INCOME TO CLAIM UNWARRANTED DEDUCTION OF EXEMPTION U/S 80IB OF THE INCOME TAX ACT ON SUCH QUANTUM OF INCOME REPRESENTED BY INTEREST ON F DRS AND, THEREFORE, THE PENALTY U/S 271(1)(C) OF THE INCOME TAX ACT, 19 61 IS CLEARLY EXIGIBLE IN THE CASE OF THE APPELLANT AND THE ASSESSING OFFICE R HAS BEEN RIGHT IN LEVYING SUCH PENALTY U/S 271(1)(C) OF THE INCOME T AX ACT AND NO INTERFERENCE IS CALLED FOR IN THIS RESPECT. 5. AGAINST THE ABOVE ORDER THE ASSESSEE IS IN APPEA L BEFORE US. 6. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE R ECORDS. LD. AUTHORISED REPRESENTATIVE OF THE ASSESSEE AT THE THRESHOLD SU BMITTED THAT THE PROPER ITA NO. 136/DEL/2010 A.Y. 2005-06 6 SATISFACTION HAS NOT BEEN RECORDED BY THE ASSESSING OFFICER AND HENCE THE LEVY OF PENALTY WAS BAD. IN THIS REGARD, HE REFERRED TH E DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF MS. MADHUSHREE GUPTA VS. UOI & ANR. 225 CTR 1. LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND SUBMI TTED THAT THERE IS NO INFIRMITY IN THE ASSESSING OFFICER S SATISFACTION IN INITIATING THE LEVY OF PENALTY. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS. WE FI ND THAT THE HONBLE HIGH COURT IN THE ABOVE SAID CASE HAS CONCLUDED AS UNDER :- 19. IN THE RESULT, OUR CONCLUSION ARE AS FOLLOWS:- (I) SEC. 271(1B) OF THE ACT IS NOT VIOLATIVE OF ART. 14 OF THE CONSTITUTION. (II) THE POSITION OF LAW BOTH PRE AND POST AMENDMENT IS SIMILAR, IN AS MUCH, 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 PENALT Y PROCEEDINGS. (III) PRIMA-FACIE SATISFACTION OF THE ASSESSING OFFICER THAT THE CASE MAY DESERVE THE IMPOSITION OF PENALTY SHOULD BE DISCERN IBLE 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 TH E ORDER PASSED BY THE ASSESSING OFFICER NEED NOT REFLECT SATISFACTIO N VIS--VIS EACH AND EVERY ITEM OF ADDITION OR DISALLOWANCE IF OVERALL SENSE GATHERED FROM THE ORDER IS THAT A FURTHER PROGNOSIS IS CALLE D FOR. (V) HOWEVER, THIS WOULD NOT DEBAR AN ASSESSEE FROM FURN ISHING EVIDENCE TO REBUT THE PRIMAFACIE SATISFACTION OF THE ASSE SSING OFFICER ; SINCE PENALTY PROCEEDING ARE NOT A CONTINUATION OF ASSESS MENT PROCEEDINGS. [SEE JAIN BROS. & ORS. VS. UNION OF IN DIA (1970) 77 ITR 107 (SC). (VI) DUE COMPLIANCE WOULD BE REQUIRED TO BE MADE IN RESP ECT OF THE PROVISIONS OF SS. 274 AND 275 OF THE ACT. (VII) THE PROCEEDINGS FOR INITIATION OF PENALTY PROCEEDIN G CANNOT BE SET ASIDE ONLY ON THE GROUND THAT THE ASSESSMENT ORDER STATES PENALTY ITA NO. 136/DEL/2010 A.Y. 2005-06 7 PROCEEDINGS ARE INITIATED SEPARATELY IF OTHERWISE, IT CONFORMS TO THE PARAMETERS SET OUT HEREINABOVE ARE MET. 6.1 FROM THE ABOVE, IT IS EVIDENT THAT THE HONBLE HIGH COURT HAS HELD THAT THERE HAS TO BE A PRIMA-FACIE SATISFACTION OF THE A SSESSING OFFICER THAT THE CASE DESERVES IMPOSITION OF PENALTY. SUCH SATISFACTION OF THE ASSESSING OFFICER SHOULD BE DISCERNIBLE FROM THE ORDER. ADMITTEDLY, THERE IS NO FORMAT FOR RECORDING THE SATISFACTION. IN THIS REGARD, WE FIND THAT THE ASS ESSING OFFICER HAS ANALYSED THE ASSESSEES ACTION OF CLAIMING INTEREST INCOME AS B USINESS INCOME IN DETAIL AND HAS REFERRED TO HONBLE APEX COURT DECISION ALSO. FINDI NG ASSESSEES ACTION NOT IN ACCORDANCE WITH LAW, THE ASSESSING OFFICER HAS O PINED THAT ASSESSEES CASE REQUIRES IMPOSITION OF PENALTY U/S 271(1)(C) FOR FU RNISHING INACCURATE PARTICULARS AND THEREBY CONCEALING THE INCOME. IN THE PRESENT CASE, WE FIND THAT ASSESSING OFFICER HAS DISCUSSED THE ISSUE THOROUGHLY AND HAD COME TO THE CONCLUSION THAT ASSESSES CLAIM WAS NOT AS PER LAW. IN SUCH EVENTU ALITY ASSESSING OFFICERS SATISFACTION TOWARDS INITIATION OF PENALTY PROCEEDI NGS CANNOT BE SAID TO BE WITHOUT ANY BASIS AND UNDER THE CIRCUMSTANCES THIS ASPECT OF THE ARGUMENT OF THE ASSESSEES COUNSEL IS DISMISSED. 6.2 ANOTHER ASPECT OF THE ASSESSEES CONTENTION IN THIS REGARD IS THAT NECESSARY INGREDIENTS FOR LEVY OF PENALTY U/S 271(1)(C) WERE NOT APPLICABLE. LD. COUNSEL SUBMITTED THAT THERE IS NO FAILURE ON THE PART OF T HE ASSESSEE TO FURNISH THE PARTICULARS OF INCOME. HE CLAIMED THAT THE ASSESSE E HAS MADE A BONAFIDE CLAIM WHICH ASSESSING OFFICER HAS NOT ACCEPTED. UNDER S UCH SITUATION, HE CLAIMED THAT THE REJECTION OF ASSESSES CLAIM CANNOT AUTOMATICALL Y LEAD TO LEVY OF PENALTY. FOR THIS PURPOSE, HE REFERRED THE DECISION OF THE HONB LE APEX COURT IN THE CASE OF RELIANCE PETRO PRODUCTS IN CIVIL APPEAL NO. 2463 OF 2010 VIDE ORDER DATED ITA NO. 136/DEL/2010 A.Y. 2005-06 8 17.3.2010. THE LD. COUNSEL FURTHER SUBMITTED THAT THE ASSESSEE HAS RELIED UPON THE PROFESSIONALS WHO ARE CHARTERED ACCOUNTANTS AN D ASSESSEE HAS RELIED UPON THEIR ADVISES AND ACCORDINGLY THE CLAIM WAS FILED. HENCE HE PLEADED THAT REJECTION OF THE CLAIM CANNOT LEAD TO LEVY OF PENALTY U/S 27 1(1)(C). LD. COUNSEL FURTHER SUBMITTED THAT IN THE PRECEDING ASSESSMENT YEAR AL SO ASSESSEE HAS MADE A SIMILAR CLAIM AND NO PENALTY WAS LEVIED ON THE DISA LLOWANCE. 6.3 LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT ASSESSEE HAS MADE A BOGUS CLAIM. THE ISSUE THAT INTEREST INCOME CANNOT BE SAID TO BE DERIVED FROM INDUSTRIAL UNDERTAKING WAS DULY SETTLED BY THE HON BLE APEX COURT IN THE CASE OF PANDIAN CHEMICALS (SUPRA). BY MAKING THE FALSE CLA IM, ASSESSEE TRIED TO EVADE TAXES. HENCE SHE PLEADED THAT LEVY OF PENALTY WAS JUSTIFIED. IN THIS REGARD, SHE RELIED UPON THE HONBLE DELHI HIGH COURT DECISION I N THE CASE ESCORTS FINANCE LTD. 183 TAXMAN 453 AND HONBLE DELHI HIGH COURT DECISIO N IN THE CASE OF C.I.T. VS. ZOOM COMMUNICATION PVT. LTD. IN ITA NO. 7/2010 VIDE ORDER DATED 24.5.2010. 6.4 WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS. WE FIND THAT SECTION 271(1(C) OF THE ACT POSTULATES IMPOSITION OF PENALT Y FOR FURNISHING OF INACCURATE PARTICULARS AND CONCEALMENT OF INCOME. IN THE PRES ENT CASE, WE FIND THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF CARRYING ON THE SCIENTIFIC RESEARCH & DEVELOPMENT. THE INCOME SO EARNED WAS CLAIMED AS EXEMPT U/S 80IB. IN THE BUSINESS INCOME THE ASSESSEE HAS INCLUDED A SUM OF RS. 30,44,710/- WHICH WAS INTEREST INCOME ON FDR. ASSESSEES EXPLANATION FO R DOING SO WAS THAT THE INTEREST ON FDR SUPPORTED MONTHLY RUNNING EXPENDITU RE OF RESEARCH AND DEVELOPMENT. SINCE 1995, THE ASSESSEE COMPANY IS RECOGNIZED DSIR AS AN IN HOUSE R&D UNIT. MAIN BUSINESS OF THE ASSESSEE WAS T O CONDUCT R&D AND EARN ITA NO. 136/DEL/2010 A.Y. 2005-06 9 FROM THAT. THE AMOUNT KEPT IN BANK DEPOSIT WAS EARN ED FROM R&D ONLY AND IS USED IN R&D ONLY. THE R&D CYCLE IS LONG TERM FROM 3 TO 5 YEARS. NO FINANCIAL INSTITUTION/ BANK / VENTURE CAPITAL INVESTOR PUT AN Y FUND IN R&D BECAUSE OF VERY HIGH RISK OF RETURNS. THEREFORE, OWN RESERVES ARE REQUIRED WHICH ARE KEPT IN THE BANK IN THE FORM OF FDR. HENCE, FDR ARE THE INTEGRA L PART OF OUR R&D BUSINESS. MOST OF THE INVESTMENT IN R&D BUSINESS IS RUNNING E XPENDITURE AND INTELLECTUAL PROPERTY OF EMPLOYEES. INFRASTRUCTURE IS IMPORTANT BUT IT IS A ONE TIME CAPITAL INVESTMENT. CONSUMPTION OF RAW MATERIAL IS VERY LES S AND UNCERTAIN WHILE IT IS WELL RAW MATERIAL OF R&D COMPANY. THE DETAILS OF FDR ACC OUNT (ALREADY SUBMITTED) CLEARLY SHOW THAT THIS MONEY IS USED AS MONTHLY RUN NING EXPENSE TO CONTINUE R&D. IT IS ALSO CLEAR THAT THE RECEIPTS OF THAT Y EAR ARE USED AGAIN IN FDRS FOR FUTURE YEARS. THIS IS THE ONLY WAY TO RUN AN R&D CO MPANY WITHOUT THE GRANT FROM GOVERNMENT. MOST OF THE R&D PROJECTS ARE SELF FUNDED BY ASSESSEE. THEREFORE, THE FDRS IN BANK DEPOSIT IN AN INTEGRAL PART OF R &D BUSINESS. THUS IT IS ASSESSES ARGUMENT THAT IT HAS MADE A BONAFIDE CLAI M AND REJECTION THEREOF CANNOT LEAD TO LEVY OF PENALTY U/S 271(1)(C). 6.5 AS AGAINST ABOVE, THE REVENUES PLEA IS THAT TH E HONBLE APEX COURT DECISION IN THE CASE OF PANDIAN CHEMICALS (SUPRA) H AD SETTLED THIS ISSUE AS THE ASSESSEE ACT OF INCLUDING INTEREST INCOME AS BUSINE SS INCOME HERE WAS DELIBERATE ATTEMPT TO MISLEADING AND EVADE TAXES. WE FIND THA T HONBLE APEX COURT IN THE CASE OF PANDIAN CHEMICALS (SUPRA) HAD HELD THAT WOR D DERIVED FROM IN SECTION 80HH MUST BE UNDERSTOOD AS SOMETHING WHICH HAS DIRE CT OR IMMEDIATE NEXUS WITH THE INDUSTRIAL UNDERTAKING. DERIVATION OF INTEREST OR PROFITS ON DEPOSITS FROM ELECTRICITY BOARD CANNOT BE SAID TO BE FLOWING DIRECTLY FROM INDUSTRIAL UNDERTAKING AND THEREFORE DEDUCTION FOR THE SAME CA NNOT BE ALLOWED. NOW WE ITA NO. 136/DEL/2010 A.Y. 2005-06 10 FIND THAT THIS DECISION WAS RENDERED IN THE CONTEX T OF SECTION 80HH WHICH DEALT WITH DEDUCTION IN RESPECT OF PROFITS AND GAINS FROM HOTELS AND INDUSTRIAL UNDERTAKING ETC. IN BACKWARD AREAS. THE CASE BEFOR E US IS A CASE OF CLAIM OF DEDUCTION U/S 80IB IN THE CASE OF THE ASSESSEE WHIC H IS ENGAGED IN SCIENTIFIC RESEARCH AND DEVELOPMENT BUSINESS. THE ASSESSEE IS CLAIMING THAT THE INTEREST OF FDR HAS BEEN SUPPORTING THE ASSESSEES BUSINESS AS THE NATURE OF ASSESSEES BUSINESS REQUIRE THAT THE AMOUNT BE KEPT ASIDE TO E ARN INTEREST TO SUPPORT THE RUNNING EXPENDITURE ON RESEARCH AND DEVELOPMENT. IN THIS BACKGROUND, WE FIND THAT WHEN ASSESSEE IS SUBMITTING ALL THE PARTICULAR S AND MAKING A CLAIM FOR INCLUSION OF INTEREST EARNED AS BUSINESS INCOME FOR DEDUCTION U/S 80IB, THE SAID CLAIM CANNOT BE SAID TO BE EX-FACIE BOGUS CLAIM. THE APPLICABILITY OF THE HONBLE APEX COURT DECISION IN PANDIAN CHEMICALS ABOVE MAY HAVE SOME IMPACT ON THE ADJUDICATION OF THE MERITS. BUT AS FAR AS THE LEVY O F PENALTY IS CONCERNED, IN OUR OPINION THE SAID DECISION DOES NOT RENDER ASSESSEE S CLAIM A BOGUS AND MALAFIDE CLAIM. ASSESSEE HAS FULLY DISCLOSED ALL THE MAT ERIALS AND THE FATS THAT IT WAS CLAIMING THE SAID INTEREST ON FDR AS THE PART OF HIS INCOME FROM BUSINESS OF CARRYING ON THE SCIENTIFIC AND RESEARCH DEVELOPMENT BUSINESS. NON-ACCEPTANCE OF THE SAID CLAIM BY THE REVENUE CANNOT BE SAID LEA D TO ATTRACT LEVY OF PENALTY U/S 271(1)(C) AUTOMATICALLY. 6.6 IN THIS REGARD WE RELY UPON THE HONBLE APEX COURT DECISION IN THE CASE OF CIT VS. RELIANCE PETRO PRODUCTS LTD. IN CIVIL APP EAL NO. 2463 OF 2010 VIDE ORDER DATED 17.3.2010 HAS HELD THAT THE LAW LAID DOWN IN THE DILIP SHEROFF CASE 291 ITR 519 (SC) AS TO THE MEANING OF WORD CONCEALMENT AN D INACCURATE CONTINUES TO BE A GOOD LAW BECAUSE WHAT WAS OVERRULED IN THE DHA RMENDER TEXTILE CASE WAS ONLY THAT PART IN DILIP SHEROFF CASE WHERE IT WAS H ELD THAT MENSREA WAS A ESSENTIAL ITA NO. 136/DEL/2010 A.Y. 2005-06 11 REQUIREMENT OF PENALTY U/S 271(1)(C). THE HONBLE APEX COURT ALSO OBSERVED THAT IF THE CONTENTION OF THE REVENUE IS ACCEPTED THEN I N CASE OF EVERY RETURN WHERE THE CLAIM IS NOT ACCEPTED BY THE AO FOR ANY REASON, THE ASSESSEE WILL INVITE THE PENALTY U/S 271(1)(C). THIS IS CLEARLY NOT THE INT ENDMENT OF LEGISLATURE. 6.7 WE FURTHER PLACE RELIANCE FROM THE APEX COURT DECISION RENDERED BY A LARGER BENCH COMPRISING OF THREE OF THEIR LORDSHIP S IN THE CASE OF HINDUSTAN STEEL VS. STATE OF ORISSA IN 83 ITR 26 WHEREIN IT WAS HE LD THAT AN ORDER IMPOSING PENALTY FOR FAILURE TO CARRY OUT A STATUTORY OBLIGA TION IS THE RESULT OF A QUASI- CRIMINAL PROCEEDINGS, AND PENALTY WILL NOT ORDINARI LY BE IMPOSED UNLESS THE PARTY OBLIGED EITHER ACTED DELIBERATELY IN DEFIANCE OF LA W OR WAS GUILTY OF CONDUCT CONTUMACIOUS OR DISHONEST, OR ACTED IN CONSCIOUS DI SREGARD OF ITS OBLIGATION. PENALTY WILL NOT ALSO BE IMPOSED MERELY BECAUSE IT IS LAWFUL TO DO SO. WHETHER PENALTY SHOULD BE IMPOSED FOR FAILURE TO PERFORM A STATUTORY OBLIGATION IS A MATTER OF DISCRETION OF THE AUTHORITY TO BE EXERCISED JUDIC IALLY AND ON A CONSIDERATION OF ALL THE RELEVANT CIRCUMSTANCES. EVEN IF A MINIMUM PENA LTY IS PRESCRIBED, THE AUTHORITY COMPETENT TO IMPOSE THE PENALTY WILL BE JUSTIFIED IN REFUSING TO IMPOSE PENALTY, WHEN THERE IS A TECHNICAL OR VENIAL BREACH OF THE P ROVISIONS OF THE ACT, OR WHERE THE BREACH FLOWS FROM A BONAFIDE BELIEF THAT THE OF FENDER IS NOT LIABLE TO ACT IN THE MANNER PRESCRIBED BY THE STATUTE. 6.8 THE CASE LAWS FROM THE DELHI HIGH COURT REFERR ED BY THE REVENUE WERE IN THE BACKGROUND OF THE FACTS THAT THE ASSESSEES CL AIM WAS EX-FACIE BOGUS AND THERE WAS NO MATERIAL TO PROVE THAT THE MISTAKES WE RE BONAFIDE. IN THE PRESENT CASE, WE HAVE CLEARLY GIVEN A FINDING THAT THE ASSE SSEES CLAIM CANNOT BE SAID TO ITA NO. 136/DEL/2010 A.Y. 2005-06 12 BE EX-FACIE BOGUS OR MALAFIDE. UNDER THE CIRCUMST ANCES, IN THE BACKGROUND OF THE AFORESAID DISCUSSION AND PRECEDENTS, WE SET ASI DE THE ORDERS OF THE AUTHORITIES BELOW AND DELETE THE LEVY OF PENALTY. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 25/06/2010. SD/- SD/- [RAJPAL YADAV] [SHAMIM YAHYA] JUDICIAL MEMBER ACCOUNTANT MEMBER DATE 25/06/2010 SRB COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY ORDER, DEPUTY REGISTRAR, ITAT, DELHI BENCHES