Rupam Mercantiles Ltd. v. Deputy Commissioner of Income-tax

Per S.K. Yadav, J.M. - All these four appeals have been filed by the assessee against the common order of CIT(A) dated 4-2-2002 for assessment year 1995-96. Since the issue involved in all these appeals is common except the amount of penalties and the assessees are of the same group, these were heard together and are being disposed of by this common order for the sake of convenience.

2. The common ground is regarding confirmation of penalty of Rs. 72,00,000, Rs. 1,14,00,000, Rs. 1,21,00,000 and Rs. 1,57,00,000 in the cases of (1) Rupam Mercantiles Ltd. (in Liquidation), (2) Preeti Mercantiles Ltd. (in Liquidation), (3) Mohit Marketing Ltd. (in Liquidation) and (4) Abhinav Mercantiles Ltd. (in Liquidation) respectively, imposed by the Assessing Officer under the provisions of section 271(1)(c) of the Act read with Explanation (1) thereto.

2.1 The facts of the cases are that the above 4 companies belong to Mardia Group of companies whose family tree is as under :—

Family Tree

Shantilal Mardia

As against the returned income filed as per Col. 3 of the chart given below, income has been assessed under section 143(3) on 23-3-1998 in all the 4 cases as indicated in Col. 5 of the chart given below :—

The assessee had filed appeals against the orders under section 143(3). Thereafter the appeals were disposed of in first appeal and the assessees further had come before the Tribunal against the additions made in orders under section 143(3) referred above. Before proceeding further, it would be relevant to discuss some of the specific facts of the cases which are common to all the 4 assessees.

As mentioned above, all the four companies are controlled by Shri Rakesh Mardia, Rasik Mardia, Rajeev Mardia belonging to Mardia Group. During the FY 1994-95, the above four companies came out with the debenture issue of Rs. 100 each (face value). The date of issue in all the four cases was stated to be 31-3-1995 and the amounts were however, received by the assessees on 25-3-1995. The recipients or the persons to whom the debentures had been issued were Shri Rakesh Mardia, Rasik Mardia and Rajeev Mardia. The schemes of the debenture and interest etc. were as under :—

"Interest Rate and manner of payment

Each debenture shall carry interest @ Rs. 62.00 payable up front on the date of allotment.

Redemption

The company agrees and undertake to redeem the Debentures at par in one instalment at the end of 6th year from the date of allotment."

The details of debentures issued, amounts received by respective companies and net interest paid and the net inflow off funds of the company are reproduced below for the sake of convenience.

This has been discussed by the Assessing Officer at pages 6,7,8 & 9 in the case of M/s. Rupam Mercantile Ltd. and the facts are similar in other 3 cases also except for number of debentures, recipients and the amount of funds etc. as indicated in the above chart. It was noted by the Assessing Officer that the entire interest amounting to Rs. 62 for the period of a year from the date of issue were shown as interest paid and accrued in FY 1994-95 itself in all the 4 cases. The assessee companies have considered this amount as up front amount, as discussed above. Thus, for each debenture of Rs. 100 the assessees claimed interest of Rs. 62 as payable and also paid in FY 1994-95 out of which TDS was deducted and the balance amount was paid/payable to the assessee companies as indicated in the above chart. It was a case of Assessing Officer that since the debentures were issued for a period of 6 years from the date of allotment, the interest element has to be spread over for the period of 6 years and that the claim of the assessee companies of said Rs. 62 per issue to the recipients of the family members of the Mardia Group is not admissible in FY 1994-95. The relevant findings of the Tribunal in its order dated 28-10-1999 in the quantum appeals of the assessee, in the case of Rupam Mercantile Ltd. and others as recorded at para 7.1 at page 7, are as under :—

"Accordingly, the Hon’ble Supreme Court relying on the aforesaid decision of the M.P. High Court in the case of M.P. Financial Corporation 165 ITR 765 held that the assessee was correct in claiming deduction only in respect of the proportionate part of discount of Rs. 12500 over the relevant accounting period in question. The Supreme Court further noted that the view taken by them was in conformity with the accounting practice of showing the discount in the "Discount of Debenture Account" which is written off over the period of debentures. The facts of the case before us are similar to the facts of the case of Mardia Industrial Investment Corporation (supra) and accordingly we do not find any merit in the ground taken by the four assessee companies, as the issue is squarely covered by the decision of the Supreme Court in Madras Industrial Investment Corporation (supra). Accordingly, we adjudicate ground No. 1 in all the appeals against the assessees and in favour of the Revenue."

The figure of Rs. 1,39,50,000 was the actual amount received by the assessee company, Rupam Mercantiles Ltd. in FY 1994-95 after deduction of TDS. This figure in the case of other three assessees are reproduced in the chart tabulated in the opening para. The Assessing Officer took a view that the said expenses cannot be allowed in FY 1994-95 in totality and accordingly allowed interest on proportionate amount for the period of 7 days only works out to Rs. 49,543 in the case of Rupam Mercantiles Ltd. The balance was disallowed as per the assessment order in the case of Rupam Mercantiles Ltd. dated 23-3-1998. Similarly proportionate interest for 7 days were allowed by the Assessing Officer in the case of other three companies and the balance was disallowed. The assessee went in appeal to the CIT(A) VI, Ahmedabad who upheld the disallowance made by the assessee as per order dated 22-3-1999 No. CIT(A)-VI/CC-2(2)/10/98-99. The following findings were given by the CIT(A) while dismiss the appeal:

"I have considered the contention of the appellant as also the observations of the Assessing Officer. I agree with the reasons given by the Assessing Officer for making disallowance of the claim of interest in debentures to the extent of Rs. 1,54,457. There is also no substance in the appellant’s claim made before the Assessing Officer that as per the agreement between the parties, the whole amount of interest on the amount of debentures was payable on day one and for the remaining period, the loan was interest-free. Para 4 of the notes forming part of accounts in the balance sheet of the appellant-company for the assessment year 1995-96 due on non-convertible redeemable debentures issued during the year was for full term as per the terms of the issue. The ratio laid down by the Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT squarely applies to the case of the appellant. In view of the above, the disallowance made of Rs. 1,54,50,457."

Similar orders were also passed by the CIT(A) VI, Ahmedabad in other three assessees also and the assessees went in appeal before the Tribunal which disposed of all the four appeals in this respect against the orders passed by the CIT(A) in the cases of these four assessees. The Tribunal, Ahmedabad Bench vide order dated 28-10-1997, disposed of the above appeals and in respect of the additions made relating to the claim of interest on debenture issue, discussed above, the matter was decided in favour of revenue and it was held that the Supreme Court’s decision in the case of Madras Industrial Investment Corpn. v. CIT [1997] 225 ITR 802¹ and the ratio of the said decision was applicable to the facts of the case and made the following observations in para 7.1 at page 7 of the order :—

"Accordingly, the Hon’ble Supreme Court relying on the aforesaid decision of the M.P. High Court in the case of M.P. Financial Corporation 165 ITR 765 held that the assessee was correct in claiming deduction only in respect of the proportionate part of discount of Rs. 12500 over the relevant accounting period in question. The Supreme Court further noted that the view taken by them was in conformity with the accounting practice of showing the discount in the "Discount of Debenture Account" which is written off over the period of debentures. The facts of the case before us are similar to the facts of the case of Mardia Industrial Investment Corporation (supra) and accordingly we do not find any merit in the ground taken by the four assessee companies, as the issue is squarely covered by the decision of the Supreme Court in Madras Industrial Investment Corporation (supra). Accordingly, we adjudicate ground No. 1 in all the appeals against the assessees and in favour of the Revenue."

Meanwhile, the Assessing Officer had also initiated proceedings under section 271(1)(c) in respect of assessment orders passed under section 143(3) in the cases of the four assessees discussed earlier. In particular, the assessees were issued show-cause notices as to why penalty not be imposed relating to disallowance made out of debenture interest held to be not pertinent to assessment year 1995-96. After considering the various submissions made by the assessees before him and also considering the various judicial decisions cited by the assessees, discussed in detail in penalty orders dated 31-5-2000 in the cases of four assessees under section 271(1)(c), the Assessing Officer imposed minimum penalty at the rate of 100% as indicated in Col. No. 6 of above chart. The above four assessees went in appeal before CIT(A) against penalty orders under section 271(1)(c) dated 31-5-2000 amounting to Rs. 72,00,000, Rs. 1,21,00,000, Rs. 1,14,00,000 & Rs. 1,57,00,000 in the cases of 4 assessees discussed in detail in table 1 above.

3. The matter was carried in appeal before the first appellate authority wherein the ld. AR for assessees submitted written submissions, copies of assessment orders under section 143(3), appellate orders of CIT(A) and Tribunal’s order were furnished. The ld. AR submitted that there is no jurisdiction in imposing the penalty under section 271(1)(c) and referred to various case law many of which were also cited in assessment under section 143(3) and also in 271(1)(c) proceedings before the Assessing Officer. The CIT(A) after considering the submissions and material on record observed that the only issue in appeal is imposition of penalty as discussed above. The ld. AR submitted that the assessee has neither concealed any income nor furnished any inaccurate particulars and therefore no penalty can be levied. The ld. counsel for the assessee through his written submissions has discussed this matter at page 3 of the submissions as under :—

"The appellant most humbly and respectfully submits that the impugned levy of penalty as made by the ld. Assessing Officer is not only wholly contrary to law and facts of the case but also wholly without jurisdiction. It is submitted at the outset that the ld. Assessing Officer has adopted a contrary stand while initiating penalty on one hand and imposing penalty on the other as would be evident from the following. The ld. Assessing Officer in course of assessment proceedings has recorded his satisfaction for issue of notice under section 271(1)(c) thus

"Issue penalty notice under section 271(1)( c) for furnishing inaccurate particulars of income by claiming deduction for debenture interest not pertaining to previous year relevant to assessment year under reference as discussed above and making wrong claim of education under section 80M as well as of interest payment."

However while imposing penalty the ld. Assessing Officer has held as follows:

"In view of the facts narrated above, I am satisfied that the assessee has concealed income by furnishing inaccurate particulars and provi- sions of section 271(1)(c) are attracted. I accordingly levy a penalty of Rs. 72, 00, 000 as against the maximum penalty leviable of Rs. 2,13,21,627.

Now when a contrary stand is taken, the order imposing penalty would be wholly rendered invalid in law. In other words, the above extracts show that the penalty was initiated on the basis that the appellant had furnished inaccurate particulars. Thus the ld. Assessing Officer while imposing penalty has dovetailed two concepts, namely, concealment of income and furnishing of inaccurate particulars of income. In short, the final conclusion reached by the ld. Assessing Officer while imposing penalty is clearly contrary to the satisfaction recorded by the ld. Assessing Officer in course of assessment proceedings."

Reference was also made to the decision of Gujarat High Court in CIT v. Nanu Engg. Works [1980] 122 ITR 306 and K.M. Bhatia v. CIT [1992] 193 ITR 379¹. The plea of the assessee is not tenable since it is a case of the appellants that the Assessing Officer has not imposed penalty for concealment for furnishing of inaccurate particulars. The view taken by the assessees is not correct since in clear terms the Assessing Officer has held that the appellants have concealed income by wrongly claiming deductions which were not admissible as referred by the assessee above also. The said observations were verified by the CIT(A) from the respective orders under section 143(3) and language used in all the cases are similar. The substance of the same is that the assessee has concealed true income and, therefore, provisions of section 271(1)(c) have been invoked. It is a different matter that the appellants gave explanation for the claim made which could not be substantiated in the assessment proceedings, in first appeal and also before the Tribunal as referred above. The CIT(A) observed that in this respect it is relevant to refer to Explanation to section 271(1)(c) of the IT Act as under:—

"271. Failure to furnish returns, comply with notices, concealment of income etc. (1) if the Assessing Officer or the (..) Commissioner (Appeals) in the course of any proceedings under this Act, is satisfied that any person has concealed the particulars of his income or (...) furnished inaccurate particulars of such income.

Explanation 1. - Where in respect of any facts material to the computation of the total income of any person under this Act.

(A)Such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the (...) Commissioner (Appeals) to be furnished, or

(B)such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him.

then, the amount added or disallowed in computing the total income of such persons as result thereof shall, for the purpose of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed."

The CIT(A) observed that proceedings under section 271(1)(c ) are applicable even in the cases where the assessee fails to substantiate explanation given by him during the course of assessment. The case laws cited by the appellants are therefore not applicable in the light of the above Explanation to section 271(1)(c). Similarly, the CIT(A) observed that it is relevant to discuss some of the case laws on which the appellants have relied upon for their claim that the explanation was bona fide or the claim of interest was justified. The assessees have referred to the decision of Calcutta High Court in Jiyajeerao Cotton Mills Ltd. v. ITO [1981] 130 ITR 710 . This relates to retrospective Legislature which is not relevant to the facts of the case. Similarly reference to Gujarat High Court’s decision in the case of CIT v. Maneklal Harilal Spg. & Mfg. Co. Ltd. [1977] 106 ITR 24 is also not applicable since they all relate to retrospective amendment which was not the case before him. Other case laws also discussed in paras 14,15,16 & 17 are also not relevant and are on similar lines and relate to imposition of penalty with reference to retrospective amendment of law.

It was further submitted by the ld. counsel for the assessee that the Assessing Officer has relied on the decision of Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. (supra). It was submitted by the ld. AR that the decision was rendered on 4-4-1997 whereas the return was filed on 29-11-1995. It was therefore submitted that the same cannot be relied on by the Assessing Officer while considering the explanation as unsatisfactory of mala fide.

The CIT(A) observed that he had perused the case laws cited and discussed by the Assessing Officer including in the case of Sir Kikabhai Premchand v. CIT [1953] 24 ITR 506 in the case of P.M Mohammad Meerakhan v. Commissioner Of Income Tax, Kerala, Ernakulam [1969] 73 ITR 735 in the case of State Bank of India v. CIT [1986] 157 ITR 67¹ Supreme Court in the case of K.S. Krishna Rao v. CIT [1990] 181 ITR 408 ². The gist of the judgment referred above has endorsed one common ratio that income has to be assessed under sections 4 & 5 of the Income-tax Act having taken into account the total income which actually is received or accrued during the year and after taking into account the expenses which are justifiable related to the earning of the said income and relate to the relevant financial year. In particular, it would be relevant to note the observations made by the Assessing Officer at page 13 of his order in the case of State Bank of India (supra) as under:—

"Any liability incurred for the business of obtaining a loan would be revenue expenditure.

Ordinarily, revenue expenditure which is incurred wholly and exclu- sively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify on assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debentures is an instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures."

The CIT(A) observed that the plea taken by the assessee that the decision of Supreme Court in the case of Madras Industrial Investment Corpn. (supra) was rendered after filing of the return of income is therefore of little assistance since when the Apex Court has held is the view taken by the earlier decisions of Supreme Court referred above. The same are also in line with the established norms of mercantile system of accountancy followed by the assessee companies. The High Court had also dismissed the case of the assessee in the background of the said legal position enunciated in the light of the decisions of the Supreme Court discussed above.

The next stand taken by the assessees in the written submissions relates to the fact that before the Supreme Court in the case of Madras Industrial Investment Corpn. (supra), the subject-matter was deduction under section 37 whereas in the case of the assessees the claim has been made under section 36(1)(iii). It is, therefore, pleaded that the same cannot be relied upon. On examination of the said decision and also on perusal of the case laws cited earlier above, it is clear that the general legal position which stands established is that expenditure which does not accrue in reality for the relevant previous year is not admissible under the Income-tax Act, 1961. It is immaterial and of academic nature whether the claim was made under section 37 or section 36. Having regard to the findings and the ratio of the above decisions this argument of the assessees would be of little help and it is therefore held that the same would not be allowable under any above sections.

The next argument taken in the written submissions before the CIT(A) by the assessees was that the Assessing Officer in the case of recipients i.e., Rakesh Mardia, Rasik Mardia and Rajeev Mardia have added the respective debenture interest in their assessment orders on protective basis and, therefore, in view of the same no penalty is justified. In particular, it is further submitted that in the case of Shri Rakesh Mardia, the said addition was made on protective basis and assessees had gone in appeal before the first appellate authority and the first appellate authority vide his order dated 26-3-1999 has held that the addition is required to be made substantive basis. It was, therefore, pleaded that the expenditure of the assessees should be considered as bona fide and satisfactory and there- fore no penalty could be called for. The first appellate authority considered and also perused the returns of income and also relevant orders of his predecessor in this respect. In both the returns of income filed as well before the appellate proceedings in the said case the assessees had never shown the said interest income in the returns filed and it was the Assessing Officer who has added the same after rejecting the claim of the assessees. Similarly, even in the appellate proceedings before the CIT(A)-VI, in the case of Rupam Mercantiles Ltd. (In Liquidation) the following observations made by the first appellate authority, are relevant :—

"I have considered the contention of the appellant as also the observations of the Assessing Officer. I agree with the reasons given by the Assessing Officer for making disallowance of the claim of interest on debentures to the extent of Rs. 1,54,50,457 there is also no substance in the appellant’s claim made before the Assessing Officer that as per the agreement between the parties, the whole amount of interest on the amount of debentures was payable on day one and for the remaining period, the loan was interest free. Para 4 of the notes forming part of accounts in the balance-sheet of the appellant company for assessment year 1995-96 states that the payment of interest of Rs. 1,55,00,000 due on non-convertible redeemable debentures issued during the year was for full term as per the terms of the issue. the ratio laid down by the Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT squarely applies to the case of the appellant. In view of the above, the disallowance made of Rs. 1,54,50,457 is upheld."

The first appellate authority observed that even in appeals the assessees cases were that interest income does not accrue to them and it is, therefore, established that it was not a bona fide or unilateral act of the assessees which had led to the inference drawn by the CIT(A). The claim that the explanation is bona fide is therefore not acceptable on this account also. The CIT(A) after considering the other case laws mentioned by the assessees observed that it is a case of the assessees that in respect of issue which are debatable, no penalty can be imposed and have relied on the decision of the Supreme Court in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192. The first appellate authority further observed that as held earlier, there has been a series of decisions by the Apex Court cited earlier in this order where it has been held that the expenditure which actually relates to the year can be allowed on accrual basis for the relevant previous year and it has been observed that there has been no diversity or difference this aspect in the above referred decisions of the Apex Court. The case law cited by the assessees have no applicability as discussed earlier. Having regard to the above reasons, the CIT(A) held that the penalty imposed by the Assessing Officer in the cases of all the four assessees is fully justified in view of the cumulative effect of the above findings and including the following reasons :

(1)As discussed above, the Explanation to section 271(1)(c) is clearly applicable. Even though the Assessing Officer has not specifically mentioned this in the body of the order, it has been held by the Supreme Court in the case of Madhusudan and others referred in 251 ITR 99 that it is not essential that the same should be specifically mentioned in the orders. The onus in this respect is on the appellant to prove that the explanation or the claim made was bona fide. This has not been done in the instant case.

(2)In none of the returns filed by the recipients corresponding interest income was declared and offered for tax on their own. The plea of the appellant that there were valid bona fide explanation therefore lacks acceptability.

(3)It is clear from the facts narrated above that in all the four appellants cases, the transactions are within the closely knit Mardia Group of companies and their Directors, and that have been arranged only with a view to reduce the tax liability of the appellant companies. The transactions relating to issue of debentures are also between the appellant and only one person who is either a director of the appellant companies or is a relative of the director of the appellant. The decision of Supreme Court in the case of McDowell & Co. reported in 154 ITR 148 is also clearly applicable to the facts of the case.

(4)As discussed by the Assessing Officer, the transactions in reality are only in the nature of advance payments paid to the respective recipients by the appellant companies for which the actual interest was accrued in a period spread over 6 years and not for this financial year (except for a period of only 7 days).

(5)It would be absurd to accept the proposition that liability to pay interest on the debentures can accrue to the appellant on the first date when the debentures are issued to the recipients. The view taken by the Assessing Officer is, therefore, in full conformity with established principles of Accountancy as well as the provisions of the Income-tax Act, 1961 duly supported by ratio of the Apex Courts as discussed earlier in this order. As the appellant(s) having followed mercantile system it cannot change the real nature of the transaction by claiming a deduction on the basis of cash payments which have been held to be mere advance payments only.

(6)As referred earlier, the Apex Court in the case of State Bank of India referred in 157 ITR 67 have clearly observed that the substance of transaction has to be seen and not the form. Mere recording of entries in the books in itself cannot justify the stand taken by the appellants or make the explanation bona fide or taking on argument that liability for interest be accrued on the basis of the scheme and the said debentures between the appellant and recipients. Since the said schemes were clearly devised in one go for all the four companies around the same time within the small group of family members of Mardia Group, it is obvious that the transaction is in the nature of colourable device, as discussed earlier also in CIT(A)’s order.

(7)The Assessing Officer has already taken the most lenient view in the matter and imposed minimum penalty of 100 per cent as against 300 per cent (maximum).

In view of above discussion, the CIT(A) confirmed the penalty under section 271(1)(c) in respect of all the assessees.

4. Before us the ld. AR submitted that the CIT(A) is not justified in upholding the impugned order imposing penalty on the ground that the assessees had concealed particulars of income by furnishing inaccurate particulars thereof. The ld. counsel for the assessees submitted that the CIT(A) overlooked the claim and contentions of the assessees that default of furnishing inaccurate particulars of income vis-a-vis default of concealment of income are two distinct and different defaults and could not be dovetailed as held by the authorities below. The ld. counsel for the assessee submitted that the decision of the first appellate authority to uphold the impugned penalty on the ground of concealment of furnishing inaccurate particulars as he did being contrary to the binding decision of the jurisdictional High Court, is wholly unsustainable in law. The ld. counsel for the assessee also submitted that CIT(A) is not right in upholding the decision of Assessing Officer that the assessees had failed to offer any explanation in support of its claim for deduction of interest as made by it in the assessment proceedings. The CIT(A) overlooked the fact that the assessees claim for deduction of the impugned amounts of interest which are subject-matter of penalty were based on decision of the Hon’ble Madhya Pradesh High Court in the case of National Newsprint and Paper Mills Ltd. v. CIT [1978] 114 ITR 172 . The ld. counsel for the assessees submitted that the authorities below having failed to discharge the burden placed on them to establish that the assessees’ explanation was false and/or not bona fide erred in invoking the said Explanation to uphold the order imposing the impugned penalty. The ld. counsel for the assessee submitted that the decision of the CIT(A) being contrary to the binding decision of the jurisdictional High Court in the case of National Textile v. CIT [2001] 249 ITR 125/ 114 Taxman 203 (Guj.) is wholly untenable in law. The ld. AR also pleaded that the CIT(A) was wrong in not appreciating the assessees’ claim founded on the ground that the assessees had filed returns of income claiming the impugned amount of interest as deduction prior to the decision of the Hon’ble Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. (supra). So upholding the impugned orders of penalty being contrary to the decision of the Hon’ble Supreme Court in the case of Commissioner Of Income-Tax v. Hindustan Electro Graphites Ltd. [2000] 243 ITR 48¹ (SC), is wholly unjustified and not tenable both in law and on facts of the cases. The ld. AR further contended that the CIT(A) erred in not appreciating the distinction between the claim of the assessees which was made under section 36(1)(iii) and the claim for deduction under section 37 of the Act which was subject-matter of adjudication before the Hon’ble Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. (supra). The ld. AR contended that the CIT(A) is wrong in not appreciating the claim of the assessees founded on the decision of the Hon’ble Supreme Court in the case of Vegetable Products Ltd. (supra) to the effect that when two views are conceivably possible, no penalty is imposable.

4.1 The ld. counsel for the assessee submitted detailed paper book containing the following documents :

Rupam Mercantiles Ltd. (in Liquidation)

1.Written submissions before CIT(A) dated 11-1-2002.

2.Reply to penalty notice under section 271(1)(c) dated 8-4-2002.

3.Letter from Assessing Officer under section 271(1)(c) dated 5-1-2002.

4.Reply to Original Notice under section 271(1)(c) dated 7-4-1998.

5.Notice initiating penalty proceedings under section 271(1)(c) dated 23-3-1998.

6.Order of Hon’ble Gujarat High Court admitting appeal on question of law dated 27-9-2000.

7.Order of Hon’ble ITAT on quantum appeal dated 28-10-1999.

8.Order of CIT(A) on quantum appeal dated 22-3-1999.

9.Order of assessment under section 143(3) dated 23-3-1995.

10.Statement of Total Income dated 29-11-1995.

11.Audited Annual accounts for financial year 1994-95, 29-8-1995.

The ld. counsel for the assessee submitted and placed on record copy of "Order/Section 119(2)(a) of Income-tax Act" as Annexure-E to the compilation, which reads as under :

"Section 119(2)(a) of the Income-tax Act, 1961 - Central Board of Direct Taxes - Instructions to subordinate authorities.

Order F. No. 400/234/95-IT (B), dated 30-1-1997.

1. The Board has issued an order vide F. No. 400/234/95-IT(B), dated 23rd May, 1996, indicating the class of income or class of cases in which reduction of waiver of interest under section 234A, 234B or 234C as the case may be could be considered by Chief Commissioner of Income-tax and Director General of Income-tax. The clause ‘D’ of para 2 of the said order read as under :

"Where any income which was not chargeable to income-tax on the basis of any order passed in the case of an assessee by the High Court within whose jurisdiction he is assessable to income-tax, and as a result, he did not pay income-tax in relation to such income in any previous year and subsequently, in consequence of any retrospective amendment of law or as the case may be, the decision of the Supreme Court, in his own case, which even has taken place after the end of any such previous year, in any assessment or re-assessment proceedings the advance tax paid by the assessee during the financial year immediately preceding the relevant assessment year is found to be less than the amount of advance tax payable on his current income, the assessee is chargeable to interest under section 234B or section 234C and the Chief Commissioner or Director General is satisfied that this is a fit case for education of waiver of such interest."

2. In partial modification of this para of the Order, the CBDT has decided that there shall be no condition that the decision of the High Court or the Supreme Court as referred to therein must be given in the assessee’s own case. Also the condition that any retrospective amendment of law or the decision of the Supreme Court or the jurisdictional High Court must have been made after the end of the relevant year stands withdrawn.

3. If any petition in the past has been rejected because the Board had not issued this modification, the same may be reconsidered and decided in accordance with this modification read with the order dated 23rd May, 1996.

Income-tax Act, 1961 : Notification under section 119(2)(a) : Reduction or waiver of penalty interest for late filing of return of income, etc.: authorisation of powers to Chief Commissioners and Director-General (Investigation)

NOTIFICATION NO. . . . DATED, 23RD MAY, 1996

1. In exercise of the powers conferred under clause (a) of sub-section (2) of section 119 of the Income-tax Act, 1961, the Central Board of Direct Taxes, hereby direct the Chief Commissioner of Income-tax and Director-General of Income-tax may reduce or waive interest charged under section 234A, or section 234B or section 234C of the Act in the classes of cases or classes of income specified in paragraph 2 of this order for the period and to the extent the Chief Commissioner of Income-tax/Director-General of Income-tax deem fit. However, no reduction or waiver of such interest shall be ordered unless the assessee has filed the return of income for the relevant assessment year and paid the entire tax due on the income as assessed except the amount of interest for which reduction or waiver has been requested for. The Chief Commissioner of Income-tax or the Director-General of Income-tax may also impose any other conditions deemed fit for the said reduction or waiver of interest.

2. The class of incomes or class of cases in which the reduction or waiver of interest under section 234A or section 234B or as the case may be, section 234C can be considered, are as follows :—

(a)Where during the course of proceedings for search and seizure under section 132 of the Income-tax Act, or otherwise, the books of account and other incriminating documents have been seized and for reasons beyond the control of the assessee, he has been unable to furnish the return of income for the previous year during which the action under section 132 has taken place, within the time specified in this behalf and the Chief Commissioner or, as the case may be, Director-General is satisfied having regard to the facts and circumstances of the case that the delay in furnishing such return of income cannot reasonably be attributed to the assessee.

(b)Where during the course of search and seizure operation under section 132 of the Income-tax Act, cash is seized which is not allowed to be utilised for payment of advance tax instalment or instalments as they fall due after the seizure of cash and the assessee has not paid fully or partly advance tax on the current income and the Chief Commissioner or the Director-General is satisfied that the assessee is unable to pay the advance tax.

(c)Where any income chargeable to income-tax under any head of income, other than "capital gains" is received or accrues after the due date of payment of the first or subsequent instalments of advance tax which was neither anticipated nor was in the contemplation of the assessee and the advance tax on such income is paid in the remaining instalment or instalments and the Chief Commissioner or Director General is satisfied on the facts and circumstances of the case that this is a fit case for reduction or waiver of interest chargeable under section 234C of the Income-tax Act.

(d)Where any income which was not chargeable to income-tax on the basis of any order passed in the case of an assessee by the High Court within whose jurisdiction he is assessable to income-tax, and as a result, he did not pay income-tax in relation to such income in any previous year and subsequently, in consequence of any retrospective amendment of law or, as the case may be, the decision of the Supreme Court in his own case, which event has taken place after the end of any such previous year, in any assessment or reassessment proceedings the advance tax paid by the assessee during the financial year immediately preceding the relevant assessment year is found to be less than the amount of advance tax payable on his current income, the assessee is chargeable to interest under section 234B or section 234C and the Chief Commissioner or Director General is satisfied that this is a fit case for reduction or waiver of such interest.

(e)Where a return of income could not be filed by the assessee due to unavoidable circumstances and such return of income is filed voluntarily by the assessee or his legal heirs without detection by the Assessing Officer.

3. The Chief Commissioner of Income-tax/Director General of Income-tax may order the waiver or reduction of interest under sections 234A, 234B and 234C under this order with reference to the assessment year 1989-90 or any subsequent assessment year but shall not so reduce or waive penal interest in those cases where waiver or reduction of such interest has been rejected in the past on the merits of the case. If any petition in the past has been rejected because the Board had not issued this direction earlier, these may be reconsidered and decided in accordance with this order."

4.2 The ld. AR has also relied on various decisions, to support of his case, as under:

1.Sarabhai Chemicals (P.) Ltd. v. CIT [2002] 257 ITR 355¹

2.CIT v. Baroda Tin Works [1996] 221 ITR 661 (Guj.)

3.Navjivan Navjivan Oil Mills v. Commissioner Of Income-Tax [2001] 252 ITR 417 (Guj.)

4.National Textiles’ case (supra)

5.Madras Industrial Investment Corpn. Ltd.’ case (supra )

6.National Newsprint and Paper Mills Ltd.’s case (supra )

7.Hindustan Electro Grpahites Ltd.’s case (supra)

8.ITO v. Burmah Shell Oil & Distributing Co. of India Ltd. [1987] 163 ITR 496² (Cal.).

In the light of above submissions, the ld. AR submitted that the penalty in respect of all the assessees are not sustainable and therefore, the same be deleted.

5. On the other hand the ld. DR supported the orders of authorities below and opposed the submissions of the ld. counsel for the assessee. He submitted that the orders of lower authorities need no interference.

6. After considering the rival submissions, going through the orders of the authorities below and also perusing the case laws relied by the parties, we find that all assessee companies i.e. (1) Rupam Mercantiles Ltd. (In Liquidation), (2) Preeti Mercantiles Ltd. (in Liquidation), (3) Mohit Marke-ting Ltd. (in Liquidation) and (4) Abhinav Mercantiles Ltd. (in Liquidation), belonging to the Mardia group, are controlled by Shri Rakesh Mardia, Rasik Mardia and Rajeev Mardia. During the financial year 1994-95 relevant to assessment year under consideration, the above four compa- nies came out with debenture issue of Rs. 100 each (face value). The dates of issue in all four companies stated to be 31-3-1995 and amounts were however, received by the assessees on 23-3-1995. The recipients or persons to whom the debentures had been issued were above mentioned Rakesh Mardia, Rasik Mardia and Rajeev Mardia. Each debenture carried interest of Rs. 62 payable on date of allotment. The details of debenture issued, amount received by respective companies and net interest paid and the net inflow of funds of companies are reproduced in form of chart on page of this order. Modus operandi in all four cases is similar. The entire interest amounting to Rs. 62 for period of 6 years from date of issue were shown as interest paid and accrued in financial year 1994-95 itself in case of all four assessee companies. The assessee companies considered this amount as up front amount as discussed above. Assessing Officer observed that since the debentures were issued for a period of 6 years from date of allotment, the interest element has to be spread over the period of 6 years and that the claim of assessee companies of said Rs. 62 per issue to recipients of the family members of the Mardia group is not admissible in financial year 1994-95. Matter in quantum appeal travelled upto the Tribunal wherein the Tribunal observed as under :

"Accordingly, the Hon’ble Supreme Court relying on the aforesaid decision of the M.P. High Court in the case of M.P. Financial Corporation 165 ITR 765 held that the assessee was correct in claiming deduction only in respect of the proportionate part of discount of Rs. 12,500 over the relevant accounting period in question. The Supreme Court further noted that the view taken by them was in conformity with the accounting practice of showing the discount in the "Discount of Debenture Account" which is written off over the period of debentures. The facts of the case before us are similar to the facts of the case of Mardia Industrial Investment Corporation (supra) and accordingly we do not find any merit in the ground taken by the four assessee companies, as the issue is squarely covered by the decision of the Supreme Court in Madras Industrial Investment Corporation (supra). Accordingly, we adjudicate ground No. 1 in all the appeals against the assessees and in favour of the revenue."

Assessees have shown actual amount received by them after deduction of TDS. These figures have been detailed in para 2 of this order. Assessing Officer took a view that said expenses could be allowed in financial year 1994-95 in totality and accordingly allowed interest on proportionate amount for a period of 27 days. Balance amount was disallowed in all four cases by Assessing Officer and same were upheld by CIT(A) by observing as under :

"I have considered the contention of the appellant as also the observations of the Assessing Officer, I agree with the reasons given by the Assessing Officer for making disallowance of the claim of interest in debentures to the extent of Rs. 1,54,457. There is also no substance in the appellant’s claim made before the Assessing Officer that as per the agreement between the parties, the whole amount of interest on the amount of debentures was payable on day one and for the remaining period, the loan was interest-free. Para 4 of the notes forming part of accounts in the balance sheet of the appellant company for the assessment year 1995-96 due on non-convertible redeemable debentures issued during the year was for full term as per the terms of the issue. The ratio laid down by the Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT squarely applies to the case of the appellant. In view of the above, the disallowance made of Rs. 1,54,50,457."

and the same was upheld by the Tribunal vide its order dated 20-10-1997 and decided these appeals in favour of revenue by following ratio laid down by Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. (supra) wherein the Tribunal has observed as under :

"Accordingly, the Hon’ble Supreme Court relying on the aforesaid decision of the M.P. High Court in the case of M.P. Financial Corporation 165 ITR 765 held that the assessee was correct in claiming deduction only in respect of the proportionate part of discount of Rs. 12,500 over the relevant accounting period in question. The Supreme Court further noted that the view taken by them was in conformity with the accounting practice of showing the discount in the "Discount of Debenture Account" which is written off over the period of debentures. The facts of the case before us are similar to the facts of the case of Mardia Industrial Investment Corporation (supra) and accordingly we do not find any merit in the ground taken by the four assessee companies, as the issue is squarely covered by the decision of the Supreme Court in Madras Industrial Investment Corporation Ltd.’s case (supra). Accordingly, we adjudicate ground No. 1 in all the appeals against the assessees and in favour of the Revenue."

Meanwhile the Assessing Officer initiated penalty proceedings under section 271(1)(c) in respect of assessment orders passed under section 143(3) in case of all four assessees companies as discussed earlier. The Assessing Officer after providing opportunity of hearing and taking into consideration the submissions made by assessees, discussed in detail in the penalty order dated 31-5-2000 in case of four assessees under section 271(1)(a) of the Income-tax Act and imposed minimum penalty at the rate of 100 per cent as indicated in column 6 of above-mentioned chart. The matter was carried in appeal before the CIT(A) who has confirmed the order of Assessing Officer vide his detailed discussion made in para 3 of this order.

Before us the assessees raised various contentions as discussed above. Having considered the rival submissions and going through the material on record we are not inclined to interfere in the findings of CIT(A). Regar-ding stand of assessees, having neither concealed any income nor furnis-hing any inaccurate particulars of income has no force. The assessees have also taken the stand that Assessing Officer initiated penalty for furnishing inaccurate particulars while he imposed penalty for conceal- ment. So the levy of penalty in question is not justified. We are of the view that assessees have concealed the income by filing wrong particulars viz. wrongly claiming deductions which was not admissible. Explanation 1 to section 271(1)(c) of the Income-tax Act reads as under :

"271. Failure to furnish returns, comply with notices, concealment of income etc. (1) If the Assessing Officer or the (..) Commissioner (Appeals) in the course of any proceedings under this Act, is satisfied that any person has concealed the particulars of his income or (...) furnished inaccurate particulars of such income.

Explanation 1. - Where in respect of any facts material to the computation of the total income of any person under this Act.

(A) such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the (...) Commissioner (Appeals) to be furnished, or

(B) such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him.

then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purpose of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed."

Penalty under section 271(1)(c ) is leviable even assessee fails to substantiate explanation given by him during course of assessment. The assessees have not been able to make out the case that either the explanation regarding its claims of interest was bona fide or claim of interest was justified. It is clear from ratio laid down by Hon’ble Supreme Court in the case of Madras Industrial Investment Corpn. (supra). It is also abundantly clear from various decisions that income has to be assessed under sections 4 & 5 of Income-tax Act having taken into account the total income which actually is received or accrued during the year after taking into account the expenses which are justifiable relating to earning of said income and relating to relevant financial year. It is pertinent to discuss the ratio laid down by Hon’ble Supreme Court in State Bank of India’s case (supra) wherein on similar issue the Court observed as under:—

"Any liability incurred for the business of obtaining a loan would be revenue expenditure.

Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify on assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debentures is an instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures."

Even if decision of Hon’ble Supreme Court in Madras Industrial Investment Corpn. Ltd.’s case (supra) was subsequent to the returns filed by assessees, does not help the assessees since interpretation of particular provisions of statute by Hon’ble Supreme Court has its effect from inception of Legislature itself. We are also of the view that once it is established that particular expenditure, which does not accrue in reality or relevant previous year, is not admissible under the Income-tax Act, 1961. It is not material whether claim was made under section 37 or under section 36 of the Act. It was in any case not an allowable expenditure.

In above background we agree with the reasonings of the CIT(A):

(1)As discussed above, the Explanation to section 271(1)(c) is clearly applicable. Even though the Assessing Officer has not specifically mentioned this in the body of the order, it has been held the Supreme Court in the case of Madhusudan and others referred in 251 ITR 99 that it is not essential that the same should be specifically mentioned in the orders. The onus in this respect is on the appellant to prove that the explanation or the claim made was bona fide. This has not been done in the instant case.

(2)In none of the returns filed by the recipients corresponding interest income was declared and offered for tax on their own. The plea of the appellant that there were valid bona fide explanation therefore lacks acceptability.

(3)It is clear from the facts narrated above that in all the four appellant cases, the transactions are within the closely knit Mardia Group of companies and their Directors, and that have been arranged only with a view to reduce the tax liability of the appellant companies. The transactions relating to issue of debentures are also between the appellant and only one person who is either a director of the appellant companies or is a relative of the director of the appellant. The decision of Supreme Court in the case of Mc Dowell & Co. reported in 154 ITR 148 is also clearly applicable to the facts of the case.

(4)As discussed by the Assessing Officer, the transactions in reality are only in the nature of advance payments paid to the respective recipients by the appellant companies for which the actual interest was accrued in a period spread over 6 years and not for this financial year (except for a period of only 7 days).

(5)It would be absurd to accept the proposition that liability to pay interest on the debentures can accrue to the appellant on the first date when the debentures are issued to the recipients. The view taken by the Assessing Officer is, therefore, in full conformity with established principles of accountancy as well as the provisions of the Income-tax Act, 1961 duly supported by ratio of the Apex Courts as discussed earlier in this order. As the appellant(s) having followed mercantile system it cannot change the real nature of the transaction by claiming a deduction on the basis of cash payments which have been held to be mere advance payments only.

(6)As referred earlier, the Apex Court in the case of State Bank of India referred in 157 ITR 67 have clearly observed that the substance of transaction has to be seen and not the form. Mere recording of entries in the books in itself cannot justify the stand taken by the appellants or make the explanation bona fide or taking on argument that liability for interest be accrued on the basis of the scheme and the said debentures between the appellant and recipients. Since the said schemes were clearly devised in one go for all the four companies around the same time within the small group of family members of Mardia Group, it is obvious that the transaction is in the nature of a colourable device, as discussed earlier also in CIT(A)’s order.

(7)The Assessing Officer has already taken the most lenient view in the matter and imposed minimum penalty of 100% as against 300% (maximum).

Apart from this we find assessees have relied on various case laws, first among which was Sarabhai Chemicals (P.) Ltd.’s case (supra) (Guj.). The ratio in the case of Sarabhai Chemicals (P.) Ltd. (supra) relied on by assessees does not help assessees since in Sarabhai Chemicals (supra) assessees were under bona fide belief that interest has not accrued under section 271(1)(c) but in the instant case assessees were not prevented by bona fide belief that interest claim was not unjustified. It was deliberate attempt to conceal the income by furnishing inaccurate particulars of expenditure to reduce the income. We find that Hon’ble Kerala High Court in Commissioner Of Income-Tax v. Sree Krishna Trading Co. [2002] 253 ITR 645¹ (Ker.) following the ratio laid own by Hon’ble Supreme Court in K.P Madhusudhanan v. Commissioner Of Income Tax, Cochin [2001] 251 ITR 99² (SC), has held that in case addition of income on account of this understatement of sale was made and explanation of assessees that it had reduced the price of liquor sold by it so as to enhance the sales was disbelieved and the addition was sustained by Commissioner (Appeals) and also by the Tribunal. Explanation 1 to section 271(1)(c) of the Act has application under circumstances of cases and levy of penalty was justified. Under the provisions of Explanation to section 271(1)(c) there is presumption of concealment when assessee is unable to explain items of credit The burden is on the assessee to rebut the presumption where there is no satisfactory explanation regarding credit imposing of penalty was justified as laid down in K.P. Madhusudan’s case (supra). In the instant cases assessees could not discharge their burden cast upon them by virtue of Explanation 1 to section 271(1)(c) that their claim of interest of Rs. 6.2 crores was bona fide or genuine. It was neither found genuine nor bona fide which is evident from the fact that the additions have been sustained by the Tribunal by observing that assessees were reducing tax liabilities by adopting such devices. Thus assessees tried for wrongful gain at the cost of revenue which should not be encouraged in any manner.

In fact and circumstances we are not inclined to interfere in the order of CIT(A) who has upheld the penalty orders of Assessing Officer in case of all four assessee companies as discussed above.

It is pertinent to mention that all case laws relied by the assessees at different levels have been taken into consideration though same have not been specifically mentioned.

7. In the result, all the four appeals of the assessees are dismissed.

Per Shri R.P. Garg, Vice-President. - I have gone through the order proposed by the learned Judicial Member upholding the levy of penalties in all the 4 cases holding the assessee to be guilty of concealment. I, however, find myself unable to subscribe to his conclusions. In my opinion, none of these cases could be a case of concealment for the reasons as discussed in the subsequent paragraphs hereunder.

2. The relevant facts in all cases of assessees which are group companies of Mardia group are similar. I, therefore, narrate the fact as are appearing in the case Rupam Mercantile Ltd. which would be applicable mutatis mutandis to all these cases. The assessee issued Non-convertible Redeemable debentures on 25-3-1995 carrying interest at Rs. 62 payable upfront on the date of allotment. The debentures were redeemable after 6 years at par in one instalment. The assessee charged to its Profit and Loss Accounts the said interest of Rs. 62 per debenture in the previous year of allotment of debentures and thus claimed deduction thereof at Rs. 1.55 cr. as revenue expenditure in the previous year ended on 31-3-1995 relevant to assessment year 1995-96.

3. The return of Income was filed by the assessee on 29-11-1995 and in the details of interest paid attached thereto following is mentioned :

4. The said Note 4 to the statement of accounts filed along with the return of income reads as under :

"4. The payment of interest of Rs. 155 lakhs due to Non-convertible Redeemable Debentures issued during the year, in profit and loss account is for full term as per the terms of the issue."

5. The tax has been deducted at source on the entire amount of interest of Rs. 62 per debenture and deposited with Central Government as required.

6. The terms of the issue of Non-convertible Redeemable debenture are stated as under :

"2. Interest :

(A) Rate and manner of payment.—Each Debenture shall carry interest at Rs. 62—payable upfront on the date of allotment

3. Repayment.—The company agrees and undertakes to redeem the debentures on payment in one instalment at the end of sixth year from the date of allotment."

7. The assessment order was made by the Assessing Officer on 23-3-1998. He allowed interest for seven days which according to him pertained to the previous year under consideration by relying upon the decision of the Supreme Court in the case of Madras Industrial Investment (P.) Ltd. (supra), a decision dated 4-4-1997. Para 11 of the order of the Assessing Officer reads as under :

"11. Thus, the issue is beyond any doubt that the assessee can only get the deduction to the extent of interest pertaining to the year under consideration for a period of 7 days. Still, further the judgment of Hon’ble Supreme Court in the case of Madras Industrial Inv. Ltd. v. CIT 225 ITR 802 settles the issue once and for all. The assessee’s contention that the issue before the Hon’ble Supreme Court in this case was premium payable after expiry of terms of the securities is patently wrong and the same become clear from the aforesaid findings of the Hon’ble Supreme Court which squarely applies to the facts of the present case. The relevant portion of the judgment is reproduced below:

‘Any liability incurred for the business of obtaining a loan would be revenue expenditure.

Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debentures is an instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures.

In view of above discussion, the claim of deduction of payment of debenture interest is allowed to the extent of Rs. 49,543 only and balance Rs. 1,54,50,457 is disallowed and added to the total income. Penalty proceedings under section 271(1)(c) are initiated for furnishing inaccurate particulars of income by making wrong claim of deduction of debenture interest not related to the previous year relevant to assessment year 1995-96."

8. The CIT(A) confirmed the disallowance by observing in paragraph 2.3 as under :

"2.3 I have considered the contention of the appellant as also the observations of the Assessing Officer. I agree with the reasons given by the Assessing Officer for making disallowance of the claim of interest on debentures to the extent of Rs. 1,54,50,457. There is also no substance in the appellant’s claim made before the Assessing Officer that as per the agreement between the parties, the whole amount of interest on the amount of debentures was payable on day one and for the remaining period, the loan was interest-free. Para 4 of the notes forming part of accounts in the balance-sheet of the appellant-company for assessment year 1995-96 states that the payment of interest of Rs. 1,55,00,000 due on non-convertible redeemable debentures issued during the year was for full term as per the terms of the issue. The ratio laid down by the Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT squarely applies to the case of the appellant. In view of the above, the disallowance made of Rs. 1,54,50,457 is upheld."

9. The Tribunal also upheld the disallowance by observing in paragraph 7.1 of its order in ITA No. 1102/Ahd./1999 and others dated 28-10-1999 as under :

"7.1 Accordingly, the Hon’ble Supreme Court relying on the aforesaid decision of the M.P. High Court in the case of M.P. Financial Corporation 165 ITR 765 held that the assessee was correct in claiming deduction only in respect of the proportionate part of discount of Rs. 12,500 over the relevant accounting period in question. The Supreme Court further noted that the view taken by them was in conformity with the accounting practice of showing the discount in the "Discount of Debenture Account" which is written off over the period of the debentures. The facts of the case before us are similar to the facts of the case of Madras Industrial Investment Corporation (supra) and accordingly we do not find any merit in the ground taken by the four assessee companies, as the issue is squarely covered by the decision of the Supreme Court in Madras Industrial Investment Corporation (supra). Accordingly, we adjudicate ground No. 1 in all the appeals against the assessee and in favour of the revenue."

10. On the disallowance of this interest the Assessing Officer held the assessee guilty of concealment and levied penalty under section 271(1)(c) by order dated 31-5-2000. CIT(A) upheld the same by giving a 7 point reasons thereof as quoted in the penultimate paragraph of the order proposed by the ld. Judicial Member.

11. The High Court has admitted the appeal of the assessee on a substantial question of law vide order dated 27-9-2000 by observing as under :

"The appeals are admitted on the following common substantial question of law :

‘Whether, in the facts and circumstances of the case, the ITAT was right in law in holding that the assessee was not entitled to the deduction of interest paid by it on debentures issued by it’?"

12. From the order of the Tribunal in the cases of recipients Rasiklal Rajiv and Rakesh S. Mardia [ITA Nos. 1142, 1145 and 1101/Ahd./1999, dated 28-10-1999], we find that besides the tax deducted at source and deposited with Government by this payer assessee company on the entire amount of interest and that the Assessing Officer had also brought the entire amount of Rs. 62 to tax as income of the recipients. CIT(A) upheld the assessment of the entire interest in their cases by relying upon the decision of Supreme Court in Keshav Mills Ltd., v. Commissioner Of Income Tax, Bombay [1953] 23 ITR 230 (SC) and E.D. Sasoon & Co. Ltd. v. CIT [1954] 26 ITR 27 (SC). The Tribunal, however, deleted the additions by following inter alia the decision of the Tribunal in quantum appeals of the assessees by the aforesaid order. In the cases of the recipient assessees also the appeal has been admitted by the High Court under section 260A on the following substantial question on which appeal is admitted by the High Court as under :

"The appeals are admitted on the following common substantial question of law :

‘Whether, the Appellate Tribunal is right in law and on facts in holding that the interest income in the hands of the assessee who was allotted debentures by the Companies is required to be taxed only on proportionate basis and that the Commissioner of Income-tax (Appeals) was not justified in sustaining the addition of the whole amount of interest at the rate of Rs. 62 per debenture in the accounting year in question’?"

13. section 271(1)(c) under which penalty is levied reads as under :

"271. (1) If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person—

(c )has concealed the particulars of his income or furnished inaccurate particulars of such income.

he may direct that such person shall pay by way of penalty,—

(iii)In the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income.

Explanation 1 - Where in respect of any facts material to the computation of the total income of any person under this Act,—

(A)such person falls to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the Commissioner to be false, or

(B)such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him,

then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purpose of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed."

14. The courts have invariably held that concealment proceedings are penal in character and under the substantive provisions of section 271(1)(c) it is for the department to prove that the assessee had concealed the particulars of his income or furnished inaccurate particulars thereof to bring the case of the assessee within the mischief of the main provisions of section 271(1)(c) of the Act. Mere rejection of assessee’s claim would not be sufficient to hold the assessee to be guilty of concealment. If there is no evidence on record except the explanation of the assessee which explanation is either found to be false or is unacceptable, it does not follow that concealment has been established. Commissioner Of Income Tax, West Bengal v. Anwar Ali [1970] 76 ITR 696 (SC), CIT v. Khoday Eswarsa & Sons [1972] 83 ITR 369 (SC), CIT v. Mussadilal Ram Bharose [1987] 165 ITR 14¹ (SC).

15. It is by virtue of explanation only, that the Assessing Officer can raise a presumption about certain income added or deduction disallowed, to consider it income in respect of which particulars of income have been concealed merely on the ground of non-submission of explanation or when explanation furnished was found false or when such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him. In other words in later case this Explanation itself exonerate an assessee if the explanation offered was bona fide and all the facts relating to the same and material to the computation of his total income have been disclosed by an assessee. See in this connection the observation of Gujarat High Court in the case of Sarabhai Chemical (P.) Ltd. (supra) :

"The deeming fiction that the added/disallowed amounts represent the income in respect of which particulars have been concealed contained in Expln. 1 will not apply if the explanation that was given _____________________

1. 30 Taxman 546.

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. In cases where explanation was offered, but was rejected as it could not be substantiated by the assessee, there would arise no presumption of concealment of the particulars of income that was added or disallowed and such assessee can show that the said explanation offered by him was a bona fide one and that he had disclosed all facts relating to such explanation and material to the computation of his total income during the quantum proceedings."

16. It is not the case of revenue that the assessee had failed to offer an explanation or that its explanation was found to be false. The allegation against the assessee is that it furnished inaccurate particulars of its income by making a wrong claim as per the Assessing Officer and that its explanation and the claim of expenditure was not bona fide as per the CIT(A) and therefore liable by virtue Part B of the Explanation.

17. Let us examine this part B of the provision of Explanation little minutely.

(I)The first sentence of this part B is "such person offers an explanation which he is not able to substantiate". Can it be said that assessee’s explanation was not substantiated ? "Not substantiated" does mean not accepted by the authority concerned but not showing a substance in the claim made by the assessee. The word "substantiate" is opposite to the words vague or fanciful, or without any foundation or basis. It cannot be equated with the expenditure allowed. What more can it be said about its substantiation that its High Court has admitted its appeal for consideration of the appeal which as per the provisions of section 260A is admitted only when a substantial question of law arise out of its claim for allowance. The Tribunal in the case of K.G. Nariman Alias N.K. Gajwani v. ITO [1989] 33 TTJ (Bom.) 565 has even taken a view that when a simple question of law is granted in reference under section 256(2) as it stood at that time the case of the assessee goes out of part B of the Explanation 1 to section 271(1)(c) of the Act. In this case an addition of Rs. 2,64,789 was made by the Assessing Officer to the income of the assessee under section 68 being not satisfied with the explanation of the assessee that it was gift received from his sister. The addition was deleted by the CIT(A) but restored by the Tribunal. The Tribunal rejected the 256(1) application of the assessee but a question of law was granted by the High Court under section 256(2). On these facts the Tribunal vide paragraph 15 of its order deleted the penalty by observing as under :

"15. We have carefully considered the rival submissions of the parties and the material already brought on record and we find force in the submissions made on behalf of assessee. It would appear from the quantum proceedings that the addition of Rs. 2,64,781 was deleted by the CIT(A) but was restored by the Tribunal. Even though the Tribunal had rejected the RA filed by the assessee under section 256(1) of the Act, the Hon’ble High Court was pleased to grant reference under section 256(2) of the Act in respect of the addition of Rs. 2,64,781 made by invoking the provisions of section 68 of the Act. In other words, it is quite apparent from the record that the question of addition of Rs. 2,64,781 is wide open. Under these circumstances only, we fall to appreciate how the assessee’s case could be brought within the mischief of clause (B) of the Explanation 1 to section 271(1)(c) of the Act. Here it is pertinent to note that it is a trite law that the penalty proceedings are two separate and distinct proceedings. Therefore, the fact that some addition is made in the assessment would not automatically justify the imposition of penalty under section 271(1)(c) of the Act.

It is an undisputed fact that in his return as well as along with his return the assessee has filed all material in respect of the computation of his total income under the Act. Not only that the assessee had supported with documentary evidence his explanation that he had received Rs. 2,64,781 by way of gift from his sister. We, therefore, entirely agree with the stand taken on behalf of the assessee that the provisions of clause (B) of the Explanation 1 to section 271(1)(c) of the Act would not be attracted in the instant case. Even assuming for the sake of argument that the said clause would be attracted in the instant case, it is difficult to hold that the explanation given by the assessee regarding the nature and source of Rs. 2,64,781 was not a bona fide. We have come to this conclusion as the CIT(A) had accepted the assessee’s explanation in the quantum proceedings and the Hon’ble High Court was pleased to grant reference under section 256(2) of the Act in respect of invoking the provisions of section 68 of the Act. In this view of the matter, even assuming for the sake for argument that the assessee’s case falls within clause (B) of the Explanation 1 of section 271(1)(c) of the Act, the assessee’s case could still be saved by the provisions contained in the proviso to the said clause. Further, after carefully going through the relevant portions of the commentaries of Kanga & Palkhiwala and Sampath Iyengar (referred to on behalf of the assessee), we are fully satisfied that this is not a fit case for imposing penalty under section 271(1)(c) of the Act."

Again, in the case of Emtici Engg. Ltd. [IT Appeal Nos. 2278 (Ahd.) of 1991 and 2984, 1341, 1342 and 1343 (Ahd.) of 1995 dated 28-11-2002], the penalty levied by the Assessing Officer for non-disclosure of the property income under the head "income from house property" was deleted by finding that question of law under section 256(1) was referred to the High Court regarding the taxability of the income from house property and the proceedings under section 147(a) of the Act and the Tribunal held that this clearly indicated that the head under which the rental income was assesseable was wide open and the assessee’s case could not be brought within the mischief of clause (B) of Explanation 1 to section 271(1)(c) of the Act.

(II)The second sentence states "and falls to prove that such explanation is bona fide". The assessee claimed to have based its claim on Madhya Pradesh High Court decision in the case of National Newsprint & Paper Mills Ltd. (supra) wherein the High Court observed in paragraph 8 of its judgment that "in order that the amount of interest could be claimed as deduction in a particular year, the assessee ought to have undertaken unconditionally to pay it to the Government." The Government was the party in this case from whom the assessee had taken the loan. In the present case also the assessee has undertaken unconditionally the liability to pay interest of Rs. 62 per debenture payable upfront on the date of allotment itself, the assessee could not therefore be said to be wrong in making a claim in the year under consideration, being the year in which the date of allotment of debenture falls. The claim of interest settled subsequently was allowed in one year in the case before the High Court as against from year to year because the interest liability was settled in later years and the entire claim of many years interest was allowed in that later year. Similarly, in the present case it was the liability settled by the terms of the debenture deed in the 1st year itself. Assessee took the view that irrespective of the period to which it pertained, a liability of interest can be claimed in the year when it accrues or settled as per agreement or by the law. When a liability can be allowed in a subsequent year though it relate to an earlier year or to so many of earlier years, the assessee in my opinion cannot be said to be lacking bona fides if he claims the same in the 1st year itself as per terms of the deed of debenture fixing the liability of future years as well in that 1st year itself.

(III)The third sentence is "and that all the facts relating to the same and material to the computation of his total income have been disclosed by him". As narrated above, all the material which are relevant for computing the income of the assessee have been disclosed by the assessee not only during the assessment proceedings but at the threshold in the return of income itself, i.e., in the details of interest furnished alongwith the return, in the note No. 4 in statement of accounts, in the terms of deed of debenture etc. It would be relevant to note that on the basis of these very material and not more the Assessing Officer has allowed a part of the interest of Rs. 49,543 allocating it as pertaining to 7 days of the previous year under consideration and disallowed the balance Rs. 1,54,50,457. No other material or fact has been brought on record for making the disallowance. There is also no allegation of revenue that debenture agreement is sham or bogus. In my opinion, the assessee’s case is very much similar and near to the case of jurisdictional High Court in the case of Sarabhai Chemical (P.) Ltd. (supra). The following is the extract from the judgment :

"The deeming fiction that the added/disallowed amounts represent the income in respect of which particulars have been concealed contained in Expln. 1 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. In cases where explanation was offered, but was rejected as it could not be substantiated by the assessee, there would arise no presumption of concealment of the particulars of income that was added or disallowed and such assessee can show that the said explanation offered by him was a bona fide one and that he had disclosed all facts relating to such explanation and material to the computation of his total income during the quantum proceedings."

18. Therefore, part B of the Explanation 1 to section 271(1)(c) would exonerate an assessee from levy of penalty as the assessee has offered an explanation which though he is not only able to substantiate but proved that his explanation was bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him. Explanation 1 to section 271(1)(c). We may usefully refer to the case of M/S. Shiv Lal Tak v. Commissioner Of Income-Tax, Jodhpur [2001] 166 CTR (Raj.) 534, wherein the Rajasthan High Court has observed as under :

"In the Explanation 1 to section 271(1)(c), as recast while the expression ‘failure to return the total assessed income as not arising on account of any fraud or wilful negligence on the part of assessee’ does not find place but clause (b) read with proviso (ii) makes it abundantly clear that where difference in the assessed income and returned income is not arising on account of any gross or wilful negligence on the part of the assessee, still no penalty is leviable. The statute has clearly drawn distinction between furnishing a deliberate false explanation by the assessee and an explanation, which may not be false but is not accepted because assessee was not able to substantiate it. While there is no relaxation in the rigour of explanation. In raising presumption against the assessee in the former case, in the latter class of cases, the statute itself relaxes its rigour by directing that where in respect of any amount, added or disallowed and any explanation is offered by such person (assessee) which is not accepted because the assessee has failed to substantiate the same, but which explanation is bona fide and all the facts relating to same and material to the computation of total income has been disclosed by cases under clause (A) of the Explanation 1 are those where explanation furnished by the assessee falls in the category of a fact ‘disproved’ whereas cases where an explanation so furnished falls in the category of fact ‘not proved’. The expressions ‘proved’, ‘disproved’ and ‘not proved’ have well known distinct connotation in legal terminology, as may be apparent from the provisions of Indian Evidence Act. On finding an explanation as was existent or disproved a reasonable inference of lack of bona fide can be drawn mere failure to substantiate the explanation as a fact not proved, cannot raise a presumption about deliberate concealment and lack of bona fide. In such events question of bona fide has to be proved as a fact like any other fact on preponderance of probability uninfluenced with any presumption."

19. It is in my opinion a mere rejection of assessee’s claim for deduction cannot, in any case, be equated with concealment. Reference may had to the following cases :

(i) Addl. CIT v. Delhi Cloth & General Mills Co. Ltd. [1986] 157 ITR 822 ¹ wherein the court observed :-

"The mere fact that a claim for expenditure stands disallowed does not, by itself lead to the inference that the assessee had furnished inaccurate particulars in regard to that item."

(ii)Madhya Pradesh High Court in the case of J.K Jajoo v. Commissioner Of Income-Tax. (1990) 181 ITR 410² observed as under :—

"But from the mere fact that a claim for certain expenditure is rejected, it cannot be held that the claim for expenditure made by the assessee was false or inaccurate to his knowledge or was a result of gross negligence."

Even under the pre-existing Explanation between 1964 to 1968 the expenditure incurred bona fide by an assessee for the purpose of making off earning any income included in the total income but which has been disallowed as a deduction was to be reduced for the purposes of computing 80% income for deeming concealment.

20. The Assessing Officer has disallowed the claim of the assessee by relying upon the decision of the Supreme Court in the case of Madras Industrial Investment (supra) which was rendered on 4-4-1997 a date subsequent to filing of the return on 29-11-1995 by the assessee for which the assessee cannot, in my opinion, be accused of furnishing inaccurate particulars. Before imposing the penalty the conduct of the appellant at the time of filing the return has to be seen and not subsequent developments which have been taken place after filing of the return. In other words, the appellant has filed the return bona fide then a subsequent decision of the Hon’ble Supreme Court or even the amendment of law retrospectively would not render the return which is filed originally bona fide into a mala fide one. Reference, in this connection may be had to the decision of the Hon’ble Supreme Court in the case of Hindustan Electro Graphites Ltd. (supra). In this case the assessee had received certain amount by way of cash compensatory support which it did not include this income in its return which was filed on 29-12-1989. The Assessing Officer treated cash compensatory support receipt as Income in view of Insertion of clause (iiib) to section 28 by the Finance Act, 1990 with retrospective effect from 1-4-1967, and levied additional tax under section 143(1A). The Supreme Court observed: "One has to see the law on the date of filing the return. To attract penal provisions, there has to be some element of lack of bona fide unless the law specifically provides otherwise. Levy of additional tax bears all the characteristics of penalty." It was held that the instant case did not represent even a bona fide mistake. In fact it was not a case where under some mistaken belief the assessee did not disclose the cash compensatory support received by it which it could offer to tax. After the assessee had filed its return of income, which was correct as per law on the date of filing of the return, it was thereafter that the cash compensatory support also came within the way of section 28. When additional tax has imprint of penalty, the revenue cannot be heard saying that levy of additional tax is automatic under section 143(1A). If additional tax could be levied in such circumstances, it would be punishing the assessee for no fault of it. That cannot even be the legislative intent. The court observed :

"It shocks the very conscience if in the circumstances section 143(1A) could be invoked by levying the additional tax. In the circumstances of the case, levy of additional tax taking into account, the income by way of cash compensatory support was not warranted."

21. Reference in this case may be had the decisions of Jiyajeerao Cotton Mills Ltd.’s case (supra). The High Court made the distinction between the retrospectivity which governs the statutory amendment and the retrospectivity qua the decision of the Hon’ble Supreme Court and held:

"The principle of retrospective legislation is not applicable to the decisions of the Supreme Court declaring the law or interpreting a provision in a statute. The law is laid down or a provision in a statute is interpreted by the Supreme Court only when there is a debate or doubt on the interpretation of any provision of a statute requiring interpretation by the Supreme Court or when there is a conflict of judicial opinion on the provision of a statute among the different High Courts of India which is required to be resolved and settled by the Supreme Court. The law laid down by the Supreme Court cannot be said to have retrospective operation in the sense that although a debate, doubt or conflict of judicial opinion is resolved and settled by the Supreme Court it does not obliterate the existence of such debate, doubt or conflict prior to such decision."

22. Again the case of Export Enterprises P. Ltd. v. CIT [1983] 142 ITR 641 ¹ (Cal.) it was observed :

"The law laid down by the Supreme Court cannot be said to have retrospective operation in the sense that although a debate or conflict of judicial opinion is resolved and settled by the Supreme Court, it does not obliterate the existence of such debate or conflict prior to such decision."

23. The principle laid down in these decisions came up for consideration before the Tribunal in the case of Soorajmull Nagarmull v. CIT [1984] 320 TTJ (Cal.) 145. The Tribunal following the Supreme Court decision in the ____________________

1. 15 Taxman 299 (Cal.).

case of CIT v. Maheshwari Devi Jute Mills Ltd. [1965] 57 ITR 36 as well as the decision of the Calcutta High Court in the case of CIT v. Empire Jute Co. Ltd. [1974] 97 ITR 581 (Cal.) disallowed the claim of the assessee holding that expenditure incurred on the purchase of loom hours was not revenue in nature. The assessee then filed a miscellaneous application dated 16-8-1983 submitting that after the service of the said order dated 14-4-1975, the assessee was informed that in view of the later judgment of the Hon’ble Supreme Court in the case of Empire Jute Co. Ltd. (supra), the said sum should have been allowed as revenue expenditure. The Tribunal held that the decision in the case of Empire Jute Co. Ltd. (supra) was rendered by the Hon’ble Supreme Court of India on 9-5-1980 i.e., after the Appellate Tribunal passed the order on 14-4-1975 relating to the reference application of the assessee. The order of the Appellate Tribunal in the appeal preferred, by the assessee had been passed much earlier on 11-10-1994. The Tribunal referred to the Calcutta High Court in the case of Jiyajeerao Cotton Mills Ltd. (supra) and held that the principle of retrospective legislation is not applicable to the decisions of the Supreme Court declaring the law or interpreting a provision in a statute. The law is laid down or a provision in a statute is interpreted by the Supreme Court only when there is a debate or doubt on the interpretation of any provision of a statute. In view of this position in law, it was not right to say that in view of the later judgment of the Hon’ble Supreme Court in the case of Empire Jute Co. Ltd. (supra) the cost of the purchase of loom hours should be allowed now as revenue expenditure, although in the appeal on the point the Appellate Tribunal vide its order dated 11-10-1974 had treated the above expenditure as capital.

24. The Gujarat High Court in CIT v. Maneklal Harilal Spg. & Mfg. Co. Ltd. [1977] 106 ITR 24 also observed similarly as under :

"Though the effect of the Supreme Court decision by virtue of the provisions of the Constitution is that the Supreme Court declares the law of the land it must be held to have been always the law of the land, once it has so declared, it cannot be placed on the same footing as a retrospective piece of legislation and the legal fiction which goes with retrospective legislation cannot arise in the case of the decision of the Supreme Court declaring what the law of the land is."

25. Though these decisions are on retrospectivity of applicability of Supreme Court they clearly observed that "When the law is laid down or a provision in a statute is interpreted by the Supreme Court only when there is a debate or doubt on the interpretation of any provision of a statute requiring interpretation by the Supreme Court or when there is a conflict of judicial opinion on the provision of a statute among the different High Courts of India which is required to be resolved and settled by the Supreme Court."

26. In the case of Madras Industrial Investment Ltd. (supra) the assessee originally claimed a proportionate deduction of Rs. 12,500 out of Rs. 3,00,000 being the discount of debenture repayable after a period of 12 years. Assessing Officer held it to be not allowable at all. On appeal, the AAC held that discount allowed at the time of issue of the debenture was an allowable deduction. Before the Tribunal assessee claimed the entire amount of discount as a deduction and the Tribunal allowed it by stating the expenditure was incurred by the assessee in the relevant previous year. The High Court though held that the Tribunal was right in permitting the assessee to raise the contention of claiming the entire amount upheld the disallowance on the ground that it was not an expenditure at all. This view of the High Court was reversed by the Supreme Court. It also held on pages 812 and 813 of its judgment in Madras Industrial Investment Corpn. Ltd. (supra) as under :—

"The Tribunal, however, held that since the entire liability to pay the discount had been incurred in the accounting year in question, the assessee was entitled to deduct the entire amount of Rs. 3,00,000 in that accounting year. This conclusion does not appear to be justified looking to the nature of the liability. It is true that the liability has been incurred in the accounting year. But the liability is a continuing liability which stretches over a period of 12 years. It is, therefore, a liability spread over a period of 12 years. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Thus in the case of Hindustan Aluminium Corporation Ltd. v. CIT [1983] 144 ITR 474 , the Calcutta High Court upheld the claim of the assessee to spread out a lump sum payment to secure technical assistance and training over a number of years and allowed a proportionate deduction in the accounting year in question.

Issuing debentures at a discount is another such instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures."

27. Thus the Supreme Court itself held that the liability for discount has been incurred in the accounting year i.e., the year of allotment of debenture; that it was revenue in nature and that ordinarily the revenue liability incurred wholly and exclusively for the purpose of business must be allowed in the year in which it was incurred. It cannot be spread over a number of years even if the assessee has written it off in his books of account over a period of years.

28. The Supreme Court made reference in allowing spread over to a decision of Calcutta High Court in Hindustan Aluminium Corporation Ltd. v. CIT [1983] 144 ITR 474¹ upholding the claim of assessee to spread out a lump sum payment to secure technical assistance and training over a number of years which itself is a depart from concept of allowing expenditure in year of allowing the expenditure in the year in as incurred. See in this connection the contrary decisions :

(i) CIT v. British India Corpn. Ltd. [1987] 165 ITR 51 ¹ (SC) in this case the assessee carrying on, inter alia, the business of tanning hides and manufacture of leather products, entered into an agreement with CW and Co., of London who agreed to permit the respondent to use a number of registered trademarks and to disclose the technique, practices and application of specialized tanning processes. The agreement was for seven years and technical fees agreed was 5 per cent, of the selling price of its products Assessee was to appoint TGS, a private company, as its distributor for sale of industrial leather manufactured by it for the period of the agreement at a discount of 15 per cent, and in addition to pay the distributor Rs. 50,000 for meeting initial expenses of establishing the distributorship. The assessee claimed deduction of the sum of Rs. 50,000 paid to TGS as revenue expenditure. The Department and the Tribunal rejected the claim but, on a reference, the High Court held that the expenditure was not of a capital nature and allowed the entire expenditure as a deduction. On appeal the Supreme Court affirmed.

(ii) CIT v. Gujarat Mineral Development Corpn. [1981] 132 ITR 377 ² (Guj.) : In this case, the assessee-company carried on the business of mineral development and development of mines, extraction of ores, etc. It incurred an expenditure of Rs. 20.46 lakhs for laying electric cables and electric supply transmission lines, etc., for a Beneficiation Plant to enable the assessee to separate waste material from useful mineral. One-seventh of the total amount of Rs. 20.46 lakhs was shown as revenue expenditure written off by way of expenditure. The installation was completed in December, 1968. The assessee claimed the amount of Rs. 20.46 lakhs as a revenue expenditure for the assessment year 1969-70. The Tribunal held that the expenditure did not relate to the year under appeal and in any event it was a capital expenditure: On a reference High Court held that it was to enable the assessee to carry on its business more efficiently and more profitably that it installed the Beneficiation Plant. The advantage was not in the capital field and hence the expenditure, although its benefit would enure for a number of years, was of a revenue nature applying Empire Jute Co. Ltd. (supra).

(iii) Hindustan Commercial Bank Ltd., In re [1952] 21 ITR 353 (All.) : In this case, the assessee, a bank, incurred during the relevant account year certain expenses in opening forty-six new branches, sub- branches and pay offices. A sum of Rs. 24,675 represented charges for advertisement, entertainment, photos and invitation cards and a sum of Rs. 89,870 represented salary, dearness and other allowances, tax on salaries, postage, telegrams, telephone rent, lighting, travelling expenses and conveyance. The question was whether the assessee was entitled to deduct these two sums under section 10(2)(xv) of the Indian Income-tax Act, 1922. The Appellate Tribunal held that the expenditure of Rs. 24,675 was of a capital nature and the expenditure of Rs. 89,870 was revenue in character. The Tribunal, however, treated the sum of Rs. 89,870 as deferred expenditure, spread it over a period of 20 years and allowed a deduction of 1/20th of the amount during the relevant year. On a reference under section 66(1) the High Court held that there was no legal justification for spreading out the sum of Rs. 89,870 over a period of twenty years and the whole amount was deductible in the year in which it was incurred if it was not in the nature of a capital expenditure; and that, assuming that the sums of Rs. 89,870 and Rs. 24,675 were expenses incurred wholly and exclusively for the purpose of the business, they were in the nature of revenue expenditure and were admissible deductions under section 10(2)(xv).

29. Can the assessee be said to have concealed particulars on his income by making that claim? In my view it is not a case of concealment of income or furnishing inaccurate particulars thereof either under the main provision of section 271(1)(c) factually or under the deeming provisions of Explanation 1 thereto, fictionally. The appeal in my opinion is to be allowed.

30. Let us now discuss the seven point reasoning given by the CIT(A) as found approval of the Ld. Judicial Member. These are extracted in his proposed order in paragraph 6. In my opinion, none of them have any substance in holding the assessee to guilty of concealment.

(i)The 1st point is as under :—

"(1) As discussed above, the Explanation to section 271(1)(c) is clearly applicable. Even though the Assessing Officer has not been specifically mentioned this in the body of the order, it has been held by the Supreme Court in the case of Madhusudan and others referred in 251 ITR page 99 that it is not essential that the same should be specifically mentioned in the orders. The onus in this respect is on the appellant to prove that the explanation or the claim made was bona fide. This has not been done in the instant case."

As regards this point, the reference of Madhusadan’s case in my opinion, has no relevance, firstly because it was a case dealing with Explanation as it existed prior to introduction of the present explanation w.e.f. 1-4-1976; and secondly because neither the assessee nor the revenue has raised any objection to the applicability thereof. In fact both have based their respective case on the Explanation itself - assessee’s claim being that Part B of the Explanation exonerate it from deemed concealment in view of fact that it had disclosed all facts material to the computation of its income and even though the explanation could not be taken to have been substantiated, it bona fide claim of the assessee based on the prevailing law at the time of filing its return of income and that by mere disallowance or rejection of its claim in assessment proceeding by itself it could be said that its was not substantiated and amounting to concealment of income or furnishing inaccurate particulars thereof.

(ii)The second point is as under :—

"(2) In none of the returns filed by the recipients, corresponding interest income was declared and offered for tax on their own. The plea of the appellant that there were valid bona fide explanation therefore lacks acceptability."

The Assessing Officer has brought the entire amount of interest @ Rs. 62 per debenture in the hands of the recipients and addition being upheld by the CIT(A). It was deleted by the Tribunal by following its decision in assessee’s case (supra) for upholding disallowance and the matter is pending in the High Court in appeal on a Substantial question of law in those cases as well. Be that as it may the offer or non-declaration of interest income in the recipient’s hands had no bearing or relevance in dealing with the question of allowability of expenditure whether assessee had concealed income by claiming the expenditure of interest as allowable revenue deduction. In Madras Industrial Investment’s case (supra) itself the Supreme Court had observed that the character of payment in the hands of payer can be different from the character of that payment in the hands of the recipient.

(iii)The third point is as under :—

"(3) It is clear from the facts narrated above that in all the four appellants cases, the transactions are within the closely knit Mardia Group of Companies and their Directors and that have been arranged only with a view to reduce the tax liability of the appellant-companies. The transactions relating to issue of debentures are also between the appellant and only one person who is either a director of the appellant companies or is a relative of the director of the appellant. The decision of Supreme Court in the case of McDowell and Co. reported in 154 ITR 148 is also clearly applicable to the facts of the case."

The mere fact that the transaction was between the closely knit Mardia group of companies and their directors would not be sufficient to bring the case of the assessee within the ken of Macdo-well. If that be the case the Assessing Officer could not have even allowed the interest for 7 days. Furthermore the contours of Macdowell have been ironed out by the recent later decision of the Supreme Court in the case of Azadi Bachao Andolan (supra).

"With respect, therefore, we are unable to agree with the view that Duke of Westminster’s case (1936) AC 1 (HL); 19 TC 490 is dead, or that its ghost has been exercised in England. The House of Lords does not seem to think so, and we agree, with respect. In our view, the principle in Duke of Westminster’s case (1936) AC 1 (HL); 19 TC 490 is very much alive and kicking in the country of its birth. And as far as this country is concerned, the observations of Shah, J. in CIT v. Raman [1968] 67 ITR 11 (SC) are very much relevant even today.

We may in this connection usefully refer to the judgment of the Madras High Court in M.V Arunachalam v. Income Tax Officer* [1988] 170 ITR 238 , which has rightly concluded that the decision in McDowell [1985] 154 ITR 148 (SC) cannot be read as laying down that every attempt at tax planning is illegitimate and must be ignored, or that every transaction or arrangement which is perfectly permissible under law, which has the effect of reducing the tax burden of the assessee, must be looked upon with disfavour. Though the Madras High Court had occasion to refer to the judgment of the Privy Council in IRC v. Challenge Corporation Ltd. [1987] 2 WLR 24, and did not have the benefit of the House of Lords’ pronouncement in Craven’s case (1988) 3 All ER 495 (HL); (1990) 183 ITR 216 (HL), the view taken by the Madras High Court appears to be correct and we are inclined to agree with it.

We may also refer to the judgment of the Gujarat High Court in Banyan and Berry v. Commissioner of Income-tax [1966] 222 ITR 831 at 850 where referring to McDowell’s case (1985) 154 ITR 148 (SC), the court observed :

"The Court nowhere said that every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax Irrespective of legitimacy or genuineness of the act; an inference which unfortunately, in our opinion, the Tribunal apparently appears to have drawn from the enunciation made in McDowell’s case (1958) 154 ITR 148 (SC). The ratio of any decision has to be understood in the context it has been made. The facts and circumstances which lead to McDowell’s decision leave us in no doubt that the principle enunciated in the above case has not affected the freedom of the citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection, within the framework of law, unless the same fall in the category of colourable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity."

This accords with our own view of the matter.

In CIT v. Arvind Narottam [1988] 173 ITR 479 (SC), a case under the Wealth-tax Act, three trust deeds for the benefit of the assessee, his wife and children in identical terms were prepared under section 21(2) of the Wealth-tax Act. The Revenue placed reliance on McDowell’s case [1985] 154 ITR 148 (SC). Both the learned judges of the Bench of this court gave separate opinions.

Chief Justice Pathak, in his opinion said (at page 486):

"Reliance was also placed by learned counsel for the Revenue on McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 (SC). That decision cannot advance the case of the Revenue because the language of the deeds of settlement is plain and admits of no ambiguity."

Justice S. Mukherji said, after noticing McDowell [1985] 154 ITR 148 (SC) case (at page 487):

"Where the true effect on the construction of the deeds is clear, as in this case, the appeal to discourage tax avoidance is not a relevant consideration. But since it was made, it has to be noted and rejected."

In Mathuram Agrawal v. State Of Madhya Pradesh [1999] 8 SCC 667 at para 12 another Constitution Bench had occasion to consider the issue. The Bench observed (page 673):

"The intention of the Legislature in a taxation statute is to be gathered from the language of the provisions particularly where the language is plain and unambiguous. In a taxing act it is not possible to assume any intention or governing purpose of the statute more than what is stated in the plain language. It is not the economic results sought to be obtained by making the provision which is relevant in interpreting a fiscal statute. Equally impermissible is an interpretation which does not follow from the plain, unambiguous language of the statute which will serve the spirit and intention of the Legislature."

The Constitution Bench reiterated the observations in Bank of Chettinad Ltd. v. CIT [1940] 8 ITR 522 (PC), quoting with approval the observations of Lord Russel of Killowen in IRC v. Duke of Westminster [1936] AC 1 (HL); (1936) 19 TC 490 and the observations of Lord Simonds in Russel v. Scott (1948) 2 All. ER 15.

It thus appears to us that not only is the principle in Duke of Westminster’s case (1936) AC 1 (HL); 19 TC 490 alive and kicking in England, but it also seems to have acquired judicial benediction of the Constitutional Bench in India, notwithstanding the temporary turbulence created in the wake of McDowell’s case [1985] 154 ITR 148 (SC)."

(iv)The fourth point is as under :—

"(4) As discussed by the Assessing Officer, the transactions in reality are only in the nature of advance payments paid to the respective recipients by the appellant companies for which the actual interest was accrued in a period spread over 6 years and not for this financial year (except for a period of only 7 days)."

It is the view taken by the Assessing Officer for rejecting the assessee’s claim, the validity and correctness of which is subject to the decision of the High Court admitting the appeal on a substantial question of law and not as a ground for holding the assessee guilty for concealment.

(v)The fifth point is as under :—

"(5) it would be absurd to accept the proposition that liability to pay interest on the debentures can accrue to the appellant on the first date when the debentures are issued to the recipients. The view taken by the Assessing Officer is, therefore, in full conformity with established principles of Accountancy as well as provision of the Income-tax Act, 1961 duly supported by ratio of the Apex Courts as discussed earlier in this order. As the appellant(s) having followed mercantile system it cannot change the real nature of the transaction by claiming a deduction on the basis of cash payments which have been held to be mere advance payments only."

The applicability of the Supreme Court decision the facts of the case is subject-matter of scrutiny of the High Court which had admitted the appeal of the assessee, it being a substantial question of law on this very issue of disallowance of interest on debenture. The Supreme Court decision is a case for a claim of discount on debenture, whereas the present is a case of interest payable upfront on the date of allotment of debenture in the previous year itself for the entire period of debenture holding.

(vi)The sixth point is as under :—

"(6) As referred earlier, the Apex Court in the case of State Bank of India referred in 157 ITR p.67 have clearly observed that the substance of transaction has to be seen and not the form. Mere recording of entries in the books in itself cannot justify the stand taken by the appellants or make the explanation bona fide to taking an argument that liability for interest be accrued on the basis of the scheme and the said debentures between the appellant and recipients. Since the said schemes were clearly devised in one go for all the four companies around the same time within the small group of family members of Mardia Group, it is obvious that the transaction is in the nature of colourable device, as discussed earlier also in this order."

It is true that substance of the transaction is to seen in determining its character but the legal effect of a transaction can also not be ignored altogether and given a go by as stated by the recent decision of the Supreme Court in Azadi Bachao Andolan’s case (supra) wherein the court at page 763 observed as under:

"We are unable to agree with the submission that an act which is otherwise valid in law can be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests, as perceived by the respondents."

(vii)The seventh point is as under :

"(7) The Assessing Officer has already taken the most lenient view in the matter and imposed minimum penalty of 100% as against 300 (maximum)."

When it is not a case for levy of penalty at all the reduction in the quantum thereof cannot be said to be lenient view in upholding the penalty.

31. I am also finding myself unable to subscribe to the view taken by the Ld. Judicial Member that Sarabhai Chemical (P.) Ltd.’s case (supra) decision of the jurisdictional High Court has no applicability to the facts of the case because of the fact that the assessee was not prevented by bona fide belief that interest was allowable in the year of accrual as against its allowability from year to year. It being a mere rejection of assessee’s claim on facts already disclosed, the decision of Kerala High Court in Shri Krishna Trading Co.’s case (supra) has, in my opinion, no application to the facts of this case. The decision of Kerala High Court in Srikrishna Trading Co.’s case (supra) holding "that the addition sustained by the Commissioner (Appeals) and by the Tribunal in the return income of the assessee would establish that the assessee had concealed the particulars of his income. The assessee’s explanation that it had reduced the price of liquor to enhance the sales was disbelieved by all the assessing authorities when an addition was made to the income returned by the assessee. Therefore, the provisions of Explanation 1 to section 271(1)(c) had application and the penalty levied against the assessee was justified." No much help can be had by the department from this decision as these observations are contrary to the observations of jurisdictional Gujarat High Court in the case of National Textiles (supra) which observed as under :

"The newly introduced Explanation 1 considerably reduces, but does not altogether remove the department’s onus to prove concealment in assessment based on unexplained cash credit or unexplained investment and like. (See Additional Commissioner Of Income-Tax, Kanpur v. Mangalsen Mohanlal. [1982] 136 ITR 905 (All.) There has not been any significant difference by the introduction of new Explanation 1 in place of original Explanation 1 with effect from 1-4-1976. The previous Explanation used the expression ‘deemed to have concealed the particulars of his income or furnish inaccurate particulars of such income for the purpose of clause (c) of this sub-section’. While the present Explanation 1 reads: ‘such income shall be deemed to represent the income in respect of which particulars have been concealed’. In effect, this makes explicit what was implicit in the previous Explanation - Commissioner Of Income-Tax, West Bengal-Ii v. Rupabani Theatres P. Ltd. [1981] 130 ITR 747 (Cal.).

The provisions of section 68 permitting the Assessing Officer to treat unexplained cash credit as Income are enabling provisions for making certain additions, where there is failure by the assessee to give an explanation or where the explanation is not to the satisfaction of the Assessing Officer. However, the addition made on this count would not automatically justify imposition of penalty under section 271(1)(c) by recourse only to Explanation 1 below section 271(1)(c).

In order to justify the levy of penalty, 2 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 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 Explanation has no bearing on factor No. (i) but it has bearing only on factor No. (ii). The explanation does not make the assessment order conclusive evidence that the amount assessed was in fact the income of the assessee. No penalty can be imposed if the facts and circumstances are equally consistent with the hypothesis that the amount does not represent concealed income as with the hypothesis that it does. If an assessee gives an explanation which is unproved but not disproved, i.e., it is not accepted but circumstances do not lead to the reasonable and positive inference that the assessee’s case is false, the Explanation cannot help the department because there will be no material to show that the amount in question was the income of the assessee.

Alternatively treating the Explanation as dealing with both the ingredients (i) and (ii ) above, where the circumstances do not lead to the reasonable and positive inference that the assessee’s explanation is false, the assessee must be held to have proved that there was no mens rea or guilty mind on his part. Even in this view of the matter, the Explanation alone cannot justify the levy of penalty. Absence of proof acceptable to the department cannot be equated with fraud or wilful default. As we find no material difference between the original Explanation 1 and Explanation 1 as substituted, in our opinion, it has to be so construed as to harmonise it with basic principles of justice and fairness, as in the case of original Explanation. We are guided by the commentaries of the learned authors Kanga and Palkhiwala Law and Practice of Income-tax Vol. 1, pages 1637, 1639 to 1640."

The provisions of the Explanation 1 to section 271(1)(c) in my opinion saves the assessee from levy of penalty rather than to hold it guilty of concealment. The assessee by giving all the material as were necessary for computation of its income even at the time of filing its return of income and also in the course of assessment proceeding cannot be accused of lack of bona fide.

32. In the case of Commissioner Of Income-Tax, Gujarat v. Suleman Abdul Sattar. [1983] 139 ITR 8¹ (Guj.), relied upon by the ld. DR, though the assessee indicated in Part IV of his return of income for the assessment year 1969-70 that a receipt of Rs. 44,239 in the relevant accounting year was not taxable but the ground that it was prize money in a crossword puzzle competition conducted by one H was. Penalty proceedings were levied and the AAC considered the evidence on record afresh and reached the conclusion that the story of money received as prize in a crossword puzzle competition was false. The Tribunal cancelled the penalty on the grounds that the department had not proved that the money was earned during the relevant year and that the amount had been disclosed in the return and, therefore, there was no concealment of income. On a reference the High Court that as the total income returned was less than 80% of the total income as assessed, a rebuttable presumption that the assessee had concealed particulars of income or furnished inaccurate particulars thereof arose. The assessee had failed to discharge the burden which lay upon him to prove that the failure to return the correct income did not arise on account of any fraud or wilful neglect on his part. In view of the fact that the assessee had shown the amount in Part IV of his return, there was a clear admission that he had earned the income shown therein, in the year under consideration. The assessee could not claim immunity from penalty by falsely indicating in Part IV of the return that he had earned income of a casual nature. This case does not in any way help the Revenue as the assessee’s claim is not false.

33. Similarly the case of Atul Kumar Deovrat & Co. v. Commissioner Of Income-Tax [1987] 168 ITR 286¹ (Cal.) is a case where the assessee has been found guilty of a conscious and deliberate attempt to claim a loss on revaluation of shares held as investment knowing all the facts that the revaluation has no basis and had no relation to break value and in absence of shares being in the nature of stock-in-trade. The court observed as under :—

"The assessee-firm which was a dealer in shares purchased the shares of company C and sold them subsequently and claimed deduction of the loss arising from the transaction. The Income-tax Officer disallowed the loss and penalty was levied for concealment. The Tribunal found that the assessee had acquired the shares by way of investment; as a result of the acquisition of the shares there was a change in the board of directors of the company; there was no evidence to show that the assessee had included the said shares in its stock-in-trade; the assessee had subsequently sold the shares at greatly reduced prices to members of the K family who were in control of the assessee and that the revaluation of the shares by the assessee in the relevant assessment year was without any basis and had no relationship with the break-up value of the shares. All the facts were known to the assessee in spite of which the assessee consciously and deliberately claimed a loss on revaluation of the said shares and thereby deliberately reduced its income for the assessment year in question. Accordingly, the assessee was held to be guilty of concealment. The Tribunal confirmed the order of penalty. On a reference the High Court held there was sufficient material before the Tribunal to come to the conclusion that the assessee was guilty of deliberate concealment and furnishing of inaccurate particulars of income. The levy of penalty was held valid."

34. In the result the concealment penalties in all the four cases are to be deleted and appeal of the assessees are to be allowed.

REFERENCE UNDER section 255(4) of the Income-tax Act, 1961

As there is a difference of opinion between the members who heard the appeals the following common point of difference is referred to the President for constituting one or more members for hearing on such difference.

"whether on the fact and in the circumstances of the case a penalty could be validly levied for concealment under section 271(1)(c) read with Explanation 1 thereto."

THIRD MEMBER ORDER

Per Shri Vimal Gandhi, President. - The following question has been referred for my consideration under section 255(4) of the Income-tax Act on account of difference of opinion between the Members who heard above referred four appeals :—

"Whether on the fact and in the circumstances of the case a penalty could be validly levied for concealment under section 271(1)(c) read with Explanation 1 thereto."

2. The facts of the case are given in detail in the orders of the learned Brothers, yet for disposal of these cases, it is necessary for me to state them briefly.

3. The assesses before me are companies belonging to Mardia Group. Facts in all four cases are identical and therefore, can be stated with reference to case of Rupam Mercantiles Ltd. The above company issued non-convertible redeemable debentures on 25-3-1995 carrying interest @ Rs. 62 and were redeemable after six years at par in one instalment. A sum of Rs. 62 was payable on each of the debenture upfront on the date of allotment itself. The assessee therefore, claimed deduction of Rs. 1.55 crore towards interest paid @ Rs. 62 per debenture in the year ending 31-3-1995 i.e. the year in which the debentures were allotted.

4. In the return of income filed by the assessee on 29-11-1995 and in the detail of interest paid, the assessee referred to note No. 4 as under :—

The said Note No. 4 to the statement of accounts filed along with the return of income reads as under :—

"4. The payment of interest of Rs. 155 lakhs due on Non-Convertible Redeemable Debentures issued during the year, in Profit & Loss account, is for full term as per the terms of the issue."

5. The assessee further deducted tax at source on the entire amount of interest computed @ Rs. 62 per debenture and deposited the same with the Central Government as required.

6. The assessee justified claim of deduction of interest @ Rs. 62 per debenture on the basis of following condition of redemption of debenture agreed to between the parties :—

"2. Interest :—

(A) Rate and manner of payment.

Each Debenture shall carry interest at Rs. 62 - payable upfront on the date of allotment.

(3) Repayment;

The company agrees and undertakes to redeem the debentures on payment in one instalment at the end of sixth year from the date of allotment."

7. The Assessing Officer during the course of assessment proceedings held that interest on debenture could be allowed only for 7 days relating to the assessment year under consideration. The balance interest claimed was held not to pertain to the year of account and accordingly not deductible. The Assessing Officer held that issue before him was fully settled against the assessee as per decision of the Hon’ble Supreme Court in the case of Madras Industrial Investment Ltd. (supra). Relevant portion of the above decision is reproduced in the assessment order. It is also extracted by the learned Vice-President (Accountant Member) in para 7 of his proposed order.

8. On appeal the CIT(A) upheld the view of the Assessing Officer with the following observations :—

"2.3 I have considered the contention of the appellant as also the observations of the Assessing Officer. I agree with the reasons given by the Assessing Officer for making disallowance of the claim of interest on debentures to the extent of Rs. 1,54,50,457. There is also no substance in the appellant’s claim made before the Assessing Officer that as per the agreement between the parties, the whole amount of interest on the amount of debentures was payable on day one and for the remaining period, the loan was interest-free. Para 4 of the notes forming part of accounts in the balance-sheet of the appellant-company for assessment year 1995-96 states that the payment of interest of Rs. 1,55,00,000 due on non-convertible redeemable debentures issued during the year was for full term as per the terms of the issue. The ratio laid down by the Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT squarely applies to the case of the appellant. In view of the above, the disallowance made of Rs. 1,54,50,457 is upheld."

9. On further appeal, the Tribunal in its order dated 28-10-1999 in ITA No. 1102/Ahd./1999, confirmed the disallowance with the following remarks:—

"7.1 Accordingly, the Hon’ble Supreme Court relying on the aforesaid decision of the M.P. High Court in the case of M.P. Financial Corporation 165 ITR 765 held that the assessee was correct in claiming deduction only in respect of the proportionate part of discount of Rs. 12500 over the relevant accounting period in question. The Supreme Court further noted that the view taken by them was in conformity with the accounting practice of showing the discount in the "Discount of Debenture Account" which is written off over the period of the debentures. The facts of the case before us are similar to the facts of the case of Madras Industrial Investment Corporation (supra) and accordingly we do not find any merit in the ground taken by the four assessee companies, as the issue is squarely covered by the decision of the Supreme Court in Madras Industrial Investment Corporation (supra). Accordingly, we adjudicate ground No. 1 in all the appeals against the assessee and in favour of the Revenue."

10. The assessees challenged order of the Tribunal in further appeal before the High Court and the same has been admitted by the Hon’ble High Court vide order dated 27-9-2000 and the following substantial question of law is pending adjudication :—

"Whether, in the facts and circumstances of the case, the ITAT was right in law in holding that the assessee was not entitled to the deduction of interest paid by it on debentures issued by it?"

11. At this stage it is relevant to mention that recipients of interest on debentures namely Shri Rasik Lal, Rajiv & Rakesh in their returns showed interest only for the period ending 31-3-1995 and claimed that remaining interest was income of subsequent five years. However, the Assessing Officer held that entire interest @ Rs. 62 per debenture was income of the assessee and made assessment accordingly. The recipients challenged above assessment in appeal but remained unsuccessful. On further appeal in their cases (ITA Nos. 1142, 1145 & 1101/Ahd./1999) vide order dated 28-10-1999 the ITAT held that only prpeportionate amount receivable till the end of 31-3-1995 was assessable. The balance amount in quantum appeal was deleted by the Tribunal. The revenue challenged above order of the Tribunal in appeal before the High Court under section 260A of Income-tax Act and following substantial question of law framed by their Lordships is pending adjudication :—

"Whether, the Appellate Tribunal is right in law and on facts in holding that the interest income in the hands of the assessee who was allotted debentures by the Companies is required to be taxed only on proportionate basis and that the Commissioner of Income-tax (Appeals) was not justified in sustaining the addition of the whole amount of interest at the rate of Rs. 62 per debenture in the accounting year in question?"

12. The Assessing Officer also initiated penalty proceedings under section 271(1)(c) of the Income-tax Act against the assessee and issued show-cause notice to the assessees to why penalty under section 271(1)(c) be not levied for furnishing inaccurate particulars of income and concealing his income. The assessee filed reply to above notice on 8-4-2000 and relevant portion of said reply is reproduced in the penalty order. In nutshell, the assessee contended that neither main provisions of section 271(1)(c) nor Explanation to the said section were invoked in the notice nor these were otherwise applicable. The assessee further raised the following objections:—

(1)That deduction of interest on debenture was rightly claimed but wrongly disallowed. The liability was to be allowed under section 36(1)(iii).

(2)That all the particulars of income were duly disclosed in the return. The assessee referred to statement of income and in particularly to Note No. 4 (referred to above) in the statement of account.

(3)The assessee further pointed out that even revenue authorities were not sure whether entire interest claimed was expenditure/income and had added entire interest in the hands of debenture holders. In the above circumstances, initiation of penalty proceedings under section 271(1)(c) was not justified.

(4)The assessee further pointed out that for making disallowance, revenue authorities and ITAT have relied upon decision in the case of Madras Industrial Investment Corporation Ltd. (supra) where claim of deduction under section 37 of the I.T. Act was considered. The assessee on the other hand, claimed liability under section 36(1)(iii) of the Income-tax Act and, therefore, above case was distinguishable.

(5)The assessee emphasized that loan through debentures represented capital borrowed for purposes of business. The entire interest of Rs. 62 became payable up front on the date of allotment. Therefore, the liability to pay interest accrued on the date of allotment and was rightly claimed.

(6)The assessee further pointed out that the decision of Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. (supra) rendered only on 4-4-1997 whereas return of income was filed by the assessee company on 30th November, 1995. In other words, the decision applied against the assessee was not available to the assessee when the return was filed.

13. In order to support the claim that no penalty under section 271(1)(c) was exigible in this case, the assessee relied upon large number of decisions reproduced in the penalty order.

14. The Assessing Officer in the penalty order took into account observations made in the assessment order as well as by higher authorities on appeal. He held that out of total claim of expenditure, only Rs. 49,543 i.e. interest for 7 days related to the year under consideration and the balance amount pertained to later years; it was only advance payment of interest. Thus under mercantile system of accounting only interest of 7 days could be allowed. He held that entire amount did not pertain to the year of account. He emphasized the entries made by the assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. The Assessing Officer also noted decision of the Hon’ble Supreme Court in the case of McDowell & Co. v. CTO [1985] 154 ITR 148 ¹ wherein their Lordships observed that colourable devices cannot be permitted to be part of tax planning and it is wrong to encourage or entertain the belief that payment of tax can be avoided by resorting to dubious methods. Ultimately, the Assessing Officer held, that claim of the assessee of deduction was clearly wrong in the light of decision of the Hon’ble Supreme Court in the case of Madras Industrial Investment Ltd. (supra). He held that the assessee concealed true characters of its income chargeable to tax for the year under consideration. It tried to make false claim of expenditure by creating evidence in the form of agreement. It attempted to change the nature of transaction through structured deeds and designs. It used colourable devices to conceal its income. After rejecting all the contentions raised on behalf of the assessee, the Assessing Officer levied penalty under section 271(1)(c) of the Act with the following observations :—

"12. In view of the facts narrated above, I am satisfied that the assessee has concealed income by furnishing inaccurate particulars and provisions of section 271(1)(c) are attracted. I accordingly levy a penalty of Rs. 72,00,000 (Rupees Seventy two lakhs only) as against the maximum penalty leviable of Rs. 2,13,21,627."

15. The assessee carried the matter in appeal before the learned CIT(A) who noted the amount of penalty imposed under section 271(1)(c) in all the four cases. He also noted that name of debenture holders and amount invested in them and how on face value of debenture of Rs. 100, interest of Rs. 62 was allowed upfront right on the date of the allotment. For example in case of Rupam Mercantile Ltd., interest of Rs. 1,39,50,000 was claimed as a deduction towards interest whereas they were entitled to interest of Rs. 49,543 for 7 days of the accounting period. The learned CIT(A) further noted that revenue authorities had applied decision of the Apex Court in the case of Madras Industrial Investment Corpn. Ltd. (supra) which was squarely applicable.

16. The learned CIT(A) further noted that only issue raised before him was whether imposition of penalty was not justified as assessee neither concealed income nor furnished inaccurate particulars of any income. The learned CIT(A) rejected above contention by observing that the Assessing Officer has held in clear terms that the assessee concealed income by wrongfully claiming deduction which was not admissible. The CIT(A) extensively quoted from decision of Madras Industrial Investment Corpn. Ltd. (supra). Explanation I to section 271(1)( c) of Income-tax Act was also held to be applicable to the case of the assessee. The directors of Mardia Group of Companies have arranged their affairs with a view to reduce the tax liability of the appellant companies. The manner in which debentures were issued only to persons who were directors of the appellant-company or relative of such directors, clearly showed that a device was adopted. The decision of the Hon’ble Supreme Court in the case of McDowell & Co., Ltd. was applicable in this case.

17. The learned CIT(A) took note of Explanation I to section 271(1)(c) of Income-tax Act and held that the assessee failed to substantiate explanation given by him during the course of assessment proceedings. He held that decision of Hon’ble Calcutta High Court in the case of Jiyajeerao Cotton Mills Ltd. (supra) and of Hon’ble Gujarat High Court in the case of Manik Lal Hari Lal (supra) were not applicable to the facts of the case as these cases related to retrospective amendment which was not relevant before the learned CIT(A). The learned CIT(A) also rejected the contention of the assessee that the decision of the Hon’ble Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. (supra) was rendered on 4-4-1997 whereas the returns were filed by the assessee on 29-11-1995. He misquoted decision of Madras Industrial Investment Corporation Ltd. at page 10 of the impugned order and took the view that in the light of the decision of Hon’ble Supreme Court in the case of State Bank of India (supra), the deduction could not be claimed. Accordingly plea of the assessee was rejected. The learned CIT(A) also did not find any force in the argument that in the case of Madras Industrial Investment Corpn. Ltd. (supra), the subject-matter under consideration was deduction under section 37 whereas the appellant raised his claim under section 36(1)(iii) of Income-tax Act. He held that question to be considered was whether expenditure did accrue in reality in the relevant previous year or not. It was immaterial and of academic interest whether claim was made under section 37 or 36 of Income-tax Act. The learned CIT(A) also did not find any force in the submission of the assessee that the Assessing Officer in the case of recipients i.e. Rakesh Mardia, Rasik Mardia and Rajiv Mardia had added total interest on debentures in their assessment orders made on protective basis. The learned CIT(A) on the other hand, noted that recipients in their returns had not shown the entire interest in their returns but only fraction of the same. It was Assessing Officer who added back entire interest and this addition was confirmed on appeal. The CIT(A) emphasized that only expenditure which actually relates to the year under reference could be allowed on accrual basis. He further held that it would be absurd to accept the proposition that liability to pay interest on debenture had accrued to the appellant on the first day when debentures were issued to the recipients. He noted that recipient in each case was only one person who was either director of the company or his relative. It was a case of device on which decision of the Hon’ble Supreme Court in the case of McDowell & Co. Ltd. (supra) was clearly applicable. The CIT(A) accordingly held that Assessing Officer took a very lenient view in imposing penalty of 100% against maximum penalty of 300%. The order of penalty was accordingly confirmed.

18. All the assessees carried the matter in appeal before the Appellate Tribunal. After hearing the case, the learned Judicial Member in the proposed order confirmed the levy of penalty. His reasoning is as under:—

(A)All the four companies under consideration belonged to Mardia Group and were controlled by Shri Rakesh Mardia, Shri Rasik Mardia and Shri Rajiv Mardia to whom debentures were issued by the company.

(B)The interest @ Rs. 62 per debenture of face value of Rs. 100 was allowed on the date of allotment of debentures. The learned JM noted the amount of loan allowed through debentures as also interest accrued to the debenture holders on the date of issue of debentures.

(C)He noted that ITAT in the case of these assessees as per order dated 28-10-1999 had only allowed deduction of interest on proportionate basis i.e. Rs. 49,543 for a period of seven days in the accounting period against Rs. 1,39,50,000 claimed by the assessee (M/s. Rupam Mercantiles Ltd.).

(D)The learned JM noted the decision in the case of Madras Industrial Investment Corpn. Ltd. (supra) and findings in this case and confirmed the penalty with the following observations :—

"(1) As discussed above, the Explanation to section 271(1)(c) is clearly applicable. Even though the Assessing Officer has not specifically mentioned this in the body of the order, it has been held by the Supreme Court in the case of Madhusudan and Others referred in 251 ITR 99 that it is not essential that the same should be specifically mentioned in the orders. The onus in this respect is on the appellant to prove that the explanation or the claim made was bona fide. This has not been done in the instant case.

(2) In none of the returns filed by the recipients corresponding interest income was declared and offered for tax on their own. The plea of the appellant that there were valid bona fide explanation therefore lacks acceptability.

(3) It is clear from the facts narrated above that in all the four appellants cases, the transactions are within the closely knit Mardia Group of Companies and their Directors and that have been arranged only with a view to reduce the tax liability of the appellant companies. The transactions relating to issue of debentures are also between the appellant and only one person who is either a director of the appellant companies or is a relative of the director of the appellant. The decision of Supreme Court in the case of McDowell & Co. reported in 154 ITR 148 is also clearly applicable to the facts of the case.

(4) As discussed by the Assessing Officer, the transactions in reality are only in the nature of advance payments paid to the respective recipients by the appellant companies for which the actual interest was accrued in a period spread over 6 years and not for this financial year (except for a period of only 7 days).

(5) It would be absurd to accept the proposition that liability to pay interest on the debentures can accrue to the appellant on the first date when the debentures are issued to the recipients. The view taken by the Assessing Officer is, therefore, in full conformity with established principles of Accountancy as well as the provisions of the Income-tax Act, 1961 duly supported by ratio of the Apex Courts as discussed earlier in this order. As the appellant(s) having followed mercantile system it cannot change the real nature of the transaction by claiming a deduction on the basis of cash payments which have been held to be mere advance payments only.

(6) As referred earlier, the Apex Court in the case of State Bank of India referred in 157 ITR 67 have clearly observed that the substance of transaction has to be seen and not the form. Mere recording of entries in the books in itself cannot justify the stand taken by the appellants or make the explanation bona fide or taking on argument that liability for interest be accrued on the basis of the scheme and the said debentures between the appellant and recipients. Since the said schemes were clearly devised in one go for all the four companies around the same time within the small group of family members of Mardia Group, it is obvious that the transaction is in the nature of a colourable device, as discussed earlier also in CIT(A)’s order.

(7) The Assessing Officer has already taken the most lenient view in the matter and imposed minimum penalty of 100% as against 300% (maximum)."

19. The learned JM further supported his conclusion by referring to decision of Hon’ble Gujarat High Court in the case of Sarabhai Chemicals P. Ltd. (supra) and held that above decision was distinguishable. In the present case there was deliberate attempt to conceal income by furnish- ing inaccurate particulars of expenditure to reduce the income. Explana-tion 1 to section 271(1)(c) of the Act was fully applicable in this case and levy of penalty was justified. The burden was on the assessee to rebut the presumption and as there was no satisfactory explanation, the said burden was not discharged. The claim of deduction of interest @ Rs. 62 per debenture was neither bona fide nor genuine. The assessee was trying to reduce its tax liability by adopting a device. On the facts and circumstances of the case the learned Judicial Member confirmed the levy of penalty.

20. The learned Vice President (Accountant Member) did not agree with the order proposed by the learned Judicial Member. In his dissenting order, he noted that assessees had issued debentures on 25-3-1995 which carried interest at Rs. 62 payable upfront on the date of allotment of the debentures. The debentures were redeemable after six years at par. The assessee charged interest payable @ Rs. 62 per debenture to the previous year and thus claimed deduction of Rs. 1.55 crores (in case of M/s. Rupam Mercantiles Ltd.) for assessment year 1995-96. The learned Vice President then referred to Note No. 4 in the statement of account about which specific reference was made in the return filed by the assessees on 29-11-1994. He noted that particulars of interest on debentures i.e. rate of interest payable and fact that these were redeemable at par at the end of six years from the date of allotment were duly specified in the return and statement of accounts.

21. The learned Vice President (V.P.), further noted that the Assessing Officer in the assessment allowed interest for a period of seven days, the balance amount of deduction claimed were held to have not accrued to the assessee. In other words, reduction of Rs. 49,543 was allowed against the claim of interest of Rs. 1,54,50,457. The Assessing Officer also initiated penalty proceedings under section 271(1)(c) of the Income-tax Act for making wrong claim. Relevant observations of the learned CIT(A) and of the Appellate Tribunal upholding the disallowance of claim are also extracted in the proposed order of the learned VP. It is further noted that both the assessee as well as the revenue have challenged the orders of the ITAT. The substantial question of law pending in the case of the assessee-company and in the appeal of the revenue are noted by the learned V.P.

22. The learned VP has referred to the provision of section 271(1)(c) along with Explanation 1. He has observed that above provision is penal in character and mere rejection of assessee’s claim would not be sufficient to hold that the assessee is guilty of concealment. He has referred to decisions of Hon’ble Supreme Court wherein above propositions have been laid down in para 14 of his proposed order.

23. The learned VP then discussed various limbs of Part-B of Explanation 1 to section 271(1)(c). The above provision has been minutely analyzed by the leaned VP. He has split above Part-B to examine import of the provision which is held to be as under:—

(i)Such person (to be penalized) offers an explanation which he is not able to substantiate;

(ii)And fails to prove that such explanation is bona fide;

(iii)And that all the facts relating to the same and material to the computation of his total income have not been disclosed by him.

It has been observed that explanation of claim cannot be treated as not substantiated where in respect of addition, the subject-matter of penalty, an appeal has been admitted by the Hon’ble High Court under section 260A of the Income-tax Act. In this connection, he has referred to and derived support from the decision of Bombay Bench of the Tribunal in the case of K.G. Nariman Alias N.K. Gajwani (supra) and from the case of Emtici Engg. Ltd. (supra) decided vide order dated 28-11-2002.

24. In respect of second sentence of Part-B of Explanation 1 i.e., "and fails to prove that such explanation is bona fide", the learned VP has referred to the decision of Madhya Pradesh High Court in the case of National News Print & Paper Mills Ltd. (supra) wherein their Lordships have held "that the amount of interest could be claimed as deduction in a particular year, the assessee ought to have undertaken unconditionally to pay it to the Government." In the present case the assessee has undertaken unconditionally to pay interest of Rs. 62 per debenture upfront on the date of allotment itself. The assessee could not be said to be wrong in making a claim in the year under consideration i.e., on the date of allotment of debenture. Thus there was no lack of bona fide on the part of the assessee if liability was claimed as a deduction on the basis of agreement between the parties.

25. As regards the requirement of the Explanation, "that all the facts relating to the same and material to the computation of his total income have been disclosed by him", the learned VP referred to note No. 4 in the statement of accounts and its mention in the return filed by the assessee. No material fact which was not disclosed, has been brought on record by the revenue authorities while making the disallowance in question. There is no allegation that debenture agreement is sham and bogus. For holding that above requirement was satisfied, the learned VP relied upon the decision of Hon’ble Gujarat High Court in the case of Sarabhai Chemicals P. Ltd. (supra).

26. In support of his conclusion that Part-B of Explanation 1 to section 271(1)(c) exonerates an assessee from levy of penalty who offers an explanation which was bona fide and that all facts relating to same and material to the computation of his total income have been disclosed by him, the learned VP relied upon decision of the Hon’ble Rajasthan High Court in the case of Shiv Lal Tak (supra). Relevant extracts of the above decision are quoted in para 18 of the order. Other decisions taking the same view are available in para 19 of the proposed order of the learned V.P.

27. The learned VP further noted that the decision of Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. (supra) was rendered on 4-4-1997 and thus was not available to the assessee on 29-11-1995 when the assessee filed the return. The learned VP has emphasized that act and conduct of the assessee as on the date of submission of the return is to be seen and therefore, a subsequent decision of Hon’ble Supreme Court or retrospective amendment of law would not affect the case of the assessee as far as bona fide conduct is concerned. The learned VP has supported his view with reference to the decision of Hon’ble Supreme Court in the case of Hindustan Electro Graphites Ltd. (supra). On effect of subsequent decision of Hon’ble Supreme Court, the learned VP reproduced the following observation of the Hon’ble Gujarat High Court in the case of Maneklal Harilal Spg. & Mfg. Co. Ltd. (supra):

"Though the effect of the Supreme Court decision by virtue of the provisions of the Constitution is that the Supreme Court declares the law of the land it must be held to have been always the law of the land, once it has so declared, it cannot be placed on the same footing as a retrospective piece of legislation and the legal fiction which goes with retrospective legislation cannot arise in the case of the decision of the Supreme Court declaring what the law of the land is."

28. The learned VP also discussed the decision of the Hon’ble Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. (supra) wherein the assessee claimed deduction of discount of Rs. 3,00,000 allowed on debentures payable after a period of 12 years. The Hon’ble Supreme Court itself held that liability for discount has been incurred in the accounting year i.e., the year of allotment of debenture and that it was revenue in nature. It was incurred wholly and exclusively for purposes of business. As the assessee had secured a benefit over a number of years, the liability should be spread over the period of debenture. The learned VP has further quoted certain decisions wherein expenditure benefiting the assessee for several years was allowed in the year in which it was incurred by the assessee.

29. In the light of above discussion, the learned VP concluded that the assessee cannot be held guilty of concealment of income or furnishing inaccurate particulars of income thereof either under the main provision of section 271(1)(c) or under deeming provision of Explanation 1 thereto. In his opinion, the appeals were required to be allowed.

30. Thereafter, the learned VP discussed all the points raised by the learned Judicial Member in the proposed order one by one and held that no case of levy of penalty was made out. The assessee did not adopt any device in claiming the deductions. The learned VP referred to the decision of the Hon’ble Supreme Court in the case of Azadi Bachao Andolan (supra) wherein their Lordships of Hon’ble Supreme Court have discussed in detail the decision of McDowell & Co. Ltd.’s case (supra). The relevant observations have been extracted by the learned VP in para 30 of his order. He has further observed that penalty is not justified in the light of the decisions quoted and extracted by him in paras 31 to 33 of his proposed order. He accordingly directed that appeals filed by the assessees be allowed.

31. I have heard both the parties in this case. The learned counsel for the assessee supported the order of the learned VP whereas the learned DR supported the order of the learned JM as also of the revenue authorities. The learned DR argued that the assessee adopted a device to hoodwink the revenue and furnished inaccurate particulars of income. Therefore, levy of penalty was fully justified under main section 271(1)(c) of the Income-tax Act.

32. After careful consideration of rival submissions of parties I see no good ground to take a view different from one taken by the learned VP. In fact the order of the learned VP is so comprehensive that I find it difficult to add anything to what has already been stated by him. The learned JM in his proposed order has merely relied upon what has been stated by the revenue authorities. The basis given or making disallowance and for holding that the assessee is guilty of concealment and furnishing inaccurate particulars of income, is that only interest for 7 days had accrued to the assessee and interest of balance period was wrongly claimed as a deduction. This was a device which the assessee-company along with its directors adopted to evade taxes. The matter was taken to be fully covered by Explanation 1 to section 271(1)(c) of Income-tax Act as assessee failed to substantiate the claim of deduction and further failed to show that plea was bona fidely raised by the assessees. The matter was taken as fully covered viz. the assessee as per decision of the Hon’ble Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. (supra). The learned VP on the other hand, has held in the proposed order that assessee’s case is covered under clause-B of Explanation 1 to section 271(1)(c) of the Act. He has held that the assessee has fully established that deduction of interest of entire period was bona fidely claimed and that no case of concealment of income or furnishing of inaccurate particulars of income has been established. I am inclined to agree with the above view of the learned VP for reasons given by him and further for the reasons discussed herein below.

33. The fundamental question, therefore, requires to be examined is whether the deduction of interest as claimed by the assessee can be said to be mala fide or is it possible to hold that case pleaded by the assessee that entire interest @ Rs. 62 per debenture had accrued, was a plausible view and, therefore, the question of levy of penalty would not arise in this case. As a corollary to the above question it is to be seen whether there is any justification for holding that interest as claimed could reasonably be treated to have accrued and was an expenditure which could legitimately be claimed as a deduction. In the case of Madras Industrial Investment Corpn. Ltd. (supra) their Lordships quoted decision of Hon’ble Calcutta High Court in the case of CIT v. Indian Jute Mills Association [1982] 134 ITR 68 ¹, as to what is an expenditure incurred for computing profits and gains of business or profession under sections 30 to 36 of Income-tax Act. Their Lordships have observed as under:—

"In that case, the Calcutta High Court was required to consider the claim of the assessee which was a non-trading association to depreciation on furniture, air-conditioner, etc., which were debited in i ts account. The Department contended that the assessee could not claim depreciation since it was a non-trading association. The Calcutta High Court held that having regard to the purpose of section 44A the depreciation claimed should be construed as "expenditure incurred" and the assessee would be entitled to the beneficial construction of the provision. The Calcutta High Court differed in that case from the view taken by the Madras High Court in the judgment which is under challenge before us.

Therefore, although expenditure primarily denotes the idea of spending or paying out, it may, in given circumstances, also cover an amount of loss which has not gone out of the assessee’s pocket but which is all the same, an amount which the assessee has had to give up. It also covers a liability which the assessee has incurred in praesenti although it is payable in future. A continent liability that may arise in future is, however, not "expenditure". It would also cover not just a one-time payment but a liability spread out over a number of years."

Their Lordships further quoted and relied upon decision of the Hon’ble Supreme Court in the case of Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1 and after noting that decision derived following conclusion from the authorities:—

"Thus "expenditure" is not necessarily confined to the money which has been actually paid out. It covers a liability which has accrued or which has been incurred although it may have to be discharged at a future date. However, a contingent liability which may have to be discharged in future cannot be considered as expenditure."

34. In my view it would be necessary to quote little more from the above decision of the Supreme Court. In the above case the assessee a land developer had claimed expenditure on estimate basis of the "undertaking given by him" to carry out developments within six months which was held to be not essence of the contract and undertaking was held to be carried out within reasonable time. No amount was actually expended and deduction was claimed on the basis of undertaking given by the assessee to carry out development in future. The Assessing Officer disallowed the claim as expenses were not actually incurred "in the year of account". This allowance was made right upto the Hon’ble High Court. About the undertaking given by the assessee to provide development in the shape of road, drains etc. their Lordships observed as under:—

"This undertaking having been incorporated in the deeds of sale themselves there was certainly a liability undertaken by the appellant to carry out these developments within six months from the dates of those deeds. Time was of course not of the essence of the contract and the appellant, therefore was at liberty to carry out that undertaking within a reasonable time. That, however, did not absolve it in any manner whatever from carrying out the undertaking and the purchasers were in a position to enforce the undertaking by taking appropriate proceedings in that behalf."

As at page 6 of the report, their Lordships noted distinction between legal enforceable liabilities and contingent liabilities. Their Lordships decided the question as under:—

"Approaching the question before us in the light of the observations made above we have got to determine what was the nature of the liability which was undertaken by the appellant in regard to the development of the lands in question, whether it was an accrued liability or was one which was contingent on the happening of a certain event in the future.

There is no doubt that the undertaking to carry out the developments within six months from the dates of the deeds of sale was incorporated therein and that undertaking was unconditional, the appellant binding itself absolutely to carry out the same. It was not dependent on any condition being fulfilled or the happening of any event, the only condition being that it was to be carried out within six months which in view of the fact that the time was not of the essence of the contract meant a reasonable time. Whatever may be considered a reasonable time under the circumstances of the case, the case, the setting up of that time limit did not prescribe any condition for the carrying out of that undertaking and the undertaking was absolute in terms. If that undertaking imported any liability on the appellant the liability had already accrued on the dates of the deeds of sale, though that liability was to be discharged at a future date. It was thus an accrued liability and the estimated expenditure which would be incurred in discharging the same could very well be deducted from the profits and gains of the business.

Inasmuch as the liability which had thus accrued during the accounting year was to be discharged at a future date the amount to be expended in the discharge of that liability would have to be estimated in order that under the mercantile system of accounting the amount could be debited before it was actually disbursed."

35. A plea or claim which is held by the Hon’ble High Court to give rise to a substantial question of law, cannot be treated to be frivolous or mala fide as to attract levy of penalty under section 271(1)(c) of the Income-tax Act. What has the assessee concealed. The assessee agreed to pay Rs. 62 i.e., entire interest on debenture of face value of Rs. 100 on the date of issue of debentures. The interest paid is supported by the agreement and there is no dispute on this. The interest paid was subjected to deduction of tax at source and tax deducted was duly deposited in the Treasury as required by the statutory provision. Thus agreement was carried in letter and in spirit and there is no avoidance of payment of tax as far as assessee is concerned. Information about the interest paid is duly disclosed in return of income and in the statement of account, appropriate note was made to draw the attention of the revenue authorities to the deduction claimed. Evidently no attempt was made by the assessee to conceal any income or furnish inaccurate particulars of income. It is nobody’s case that deduction of interest was not supported by contract or such contract was not filed during the course of assessment proceedings. It is therefore, difficult to conclude that the assessee failed to substantiate its claim during the course of assessment proceedings and therefore, Explanation 1 to section 271(1)(c) of the Income-tax Act was attracted in this case. The said Explanation had no application for the above short reasons apart from elaborated reasons given by the learned VP in his proposed order.

36. The revenue has justified disallowance of interest of Rs. 62 and levy of penalty as the assessee paid interest for six years when it could pay only for 7 days in the relevant period. It has been over emphasized by the revenue that interest for period other than 7 days, did not accrue to the assessee; the excess amount was paid as advance interest only on account of close relationship between the assessee and the recipients. In adopting the above approach the revenue has totally disregarded the agreement between the parties, which as noted in details was given effect to and implemented. Finding that the liability to pay interest other than for 7 days had not accrued is contrary to well-settled principle of law. A liability accrues under an agreement and is fastened with the obligation to be discharged. There is no dispute that under the agreement the assessee was obliged to pay Rs. 62 upfront on the date of issue of the debentures. Thus there was an accrued liability to pay whole of the interest and such a liability could legitimately be claimed as a deduction. I have already referred to the decision of the Hon’ble Supreme Court in the case of Calcutta Co. Ltd. (supra) and the learned VP in his proposed order, has referred to several other decisions to support the conclusion that the entire liability of @ Rs. 62 per debenture paid under agreement was accrued liability. The revenue authorities while holding to the contrary took into account the treatment given to the interest income by the receipts in their returns. They had shown interest only for 7 days and rest of the amount was claimed to be taxable in the subsequent years. Thus different treatment give to interest income by the payer and recipients and this had been taken in account to draw an adverse opinion against the assessee. In my considered opinion, action of the assessee was separate and distinct from that of recipients/directors or their relatives and two could not be combined. Moreover character of a receipt in the hands of recipient from the angle of taxability may be totally different from what it is in the hands of payer. This is demonstrated from the following observations of their Lordships in the case of Madras Industrial Investment Corpn. Ltd. (supra):—

"Our attention was drawn to the case of Lomax (Inspector of Taxes) v. Peter Dixon and Son Ltd., a decision of the English Court of Appeal reported in [1944] 12 ITR (Suppl.) 1, where the English Court had treated discount or premium in the hands of the recipient as a receipt of a capital nature. But the character of payment in relation to the payer can be different from the character of that payment in the hands of the recipient. In the light of the ratio laid down by this Court in the case of India Cement Ltd. [1966] 60 ITR 52, any liability incurred for the purpose of obtaining the loan would be revenue expenditure."

Therefore, no addition or penalty could be levied on the assessee on how the recipient treated interest income in their returns.

37. The plea of the revenue that the assessee adopted a device and therefore, should be penalized in the light of decision of the Hon’ble Supreme Court in the case of McDowell & Co. Ltd. (supra), has been properly dealt with by the learned VP with reference to subsequent decisions. In my view the assessee entered into a legal transaction and there is no case for levy of penalty on this account.

38. The bedrock of revenue’s case is why did the assessee agree to pay entire amount of interest for six years on the date of issue of debentures. This was done to reduce the tax liability. How interest for the whole period could be agreed to be paid in advance. This was agreed to be paid to because of close relationship between the assessee and recipient directors or their relations. It is settled law that businessman is the best judge of his affairs and how they are to be conducted. The revenue authorities cannot apply subjective standard. In a recent decision in the case of CIT v. Dalmia Cement (Bharat) Ltd. [2002] 254 ITR 377 ¹, their Lordships of Delhi High Court observed as under:—

"An expenditure to which one cannot apply an empirical or subjective standard is to be judged from the point of view of a businessman and it is relevant to consider how the businessman himself treats a particular item of expenditure. The term "commercial expediency" is not a term of art. It means everything that serves to promote commerce and includes every means suitable to that end. In applying the test of commercial expediency, for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business the reasonableness of the expenditure has to be judged from the point of view of the businessman and not the Revenue (See CIT v. Walchand and Co. (P.) Ltd. [1967] 65 ITR 381 (SC); J.K Woollen Manufacturers v. Commissioner Of Income Tax U.P [1969] 72 ITR 612 (SC); Aluminium Corporation of India Ltd. v. CIT [1972] 86 ITR 11 (SC) and CIT v. Panipat Woollen and General Mills Co. Ltd. [1976] 103 ITR 66 (SC)."

39. Assuming against the settled law that revenue is entitled to go behind the ostensible transaction to find out the real intention as also to see whether the purpose of the transaction is to avoid taxation by diversion of income, nobody in the present case asked the assessee to justify how it was prudent for the assessee to pay Rs. 62 upfront as interest to debenture-holder of face value of Rs. 100 on the date of issue of the debenture. There is no discussion on above point either in the assessment order or in the penalty order. It has been presumed rather than establishing that the assessee adopted a device to avoid and evade tax. The question has not been examined as required by law. No figures relating to benefit or loss on agreeing to pay Rs. 62 per debenture, were asked for or collected in this case. The levy of penalty on presumption and assumption in my considered opinion, is not justified at all. The addition has been made and levy of penalty is justified on the basis of decision of the Hon’ble Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. (supra). As already noted the aforesaid decision was not available at the time of filing of penalty has to be decided on the basis of law existing at the time of filing of the return. The assessee did not have the advantage of abovesaid decision in which it has been held that discount on debenture is to be ___________________

1. 121 Taxman 706 .

spread over and allowed on proportionate basis. But even in the above decision, it has been accepted that discount was a loss and it accrued in the year of account in the business. Their Lordships observed as under:—

"Therefore, when a company issues debentures at a discount, it incurs a liability to pay a larger amount than what it has borrowed, at a future date. We need not go into the question whether this additional liability equivalent to the discount, which is incurred in praesenti but is payable in future, represents deferred interest or not. That may depend upon the totality of circumstances relating to the issue of debentures, including terms. The liability, however, to pay the discounted amount over and above the amount received for the debentures is a liability which has been incurred by the company for the purposes of its business in order to generate funds for its business activities. The amounts so obtained by issue of debentures are used by the company for the purposes of its business. This would, therefore, be expenditure." (Italics to emphasis).

Their Lordships have given basis of their decision as under:—

"The Tribunal, however, held that since the entire liability to pay the discount had been incurred in the accounting year in question, the assessee was entitled to deduct the entire amount of Rs. 3,00,000 in that accounting year. This conclusion does not appear to be justified looking to the nature of the liability. It is true that the liability has been incurred in the accounting year. But the liability is a continuing liability which stretches over a period of 12 years. It is, therefore, a liability spread over a period of 12 years. Ordinarily revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Thus in the case of Hindustan Aluminium Corporation Ltd. v. CIT [1983] 144 ITR 474, the Calcutta High Court upheld the claim of the assessee to spread out a lump sum payment to secure technical assistance and training over a number of years and allowed a proportionate deduction in the accounting year in question."

40. It is evident from above that expenditure incurred wholly and exclusively for the purposes of business and of revenue nature can be allowed when lump sum payment is made or can be spread over in number of years, if allowing it in one year would give "distorted picture of profit" of that particular year. In the case of Hindustan Aluminium Corpn. Ltd. (supra) lump sum payment was allowed to be spread over to a number of years on the instance of the assessee. This principle of "distorted picture" was laid down by their Lordships of Hon’ble Supreme Court for the first time and such principle is not available in earlier decisions of the Court.

41. The learned VP in the proposed order referred to several decisions where a lump sum payment was allowed as a permissible deduction in the year in which amount was spent although the assessee was to receive its benefit for many years to come. The payment of entire interest in advance is not unknown in the trading circle. Money-lenders as per above practice, take entire interest in advance on the money lent. I am therefore, inclined to hold that the argument to pay entire interest in advance and claim of above amount in the return, cannot be said to be mala fide. Such claim is not unknown to the commercial world, so as to justify the levy of penalty under section 271(1)(c) of the Income-tax Act.

42. Before concluding I would like to quote the following observation of their Lordships of Hon’ble Supreme Court in the case of Hindustan Electro Graphites Ltd. (supra):—

"This court further said that if the view canvassed on behalf of the Revenue were accepted, the result would be that even if the assessee raises a bona fide contention that a particular item is not liable to be included in the taxable turnover, he would have to show it as forming part of the taxable turnover in his return and pay tax upon it on pain of being held liable for penalty in case his contention is ultimately found by the court to be not acceptable. That surely could never have been intended by the Legislature, this court so observed."

In the earlier portion of the said decision, their Lordships noted with approval the decision in the case of Modern Fibotex India Ltd. v. Dy. CIT [1995] 212 ITR 496 (Cal.) wherein while cancelling the penalty levied on the assessee, their Lordships have observed as under:—

"An assessee cannot be imputed with clairvoyance. When the return was filed, the assessee could not possibly have known that the decision on the basis of which cash compensatory support had been claimed as not amounting to the assessee’s income ceased to be operative by reason of retrospective legislation."

43. In the light of above discussion and for the reasons given in detail by the learned VP, I am of the view that all the four cases before me are not fit cases for levy of any penalty under section 271(1)(c) of the Income-tax Act. I fully agree with the view expressed by the learned VP.

Order

Per Bench : In view of the Majority decision, the penalties levied under section 271(1)(c) of the IT Act, 1961 are deleted and the appeals are allowed.

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