ACIT, Bangalore v. M/s Mphasis Software & Services India Pvt. Ltd.,, Bangalore

. IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K. JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY ACCOUNTANT MEMBER ITA NO.732/BANG/2010 ASSESSMENT YEAR : 2001-02 THE ASST. COMMISSIONER OF INCOME TAX CIRCLE 12(1) BANGALORE. : APPELLANT VS. M/S. MPHASIS SOFTWARE & SERVICES INDIA PVT. LTD. BAGMANE TECHPARK BYRASANDRA C.V. RAMAN NAGAR BANGALORE 560 093. : RESPONDENT APPELLANT BY : SMT. JAZINTA ZIMIK VASHAI ADDL. CIT (DR) RESPONDENT BY : SHRI T. SURYANARAYANA ADVOCATE O R D E R PER A. MOHAN ALANKAMONY ACCOUNTANT MEMBER THIS APPEAL IS FILED BY THE REVENUE DIRECTED AGAIN ST THE ORDER OF LD. CIT(A)-III IN ITA NO.49/C-12(1)/CIT(A)-III/BNG/06-0 7 DATED 8.2.2010 FOR THE A.Y. 2001-02 DELETING THE PENALTY LEVIED BY THE LD. AO U/S. 271(1)(C) OF THE ACT. ITA NO.732/BANG/10 PAGE 2 OF 7 2. IN THE ASSESSMENT PROCEEDINGS U/S. 143(3) OF THE ACT FOR THE A.Y. 2001-02 THE LD. AO DETERMINED THE TOTAL LOSS AT R S.1 49 09 417 WHEREAS THE APPELLANT HAD FILED IN ITS RETURN OF INCOME DEC LARING A LOSS OF RS.1 84 83 424. DURING THE COURSE OF THE ASSESSMEN T PROCEEDINGS THE LD. AO HAD FOUND THAT THE ASSESSEE HAD DECLARED IN ITS PROFIT & LOSS ACCOUNT UNDER THE HEAD MISCELLANEOUS EXPENDITURE RS.25 76 9 68 FOR WHICH THE ASSESSEE COULD NOT FURNISH ANY EXPLANATION WITH SUP PORTING DOCUMENTS AND EVIDENCE AND STAFF WELFARE EXPENDITURE OF RS.19 9 4 078/- PERTAINING TO CASH PAYMENTS FOR FOOD TAXI FARE MEDICINE BIRTHD AY CAKES SNACKS ETC. SINCE THE ASSESSEE WAS NOT ABLE TO PROVE THAT THE E XPENSES FOR RS. 25 76 968/- WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE BUSINESS THE LD. AO DISALLOWED THE SAME AS ALLOWABLE EXPENDITURE IN THE COMPUTATION OF INCOME. SIMILARLY THE LD.AO DISALLOWED 50% OF THE E XPENSE CLAIMED AS STAFF WELFARE EXPENSES AS IT WAS NOT POSSIBLE TO VE RIFY WHETHER THE EXPENSES WERE USED WHOLLY AND EXCLUSIVELY FOR THE B USINESS. THEREAFTER IN THE PENALTY PROCEEDINGS LD. AO LEVIED MINIMUM PENAL TY AMOUNTING TO RS. 8 76 633/-. SUBSEQUENTLY IN THE QUANTUM APPEAL BEF ORE THE LD. CIT(A) AN AMOUNT OF RS.20 LAKHS SHOWN AS MISCELLANEOUS EXPEND ITURE AND RS.2 LAKHS SHOWN AS STAFF WELFARE EXPENDITURE WAS CONFIR MED SINCE THE ASSESSEE WAS TOTALLY OPAQUE ABOUT THE TRANSACTION A ND HAD NOT GIVEN THE COMPLETE AND SATISFACTORY DETAILS. 3. BEFORE THE LD. CIT(A) IN THE PENALTY PROCEEDINGS THE LD. AR MADE THE FOLLOWING SUBMISSIONS: (A) THE PENALTY WAS LEVIED BY THE ASSESSING OFFICER BASED ON ADHOC DISALLOWANCE AND WANT OF EXHAUSTIVE INFORMATION. (B) THE DISALLOWANCE WAS MADE AN ESTIMATE BASIS. ITA NO.732/BANG/10 PAGE 3 OF 7 (C) THE APPELLANT OUT OF THE PROVISION MADE FOR RS. 22 LAKHS A SUM TO THE EXTENT OF RS.19 28 210 HAS BEEN REVERSED IN THE SUBSEQUENT YEAR I.E. A.Y. 2002-03. (D) THE APPELLANT HAD ONLY MADE A PROVISION FOR EXP ENDITURE DURING THE A.Y. 2001-02 FOLLOWING THE ACCRUAL METHOD OF AC COUNTING. (E) PENALTY CAN BE LEVIED ONLY WHEN THERE WAS A DEL IBERATE CONCEALMENT OF INCOME WITH MALAFIDE INTENTION TO EV ADE TAXES. (F) PENALTY CANNOT BE LEVIED UNLESS THERE IS SOME P OSITIVE MATERIAL ADDUCED BY THE LD. AO ON WHOM THE BURDEN LIES TO SH OW THAT THE ASSESSEE HAD WILLFULLY SUPPRESSED THE INCOME. (G) VARIOUS CASE LAWS WERE CITED BEFORE THE LD.CIT( A) AND THE SAME ARE EXTRACTED IN THE ORDER OF THE LD. CIT(A). 4. THE LD. CIT(A) AFTER CONSIDERING THE ARGUMENT OF THE ASSESSEE AND NUMEROUS CITATIONS OF DECIDED CASES ALLOWED THE AP PEAL OF THE ASSESSEE. THE RELEVANT PORTION OF LD. CIT(A) PENALTY ORDER I S EXTRACTED HEREINBELOW: 5. I HAVE HEARD THE ARS OF THE APPELLANT AND ALS O CONSIDERED THE SUBMISSIONS FILED. 5.1. IN ITS SUBMISSION THE AR OF THE APPELLANT HAS RELIED ON THE CASE OF CIT VS. M.M. RICE MILLS [253 ITR 17 (P&H)] THE HIGH COURT HELD THAT: HELD THAT MERELY BECAUSE THE ADDITION HAD BEEN MAD E ON ESTIMATE UNDER THE PROVISO TO SECTION 145(1) BY ADO PTING THE VIEW THAT THE GROSS PROFIT SHOWN IN THE ACCOUNT ING EMPLOYED DID NOT AUTOMATICALLY LEAD TO THE CONCLUS ION THAT THERE WAS FAILURE TO RETURN THE CORRECT INCOME BY MEANS OF FRAUD OR GROSS OR WILLFUL NEGLECT. THOUGH THE ONUS TO PROVE THAT THERE WAS NO FRAUD OR GROSS OR W ILLFUL NEGLECT WAS ON THE ASSESSEE YET THE QUANTUM OF PRO OF TO DISCHARGE IT WAS THAT AS REQUIRED IN A CIVIL CASE I.E. BY PREPONDERANCE OF PROBABILITIES. THIS HAD BEEN DISC HARGED BY THE ASSESSEES PRODUCING REGULAR BOOKS OF ACCOUN T AND THAT WAS ENOUGH EVIDENCE BEFORE THE TRIBUNAL TO C OME TO THE VIEW THAT THE ONUS HAD BEEN DISCHARGED. THIS A LSO APPLIED TO THE DISCREPANCY IN THE STOCK STATEMENTS. 5.2 IT IS ALSO RELEVANT TO NOTE THAT THE APEX COURT HAS RECENTLY DISMISSED THE SPECIAL LEAVE PETITION OF THE DEPARTM ENT AGAINST THE ORDER OF PUNJAB AND HARYANA HIGH COURT IN ITA NO 47 0 OF 2007 (2008) 303 ITR 53 WHERE BY THE HIGH COURT DISMISSE D THE ORDER ITA NO.732/BANG/10 PAGE 4 OF 7 OF THE TRIBUNAL CANCELING THE PENALTY FOLLOWING DEC ISIONS IN 254 ITR 191 AND 158 ITR 85 IN WHICH THE COURT HAD HELD THAT PROVISIONS OF SECTION 271(1)(C) ARE NOT ATTRACTED W HEN THE INCOME OF THE ASSESSEE IS ASSESSED ON ESTIMATE BASIS AND A DDITIONS ARE MADE THEREON [CIT VS. SANGRUR VANASPATI MILLS LTD. SLP NO.31541 OF 2008 DT. 19-12-2008 (2009) 308 ITR (ST. ) 18 (SC)]. 6.0 IN VIEW OF THE ABOVE I DO NOT CONCUR WITH THE VIEW OF THE AO THAT THE FACTS IN THE INSTANT CASE MERIT LEVY OF PENALTY UNDER SECTION 271(1)(C) OF THE ACT. IT WOULD NOT BE OUT OF PLACE TO MENTION HERE THAT IN THE DISALLOWANCE OF MISCELLANE OUS EXPENSES TO THE TUNE OF RS.20 00 000/- UPHELD BY THE CIT(A) THE APPELLANT ITSELF HAS REVERSED A SUM OF RS.19 28 210/- IN THE SUBSEQUENT YEAR I.E. AY 2002-03 AS IN THE AY 2001-02 THE APPELLA NT HAD MADE A PROVISION OF RS.22 00 000/- ON ACCOUNT OF PROVISION S MADE FOR VARIOUS EXPENSES. FOR THE PURPOSES OF LEVYING OF P ENALTY U/S 271(1)(C) I.E. CONCEALMENT PENALTY THIS REVERSAL OF ENTRY OF THE PROVISION TO THE EXTENT OF RS.19 28 210/- BY THE AP PELLANT ALSO IS A POINTER TOWARDS NON CONCEALMENT OF INCOME. BY TAKI NG INTO ACCOUNT THE FACTS OF THE CASE AND THE VARIOUS JUDI CIAL PRONOUNCEMENTS RELIED UPON BY THE APPELLANT AND INC LUDING THAT OF THE APEX COURT REPORTED IN 308 ITR ST. 18 WHEREI N IT WAS HELD THAT THE PROVISIONS OF S. 271(1)(C) OF THE ACT ARE NOT ATTRACTED WHERE THE INCOME OF THE ASSESSEE IS ASSESSED ON EST IMATE BASIS AND ADDITIONS ARE MADE THEREIN. ACCORDINGLY THE A PPEAL FILED BY THE APPELLANT STANDS ALLOWED AND THE PENALTY LEVIE D OF RS.8 76 633/- U/S. 271(1)(C) OF THE ACT IS HEREBY D ELETED. 5. LD. DR SUPPORTED THE STAND OF THE LD. AO AND PRA YED THAT THE ORDER OF THE LD. AO MAY BE UPHELD. LD. AR CAME UP BEFORE US WITH THE SAME ARGUMENTS AS PUT FORTH BEFORE THE LD. CIT(A) WITH T HE REQUEST TO SUSTAIN THE ORDER OF THE LD. CIT(A). 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULL Y PERUSED THE MATERIALS ON RECORD. ON EXAMINING THE BALANCE SHEE T AND P&L ACCOUNT SUBMITTED BY THE APPELLANT IT WAS REVEALED THAT TH E ASSESSEE HAS DISCLOSED IN THE FINANCIAL STATEMENTS UNDER THE HEAD OPERATI VE EXPENSE AND SUB- HEAD MISCELLANEOUS EXPENSE RS.41 11 444. THE AM OUNT OF RS.25 76 968 ITA NO.732/BANG/10 PAGE 5 OF 7 IS A PART OF THIS AMOUNT OF RS.41 11 444. THE APPE LLANT CLAIMS THAT OUT OF THE AMOUNT OF RS.25 76 968 RS.22 LAKHS WAS PERTAIN ING TO CERTAIN PROVISIONS MADE FOR EXPENSES INCURRED DURING THE R ELEVANT ASSESSMENT YEAR. THE LD. CIT(A) ON EXAMINING THE FACTS FOUND THAT THE APPELLANT COULD NOT EXPLAIN THE PROVISION MADE FOR RS.20 LAKHS AND THEREFORE DISALLOWED THE SAME. WITH REGARD TO THE DISALLOWANCE OF RS.9 97 0 39 SHOWN AS STAFF WELFARE EXPENSES BY THE APPELLANT NO PROPER VOUCHE RS WERE PRODUCED BEFORE THE REVENUE TO SUBSTANTIATE THIS EXPENDITURE HOWEVER NOT DISPUTING THE PAYMENTS MADE ARRIVED AT A CONCLUSION THAT THE ENTIRE EXPENDITURE COULD NOT HAVE BEEN SPENT FOR THE PURPOSE OF BUSINE SS WHOLLY AND EXCLUSIVELY. CONSIDERING THE NATURE OF EXPENSE T HE LD. CIT(A) LIBERALLY ALLOWED RS.7 97 039 AND UPHELD THE ADDITION FOR RS. 2 LAKHS ON AN ESTIMATE BASIS. 7. FROM THE FACTS AND CIRCUMSTANCES OF THE CASE IT IS VERY CLEAR AND EVIDENT THAT THE ASSESSEE HAD NOT PROPERLY DISCLOSE D THE PROVISIONS IN THE BALANCE SHEET AND P&L ACCOUNT. IF AN AMOUNT IS DEBI TED TO THE P&L ACCOUNT AS PROVISION IT SHOULD BE CLEARLY DISCLOSE D AS PROVISION INSTEAD IT IS NEATLY HIDDEN UNDER THE HEAD MISCELLANEOUS EXPE NDITURE. THE SAME SHOULD ALSO HAVE BEEN DISCLOSED IN THE BALANCE SHEE T UNDER THE HEAD CURRENT LIABILITIES SUB-HEAD PROVISION FOR EXPEN SE WITH DETAILS. UNLESS THE ASSESSING OFFICER HAD EXAMINED SO METICULOUSLY THIS CLAIM OF THE ASSESSEE AS PROVISION COULD NOT HAVE BEEN EXPOSED. THE APPELLANT HAS CAREFULLY CAMOUFLAGED THE PROVISION MADE UNDER TH E HEAD MISCELLANEOUS EXPENDITURE. WITH RESPECT TO STAFF WELFARE EXPEN SE THE APPELLANT WAS NOT ABLE TO SUBSTANTIATE THE EXPENSE WITH NECESSARY VOU CHERS ESPECIALLY WHEN ITA NO.732/BANG/10 PAGE 6 OF 7 ALL SUCH PAYMENTS WERE MADE BY CASH. THEREFORE THE CASE LAWS CITED BY THE ASSESSEE BEFORE THE LD. CIT(A) AND THE BENCH D OES NOT SUPPORT THE CLAIM OF THE ASSESSEE. FURTHER THE ASSESSEE HAS C LAIMED THAT ALL THESE EXPENSES PERTAIN TO PAYMENT MADE FOR FOOD MEDICINE BIRTHDAY CAKES SNACKS ETC. IT WAS THE DUTY OF THE APPELLANT TO K EEP RECEIPTS AND VOUCHERS FOR THESE EXPENSES TO THE EXTENT POSSIBLE WHICH IT HAD NOT COMPLIED HOWEVER LD. CIT(A) WAS MAGNANIMOUS ENOUGH TO GRANT RELIEF OF RS.7 97 039 ON THESE EXPENSES CLAIMED BY THE ASSESS EE IN THE QUANTUM APPEAL. FROM THE FACTS OF THIS ISSUE IT IS APPAREN T THAT BOTH THE LD. AO AND THE LD. CIT(A) DID NOT DOUBT THE PAYMENTS MADE HOW EVER THEY WERE OF THE OPINION THAT THE ENTIRE PAYMENTS COULD NOT BE CONSI DERED AS EXPENDITURE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE ASSES SEES BUSINESS. 8. IN VIEW OF THE ABOVE WE AGREE WITH THE FINDINGS OF THE LD. CIT(A) IN DECIDING THE PENALTY PROCEEDINGS U/S. 271(1)(C) IN FAVOUR OF THE ASSESSEE WITH RESPECT TO STAFF WELFARE EXPENSES SINCE PENALT Y CANNOT BE LEVIED IN A CASE WHERE ADDITION IS MADE ON ESTIMATE BASIS. WIT H RESPECT TO THE OTHER DISALLOWANCE OF RS.20 00 000 CAMOUFLAGED UNDER THE HEAD MISCELLANEOUS EXPENDITURE THERE IS CERTAINLY A CONCEALMENT OF IN COME. BY REVERSING THE EXPENDITURE IN THE BOOKS OF ACCOUNTS IN THE SUBSEQU ENT YEAR WILL NOT TRANSFORM SUCH INCORRECT DISCLOSURE BONAFIDE. THE APPELLANT SHOULD HAVE CORRECTLY DISCLOSED IN ITS STATEMENT OF AFFAIRS THA T SUCH A PROVISION WAS MADE INSTEAD DECLARED IT AS EXPENSE INCURRED DURIN G THE YEAR. HAD THE PROVISION MADE BEEN DISCLOSED IN THE STATEMENT OF A FFAIRS OF THE APPELLANT PROBABLY IT WOULD NOT HAVE BEEN A CASE FIT FOR LEVY OF PENALTY. BUT IN THIS CASE THE FACT THAT PROVISION WAS MADE WAS UNEARTHE D ONLY AFTER A DETAILED ITA NO.732/BANG/10 PAGE 7 OF 7 EXAMINATION AND FOUND CAMOUFLAGED UNDER THE HEAD MISCELLANEOUS EXPENDITURE. FROM THE FACTS AND CIRCUMSTANCES OF THE CASE WE DO NOT HAVE ANY HESITATION TO UPHOLD THE ORDER OF THE LD. AO LEVYING PENALTY U/S. 271(1)(C) OF THE ACT WITH RESPECT TO THE ADDIT IONS MADE ON ACCOUNT OF MISCELLANEOUS EXPENDITURE HOWEVER RESTRICTING I T TO THE RELIEF GRANTED BY THE LD. CIT(A) IN THE QUANTUM APPEAL. LE VY OF PENALTY WITH RESPECT TO STAFF WELFARE EXPENSE IS HELD IN FAVOUR OF THE ASSESSEE. IT IS ORDERED ACCORDINGLY. 9. IN THE RESULT THE APPEAL OF THE REVENUE IS PART LY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 25 TH DAY OF FEBRUARY 2011. SD/- SD/- ( GEORGE GEORGE K. ) (A. MOHAN ALANKAMONY ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE DATED THE 25 TH FEBRUARY 2011. DS/- COPY TO: BY ORDER ASSISTANT REGISTRAR ITAT BANGALORE. 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ITAT BANGALORE. 6. GUARD FILE