COMMISSIONER OF INCOME TAX Vs. M/S STEEL AUTHORITY OF INDIA LTD.
October, 30th 2014
$~32 & 33
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of Decision: September 25, 2014
+ ITA 599/2014 & CM No. 15750/2014
COMMISSIONER OF INCOME TAX
Through: Ms.Suruchi Aggarwal,
M/S STEEL AUTHORITY OF INDIA LTD.
+ ITA 600/2014
COMMISSIONER OF INCOME TAX
Through: Ms.Suruchi Aggarwal,
M/S STEEL AUTHORITY OF INDIA LTD.
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE V. KAMESWAR RAO
SANJIV KHANNA, J (ORAL)
CM No. 15750/2014 in ITA No. 599/2014
Exemption allowed, subject to all just exceptions.
Application stands disposed of.
ITA No. 599/2014
ITA No. 600/2014
These two appeals filed by the revenue under Section 260A of
the Income Tax Act, 1961 (Act, in short) relate to the Assessment
Years 1999-2000 and 2000-2001.
2. By the common impugned order dated 24.01.2014, Income Tax
Appellate Tribunal (`Tribunal', in short), has affirmed the order of the
Commissioner of Income Tax (Appeals) [`CIT(A)', in short], deleting
penalty levied under Section 271 (1)(c) of the Act amounting to Rs
128.10 lacs for the assessment year 1999-2000 and Rs 19.25 lacs for
the assessment year 2000-2001.
3. The respondent assessee, a Public Sector Undertaking during
the relevant period operated integrated steel plants and was
engaged in activities relating to manufacturing and sale of steel
articles etc. The respondent-assessee had shown considerable
capitalization of assets on account of expansion and modernization.
As installation, erection and commissioning of new machinery
involved substantiated gestation time, Interest, relatable to the
borrowings from the date of acquisition to the date of putting the
asset to use, were added to the value of the assets and accordingly
capitalized. This capitalization of interest became subject matter of
audit objections by the Chief Vigilance Commission (CVC, for short)
and Comptroller and Auditor General of India (CAG, for short) for the
reason that the interest capitalized was higher or more than
justified/required. In other words, a part of the interest capitalized
should have been claimed as a revenue expenditure. These
objections were raised subsequent to the statutory audit and long
after filling of tax returns and even assessments for the respective
years. In order to comply with and meet the said audit objection, the
excess interest was de-capitalized by debiting interest and crediting
the assets in the two assessment years. The impact of the said
adjustments was reflected in the Profit & Loss a/c as an "Adjustment
relating to an earlier years", since the interest related to earlier years,
though the decision was taken during the current years.
4. For the assessment year 1999-2000, respondent assessee
claimed various deductions including "interest of Rs 366 lacs"
being an "Adjustment relating to an earlier years". Likewise for
assessment years 2000-2001, respondent assessee claimed various
deductions including "interest of Rs 50 lacs" being an "Adjustment
relating to an earlier years".
5. In the regular assessment proceedings, no disallowance was
made, but then, the Assessing Officer found that income had escaped
assessment as "adjustment relating to earlier years" had been
allowed as a deduction in the assessment years in question.
Consequently, notices under section 148 of the Act were issued.
6. In the re-assessment orders, the Assessing Officer held that
"interest" claimed (Rs. 366 lacs and Rs. 50 lacs for the assessment
years 1999-2000 and 2000-01) pertained to earlier years, and was not
related to the years in consideration. Therefore, the said interest
claimed in the profit and loss account was disallowed. We are not
concerned with the quantum order in these appeals, but with the
penalty of Rs. 128 lacs and Rs. 19.25 lacs, for concealment of income,
imposed by the Assessing Officer, under section 271(1)(c) of the Act,
for furnishing inaccurate particulars of income by claiming prior
7. Before we dwell on the appellate orders, we notice with
regret, failure of the Assessing Officer to consider the justification
and reasons given by the assessee for making the claim and failure to
notice and consider Explanation 1 to Section 271(1)(c) of the Act.
The two penalty orders are identically worded and for the sake of
convenience, the entire reasoning given by the Assessing Officer is
"The AO observed that the claim of the assessee was not
admissible as it could not be proved that the liability has been
incurred during the year consideration. This issue was confirmed
by the CIT(A) also. The interest had been capitalized by the
assessee from the date of commencement of production. The
C&AG auditors appear to have counted trial production as full
production. The interest has, therefore, been de-capitalized
based on wrong premises. Moreover, it is not possible to
capitalize & de-capitalized in this way. In my opinion, the action
of the AO in not allowing the reversal an account of
decapitalization was justified. Hence, it is clear that the assessee
has claimed capitalized interest on certain Plant & Machinery
which was not allowable as per the provisions of the Act. Hence I
am satisfied that the assessee had concealed the particulars of
income and had also furnished inaccurate particulars of its
income and thus committed default within the meaning of
explanation 1 to Sec. 271 (1 )(c)."
(The first two sentences in the above quote refers to the
orders passed in the quantum proceedings.)
8. Penalty imposed under section 271(1)(c) is a civil liability. The
section is enacted as a provision to assist and to vigorously check and
prevent loss of revenue, but penalty for concealment can be imposed
after noticing and applying the provisions of Section 271 (1)(c) of the
Act including Explanation 1. This is the primary and the basic flaw in
the penalty orders passed by the Assessing Officer.
9. The C.I.T (A) by a common order dated 20.5.2013 set aside the
penalty and observed that it was a case of wrong interpretation and
understanding of the legal and accounting principles. Justification of
the assessee should be accepted as bona fide. He observed:-
"After considering the facts of the case and the
submissions of the appellant which have sufficient force, I am
inclined to hold that the appellant has neither concealed
income nor furnished inaccurate particulars for ,AY 1999-2000
and 2000-01. The entries have been passed in the books of
account in a bona fide manner and as per the guidelines of the
auditors and there is no case for penalty. Hence the penalty of
RS.1 ,28,10,000/- and Rs. 19,25,000/- imposed by the
Assessing officer is hereby deleted."
10. The Tribunal has affirmed the said finding, holding that
assessee had declared and disclosed full and true material facts in the
returns. The Tribunal held:
"4. We have heard rival contentions and perused the
material available on record. It has not been disputed that the
changes in capitalization or de- capitalization of interest were
effected by the assessee consequent to well controlled and
regulated statutory regime under the aegis of Central
Government. The assessee's book results after statutory audit
are subjected to audit and correction of CVC and CAG. The
changes carried out by the assessee are in consonance to the
recommendations of CVC and CAG. Besides, these details were
filed along with the return of income. All these factors make
the assessee's case squarely falling within the purview of
Supreme Court judgment in the case of Reliance Petroproducts
(supra) and other case laws cited by the assessee. On over all
consideration of the facts and circumstances, we see no
infirmity in the order of CIT(A) deleting these penalties. His
orders are upheld".
11. The appellate orders by the C.I.T (A) and the Tribunal take due
notice of the factual matrix and examine the question of bonafides.
It stands recorded that the returns filed and income declared was as
per the statutory audit report and the interest paid had been
capitalized. Subsequently, audit objections that excessive interest
had been capitalized, were raised by CVC and CAG. In other words, a
part of interest so capitalized should have been treated as revenue
expenditure. In order to comply with the said objections, excess
interest was decapitalised. This impacted, the profit and loss
account for the current years, even when the interest related to
earlier years, as the enteries in the profit and loss account and in the
books were made in the current years. The de-capitalization was
under-taken in the two assessment years and therefore had
compressed the profits in the years in question. The reason given
was that the decision to de-capitalize was taken in the years in
question. On the issue, relating to capitalization and de-
capitalization, the assessee was guided by the opinion of the auditors
and consultants. These were certainly accountancy issues, complex
and capable of different opinions and understanding at each step.
12. The assessee had given truthful and cogent explanation
without concealing or hiding facts why interest relating to earlier
years, which was capitalized, had been accounted for as a liability in
the current years. It cannot be doubted or even questioned that the
assessee had disclosed all facts relating to the explanation offered.
Nothing was hidden or concealed. The quantum of interest
capitalized and decapitalized as mentioned by the assessee has not
been doubted. It is not the case of the revenue that the assessee had
tried to wrongly classify or camouflage the "prior period expenses".
On the contrary, the assessee had given full particulars and details in
the returns. In the notes of accounts, filed with the original returns,
the assessee had prudently and being tentative, mentioned:-
"Normally the erection, installation and commissioning of plant
and machinery in our case takes a considerable time - more
than one year. The interests incurred on borrowing related to it
are capitalized. The capitalization of interest is by debiting
capital WIP/Plant & machinery and crediting interest. The
company hasa number of expansion schemes in progress at
any given time. When the plant is commissioned, it is shifted
from Capital work in progress (WIP) to plant on the basis of
capitalization report. Insome cases, the subsequent events
bring out the capitalization of a particular scheme over and
under capitalized on erroneous adjustments between the
schemes or on account of an error in date of start or finish or
erection, etc. such error are correct when discovered. It has
been found in this year ( 1999-2000) that interest of 366 lacs
had been excess capitalization in various expansion schemes (
50 lac in year 2000-2001).
It has thus reduced the capitalization of interest by
debiting interest and crediting Plant & Machinery. Since the
interest was credited (and capital WIP debited) in the earlier
years, the reversal by debiting interest (and crediting P&M) has
been shown as an adjustment relating to earlier years. If the
department does not accept this reversal then it will have to
allow a higher depreciation on Plant & Machinery year after
year. Otherwise, the cost WOV of Plant & Machinery cannot be
adjusted u/s 43 of the I. T. Act."
13. The C.I.T (A) in the quantum proceedings against the
reassessment order did not entirely agree with the Assessing Officer
and held that interest once capitalized cannot be de-capitalised.
Thus, depreciation was allowed on the entire interest which had been
capitalized without de-capitalization. It is noticeable that the
capitalization of the interest in the earlier years was to the detriment
of the assessee as it had resulted in higher taxation in the said
assessment years. This reflects and indicates bona fides, rather than
an attempt or desire to evade taxes. The conduct of the assessee or
the adjustment made in the current assessment years were duly
disclosed and informed to the Assessing Officer by way of a note in
the original return. The anomaly and error was sought to be
corrected and ratified for the future years. This was the justification
and reason given.
14. The Tribunal and the CIT (Appeals) after examining the factual
matrix and the explanation given by the assessee, have come to the
conclusion that the said explanation of the assessee was bona fide.
This factual finding is reasonable, plausible and essentially a question
of fact. The finding does not require interference and cannot be
categorized as perverse.
15. The appeals are accordingly dismissed.
SANJIV KHANNA, J
V. KAMESWAR RAO, J
SEPTEMBER 25, 2014/akb