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Dy. Commissioner of Income Tax Circle 4(1), New Delhi. Vs. M/s. Learning Universe Pvt. Ltd. 59, Lower Ground Floor, Mandakni NRI Colony, GK-IV, New Delhi.
June, 27th 2014
                         DELHI BENCH: E: NEW DELHI


                                ITA No. 441/Del/2005
                              Assessment Year 2001-02

       Dy. Commissioner of Income Tax vs. M/s. Learning Universe Pvt. Ltd.
       Circle 4(1), New Delhi.            59, Lower Ground Floor,
                                          Mandakni NRI Colony, GK-IV,
                                          New Delhi.

                (Appellant)                     (Respondent)

                Appellant by              :      Shri Rajiv Saxena, Advocate
                Respondent by             :      Shri Keyur Patel, Sr. DR



       The revenue has questioned first appellate order on the following


       The Ld. CIT(A) erred in law and on facts in deleting penalty of Rs.
       52,85,990/- imposed u/s 271(1)(c) by the AO without appreciating

     (i) that assessee deliberately claimed these as expenses when these were
         not allowable

     (ii) that such disclosure in the notes to account only prove that the assessee
          intentionally claimed such expenses though not allowable

2.        We have heard and considered arguments advanced by the parties in

view of orders of the authorities below, material available on record and the

decisions relied upon.

                                                     ITA No. 441/Del/2005

3.           The facts in brief are that the assessee, a private Ltd. Company is

engaged in the business of web based education services. During the year it had

claimed an expenditure of Rs. 4,15,14,394/- on account of cost of WEB site

maintenance. Out of this expenditure the assessee had debited an amount of

Rs. 1,50,21,941/- in the profit and loss account. The balance of Rs.

2,64,92,553/- was capitalized and transferred to balance sheet under the head "

miscellaneous expenditure" in schedule 7, on which the assessee had claimed

depreciation @ 25%. In response to specific query as to why the amount of Rs.

1,50,21,841/- should not be capitalized, the assessee could not furnish any

satisfactory explanation therefore the amount of Rs. 1,31,44,111/- was added to

the income of the assessee after allowing depreciation of Rs. 18,77,730/-

allowable under the Act.

4.      The assessee had claimed an expenditure of Rs. 13502409/- towards

payment made to FCB ULKA Advertising Ltd. Summons u/s 131 were issued to

the party to confirm the transaction. In reply, the party i.e. FCB ULKA Advertising

Ltd. confirmed that they have booked an income of Rs. 13281184/-. Therefore,

the difference of Rs. 2,21,225/- was added to the income of the assessee on

account of unexplained expenditure. The AO initiated penalty proceedings u/s

271(1)(c) of the Act and being not satisfied with the explanation of the assesee

has levied the penalty of Rs. 2,52,85,990/- u/ s271(1)(c) of the Act. The Ld.

CIT(A) has deleted the same against which the present appeal has been


                                                     ITA No. 441/Del/2005

5.       In support of the ground the Ld. DR has basically placed reliance on the

penalty order. He submitted that the Ld. CIT(A) while deleting the penalty has

failed to appreciate that the assessee has deliberately claimed the above

expenses which were not allowable. He submitted that the disclosure made by

the asseseee in the notes to account only proves that the assessee had claimed

such expenses fully knowing that these were not allowable. Thus there was

concealment of particulars of income and furnishing inaccurate particulars

thereof on the part of the assessee to attract the penal provisions. In support he

placed reliance on the following decisions :-

     Chadha Sugars (P) Ltd. vs. ACIT (2012) 18 244 (Delhi)

     CIT vs. Gold Coin Health Food (P) Ltd. (2008) 172 taxmann 386 (SC)

     CIT vs. Unipol Chemicals Intermediates Ltd. (2012) 27 87

     JCIT vs. Saheli Leasing & Industries Ltd. (2010) 324 ITR 170 (SC)

6.        Ld. AR pointed out that it is second round of the appeal before the

Tribunal, since the earlier order passed by the Tribunal disposing the appeal of

the revenue has been remanded back by the Hon'ble Delhi High Court for fresh

consideration of appeal on its merit. Ld. AR on the other hand tried to justify the

first appellate order with this submission that the assessee      had made fully

disclosure in support of the claimed expenditure and only because the same

were not allowed does not attract penal provision alleging that there was

                                                     ITA No. 441/Del/2005

concealment of particulars of income or furnishing inaccurate particulars thereof

on the part of the assessee. He also placed reliance on the following decisions

CIT vs. Indian (P) Ltd. (2008) 219 CTR 603 (Delhi)

Karan Raghav Exports Pvt. Ltd. vs. CIT ITA 1152/2011 (Delhi High Court)

CIT vs. Udaipur Hotels Ltd. (2013) ­TIOL-16-HC-DEL-IT

7.         On perusal of order dated 27.4.2006 of the Hon'ble Jurisdictional Delhi

High Court in ITA No. 584/2006 on the appeal preferred by the Department

against the order dated 12.8.2005 of the Tribunal in ITA No. 441(D) of 2005, we

find that the Hon'ble High Court has been pleased to remand the matter back to

the file of the Tribunal in view of their answer given to the following similar

issues in the case of CIT vs. Aditya Chemical Ltd. and Others (ITA No.

205/2001). In the present case of the assessee two substantial question of law

were raised before the Hon'ble High Court , namely

     1.   Whether the ITAT was right in deleting penalty u/s 271(1)© of the

Income Tax Act 1961 on the ground that the total income of the assesee has

been assessed at a minus figure / loss ?

     2. Whether the ITAT was justified in holding that the judgments in Prithipal

Singh &Co. (183 ITR 69) and 249 ITR 670) will apply even after insertion of

Explanation 4 to section 271 (1)(C) w.e.f. 1.4.1976 ?

                                                   ITA No. 441/Del/2005

8.    The Hon'ble High Court noted that similar questions were examined by a

division bench of that court in the case of CIT vs. Aditya Chemicals Ltd. and

others (supra) and connected matters and answered in the following words :-

      18. Hence answering question 1 in favour of the revenue we hold that the

      ITAT was not right in deleting the penalty imposed u/s 271(1)© of the

      Income Tax Act 1961 merely on the ground that the total income of the

      assesee has been assessed on a minus figure / loss. Question No. 2 has

      already been answered in the negative by us.

      19. In all these appeals the ITAT decided against the revenue and in

      favour of the assessee without going into the merits of the question in

      each case so in order to return a positive finding of fact that the assesee

      in each case had "concealed the particulars of his income or furnished

      inaccurate particulars of such income." Nor did it examine the quantum of

      penalty in each case. ITAT decided the appeals before it on the

      understanding that where there was a returned loss and a reduced loss

      was assessed there could be no question of imposing of penalty u/s 271

      (1)© of the Act. This understanding we have indicated above does not

      hold good for the period between      1976 and 2003 amendments. This

      being the position answering the question as indicated above and allowing

      all the appeals we remand all these cases to the ITAT for disposal of

      merits. No costs".

                                                   ITA No. 441/Del/2005

9.    In the light of above the questions stand answered similarly in the present

case and the matter remanded to the Tribunal for disposal on merits.

10.     Having gone through the order of the penalty as well as first appellate

order we find that the Ld. CIT(A) has deleted the penalty on two basis. Firstly

that when assessment has been made at loss the question of determining the

amount of tax will not arise and therefore no penalty can be determined. In this

regard he has observed that return of income was furnished on 29.10.2001

therefore concealment if any took place on that date and the law as on that date

(before its amendment) would be applicable. Secondly that there was full

disclosure of the expenditure and its treatment for account purposes was made

known by the assessee hence there was no question of alleging the assesseee to

concealment of income by furnishing inaccurate particulars of income.

11.     Thus we find that the first basis on which the Ld. CIT(A) has deleted the

penalty and has been upheld by the Tribunal cannot be justified now in view of

the above cited judgment of the Hon'ble Delhi High Court. We hold as such.

12.      So far as the second basis on which the Ld. CIT(A) has deleted the

penalty, we find that this material fact has not been rebutted by the revenue

before us that in support of the claimed expenditure there was full disclosure of

the expenditure and about its treatment for accounting purposes was made

known to the Assessing Officer by the assesee. The expenditure in question was

related to cost of website maintenance. The total cost was Rs. 4,15,14,394/- and

the asset was expected to last for three years. Therefore the assesee wrote off

                                                     ITA No. 441/Del/2005

1/3rd equal to Rs. 1,50,21,841/- this year and the balance was capitalized. The

AO reproduced `Notes' to the accounts (schedule 14) as "content development

cost incurred on online educational material is deferred and amortized over its

estimated useful life of 3 years commencing from the date on which the

company starts generating revenues from the sale of the respective educational

material or over the remaining useful life of the content material. Schedule 10

gave details of expenditure and extent of capitalization. It was explained by the

assesee that website maintenance is not an asset which figures in appendix I of

the Income Tax Act. Apparently, that was the reason as to why depreciation

thereon was calculated at the general rate. The assessee stated that the useful

life of the asset was three years and therefore 1/3rd was written off this year.

This appears to be case of deferred revenue expenditure and not one where the

capital asset was acquired for the enduring benefit of the trade. It was stated

that the courts of law have not specified in terms of time as to what would

qualify as enduring. There is no definition of enduring in Income Tax Act 1961.

Only there is a definition of short term capital asset in clause (42A) of section 2

which provides that short term capital asset means a capital asset held by an

assessee for not more than 36 months immediately preceding the date of

transfer. Although the definition is strictly not applicable to the facts of the

assessee's case, it is debatable whether an asst which lasts only for a period of

three years (there is no dispute regarding this) should be regarded as one

acquired for the enduring benefit of the trade. In respect of addition of Rs.

                                                    ITA No. 441/Del/2005

2,21,225/- the explanation furnished by the assessee was that the difference

between the amount debited by the assesee and that admitted by the payee was

on account of TDS and short payment which was not reflected in payee's books.

13.       There is nothing on record to suggest that the above explanation

furnished by the assesee against the claimed expenditure was not bonafide.

Thus in our view there was no reason to arrive at the conclusion by the AO that

there was concealment of particulars of income or furnishing inaccurate

particulars thereof in relation to the claimed expenditure on the part of the

assessee to attract penal provison u/s 271(1)(c) of the Act. We are thus of the

view that the Ld. CIT(A) has rightly deleted the penalty in question on these

merits. In this regard we also find strength from the decisions relied upon by the

Ld. AR. The decision relied upon by the Ld. DR having distinguishable facts are

not helpful to the revenue.

14.       Having gone through the decisions relied upon by the Ld. DR we find

that in the case of Chadha Sugars (P) Ltd. vs. ACIT (supra) the penalty u/s

271(1)© was levied on two accounts. Firstly against the claimed amount paid to

the Registrar of Companies for increasing authorized capital as revenue

expenditure and secondly the assessee had computed taxable income by

claiming excess expenditure . The assessee's contention was that it was not an

expert in the field of taxation and claim had been made on advice of chartered

accountant. The question was as to whether explanation tendered by the

assesee was not bonafide and hence penalty imposed upon it for making

                                                      ITA No. 441/Del/2005

patently false claim was justified. The Tribunal answered it in affirmative in

favour of the revenue. Likewise in the case of CIT vs Gold Coin Health Food (P)

Ltd. (supra) the issue was as to whether amendment made in Explanation 4 to

section 271(1)(c) (iii) with effect from 1.4.2003 is clarificatory and therefore will

have retrospective effect. It was answered in affirmative by the Supreme Court

of India. In the case of CIT vs. Unipol Chemicals Intermediates Ltd. (supra) the

assessed income resulted in loss. The issue was as to whether penalty u/s

271(1)© can be levied even when assessed income is a loss. In was answered in

affirmative in favour of the revenue. In the case of JCIT vs. Saheli Leasing &

Industries Ltd. it has been held that in view of Explanation 4(a) to section

271(1)(c), penalty would be levied not only in a case where after addition of

concealed income a loss returned becomes positive income, but also in a case

where addition of concealed income reduces returned loss and finally assessed

income is also a loss or minus figure. The issue is finally settled by the Hon'ble

Supreme Court that even in a case where income is assessed in minus or on

reduced loss, penalty is leviable. Thus in case of levy of penalty we have to see

as to whether there was concealment of particulars of income or furnishing

inaccurate particulars thereof by the assessee towards the addition made. If the

assesee is able to furnish bonafide reason for the claim or the claim made was a

debatable issue in view of the provisions of the law and in view of the decisions

of the Hon'ble Courts, in that case penalty u/s 271 (1)(c) is not leviable. Such

precaution is being taken within the provision of the law keeping in mind that the

                                                     ITA No. 441/Del/2005

action u/s 271(1)(c) of the Act is penal in nature. So we have to examine in the

present case as to whether the reason shown for the claimed expenditure were

bonafide or not. If it was bonafide then there is no question of levy of penalty.

In the decision of CIT vs. Indian (P) Ltd. (supra) relied upon by the Ld.

AR the assessee was engaged in travel business, made all kinds of arrangements

for its clients such as booking of hotel rooms, providing taxi services, booking of

air tickets and railway tickets, etc. During relevant assessment year assesee

incurred on certain expenditure on development of ots website. In such

arrangement the assessee's client can use assessee's website for the purpose of

availing of the services provided by it. The AO opined that expenditure incurred

on development of its website was of a capital nature in as much as assessee

had acquired an asset which would provide it with an enduring benefit, Tribunal

however concluded the expenditure in question was of revenue in nature. Issue

before Hon'ble High Court was as to whether merely because the expenditure

may result in an enduring benefit would not make such an expenditure of a

capital nature and what is to be seen is what is the real intent and purpose of

expenditure and as to whether there is any accretion to the fixed capital of the

assesee. It was held `yes'. The further issue was as to whether since in case of

expenditure of website there would be no change in the fixed capital of the

assessee, even though website may provide an enduring benefit to an assesee

the expenditure incurred was to be regarded as revenue expenditure. It was

answered in affirmative.   The Hon'ble Delhi High Court in the case of Karan

                                                    ITA No. 441/Del/2005

Raghav Exports Pvt. Ltd. vs. CIT (supra)        has been pleased to hold that

imposition of penalty u/s 271(1)© of the Act is not akin to or like criminal

proceedings and the question of mens rea or mala fides on the part of the

assesee need not be examined and is not relevant. However at the same time it

is not mandatory that each case wherein addition or disallowance is made by the

Assessing Officer , penalty must and should be imposed. When an assesee

establishes and shows that he had acted bonafidely and all facts and material

were disclosed by him, penalty should not be imposed as per clause B to

Explanation 1to section 271 (1)(c) of the Act. Likewise in the case of CIT vs.

Udaipur Hotels Ltd. (supra) the Hon'ble Delhi High Court has been pleased to

hold that mere submission of a claim which is incorrect in law would not amount

to giving inaccurate particulars of income, hence penalty for concealment can not

be levied on the same.

15.      When we examine the facts of the present case as discussed above in

the light of the above decisions we find that there is no doubt on the

genuineness of the claimed expenditure, the only question was the treatment

given by the assesee to those expenditure which was a debatable issue and

further that there was no allegation that the assesee had not disclosed full facts

relating to the claimed expenditure as it was disallowed by the AO only on the

basis of those disclosures. We thus find that the Ld. CIT(A) has rightly deleted

the penalty levied by the AO in question.

                                                     ITA No. 441/Del/2005

16.     In the result the first appellate order whereby the Ld. CIT(A) has deleted

the penalty in question is justified and upheld. The ground is thus rejected.

        In the result appeal is dismissed.

        Order is pronounced in the open court on 24th June, 2014.

                  sd/-                                        sd/-
              (B.C. MEENA)                              ( I.C. SUDHIR )
           ACCOUNTANT MEMBER                          JUDICIAL MEMBER

Date    24th .June, 2014


Copy of order forwarded to:
  1. Appellant
  2. Respondent
  3. CIT(A)
  4. CIT
  5. DR
                                                       By Order

                                                     Asstt. Registrar, ITAT
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