By TIOL News Service

CHENNAI, DEC 10, 2013: THE issue before the Bench is - Whether penalty can be imposed merely because assessee claimed deduction of liquidated damages provided for in contract but never filed a claim for the same. And the answer goes against the Revenue.

Facts of the case

The assessee, a company, had filed its return of income, which was processed u/s 143(1)(a). Subsequently, a notice u/s 148 was issued on 19.08.2002, proposing to reassess the income for the said AY. The assessment u/s 143(3) read with Section 147 was completed on 29.11.2002, disallowing the claim for provision for liquidated damages in respect of delays in supply of materials, amounting to Rs.74,50,000/-. The AO thereafter issued a notice and initiated proceedings u/s 271(1)(c). Not satisfied with assessee's reply, AO imposed penalty of Rs.26,50,000/-. On appeal, CIT(A) had dismissed the appeal both regarding quantum and penalty. Aggrieved by both such orders, assessee preferred appeals to the Tribunal. By a common order, Tribunal had dismissed the quantum appeal and allowed the appeal filed against the order of penalty.

Before HC, the Revenue's counsel had contended that the Tribunal erred in deleting the penalty and the findings of the Tribunal that the assessee had not concealed any particulars either in its accounts or in other particulars, was an incorrect finding and the Tribunal ought to have seen that the assessee had wrongly claimed deduction on account of liquidated damages, when the contracting party had made no such claim. Further, it is contended that the Tribunal ought to have seen that the assessee chose to show the amount only in the year 2001-02, while claiming it as a deduction in the assessment year 1998-99, thereby choosing to offer to tax the amount in a year convenient to it and it was a clear case where penalty u/s 271(1)(c) was leviable. It was submitted that under the contract entered into between the assessee and M/s.Hyundai Motor India Ltd., (HMIL) the liquidated damages could be claimed only after 01.05.1998, whereas the assessee had calculated the alleged liquidated damages as on 31.03.1998 itself well before the liability accrue, which was sufficient to hold that the assessee was liable to penalty. Further, it was submitted that the assessee had concealed its income and therefore, the order of FAA confirming the penalty, was perfectly justified.

On the other hand, assessee's counsel had submitted that the contract was a composite contract which required purchase of erecting of the paint shop for the automobile assembly equipment for HMIL. It was further stated that the assessee was responsible for all activities relating to procurement and supply of the materials to the site of the customer.Admittedly, there was delay in supply of equipment and therefore, the assessee was under the bonafide belief that HMIL being entitled to invoke clause 10 of the contract, which provided for payment of liquidated damages. Therefore, it was submitted that though the HMIL had placed orders directly to the suppliers, who effected supply in terms of the purchase order, assessee was bound over and liable for liquidated damages in the event of failure to meet the delivery date as set forth in clause 4 of the contract. It was further submitted that the assessee for the FY ended 31.03.1998, provided for a penalty for delayed supply of materials to their client HMIL, and it was an admitted fact that there was no delay in installation. The fact that there had been a delay in supply of materials was accepted by the FAA while considering the quantum appeal in his order dated 27.05.2003. Further, it was submitted that the assessee never stated that HMIL had made a written claim for liquidated damages, however in view of the penal clause, assessee bonafidely believed that it would be liable to liquidated damages and therefore, provided for the liability in its books of accounts. Further, it was submitted that the delay in supply occurred due to the delay committed by the assessee in placement of orders, delay in approval of materials etc., and the sub-suppliers or sub-contractor were in no way responsible for the delay. It was further submitted that after it became clear that the provision for liquidated damages would not be payable, the assessee voluntarily had written back the provision in the books of accounts and offered it to tax in the AY 2001-02 and therefore, it was clear that the assessee had no malafide intention of concealing income, and infact, there was no escapement of income.

Held that,

++ it is an admitted case that there was delay in supply of material i.e., the delivery schedue as mentioned in clause 4.0 was not adhered to, since the materials were not supplied before 30th, July, 1997. It is further not in dispute that there was no delay insofar as installation as it was done within the date of final acceptance (i.e.,) 01.10.1998. The assessee's specific case is that the delay in supply occasioned due to the delay committed by them being delay in placement of orders, delay in approval material etc., and the sub-suppliers were no way responsible, liable or cause for the delay. Therefore, the assessee would state that there is no malafide intention of concealing the income and considering the terms of the contract that they would be liable for liquidated damages in terms of clause 10.1 of the contract, though such claim could be made only after 01.05.1998, the assessee voluntarily made provision in their books of accounts. It is the further case of the assessee that after the end of the warranty period (i.e.,) 01.10.1999, it became clear that no liquidated damages would be payable, the assessee had written back the provision in their books of accounts and offered it to tax in the assessment year 2001-02. Therefore, it is the case of the assessee that there is no malafide intention of concealing income and in fact, there was no escapement of income;

++ in order to appreciate the scope and ambit of the Explanation 1 to Section 271(1)(c) of the Act, we may refer to the decision of SC in the case of UOI and Ors vs. Dharmendra Textiles Processors & Ors., (2008-TIOL-192-SC-CX-LB), wherein it was held that the explanations appended to Section 271(1)(c), indicate the element of strict liability on the assessee for concealment or for giving inaccurate particulars, while filing the return and the object of the said provision indicates that the Section has been enacted to provide for a remedy for loss of revenue. The penalty under the provision is a civil liability. Wilful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution u/s 276C. The said decision in the case of UOI and Ors vs. Dharmendra Textiles Processors & Ors., was taken note of in a subsequent decision of SC in the case of CIT vs. Reliance Petroproducts Pvt., Ltd., (2010-TIOL-21-SC-IT), and SC after referring to the decision in the case of UOI vs. Rajasthan Spinning and Weaving Mills (2009-TIOL-63-SC-CX), held that it must be shown that the conditions u/s 271(1)(c) must exist before the penalty is imposed. There can be no dispute that everything would depend upon the return filed, because that is the only document, where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. In the case of Dilip N.Shroff vs. Joint CIT (2007-TIOL-96-SC-IT), SC while explaining the terms of 'concealment of income' and 'furnishing inaccurate particulars', held that in order to attract penalty u/s 271(1)(c) bonafide of the conduct was necessary, as according to the Court, the word 'inaccurate' signified a deliberate act or omission on the part of the assessee. Further, it was held that clause (iii) of Section 271(1)(c) provided for a discretionary jurisdiction upon the Assessing Authority, inasmuch as the amount of penalty could not be less than the amount of tax sought to be evaded. SC in the case of CIT vs. Reliance Petroproducts Pvt., Ltd., observed that it was only on the point of mens rea, the judgment in Dilip N.Shroff vs. Joint CIT, was upset and pointed out that in the case of UOI and Ors vs. Dharmendra Textiles Processors & Ors., after considering Section 271(1)(c), the Apex Court came to the conclusion that the said Section indicates the element of strict liability on the assessee for the concealment or for giving inaccurate particulars while filing return, and there was no necessity of mens rea;

++ in the case of CIT vs. Zoom Communication P. Ltd., (2010-TIOL-361-HC-DEL-IT), the Division Bench of the Delhi HC after considering the Section 271(1)(c) and Explanation 1, observed that it is true that mere submitting a claim which is incorrect in law would not amount to giving inaccurate particulars of the income of the assessee, but it cannot be disputed that the claim made by the assessee needs to be bona fide. If the claim besides being incorrect in law is mala fide, Explanation 1 to Section 271(1)(c) of the Act would come into play and work to the disadvantage of the assessee. Thus, the sum and substance on the above referred decisions are that penalty being a civil liability, the requirement of mens rea is not an essential element, but the claim of the assessee should be bonafide and mere submission of inaccurate particulars by itself cannot be held against the assessee under the provisions of Section 271(1)(c). In the background of the above case laws, the findings of the Tribunal as regards the bonafide as against the assessee has to be considered. The Tribunal held that the assessee had not concealed any particulars either in its accounts or in other particulars and the contract was made available before the Assessing Officer. The Tribunal noticed that the contract provided a clause by which HMIL could claim liquidated damages from the assessee for delay caused in executing the work and HMIL did not invoke the provision and the assessee was not put to any liability. But, the contract provided for such liability, which is otherwise enforceable in law. The Tribunal observed that the assessee took precaution and provided for the penalty, claimed the same as deduction at the earliest point of time being the assessment year 1998-99. Therefore, the Tribunal held that the precaution taken by the assessee could not be compared with concealment of income and concealment of income means concealment per se for the purpose of avoiding payment of tax, whereas in the case of the assessee, there was no case of concealment at all. In its good faith, the assessee was claiming the deduction at the earlier point of time by furnishing all the details;

++ the battle of brains between the assessee and their consultants on one hand as to its liability under the contract and the Revenue on the other in making the provision, has thus resulted in different interpretation, which is evident in the case on hand on clause 10.1 of the contract. As long as there is nothing on record to show that the assessee concealed the income with a dishonest intention or furnished inaccurate particulars either deliberately or as a result of gross negligence which was not capable of being regarded as an innocent act, penalty is not to be ordinarily levied. In the light of the above findings and taking note of the conditions contained in the contract between the assessee and HMIL we are fully convinced that the assessee's claim for deduction at the earliest point of time for the assessment year 1998-99, cannot be stated to be lacking in bonafides or with the malafide intention with intent to conceal in particulars of income for the purpose of avoiding payment of Tax. In the light of the above, we agree with the findings recorded by the Tribunal and dismissed the Tax Case filed by the Revenue. No costs.

(See 2013-TIOL-995-HC-MAD-IT)