Mens rea is not required to impose penalty for concealment – Del HC


Shervani Hospitalities Ltd v CIT [I.T.A. No. 804 of 2011 dated 28.05.2013] Delhi High Court

Background:

The assessee is a company engaged in hospitality services. For the AY 2001-02, the assessee filed its return declaring loss of Rs.43,15,328. The assessment was completed under Section 143(3) of the Act at a positive income of Rs.9,26,510. In the first appeal, the assessee substantially succeeded and most of the additions/disallowances were deleted. After giving the first appeal effect, the loss was determined at Rs.34,30,680. Aggrieved, the Revenue preferred an appeal before the Tribunal, which was substantially allowed vide order dated 25th April, 2008.

Proceedings under Section 271(1)(c) of the Act were initiated and vide order dated 29th January, 2009, penalty of Rs.16,44,330/– was imposed inter-alia observing that the assessee had failed to substantiate the explanation regarding additions/disallowances made in the assessment order resulting in reduction of returned loss. It was observed that the losses claimed could not be justified before the Assessing Officer and the additions had been finally upheld by the Tribunal. Concealment penalty was upheld in the first appeal by the Commissioner of Income Tax (Appeals).

Additions made / Issues involved

Sr.  Particulars Amount
1. Loss of closure of South Extension Unit Rs.25,37,521
2. Capital Expenditure for interior designing Rs.1,32,000
3. Depreciation on assets purchased from M/s Star Hospitality Rs. 3,03,433
4. Donations Rs. 10,494
5. Loss of subsidiary Company Rs.1,39,595

It was observed in the quantum proceedings before the Tribunal that loss of Rs.1,39,595/- suffered by the subsidiary company upon liquidation claimed in the hands of the assessee was untenable in law because the subsidiary company was a separate taxable entity. The assessee had accepted that this was an error or a mistake and it was pointed out that even in the quantum proceedings this claim was not pressed.

The real question pertains to the first two claims i.e. loss on closure of South Extension Unit of Rs.25,37,521/- and Capital Expenditure for interior designing of Rs.1,32,000/-. The assessee had claimed that the expenditure incurred in the setting up the restaurant like flooring, civil and electrical works, alterations, repairing, wood work, fixtures and furniture etc. should be allowed as revenue loss. Disagreeing, the Tribunal in the quantum proceedings observed that the aforesaid loss was a capital loss and not a revenue loss.

HELD:

  • Findings recorded in the quantum proceedings are germane and relevant but it does not follow that every addition justifies and compulsorily mandates imposition of penalty.
  • Subject matter or the core question in the quantum or assessment proceedings is computation of correct income as per the Act and the subject matter of the penalty proceedings is the conduct of the assesse i.e. concealment or furnishing of inaccurate particulars which has resulted in additions in the quantum proceedings.
  • Mens rea is not required or necessary to impose penalty for concealment but an assessee can escape penalty when he can show and establish that his case falls within four corners of the exclusion provided in Explanation 1 applicable to the said section.
  • The assessee in its return of income or the profit and loss account had not concealed and tried to camouflage the nature of loss that it was loss on account of wholly owned subsidiary and on closure of the unit.
  • Whether or not expenditure incurred on renovation or improvement or repairs on the leasehold premises can be allowed and treated as revenue expenditure, has been elucidated in several cases.
  • We are not required to go into the correctness of the said view in the present case, but only notice that two views on the question were possible.
  • The assessee had an arguable case or had taken a bonafide plea.
  • The assessee had given his explanation and categorically and clearly stated the true and full facts in the return itself.
  • Levy of penalty is not an automatic consequence when an addition is made by disallowing an expense and by not accepting the interpretation given by the assesse.
  • Merely making a claim which is held as not sustainable under law should not lead to penalization, when the assessee had furnished full details in the return itself and the claim is a debatable, reasonably plausible or may well have been accepted.

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