In the case of Jhavar Properties (P.) Ltd. v. Asstt. CIT  123 ITD 429 (Mum.), the question before the Tribunal was whether the Assessing Officer was justified in levying penalty for concealment of income under section 271(1)(c) of the Income-tax Act, 1961 (‘the Act’), solely on the basis of disallowance of excessive or unreasonable payments made by him under section 40A(2) of the Act. The Tribunal answered the question in the negative. This article explains this case.
The statutory backdrop
The two provisions in the Act which are relevant for the case under discussion are as follows:
- Section 40A(2)(a) of the Act provides that, where an assessee incurs any expenditure in respect of which payment has been or is to be made to certain persons specified in section 40A(2)(b), and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee, so much of the expenditure as is considered by him to be excessive or unreasonable shall not be allowed as a deduction.
- Section 271(1)(c) of the Act empowers the Assessing Officer to levy penalty for concealment of income, if he is satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income. For this purpose, Explanation 1 clarifies that, where in respect of any facts material to the computation of the total income of any person under the Act.
- such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer to be false, or
- such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him,
then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of section 271(1)(c), be deemed to represent the income in respect of which particulars have been concealed.
Facts of the case
The appellant was a company engaged in the business of real estate development and construction. It had claimed a deduction of Rs. 63 lakhs on account of payment to a sister concern for job work done by that concern. The Assessing Officer examined the records of that concern and found that the value of the job work carried out by that concern worked out only to Rs. 32.10 lakhs. Consequently, the Assessing Officer invoked the provisions of section 40A(2) and disallowed a sum of Rs. 30.82 lakhs. The disallowance was sustained by the Commissioner (Appeals). The Assessing Officer also initiated penalty proceedings under section 271(1)(c) of the Act read with Explanation 1, and imposed a penalty of Rs. 14.94 lakhs. This penalty was also sustained by the Commissioner (Appeals). The appellant preferred an appeal before the Tribunal.
Tribunal holds in favour of appellant
After hearing both sides, and analyzing the relevant provisions, the Tribunal observed as follows :
- The provisions of section 40A(2) of the Act by its very nature is something which the Assessing Officer has to determine by using his discretion, subject to the limitations laid down in this behalf in the aforesaid provisions. It is not possible for an assessee to anticipate whether the Assessing Officer would invoke his discretion and make a disallowance under those provisions. Therefore, there cannot be disclosure of income resulting from disallowance made under those provisions.
- The form in which return of income is to be filed by a corporate assessee does not contemplate any disclosure of income earned by the assessee which could be subject to scrutiny under section 40A(2) of the Act.
- The Supreme Court had held in the case of VDM. RM. M.RM. Muthiah Chettiar v. CIT  74 ITR 183 that, where there was no clause in the form of return prescribed under the rules which required a particular disclosure of income, it could not be said that an assessee by not showing such income failed or omitted to disclose fully and truly all material facts necessary for his assessment. This principle was later reiterated by the Supreme Court in the case of CIT v. Smt. P.K. Kochammu Amma Peroke  125 ITR 624.
- Since no specific form of disclosure is contemplated by the Act as well as the Rules and the form of return prescribed, an assessee can never be held to be guilty of non-disclosure of income which is determined by applying the provisions of section 40A(2).
- Since the assessee had furnished all the details and the details were admittedly correct, there could not be any charge on the assessee of furnishing inaccurate particulars as well. The Assessing Officer applied the deeming provisions of law for effecting disallowance. But for the deeming provisions, the Assessing Officer could not have made any disallowance, since it was an admitted fact that the genuineness as well as the incurring of the expenditure had not been doubted or disputed by the Assessing Officer.
- In view of the peculiar facts of the case, it could not be stated that the assessee had either furnished incorrect particulars or concealed income. The provisions of section 271(1)(c) of the Act were not attracted to the cases where income of an assessee is assessed on estimate basis and additions are made therein.
The Tribunal also pointed out that, in the light of the judgment of the Supreme Court in the case of Dilip N. Shroff v. Jt. CIT  291 ITR 519, penalty was not leviable when additions had been made on the basis of estimate and not on account of any concrete evidence of concealment. In the end, the Tribunal set aside the order and cancelled the penalty levied.
On the facts of the case, the Tribunal has come to the correct conclusion and cancelled the penalty. There are certain stand-alone provisions in the Act, under which action lies solely at the end of the Assessing Officer, and section 40A(2) is one of them. The assessee does not enter the picture once he has made a claim for deduction which is genuine. After all, even under section 40A(2), the Assessing Officer has to first form an ‘opinion’ that the expenditure is excessive or unreasonable, and only thereafter, he has to determine the quantum of disallowance to be made. It is an undeniable fact of life that opinions on issues will differ from person to person. An assessee can have the opinion and conviction that the expenditure incurred is not excessive or unreasonable, having regard to business necessities. So long as it is not disputed that the expenditure is not fictitious but genuine, nothing prevents the assessee from claiming the expenditure as a deduction. The ball is thereafter in the court of the Assessing Officer, and he has the discretion under section 40A(2) to examine the reasonableness/excessiveness of the expenditure claimed as deduction. At that stage, the Assessing Officer is not required to call for any explanation from the assessee as to why such huge expenditure was incurred and claimed as deduction.
The Gauhati High Court held in the case of Narsingdas Surajmal Properties (P.) Ltd. v. CIT  127 ITR 221 that, in the absence of fraud, the question whether a transaction has the effect of reducing the assessee’s taxable income or whether it was prudent or judicious or whether it was indispensable or necessary for the assessee to enter into the transaction, are all irrelevant in determining whether expenditure relating to the transaction should be allowed under section 37.
The Patna High Court held in the case of Jamshedpur Motor Accessories Stores v. CIT  95 Taxman 664 that, unless there was a limitation put by the law on the amount of expenditure, a lesser amount than the amount expended could not be allowed merely because the assessing authority thought that the assessee could have managed by paying a lesser amount as a prudent businessman.
Thus, even while exercising the discretion under section 40(2), the Assessing Officer has to limit his enquiry to examine the quantum of expenditure, having regard to ‘the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee’ and once he has adhered to these restrictions and effected disallowance (as in the case on hand), the matter gets closed. The Assessing Officer cannot proceed to initiate penalty proceedings on the same material without anything more. Explanation 1 to section 271(1) will also not be attracted, since that Explanation comes into the picture only in cases where a specific explanation was called for from the assessee and the explanation offered by the assessee was found to be not acceptable. In the case on hand, the disallowance was made suo motu by the Assessing Officer on the basis of the opinion formed by him about the reasonableness/excessiveness of the expenditure, and not on the basis of any explanation offered by the assessee which was found to be not acceptable.
In the case of CIT v. Ajaib Singh & Co.  253 ITR 630 (Punj. & Har.), the High Court observed as follows :
‘Merely because certain expenses claimed by the assessee are disallowed by an authority, it cannot mean that the particulars furnished by the assessee are wrong. Disallowance of an expense per se cannot mean that the assessee has furnished incorrect particulars of its income. Concealment involves penal action. It has to be proved as a conscious act. It is true that direct evidence may not be available in every case. Yet, it must be proved as a necessary corollary from the facts and circumstances established on the record’.BY:V. Pattabhiraman