ACIT vs. VIP Industries (ITAT Mumbai)

SC judgement on penalty distinguished

Where the assessee carrying on R & D activity claimed 100% deduction on a motor car on the ground that it was used for scientific research but the same was negatived by all authorities and the question arose whether penalty u/s 271(1)(c) for making a wrong claim was imposable and the dept relied on Dharmendra Textiles Processors 306 ITR 277 (SC) to argue that penalty was automatic for a wrong claim, HELD:

(i) The mere fact that an addition is confirmed cannot per se lead to the confirmation of the penalty because quantum and penalty proceedings are independent of each other;

(ii) In order for the deeming provision of Explanation 1 to s. 271(1)(c) to apply it must be show either that (a) the assessee fails to offer an explanation, or (b) he offers an explanation which is found to be false, or (c) he offers an explanation which cannot be substantiated or shown to be bona fide. On facts, the claim of deduction on a motor car used for research staff cannot be said to be not bona fide;

(iii) The judgement of the Supreme Court in Dharmendra Textiles Processors which holds that penalty u/s.271(1)(c) is a civil liability and that “willful concealment” and “mens rea” are not essential ingredients for imposing penalty cannot be read to mean that in all cases where addition is confirmed, penalty shall mechanically follow. In order to attract s. 271 (1) (c), there must be “concealment” – the fact that the same is willful or unintentional is irrelevant;

(iv) But where an assessee genuinely claims a deduction after disclosing necessary facts, there is no “concealment” even if the claim is rejected. If penalty is imposed under such circumstances also there will remain no course open to an assessee to raise disputed claims and such proposition is beyond recognized canons of law.