Mangalam Drugs & Organics Ltd vs. DCIT (ITAT Mumbai)

(i) Similar disallowance was made by the AO u/s 80HHC in assessment year 2003-04 i.e. immediately preceding year. It has been shown to us, on the basis of penalty order of assessment year 2003-04 passed by the AO u/s 271(1)(c) dated 28th March 2008, that no penalty was initiated or levied by the AO with respect to disallowance made u/s 80HHC in assessment year 2003-04. In our considered view, when the AO has found that penalty was not leviable with respect to similar disallowance made for deduction u/s 80HHC in A.Y. 2003-04, then following the same yardsticks, he should not take a different stand in this year and burden the assesse with rigorous provisions of penalty. The revenue is expected to follow some consistency with regard to penal provisions. We derive our support from the judgment of Hon’ble Supreme Court in the case of CIT vs. Excel Industries Ltd. 358 ITR 298(SC) for the proposition that consistency should be followed by the Revenue on year to year basis for deciding various issues of the taxpayers. In absence of consistent approach, it may give rise to a chaotic situation and avoidable litigation, which may in turn hamper voluntary compliance by the taxpayers.

(ii) It has been noted by us that the AO has made disallowance on the basis of return of income filed by the assessee and audit report of the assessee. The assessee has made its claim in the profit and loss accounts and computation sheet giving complete facts and particulars. Thus, it cannot be said that there was concealment of facts. The assessee had made a claim, duly supported with the audit report from the qualified accountant. The claim was not found allowable by the AO, in his opinion. Under these facts and circumstances, Hon’ble Supreme Court in the case of Reliance Petroproducts Pvt Ltd 322 ITR 158(SC), has held that it would not be a fit case for levy of penalty.

(iii) It is further seen by us that it is a well known fact that there has been enormous litigation on account of interpretation of section 80HHC, throughout the country, various tax experts and courts are still grappling with the complexities in appreciation and interpretation of provisions of section 80HHC. These provisions are full of controversies. Under these circumstances, the assessee has taken stand and Mangalam Drugs 6 & Organics Ltd made a claim accordingly. Merely because the claim of the assessee was not found allowable by the AO in its opinion, it should not ipso facto give rise to an inference that there was concealment of income or furnishing of inaccurate particular of income by the assessee. The Assessee had made a bonfide claim as per the advice received by it, under these circumstances it cannot be said that the assessee’s claim was bogus or wholly erroneous. Under these circumstances, it cannot be said to be a fit case for levy of penalty.

(iv) It is further noted, from the perusal of penalty order, that the penalty has been levied, on all the additions/disallowances, in a ‘whole sale’ manner. The AO has not given his findings, for levying the penalty, for each issue separately, with respect to the satisfaction of the AO for each of the issue respectively, nor has he given a finding for each issue separately as to whether there was a concealment of income or furnishing of inaccurate particulars of income. The AO has held in the penalty order that various disallowance made by the AO have been confirmed by the Ld CIT(A) and therefore, it is automatically established that the assessee has concealed its income and furnished inaccurate particulars, which has led into concealment of income within the meaning of section 271(1)(c) of the Act. In our considered view, this approach of the AO for levy of penalty is not correct as per law. Penal provisions are quite harsh, these can make the assessee liable for prosecution, as well. Therefore, the AO is obliged, under the law, to make application of his mind meticulously and carefully for each issue separately and to show and establish precisely and specifically whether there was concealment of income or there was furnishing of inaccurate particulars of income on the part of the assessee, at the stage of filing of return of income. The Assessee cannot be fastened with the liability of penalty without there being a clear or specific charge. Fixing a charge in a vague and casual manner is not permitted under the law. Fixing the twin charges is also not permitted under the law. We drive support from the judgment of Hon’ble Gujrat High Court in the case of New Sorathia Engineering Co vs CIT 282 ITR 642 (Guj).

(v) It is further noted by us that the AO has held that since the disallowances have been confirmed, it is established that the assessee has concealed its income and penalty is automatically leviable. In our view, this approach is also not acceptable as per law. It is now a well settled law, that the assessment proceedings are ‘independent’ proceedings. In a given situation, the assessee may be liable for assessment of his taxable income, but that would not, necessarily and automatically, make the Assessee liable for levy of penalty as well, on the income assessed. The parameters for imposition to tax and for levy of penalty are different under the law. Grave errors are done by the AOs, under the law, when both are mixed up. The assessee may be liable to be taxed for want of substantiation of the claim made by the Assessee, but for levy of penalty, the AO may be required to disprove the claim or to show that the claim made by the assessee was bogus. In the present case, no such exercise has been done at all by the AO while levying the penalty and the penalty has been levied in a highly automatic, mechanised and casual manner. This kind of approach gives rise to avoidable hardships to the taxpayers and should be avoided. Therefore, keeping in view the aforesaid discussion, we find that levy of penalty on the disallowance of deduction u/s 80HHC was not justified and therefore, same is deleted and Ground No.2 (b) is allowed.