INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH “B”, HYDERABAD

ITA No. 322/Hyd/2014 Assessment Year: 2009-10
Dy. Commissioner of Income (Appellant) vs M/s Exensys Software Solutions Ltd (Respondent)
Date of Order: 27-10-2015

ORDER

PER S. RIFAUR RAHMAN, A.M.:
This appeal by revenue is directed against the order dated 20/12/2013 of ld. CIT(A)-III, Hyderabad, whereby cancelling the penalty imposed u/s 271(1)(c) of the Income-tax Act, 1961 (Act) by the AO, for the AY 2009-10.

2. Briefly the facts of the case are, the assessee company is engaged in the software business and filed its return of income for the year under consideration admitting Nil income. Later, it filed a revised return of income on 24/08/10 admitting Nil income under normal provision and Rs. 1,21,03,661 under M.A.T. The case of assessee was taken up for scrutiny and AO passed the assessment order u/s 143(3) dated 16/12/2011 assessing the total loss admitted by assessee as under:
Loss admitted as per return of income             Rs. 22,76,77,589
Less: Excess depreciation disallowed               Rs. 19,99,56,403
Loss revised                                                     Rs.   2,77,21,186

2.1 With regard to the aforesaid disallowance on excess depreciation, during the course of assessment proceedings, it was noticed by AO that assessee had claimed higher depreciation on software @ 60% and on software development @ 100%. Observing that any purchase or development made on software comes under intangible assets and the rate of depreciation is @ 25% only, AO reworked out the allowable depreciation in the assessment order and arrived the excess depreciation claimed by assessee at Rs. 19,99,56,403. The assessee did not go in appeal against the quantum addition because it stated that firstly there was no tax effect and secondly there was only a bona fide error in claiming the percentage of depreciation.

2.2 Thereafter, AO initiated penalty proceedings u/s 271(1)(c) and accordingly notice u/s 274 r.w.s. 271(1)(c) dated 30/12/2011 was issued to assessee. In response to the said notice, assessee filed a letter dated 27/06/12 stating therein that it had claimed the depreciation on higher rate on capitalization of software developed by the assessee company on account of difference in the interpretation of claim of depreciation and, therefore, assessee had not concealed any particulars in the return of income filed. Accordingly, assessee requested the AO to drop the penalty proceedings initiated u/s 271(1)(c). However, rejecting the submissions of assessee, AO observed that by claiming depreciation at 100% in respect of software development and 60% in respect of software was patently wrong and intentional and deliberate. Therefore, assessee’s explanation that he has filed all particulars and hence not furnished inaccurate particulars is not acceptable. Accordingly he levied a minimum penalty of Rs. 6,79,65,180 u/s 271(1)(c) of the Act.

3. Aggrieved by the penalty order of AO, assessee carried the matter in appeal before ld. CIT(A).

4. During the course of appeal proceedings, assessee stated that it had disclosed fully and truly all material facts and there was no information collected from outside by AO. Further, it was stated that the error in depreciation was only in respect of percentage claim. Itwas pointed out that it was a debatable issue because software development is increasingly being recognized as a revenue expenditure by various courts.

5. The ld. CIT(A) after considering the submissions of assessee and analyzing the issue in dispute with case laws, cancelled the penalty imposed by AO by observing as under:
4.6 Coming to the facts of the case of the appellant , it is seen that depreciation had been claimed at a higher rate on software development by the appellant. The assessing officer found the mistake during assessment proceedings and pointed it out to the appellant. The appellant agreed to the lower claim of depreciation and did not contest the addition in appeal. I t is also to be noted that there are huge accumulated losses which are being carried forward by the appellant and the addition in question did not result in any taxable income.
4.7 In order to determine whether the case entails the imposition of penalty, the conduct and the level of disclosure made by the appellant has to be examined. Regarding the conduct, it is seen that the appellant had filed a revised return of income wherein an income of Rs. 1.21 crore was disclosed under MAT and taxes were paid on this income. Further , the entire details had been disclosed by the appellant in its return of income and the accompanying documents. The depreciation schedule was clearly provided and the claim of depreciation was also given clearly in the computation of income. It is from these documents only that the assessing officer was able to find out that the claim was on a higher percentage. In other words, a proper disclosure had been made by the appellant and nothing had been concealed. Thereafter once the mistake was pointed out, the appellant agreed to it and did not file any appeal.
4.8 From above, it is clearly seen that the proper and full disclosure had been made by the appellant and the higher percentage claimed in depreciation was only a bone fide error which was corrected by the appellant. In any case, there was no tax due even after the correction of the error . Therefore, applying the aforementioned case law I find that this is not a f it case for the imposition of penalty. The same is accordingly cancelled. ”

6. Aggrieved by the order of ld. CIT(A) in cancelling the penalty imposed by AO u/s 271(1)(c), the revenue is in appeal before us raising the following grounds of appeal:
“1. The CIT(A) erred on facts and in law in granting relief to the assessee.
2. The CIT(A) erred in deleting the penalty though s per Explanation 1 to sect ion 271(1)(c) , the assessee is liable for penalty because the explanation offered by him was found to be false with respect to claim of depreciation ”

7. The ld. DR submitted that the assessee filed revised return of income only to accommodate the higher depreciation in order to claim the additional tax by filing inaccurate particulars and hence, this is done deliberately and knowingly. He relied on the decision of the ITAT, Ahmadabad in case of ITO Vs. Geep Industrial Syndicate Ltd., wherein it was held as under:
“22. We hence hold that penalty for concealment of income is imposable in respect of the concealment of Rs. 2,14,364 on account of wrong claim of depreciation, as made by assessee. We direct that minimum penalty may be imposed.”

8. Ld. AR submitted that the assessee was under bonafide belief that the software comes under computer and accordingly claimed the depreciation. For the claim on software development expenditure, he submitted that the software were developed and became redundant due to non-marketability. The assessee should have claimed it as business expenditure but capitalized the same and claimed it as 100% depreciation with the bonafide belief that it can be claimed. He also submitted that it is only difference of opinion and not filing of inaccurate particulars. He relied on the judgment of Hon’ble AP High Court in the case of M/s Taher Ali Industries & Projects Ltd. in ITA No. 128 of 2014, dtd. 04/03/2014.

9. We have heard the arguments of both the parties and perused the material on record as well as the orders of revenue authorities. It is seen that assessee was claimed depreciation at a higher rate on software development and AO found the mistake during the course of assessment proceedings and pointed out to assessee. Assessee agreed to the lower claim of depreciation and did not contest the addition in appeal. The ld. CIT(A) while cancelling the penalty, regarding the conduct of assessee, observed as follows:
“it is seen that the appellant had filed a revised return of income wherein an income of Rs. 1.21 crore was disclosed under MAT and taxes were paid on this income. Further, the entire details had been disclosed by the appellant in its return of income and the accompanying documents. The depreciation schedule was clearly provided and the claim of depreciation was also given clearly in the computation of income. It is from these documents only that the assessing off icer was able to find out that the claim was on a higher percentage. In other words, a proper disclosure had been made by the appellant and nothing had been concealed. Thereafter once the mistake was pointed out, the appellant agreed to it and did not file any appeal.”

9.1 We find that the ld. CIT(A) arrived at the conclusion considering non-concealment of information, he did not discuss anything about inaccurate furnishing of information. On the other hand, ld. DR submitted that the information furnished by the assessee is inaccurate and deliberate that nothing has been brought on record to support its claim except pointing out that the revised return of income was filed only to claim additional depreciation. We are of the view that penalty cannot be levied on presumptions relying on the judgment of the Hon’ble Supreme Court in the case of Dilip N Shroff Vs JCIT ( 291 ITR 519) , wherein the Hon’ble Court has observed as follows:

48. Primary burden of proof, therefore, is on the revenue. The statute requires satisfaction on the part of the assessing officer. He is required to arrive at a satisfaction so as to show that there is primary evidence to establish that the assessee had concealed the amount or furnished inaccurate particulars and this onus is to be discharged by the department. [See D.M. Manasvi v. Commissioner of Income Tax, Gujarat ,-II [(1973) 3 SCC 207]
49. While considering as to whether the assessee has been able to discharge his burden, the assessing officer should not begin with the presumption that he is guilty.
50. Once the primary burden of proof is discharged, the secondary burden of proof would shift on the assessee because the proceeding under Sect ion 271(1)(c) is of penal nature in the sense that its consequences are intended to be an effective deterrent which will put a stop to practices which the Parliament considers to be against the public interest and, therefore, it was for the department to establish that the assessee shall be guilty of the particulars of income. [See Anwar Ali (supra) and M/s Khoday Eswarsa (supra) ].
51. The order imposing penalty is quasi-criminal in nature and, thus, burden lies on the department to establish that the assessee had concealed his income. Since burden of proof in penalty proceedings varies from that in the assessment proceeding, a finding in an assessment proceeding that a particular receipt is income cannot automatically be adopted, though a finding in the assessment proceeding constitute good evidence in the penalty proceeding. In the penalty proceedings, thus, the authorities must consider the matter afresh as the quest ion has to be considered from a different angle. [See Anantharam Veerasinghaiah& Co. v. C.I.T., Andhra Pradesh, 1980 Supp SCC 13] .

9.2 In this connection, we refer to the judgment of the Hon’ble Supreme Court in the case of CIT Vs. Reliance Petro-products Pvt. Ltd., [2010] 322 ITR 158 (SC) wherein the Hon’ble Court has laid down the law as under:-

“A glance at the provisions of section 271(1)(c) of the Income Tax Act, 1961, suggests that in order to be covered by it, there has to be concealment of the particulars of the income of the assessee. Secondly, the assessee must have furnished inaccurate particulars of his income. The meaning of the word ‘particulars’ used in section 271(1)(c) would embrace the details of the claim made. Where no information given in the return is found to be incorrect or inaccurate, the assessee cannot be held guilty of furnishing inaccurate particulars. In order to expose the assessee to penalty, unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By no stretch of imagination can making an incorrect claim tantamount to furnishing inaccurate particulars. There can be no dispute that everything would depend upon the return filed by the assessee, 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. To attract penalty, the details supplied in the return must not be accurate, not exact or correct, not according to the truth or erroneous. Where there is no finding that any details supplied by the assessee in its return are found to be incorrect or erroneous or false there is no question of inviting the penalty under section 271(1)(c). A mere making of a claim, which is not sustainable in law, by itself , will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such a claim made in the return cannot amount to furnishing inaccurate particulars.”

9.3 In the case under consideration, the ld. CIT(A) gave a categorical finding that the assessee has made proper and full disclosure of its income and the higher percentage claimed in depreciation was only a bonafide error which was corrected by assessee. Therefore, the ratio laid down by the Hon’ble Supreme Court fully supports and is applicable to the case of assessee. Accordingly, we do not find any infirmity in the order of ld. CIT(A) in cancelling the penalty of Rs. 6,79,65,180/- levied by AO u/s 271(1)(c) of the Act and the same is hereby upheld dismissing the grounds raised by the revenue.

10. In the result, appeal of revenue is dismissed.

Pronounced in the open court on 27th November, 2015.

(P. MADHAVI DEVI)    (S. RIFAUR RAHMAN)
JUDICIAL MEMBER   ACCOUNTANT MEMBER