| SooperKanoon Citation | sooperkanoon.com/65422 |
| Court | Income Tax Appellate Tribunal ITAT Cochin |
| Decided On | May-31-1992 |
| Reported in | (1993)45TTJ(Coch.)300 |
| Appellant | Southern Cables and Engineering |
| Respondent | income Tax Officer. |
2. Secondly the assessee attacks the order of the CIT(A) confirming the penalty on the ground that the learned CIT(A) has not appreciated the fact that no adequate opportunity had been granted to the assessee to cross-examine the officials of M/s. Aluminium Industries Ltd., from whom the Revenue had obtained confirmation as regards the amounts payable by the assessee to it and acted upon by the Revenue believing the statements received from M/s. Aluminium Industries Ltd. without confronting it with the assessee.
3. Further the assessee is aggrieved by the confirmation of the penalty order without considering the fact that the Department itself has conceded the fact that the quality control fee as far as the year under consideration continues, but not the technical services fee which is itself an inconsistent stand. Therefore, the assessee pleads that the CIT(A) ought to have held that the agreement remained in force and/or it was the assessees bona fide belief that the agreement was in force and had necessarily provided both the quality control fees and technical services fees, under the agreement. In support of the above plea the assessee submits that the Department had not imposed any penalty under S. 271(1)(c) of the Act in respect of other years, though while completing the assessment the disallowance of quality control fees and technical services fees was made. In short, the assessees belief is that for the above reasons, the penalty levied under S.271(1)(c) is bad and it should be cancelled.
4. The assessee filed the return for the assessment year under consideration on 11th Jan., 1982, disclosing a total income of Rs. 18,21,548. The assessee is engaged in the business of manufacturing and supplying of Aluminium Cables to Kerala State Electricity Board (KSEB).
At the time of framing the assessment order, the ITO noted that the assessee has claimed an amount of Rs. 5,64,609 as quality control fee and technical fee debited to M/s. Aluminium Industries Ltd., Kundara (for short ALIND) as per agreement entered into between them on 10th July, 1971. A copy of the agreement is placed vide paper book No. 1, page 11. As the ITO felt that the claim of Rs. 5,64,609 as technical and quality control fee was excessive, vide his letter dt. 29th Dec., 1983 he sought clarifications so as to satisfy himself whether any change has been effected in the agreement dt. 10th July, 1971 or not.
Vide their letter dt. 10th Jan., 1984 ALIND replied that (i) there has been no amendment to the original agreement; (ii) an amount of Rs. 1,90,318.64 p. is only due by way of technical and quality control fee upto 31st March, 1981, and (iii) statement to the effect that so far ALIND has not received the aforementioned amount.
5. In the result the ITO disallowed the claim of the assessee to the balance of Rs. 3,63,457 i.e., Rs. 5,64,609 (Rs. 1,99,319 a marking fee of Rs. 1,833). As the proposed dealings exceeded Rs. 1 lakh the matter was referred to IAC and vide his order F. No. 2/GEN/MAT(A)(11)/83-84 dt. 14th Sep., 1984 the IAC approved the addition on the following lines : "The only dispute in this case is with regard to the sum of Rs. 3,63,457 claimed by the assessee as technical and quality control fee payable to M/s. Aluminium Industries Ltd., Kundara. The ITO wrote to M/s. Aluminium Industries Ltd. and ascertained the fact that the assessee does not have to pay any technical services fee to them.
Having regard to these circumstances the ITOs proposal is approved." The assessment was completed on 21st Sept., 1984 and the penalty proceedings under S. 271(1)(c) was initiated under these circumstances.
6. A notice under S. 271(1)(c) was issued, to which the assessee replied on the following lines : "The assessee had not concealed particulars of its income or had furnished inaccurate particulars thereof. In any case the assessee had not deliberately or wilfully done so. The penal provisions are proposed to be invoked presumably on the ground that out of quality control fee claimed as payable to Aluminium Industries a sum of Rs. 3,63,457 is not legally payable to them as the agreement to pay the quality control fee had expired after five years from the date of the execution i.e., on 10th July, 1971. It is true that the agreement was not renewed in writing. But there is a provision that it can be renewed after five years. The mere fact that by oversight or otherwise the agreement was not renewed does not and will not permit the inference that the assessee know that there was no legal liability to pay the fees. The assessee honestly believed that it had to pay the amount to Aluminium Industries. If at all it is a bona fide mistake. There was no mens rea which is one of the essential requisite for invoking the penal provisions. A wrong claim for an allowance by itself will not warrant the levy of penalty for concealment of income. An amount added back or disallowed rejecting the explanation offered shall not be deemed to be concealment of income if the explanation is bona fide and all the facts relating to the case had been disclosed by the assessee. The assessee had placed before your predecessor all the facts and particulars. It had not cancealed anything. At worst it might have made a wrong claim for deduction. But this was neither intentional nor deliberate. The assessee did not knowingly prefer a wrong deduction in the computation of income. We invite your attention to the proviso to Explanation 1(B) to S. 271(c)." 7. As the assessees explanation was not satisfactory, the ITO further verified the matter with the ALIND and on the fact that upto 31st March, 1981 only the aforementioned amount of Rs. 1,99,318.64 was according to them due to them coming to the conclusion that the assessee concealed income at least to that extent, if not for the full amount. Coupled with the above fact and on the basis of categorical denial of ALIND that after May, 1977 there was no transactions on account of technical services and quality control fee, the ITO justified his conclusion that the assessee concealed the facts at the assessment stage. The ITO vide para 7 of his penalty order justifies his view on the following lines : "That the agreement creating liability to incur expenses towards technical service and quality control fee, ceased to have effect in the year 1977, that the agreement was not renewed, that ALIND did not raise any demand after March, 1977, and that there were no transactions whatsoever between the assessee and ALIND on account of technical services and quality control fees after 1977 were all facts which were within the special knowledge of the assessee. Any reasonable person would have on the basis of these facts, concluded that there was no liability towards technical services and quality control fees to ALIND for the asst. yr. 1981-82.
The contention of the assessee that the claim was a bona fide mistake is not borne out by facts. On the other hand available evidence indicates that the assessee knew that they had no liability to pay the amount. The enquiry regarding the expenses was conducted in 1984, that is nearly seven years after all transactions with ALIND in connection with the services ended. Even then the assessee tried to support the claim without disclosing the correct facts and the objections was pursued through the course of S. 144B proceedings. It may also be mentioned that the assessee continued to make such claim even in the returns for the asst. yrs. 1982-83 and 1983-84. Steps are being taken to assessee the entire income concealed in the return for the asst. yr.
1981-82 to tax. Steps are also being taken to reassess expenses allowed on similar bogus claims for other assessment years." Aggrieved by the above order the assessee went in appeal before the first appellate authority.
8. Before the CIT(A) the assessee contended that having regard to the financial circumstances of the case, the ITO ought to have held that the agreement dt. 10th July, 1971 is still valid, for the said agreement has not been terminated by either of the parties to the agreement serving upon the other party a notice as stipulated in the agreement, and as such the ITO ought to have held that M/s. ALIND was entitled to the technical services fee and quality control fee in respect of the turnover of the accounting year which ended on 31st March, 1981, and, therefore, the ITO ought to have held that the provision made by the assessee in the account was in accordance with the agreement coupled with the fact that the mercantile system was the assessees accounting method and as such the learned ITO ought to have held that there is no concealment of income and no scope for penalty order under S. 271(1)(c) of the Act.
9. Alternatively the assessee contended that the assessee bona fide believes that the agreement has not come to an end and the agreement had not been terminated by either of the parties to the agreement and it cannot be terminated only in the manner provided for in the agreement itself. It was also contended before the CIT(A) that the assessee was led to believe that the payments were to be provided in the account for the reasons that such technical services and quality control fees were contemplated in the agreement dt. 10th July, 1971 continued to be performed in the relevant accounting year and indeed even for later accounting year in view of the fact that there was no suggestion from ALIND, that the agreement stood terminated and there was no services rendered by them or the ALIND refused to perform such services specified in the agreement dt. 10th July, 1971 after the so-called expiry of the agreement. It was also contended by the assessee that the penalty order is bad in law considering the fact that the very assessment which has been made by the ITO pursuant to which the proceedings have been initiated, has been reopened under S. 148 of the IT Act, 1961. Discussing the issue in great detail in his appellate order, the learned CIT(A) upheld the order of the ITO levying the penalty observing as under : "Now I will deal with the argument of the appellants representative on merits. As stated earlier, it is very clear from the agreement dt. 10th July, 1971 between the appellant and ALIND, that the agreement was only for a period of five years. There is no clause for renewal of this agreement, but at the same time there is a clause to terminate this agreement with six months notice in writing from either side.
Therefore, it cannot be said that the appellant was under the bona fide belief that the agreement was in existence for a period beyond five years. From the facts of the case, it can be seen that the agreement has come to an end by the end of the asst. yr. 1977-78 and the appellant continued to claim the liability till the asst. yr. 1984-85.
Though the technical service fee and quality control fee was allowed for asst. yrs. 1978-79 to 1980-81, these assessments were also reopened and the claim was disallowed in the reassessments. Regarding the assessment for 1981-82, the provision made for the payment of technical service fee and quality control fee cannot be said to be under the bona fide belief that the amount was payable. There is nothing in the agreement to renew it beyond the period of five years. Even if it is a mistake, this could occur only in the sixth year. But this is the ninth assessment year from the commencement of the agreement. Therefore, there is every reason to believe that the claim made by the appellant is with the deliberate view of suppressing the income by making wrong claim of expenditure. In the Kerala High Court decision in the case of CIT vs. Gates Foam & Rubber Co. (1973) 91 ITR 467 (Ker), it is sufficient if any assessee has furnished inaccurate particulars of his income in this manner. This decision applies to the facts of the appellants case.
The Supreme Court decision reported in Sir Shadilal Sugar & General Mills Ltd. & Anr. vs. CIT (1987) 168 ITR 705 (SC) will not be of any help to the appellant. The penalty was not levied only on the mere fact that the appellant has not appealed against the addition made by the ITO in the order dt. 21st Sept., 1984. The ITO has levied the penalty purely on the basis of contumacious conduct of the appellant. This is evident from the fact that the appellant has made the claim of expenditure wrongly for several years beyond the period of five years.
From the conduct of the appellant, it is very clear that the claim was made dishonestly and there is a conscious concealment of particulars of income in this case. Even the proviso to Expln. 1 is applicable only in a case where the assessee has made a claim under the bona fide belief.
Therefore, the proviso to Expln. 1 is also of no help to the assessee.
Similarly, the Kerala High Court decision reported in CIT vs. Saraf Trading Corporation (1987) 167 ITR 909 (Ker) and CIT vs. Shri Pawan Kumar Dalmia (1987) 168 ITR 1 (Ker) will not be of any help to the appellant as the ITO has established beyond doubt that there is a conscious concealment of income in this case. Though I agree with the view that the penalty proceedings are distinct and different from assessment proceedings, where a concealment is established on account of the conduct of an assessee, as in this case, penalty under S.271(1)(c) is clearly applicable. Therefore, in my opinion, the ITO was justified in levying the penalty in this case." 10. It is against this order that the assessee is in appeal before the Tribunal.
11. Before recording the arguments of the respective parties we would like to go through the agreement on the basis of which the dispute arose. This agreement was entered into between the parties i.e., M/s.
Aluminium Industries Ltd., Kundara and M/s. Southern Cables & Engineering Works (assessee) on 10th July, 1971. The assessee applied for permission to the State Government of Kerala for establishing a factory in a small scale sector and as the assessee was desirous of purchasing machinery and equipments and also obtaining technical instructions, advice and assistance for the manufacture of its products, it approached the ALIND and the ALIND vide the agreement entered into between the parties agreed to supply the plant machinery and also to provide technical advice and assistance. Vide all the clauses of the agreement it was agreed by the ALIND to pay careful attention and do everything necessary regarding the design and manufacture of machinery and their layout; engineering, technical services and supervision of manufacture of the products during the initial stages so as to enable the plant to attain optimum efficiency in production. Vide cl. 5.2 of the agreement it was agreed that the ALIND shall be paid a lump sum of Rs. 1 lakh in four instalments for the technical services rendered. Vide cl. 5.3 of the agreement it was agreed that a technical service fee for rendering technical services for the manufacture and for engineering assistance for the marketing of the products shall be paid to ALIND by the assessee as under : (a) A technical service fee amounting to 5% of ex-factory turnover value of the products manufactured by the firm in the first two years from the date of commencement of sales; and (b) A technical service fee amounting to 2 1/2% of ex-factory turnover value of the product manufactured by the assessee for the subsequent three years.
Vide cl. 6.2 of the agreement it was agreed that wherever necessary ALIND shall test the samples of raw materials, intermediatory of finished products procured and/or manufactured by the assessee and shall supply necessary test certificates and reports. It was also agreed by the same clause that for testing inspection services ALIND shall be paid a quality control fee amounting to one per cent of the ex-factory turnover value of the products. It was agreed for ex-factory price and turnover value shall be calculated as provided in cl. 5.3.2 of the agreement. For the purpose of determining the issue involved before us, cl. 14 of the agreement which runs as under, is important : "The agreement shall remain in force and in effect as long as ALIND is eligible for technical know-how fee or technical service fee stipulated in cl. 5 of this agreement. Thereafter either of the contracting parties shall have the right to terminate this agreement with six months notice in writing to the other party." 12. The learned counsel for the assessee submitted that the agreement between the parties came to an end as stated by the ITO immediately after the completion of five years from the date of agreement, is not true. Even after the expiry of five years, technical services were rendered and payments were made by the assessee, the debit advice notes being produced vide page Nos. 32, 33 & 34 of the paper book. These debit notes indicate that technical services were rendered on 3rd July, 1979, on 8th, 9th & 10th Aug., 1979 and on 9th and 10th Feb., 1979. It is true that in the year 1981 an enquiry was made by the Department with the ALIND so as to confirm the view they were holding, as far as the agreement is concerned. Reply to the ITOs letter dt. 29th Dec., 1983 by ALIND is at page 30 of the paper book. This reply by ALIND is also an evidence on record. In this reply the ALIND confirmed that there had been no amendment to the original agreement executed between the parties as on 10th July, 1971 and only an amount of Rs. 1,99,318.64 was due to ALIND towards technical services and quality control fees upto 31st May, 1981. Commenting upon the enquiry by the learned ITO and the reply from ALIND, the learned counsel for the assessee Mr. G.Sarangan submitted that even this agreement, if interpreted exactly as it is will not support the case of the Department. The learned ITO only sought clarifications so as to know whether any change had been effected in the agreement dt. 10th July, 1971. The reply was negative.
Further the learned ITO wanted to know technical services and quality control fees payable by the assessee for the period upto 31st March, 1981 and whether the payments were actually made or not. The reply as evidenced by the letter only says that an amount of Rs. 1,99,318.64 is due towards technical services fee and quality control fee upto 31st March, 1981. The learned counsel for the assessee also brought to our attention the letter dt. 20th Jan., 86 which is reproduced at page 31 of the paper book. This is a reply by ALIND to the letter No.46-004-FV-2385/CHN/MAT(A) dt. the 15th Jan., 1986 with regard to the discussions, the inspector had with ALIND. This letter does not specifically say that the agreement came to an end as held by the ITO at the end of 5th year from the date of agreement. It only replies to the effect that there was no transaction with the assessee regarding the technical services and quality control fees after 31st March, 1977.
It does not say that the agreement does not exist as per cl. 5. The ALIND only confirms that apart from Rs. 1,99,318.64 shown no further amount is receivable on 31st March, 1977, from the assessee on account of technical services fee, quality control or collaboration fee. In other words, it does not say that the agreement has come to an end on 31st March, 1977. The learned counsel for the assessee, therefore, disputed the observations of the ITO and submitted that under these circumstances there cannot be specific conclusion to the effect that ALIND itself has stated that the agreement came to an end.
13. The learned counsel for the assessee alternatively submitted that even if the view of the ITO is accepted for the purpose of arguments sake, at the most it can only be said that the interpretation given by the Revenue authorities from the letter of ALIND, before acting upon and using it against the assessee it should have been afforded an opportunity to confront the view expressed by ALIND with regard to the agreement, but it has not been done so by the Department. Non-giving the assessee an opportunity to confront the view taken by the ALIND is bad in law and is in violation of the principle of natural justice.
Therefore, the same cannot be taken as a basis for levying the penalty under the section. The learned counsel for the assessee also repeated the reply by the assessee to the ITO with regard to notice issued under S. 271(1)(c).
14. The learned counsel also submitted that for the asst. yr. 1982-83 there was no penalty proceedings even by the Department is a point that even the Department has accepted the explanation given by the assessee that the view taken up by the assessee as far as the continuance of the agreement is concerned, is a bona fide mistake and not a deliberate or wilful intention or inflationary tactics adopted by the assessee so as to reduce the tax effect. Page 41 of the paper book-I is a notice under S. 274 read with S. 271 of the Act, seeking assessees explanation as to why an order imposing penalty should not be passed under S. 271(1)(c) and page 42 is the order of the ITO intimating that the penalty proceedings initiated under S. 271(1)(c) for the asst. yr. 1979-80 is being dropped. For the asst. yr. 1983-84 also there was no penalty proceedings.
15. On merit the learned counsel for the assessee submitted the following points for our consideration : (a) The stand of the Department that the assessee concealed the income by furnishing enhanced or non-existence amount of Rs. 3,63,457 for technical services fee and quality control fee is not a correct appreciation of facts. The agreement was already with the Department.
If the meaning of the words understood by the assessee differ from that of the Department it also means difference of appreciation of the meaning of the words. It is a question of interpretation.
(b) The different view either by the Department or by ALIND does not amount to a fault that may lead to a proceeding under S. 271(1)(c).
According to the assessee until 1985, the year in which the assessee gives a notice under cl. 14 of the agreement the agreement was in subsistence.
(c) Though there is divergent understanding of the meaning between the parties concerned and the Department inter se the agreement is one and same. Therefore, it is absurd to say that as far as the quality control fee is concerned the agreement is still in force whereas the agreement with regard to the technical services fee and quality control fee does not continue. It should either continue for quality control fee and other fees or it ceases to exist on all fees concerned. In other words it should be good for both or bad for both, it cannot be good for some one and bad for some one else.
(d) Until either party gives notice as is stipulated upon the other party under cl. 14, according to the assessee, the agreement is in force.
(e) If two parties understand an agreement differently it does not mean that either party or both parties are telling a lie.
(f) The Finance Manager of the ALIND left his services, and the office was shifted to Madras, and afterwards came back to Kerala. Therefore, every possibility is there that by every means the documents might have been lost in transit or it was left behind in absence of persons who originally dealt with the documents. Even if the accounts of the ALIND as far as the payment after 1979 does not tally with that of the assessee it does not mean that the assessee is wrong.
(g) The assessee still believes that the assessee is liable to pay the amount to ALIND. It is bona fide belief that all the documents concerned were with the Department. Therefore, there cannot be any suppression.
(h) Assuming for arguments sake but not agreeing, even if the interpretation of the ALIND is right to the effect that the agreement ceased to exist prior to the assessment year, the assessee believes, that the assessee is right and the Department on the other hand holds that the ALIND is right. Under these circumstances in all fairness the Department should have given an opportunity to the assessee to confront the interpretation of the ALIND and cross-check its accounts. In the absence of these levying of penalty is bad without jurisdiction, improper and liable to be set aside.
16. For this proposition the learned counsel for the assessee relied upon the following judgments : Addl. CIT vs. Delhi Cloth and General Mills Co. Ltd. (1986) 157 ITR 822 (Del).
17. Replying to the contentions raised by the learned counsel for the assessee, the learned Departmental Representative submitted that the decision of the Kerala High Court in the case of CIT vs. K. Kesava Reddiar (1989) 178 ITR 45 (Ker), is not applicable in the case of the assessee in as much as this was a case in which the Court was called upon to consider the effect of the reopening of an assessment.
Supporting the order of the Revenue authorities, the learned Departmental Representative submitted the following points : (b) Concealment of income or particulars of income is the basis for levying penalty; therefore, he submitted that K. Kesava Reddiars (supra) decision does not apply in penalty proceedings.
(c) Even the assessee himself has admitted the fact of omission on the part of the assessee, therefore, to that extent the order of the Revenue authorities is based on undisputed and uncontroversial facts and binding upon the assessee.
(d) The assessee is claiming the disputed amount knowingly, deliberately with the intention to reduce the tax effects. Therefore, the penalty levied under S. 271(1)(c) is in accordance with law.
(e) The interpretation of the cls. 5, 6, & 14 of the agreement by the assessee is without bona fide. It should be interpreted as any prudent man will interpret it. The agreement may continue, but not in entirety.
The clauses dealing with the condition of remuneration cannot be interpreted in isolation. The stand of the assessee that the agreement should be good for both or bad for both with regard to the technical services and quality control fees, is not correct. The obligation on the part of the ALIND may continue with regard to technical services fee but, when the time is over may come to an end.
18. The actual meaning should be, not how the assessee interprets the relevant clauses of the agreement but how a reasonable man will interpret it. There is no inconsistency with regard to the stand of the Department that the quality control fee does not come to an end by efflux of time until it is terminated, as ultimately done by the assessee in the year 1985 vide their letter to the ALIND.19. As per the agreement [Para 5.3.1(a)] the assessee is bound to make payments @ 5% of ex-factory sales turnover value of the products manufactured by the firm in the first 2 years from the date of the commencement of sales; and (b) at 2-1/2% for the subsequent three years. The first sale took place as per record on 7th Feb., 1973.
Therefore, as per the agreement the fifth year will come to an end by 6th Feb., 1978 during the relevant accounting year, i.e., 31st March, 1978. The assessee is not exclusively depending upon the accounts, but also on the agreement. If the assessee truely and bona fide believes what the assessee states now, the assessee should have some intimation or produced some evidence that they sent some credit note to the other party concerned. In the instant case the claim of the assessee is without merit and not bona fide and the order of the Revenue authorities need to be confirmed.
20. The learned Departmental Representative tried to distinguish the cases relied upon by the assessee. Distinguishing the case of CIT vs.
Nadiad Electric Supply Co. Ltd. (supra) the learned Departmental Representative submitted that immediately after the dispute between the Municipality and the Electric Supply Co. the assessee-company filed a suit in which the High Court held that the assessee-company was bound to continue to supply electricity to the municipality on the same terms and conditions as those contained in the agreement expired. Further, in this case at least the assessee used to send bills claiming higher charges whereas in the instant case no bill as such has been ever sent by the assessee after the expiry of 5 years from the first commencement of the business and as such the case is clearly distinguishable and the decision in that case will not help the assessee in any way.
21. Coming to the case of CIT vs. Saraf Trading Corpn. (supra) the learned Departmental Representative distinguished the case on the facts that in this case relied upon by the assessee the Honble High Court held that levying of penalty and cancellation of the same was right on account of the fact that the assessee had discharged the burden of proving the failure to return the correct income did not arise from any act of commission or omission on the part of the assessee. This conclusion was arrived at by the Honble High Court on the undisputed fact that the amount available with the assessee was also accepted by the Department and the investment made during the year and the cash balance and on the basis of the analysis of the facts that the assessee had discharged the initial burden of proving the onus cast upon the assessee. In the instant case of the assessee the facts are dramatically different and the assessee cannot claim that it has discharged the first burden of proving that the failure to return the correct income did not arise from any act of omission or commission on assessees part.
22. Distinguishing the facts in the case of Delhi Cloth and General Mills Ltd. (supra) from the case of the assessee, the learned Departmental Representative submitted that this was a case wherein the assessee had incurred a revenue expenditure on the purchase of fans which was disallowed and the amount spent on acquisition of two new depots was not included in the return due to oversight; and this amount was surrendered when the mistake was discovered. In the instant case of the assessee not only the assessee makes the claim for the year under consideration but year after years the same claim continued and it did not make any attempt to intimate the other party that certain amount is due from them. Therefore, the reliance by the assessee in the instant case is devoid of merit.
23. Coming to the case of CIT vs. Late G. D. Naidu & Ors. (supra), the learned Departmental Representative distinguished the case on the following lines : In this case relied upon by the assessee, the deceased and his son were getting payments from various firms to ward off competition from them in regard to the bus services. In the assessments of the various firms, the amounts so paid were claimed as deduction. Under these circumstances the Honble High Court held that the compensations were paid on the basis of the understanding of restrictive covenants not to carry on similar business for a period of limited years. Therefore, this was in the nature of a separate transaction unconnected with the business of the assets of the partnership firm. By dint of imagination, in the case of the assessee it can be said that the amount debited was unconnected with the amount in the business of the assessee.
24. Therefore, all the cases relied upon by the assessee are of no help. On the contrary the learned Departmental Representative relied upon the judgment of the jurisdictional High Court in the case of CIT vs. Gates Foam and Rubber Co. (1973) 91 ITR 467 (Ker) wherein the Honble High Court held : "that the placing of the bogus debit as genuine constituted furnishing of inaccurate particulars of income. It had been proved that the agent firm was a bogus concern set up for the purpose of diverting a large portion of the income of the assessee. The presumption provided for in S. 271(1)(c) applied to the facts of the case and penalty had to be imposed." 25. The above finding was based on the appreciation of the fact that real income was suppressed by spurious items of expenditure or deductions and it was held that to attract S. 271(1)(c) it is sufficient if an assessee has furnished inaccurate particulars of his income. This was a case where the assessee firm having four partners and managing partners, while furnishing return disclosed payment of commission to another firm and on enquiry the ITO found out that the only partners of the agent firm, were the children of the managing partners. Under these circumstances it was held that the agency commission claimed was a bogus debit and the furnishing of inaccurate particulars of income spans to constitute all the ingredients to levy penalty under S. 271(1)(c).
26. In his rejoinder the learned counsel for the assessee stressed that there was no confrontation between the assessee and the ALIND and, therefore, the acceptance of the view of the ALIND in other words, the acceptance of the interpretation of the agreement as interpreted by ALIND is without justification and is in violation of natural justice.
In all fairness the Department should have provided an opportunity to the assessee to controvert and to put its case before the finalisation which was not afforded to. Under such circumstances the levying of penalty cannot stand on the legal scrutiny, added the learned counsel for the assessee.
27. The accounts of the ALIND have not been put before the assessee so as to establish the genuineness of the account of ALIND. Under these circumstances even the accounts of ALIND cannot be used as a means to levy the penalty upon the assessee. In any case as a prudent assessee, it should be advantageous to pay 50% of the amount due to the assessee as its income then paying 100% to the ALIND. In all fairness the cls. 5 & 6 either stand together or to go together.
28. Hearing the rival submissions and on perusal of judgments of various High Courts as relied upon by the parties, we are of the opinion that the stand of the assessee is genuine and the levy of penalty has no legal sanctity on the following grounds : 29. Coming to the interpretation of the agreement we would say rather that the cls. 5 & 6 stand together for the reasons, the cl. 14 is in a way condition precedent for the termination of the agreement by either party giving a notice of six months. Clause 14 of the agreement can be divided into two parts - (i) the agreement shall remain in force and in effect as long as ALIND is eligible for technical know-how fee or technical services fee stipulated in cls. 5 and 6 of this agreement.
Clause 5 says for the first two years technical services fee will be paid at 5% of ex-factory sales turnover and for the remaining three years at 2 1/2%. We would accept the view as interpreted by the ALIND as genuine if the second portion of the cl. 14 does not exist. The second portion of the cl. 14 says that "thereafter either of the contracting parties shall have the right to terminate this agreement with six months notice in writing to the other party". The word thereafter is the link between the first and the second parts of cl.
14. There-after can be interpreted only in this way, i.e., only after the completion of the first five years as laid down by cl. 5, either of the party can terminate the agreement by giving six months notice. If either of the party gives notice before the completion of 5 years, that notice itself has no legal sanctity and the terms and conditions of the agreement will continue till the end of 5 years. Only after the lapse of 5 years as laid down in cls. 5 and 6 either of the party gets the right to terminate this agreement. In other words before the lapse of 5 years none of the parties can terminate this agreement entered into between the ALIND and the assessee to the detriment of the other party.
The word terminate originates from the word terminus which is connected with Roman God of boundaries. This literally means an end point.
Therefore, the finality of the agreement starts from the issuance of the notice by either of the parties and the agreement will come to an end only after the lapse of six months notice period. Therefore, we are of the view that the agreement came to an end by the ultimate notice of Dec., 85, given by the assessee. Therefore, the stand taken by the assessee that it was bound to make payment to ALIND even beyond 5 years is a genuine interpretation. Even if this interpretation ultimately does not survive there is every possibility and every circumstance that it is a possible interpretation. Under these circumstances the levy of penalty is not justified.
30. Secondly before the Department coming to a final conclusion that the agreement as interpreted by ALIND is genuine, an opportunity should have been afforded to the assessee to controvert that interpretation.
The non-affording of that opportunity is a violation of natural justice and the levy of penalty on this ground is also bad.
31. Thirdly the assessees stand that the assessee has debited the account is not disputed by the Department but the departments only stand is that there was no corresponding account in the account of ALIND. On this ground also the assessees stand an opportunity should have been afforded to satisfy itself and to submit its submission before accepting their view as a reasonable one and non-affording such an opportunity is a violation of natural justice. Therefore, the levy of penalty on this ground also cannot survive. The case relied upon by the Department deals with the asst. yr. 1966-67. The cases relied upon by the assessee, we are afraid, though lay down general principles regarding levy of penalty under given circumstances the same cannot be made applicable in the instant case of the assessee so far even the Department has not case that the payment was made to a spurious party.
The Departments only grievance is that the payment was debited in the account at the most without bona fide. Even the stand that the payment was debited in the account of the assessee without satisfying itself is without merit as we have shown in the foregoing paragraphs. The observation of the Delhi High Court in the case of Delhi Cloth and General Mills Co. Ltd. (supra) is relevant in this context."Penalty for concealment of income can be imposed only if there is conscious and deliberate concealment on the part of the assessee. The mere fact that a claim for expenditure stands disallowed does not by itself lead to the inference that the assessee had furnished inaccurate particulars in regard to that item". This was a case where the revenue expenditure claimed by the assessee was disallowed and amounts spent on acquisition of new depots were included, due to oversight and later the same was surrendered when the mistake was discovered. In the instant case of the assessee, the assessees claim that it bona fide believes that the assessee is liable to make payment to ALIND, we would say, is bona fide belief for honest difference of opinion on the interpretation of the agreement. The difference of opinion on interpretation of an agreement cannot be used at least for levying the penalty against the wrong interpreter. If such a wrong interpretation is given a possibility, we have already discussed the issue in great detail and held that the interpretation given by the assessee is a possible interpretation.
32. Under these circumstances, for the reasons stated herein above and on the basis of the cases relied upon by the assessee, we cancel the order of levy of penalty.