ORDER
Shri R.V. Easwar, Judicial Member
1. This appeal by the department pertains to the assessment year 1985-86 and is directed against the order of the CIT(A) dated 26-7-1990 by which he cancelled the penalty of Rs. 2,10,533 imposed on the assessee under Section 273(2)(a) of the I.T. Act.
2. The appeal arises this way. A notice Under Section 210 of the Act was served on the assessee on 29-11-1984 demanding an advance-tax of Rs. 60,190. On 30-11-1984 the assessee responded by filing an estimate in Form No. 29 declaring nil income and consequently nil advance-tax. In filing this estimate the assessee-company took into account the loss of Rs. 16,87,520 for the assessment year 1984-85 as per return filed on 18-6-1984 and the loss of Rs. 3,38,860 for the assessment year 1983-84 as per return filed on 21-7-1983. The ITO completed the assessment on 11-1-1988 determining the total income at Rs. 45,85,583. He initiated proceedings for the levy of penalty under Section 273(2)(a) of the Act on the ground that the assessee filed an estimate of advance-tax which it knew or had reason to believe to be untrue. After considering the explanation of the assessee he imposed a penalty of Rs. 2,10,533.
3. On appeal it was noticed by the CIT(A) that as per the returns filed for the assessment years 1983-84 and 1984-85 there was only a loss and therefore at the time when the assessee filed the estimate it had reasons to believe that after adjusting the losses there would be no income on which advance-tax should be paid. He further noticed that the assessments for the aforesaid two assessment years were completed on 31-3-1986 and 12-2-1987 respectively which dates fell after the date of the filing of the estimate. In the assessment for the assessment year 1983-84 there was a loss of Rs. 1,51,890 but the assessment for the assessment year 1984-85 was made on an income of Rs. 15,01,482. Since the assessments were completed after the date of filing of the estimate the assessee did not know that there would still be some income subject to advance-tax for the assessment year under appeal. He, therefore, cancelled the penalty.
4. The Ld. D.R. contended in support of the appeal that there was wide disparity between the estimate and the income returned and the assessee had not explained the same. In this connection he referred to the judgment of the Calcutta High Court in CITv. Birla Cotton Spg. & Wvg. Mills Ltd. [1985] 155 ITR 448 especially the observation at page 449 wherein it has been held that it was the assessee’s duty to explain the disparity between the income estimated and the income returned or assessed. It was further pointed out by him that the assessee should have known or anticipated that the interest on advances would be assessed on accrual basis though its method of accounting in respect of such interest had been changed from accrual basis to cash basis. In this connection it was pointed out by him that in the assessment year 1984-85 the change in the method of accounting for interest was not accepted by the departmental authorities and this position should have put the assessee on guard. He further submitted that the assessee’s explanation is a mere self-serving statement which should not have been accepted by the CIT(A).
5. The Ld. Representative for the assessee on the other hand submitted that the estimate showing nil income was filed bona fide on the basis of the position obtaining at the time of filing the same. According to him, the assessee had filed returns for the assessment years 1983-84 and 1984-85 declaring huge losses and there was nothing to create an apprehension in its mind that the losses will not be accepted. That apart, the assessee had claimed a loss of Rs. 21.57 lacs representing bad debts or trade loss in the assessment year 1984-85 and if that had been allowed, even the assessment for that year would have resulted in the loss as against the positive income of Rs. 15,01,482. According to the Ld. representative, though ultimately the disallowance of the loss was upheld by the Tribunal by order dated 27-4-1992, the assessee could not anticipate the same and bonajide believed that the claim would be allowed and the assessment would result in a negative figure. Thus the assessee was justified in believing that there losses for the earlier two assessment years which were available for set off against the income for the year under appeal. Another point made by him was that in recognition of the change in the method of accounting in respect of the interest on the advances given by the assessee the Tribunal had, by the same order, cited supra, deleted the additions in respect of the interest on accrual basis for the assessment years 1985-86, 1986-87 and 1987-88. Though the order of the Tribunal is subsequent to the date of filing the estimate, it showed that the assessee’s contention that the interest was not taxable on accrual basis was justified. The Ld. representative for the assessee further drew our attention to the noting made by the assessee’s employee in the demand notice issued by the ITO under Section 210 of the Act to the effect that the profit of Rs. 13 lacs (approx.) for the year will be wiped out by the loss of Rs. 16,87,524 claimed in the return for the assessment year 1984-85 and therefore nil estimate may be filed. This noting, according to him, showed that the position obtaining at the time of filing the estimate was kept in view by the assessee and it was only on that basis that the estimate was filed. Under these circumstances, according to him, the estimate cannot be considered as untrue and the assessee cannot be held guilty of having knowingly filed a false or untrue estimate. In support of his contentions, the Ld. Representative also relied on the judgment of the Calcutta High Court in Birla Cotton Spg. & Wvg. Mills Ltd. ‘s case (supra) 155 ITR 448 (at page 457) and CITv. Birla Cotton Spg. & Wvg. Mills Ltd. [19861 157 ITR 516.
6. On a consideration of the rival contentions we are of the view that the order of the CIT(A) cancelling the penalty requires to be upheld. The facts and figures are not in dispute. The assessee is charged with the guilt of having filed an untrue or false estimate. The Calcutta High Court in CIT v. Birla Cotton Spg. & Wvg. Mills Ltd. [1986] 157 ITR 516 has held that the mental element of the assessee at the time when he filed the estimate must be ascertained in order to find out whether the estimate was untrue or false. Any subsequent development such as spurt in the profit or unanticipated additions or disallowances in the assessment cannot be projected backwards to hold that the assessee was guilty of having filed a false or untrue estimate. This is the gist of the judgment. If this test is applied to the facts of the present case, it will be clear that the assessee cannot be held guilty of having filed an untrue estimate. It is not disputed that the assessee claimed a loss of Rs. 16.87 lacs and Rs. 3.38 lacs in the returns for the assessment years 1983-84 and 1984-85. It is also not disputed that if these losses had been accepted, these would have been available to the assessee for being set off against the income for the year under appeal and that would wipe out the income. These returns were filed earlier to the filing of the estimate. The assessments for those years were completed subsequently. Those assessments had resulted in a loss for the assessment year 1983-84 but a profit for the assessment year 1984-85. The question now remains as to whether the assessee was justified in its belief that there would be a loss for the assessment year 1984-85. In the return for that year the assessee had claimed bad debt or trading loss of Rs. 21.57 lacs. That was disallowed in the assessment but the assessee kept the issue alive by taking it to the Tribunal. In the accounts for the assessment year 1984-85 the amount had been written off. The amount represented money paid to the bank on behalf of M/ s. Oriental Electric and Engineering Co. in respect of which the assessee stood guarantee to the bank. Since that firm did not pay the bank, the guarantee was enforced and the assessee had to pay the bank. Ultimately, the assessee could not recover this amount from the firm and hence the write-off. At no point of time had the write-off been questioned. The deptl. authorities had taken the contention that the debtor-company had gone on liquidation and until the liquidation proceedings are finalised, the write-off must be held to be premature. This stand of the department was upheld by the Tribunal relying on the judgment of the Madras High Court in CIT v. Amalgamations (P.) Ltd. [1977] 108 ITR 895.
It will be seen from the facts relating to the claim that the claim was made bona fide by the assessee. The matter was a highly contentious matter and it cannot be said that the assessee could not have entertained a reasonable belief that it had chances of succeeding in its claim. Had this amount been allowed, even the positive income of Rs. 15.01 lacs for the assessment year 1984-85 would have resulted in a loss. These losses would have been available for set off against the income for the assessment year 1985-86. The facts narrated would show that the assessee was fully justified in filing a ‘nil estimate of its income. That apart, its contention that the interest cannot be assessed on accrual basis because it had changed its method of accounting from mercantile to cash had been accepted by the Tribunal showing that the claim was not a hollow one but was prima facie tenable. Therefore, the assessee was justified in its belief that the interest cannot be taxed on accrual basis. All these facts existing at the time of filing the estimate would go to show that the belief that there would be no income for the year in question on which advance-tax would be payable was a reasonable belief and that the assessee had taken care to base its estimate on the data and position available at that point of time. Far from showing lack of bona fides on the part of the assessee or a guilty state of mind, the facts show that the estimate was filed bona fide. Even the noting made on the notice under Section 210 shows that there was some basis for filing the nil estimate. On these facts it is not possible to sustain the penalty imposed on the assessee on the ground that the estimate tiled was untrue or false to the knowledge of the assessee. The observations and the principles laid down in the judgment of the Calcutta High Court in CIT v. Birla Cotton Spg. & Wvg. Mills Ltd. [1985] 155 ITR 448 are fully applicable to the present case. We are, therefore, of the view that the CIT(A) has rightly cancelled the penalty. We fully agree with him in his conclusion. His order is, therefore, upheld and the appeal is dismissed.