Penalty-2711c not imposable if income estimated u/s 144 where books of accounts not produced

INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH; AMRITSAR

ITA No.293(Asr)/2013 Assessment year: 2005-06

Income Tax Officer (Appellant)  vs. M/s. Age Construction Pvt. Ltd. (Respondent)

Date of Order: 04-03/2016

ORDER

PER A.D. JAIN, JM:

This is the Department’s appeal for the assessment year 2005-06 against the order, dated 06.02.2013, passed by the ld. CIT(A), Jammu. The Department has raised the following grounds of appeal:

“1. On the facts and circumstances whether ld. CIT(A) was right in deleting the penalty imposed u/s 271(1)(c) of Rs.13,88,830/- when the assessee had failed to produce books of account during assessment proceedings in confirmation of the income declared by the assessee. Under these circumstances, the income assessed over and above the income returned by the assessee represents its concealed income.

2. On the facts and circumstances whether ld. CIT(A) was right in deleting imposed u/s 271(1)(c) Rs.13,88,830/- when penalty u/s 271(1)(c) has been upheld in the following case laws despite the fact that the addition made was based on estimate basis.

1. Addl. CIT vs. Chandrakantaha and another, 205 ITR 607 (All).

2. Addl. CIT vs. Lakshmi Industries and Cold Storatge Co. Ltd. 146 ITR 492 (All.)

3. Sushil Kumar Sharad Kumar vs. CIT 232 ITR 588 (All)

4. A.M. Shah & Co. vs. CIT, 238 ITR 415 (Guj.)

5. CIT vs. Swarup Cold Storage & General Mills, 136 ITR 435 (All.)

6. CIT vs. Chandra Vilas Hotel, 292 ITR 202 (Guj.)”

2. The facts are that the assessee, a Private Limited Company, filed return of income for the assessment year 2005-06, declaring a taxable income of Rs.1,27,217/-. The AO assessed the income at Rs.1,66,98,147/-, vide assessment order passed u/s 144 of the I.T. Act. The said assessment order was challenged by the assessee before the ld. CIT(A0, under section 164 of the Act. The order passed u/s 164 confirmed income at Rs.39,22,515/-. In the penalty order, the AO reiterated that due to non-furnishing of details and books of account, he had estimated the income @ 10% of the turnover from contract receipt of Rs.3,92,28,150/- and had arrived at an income of Rs.39,22,515/-, in view of the judgment of the ITAT, Amritsar, in the case of ‘M/s. Pooja Construction Company’, 66 TTJ (Asr) 733, wherein the ITAT upheld the estimation of net profit at the rate of 10% of the gross receipts as reasonable in construction contracts. By virtue of the impugned order, the ld. CIT(A) deleted the penalty of Rs.13,88,830/-, bringing the Department in appeal before us.

3. The ld. DR has contended that the ld. CIT(A) has erred in deleting the penalty imposed by the AO, when the assessee had failed to produce books of account during assessment proceedings in confirmation of the income declared by the assessee. Thus, the income assessed over and above the income returned by the assessee represented its concealed income. He also placed reliance on the various case laws ( as reproduced above in the grounds of appeal), wherein penalty u/s 271(1)(c) of the Act has been upheld, despite the fact that the addition made was based on estimate basis:

4. Per contra, the ld. counsel for the assessee has placed strong reliance on the impugned order.

5. We have heard the rival contentions in the light of the material placed on record, The AO, while levying the penalty, in question, observed as follows:

“I have gone through the reply filed by the assessee ad the case laws referred by it in its reply. The main contention of the assessee is that the addition of Rs.39,22,515/- has been made on account of estimation by applying rate of 10% of the turnover. Here, it is pertinent to mention that assessment by estimation is one of the known methods of assessment in the taxation^ world where the assessee conceals relevant material evidence. The revenue has no option but to make a best judgment by estimate. An assessment by estimation is as much legal as any other assessment. Once an assessment has been done, whether it is best assessment or otherwise, the figure assessed must be held to be the income of the assessee. This view has been held by Hon’ble Punjab & Haryana High Court in the case of CIT vs. Warsat Hussain, (1988)171 ITR 405, 412 (PUNJ). Further, if the difference between income assessed and the income returned is due to fraud or gross or willful neglect on the part of the assessee then it cannot be said that income returned was the result of the honest belief of the assessee regarding his exact income (Hari Lai Kunj Behari Lai (1977) 166 ITR 720 (ALL). In the present case, the assessee has not furnished any material to the Assessing Officer who was forced to complete the assessment to the best of his judgment. It is not a case where best judgment was made because of the fact that assessee inspite of furnishing all the information available with him was unable to satisfy the A.O. regarding the quantum of the income. On the contrary it is a case where the assessee has deliberately concealed the material facts which were important for the assessment of the case. The assessee did not produce the books of accounts, did not furnish reply to the questionnaire, did not comply with the notices issued u/s 142(1) of the I.T. Act, 1961, did not furnish details regarding, purchase of material, and wages etc. All these were material information regarding the assessment of the income of the assessee. On the contrary, the assessee, during the assessment proceedings had quite deliberately not only avoided the furnishing of the information as called by the Assessing Officer and had avoided the production of books of accounts, but had also deliberately sought adjournments on one pretext or the other, in order to dodge the Assessing Officer. The assessee had either not attended the hearings fixed lay the Assessing Officer or when attended, had sought adjournments, each time, with a promise that the books of accounts and the reply to the questionnaire would be furnished on the next hearing. However, till the last, the same were never furnished/ produced. I have also gone through the assessment record and in particular the order sheet entries recorded by the Assessing Officer. A perusal of the same reveals that the A.O. had given_ sufficient opportunities to the assessee to furnish the information and to produce books of accounts. However, the assessee had never furnished the information called for by the A.O. and had ever produced the books of accounts. I have not found any plausible reason submitted by the assessee, to the A.O., during the assessment proceedings for not furnishing the information and for not producing the books of accounts.”

6. Deleting the penalty, the ld. CIT(A) held as under:

“4.3. I have considered the rival submissions and my views are that penalty is not leviable when income is estimated even though the estimated income attained finality.

The addition on estimate basis will not result in attracting the penalty provision u/s 271 (1) (C).In CIT vs K.R. Chinni Krishna Chetty (2000) 246 ITR/f^/lad), an estimated addition made in respect of cost of construction based upon the valuation made by a valuer, it was held, does not justify penalty. The penalty is not automatic on addition being confirmed. The law that assessment and penalty proceedings are different and that penalty does not exigible, merely because the addition has become final. It was in this context, the High Court in CIT vs Mata < Prasad [2005] 278 ITR 354 (All) found no merit in departmental appeal questioning the deletion of penalty on the ground that the Tribunal itself having upheld the addition, could not have deleted the penalty. According to the question raised, this amounted to a volt face on the part of the Tribunal amounting to a review of its own finding in quantum appeal. – The High Court found that decision rendered on evidence on material by the Tribunal did not suffer from any legal infirmity and that tribunal was well within its jurisdiction in coming to the conclusion, that penalty was not leviable, though addition was justified. The penalty is also not leviable for artificial disallowances.

The law that penalty would not be exigible merely because an addition is made on estimate^, basis was reiterated in CIT V. Raj Bans Singh [2005] 276 ITR 351(AII), where the issue related to estimate of income of truck operator on sale of a truck.

Concealment of income is presumed in every case of difference between reported and assessed income under Explanation 1 to section 27l(l)(c). But such presumption is rebuttable. The Explanation itself provides for such rebuttal in cases, where the taxpayer has an explanation for the difference, produces all the materials available with him and such Explanation is not found to be mala fide. In case of estimated additions, penalties are continued to be levied in almost every case on wrong view that every addition should entail penalty. In CIT v. Dhillon Rice Mills 2002] 256 ITR 447(P & H), the High Court held that in a case of addition based upon estimated higher yield in manufacture and low gross profit, there can be no penalty unless the Income-tax department brings something on record to indicate that there has been concealment on the part of the assessee. In coming to this conclusion, it followed its own earlier decision in CIT v. Metal Products of India [1984] 150 ITR 714 (P&H). It is true that all estimate cases may not avoid penalty, as in a case, where income has to be estimated, where books were found to be incomplete due to willful omission of sales. Penalty should not be exigible merely because income is estimated due to the inability of assessee to prove its income. The taxpayers, who file return necessarily, deserve better treatment than those, who do not file the returns at all.

The proposition that penalty cannot be imposed, where an addition is based merely on estimate finds further support in Harigopal Singh v. CIT[2002] 258 ITR 85 (P&H).

An estimate made by the assessee for returning his income at Rs. 12,000 per bus, where such estimate was found to be low and was subjected to higher estimate, the difference could not be subjected to penalty, unless it could be shown that the estimate was not bona fide or that there was any gross of willful negligence on the part of the assessee in making his estimate as held in CJT v. Smt. K. Meenakshi Kutty [2002] 258 ITR 494 (Mad). In coming to the conclusion the High Court followed its own decision in A.K. Bashu Sahib v. CIT [1977] 108 ITR 736 (Mad).

The assessee who is a manufacturer of salt claimed loss due to cyclone and rain, but such loss was not fully accepted, because of estimates involved. There is no room for penalty for such estimated addition was held in CIT v. Valimkbhai H. Patel [2006] 280 ITR 487(Guj). The High Court also pointed out there is not legal issue involved in view of concurrent finding by the Commissioner (Appeals) and Appellate Tribunal.

Where an estimate of income was made for lack of vouchers, penalty does not automatically follow. Where addition is made solely on the basis of estimate without any proof of concealment, by way of best-judgment assessment, there could hardly be any case of penalty. It was this law, which was adopted to delete a penalty of Rs. 29,87,077/- sustained by the commissioned Appeals) in Dr. Hakeem S.A. Syed Sathar v. Asst. CIT [2009] 314 ITR (AT) 290 (Chennai).

Where income is merely estimated, but there is no conclusive proof available as is evident from the fact that the estimated addition was reduced in first appeal, there is no scope for levy of penalty as was pointed out by the High Court in CIT v. Aero Traders P. Ltd. [2010] 322 ITR 316 (Delhi). The High Court found that the decision of the Tribunal in this case was purely one of fact, so that the appeal by revenue could be entertained.

Merely because the Assessing Officer estimated assessee’s profit at 10% of gross profits as against 6.3% disclosed by the assessee could not be taken as concealed income, the difference, couId not be taken so as to justify inference of concealment. In coming to the conclusion, the High Court adverted to the controversy generated by the decision in a central excise case in Union of India y. Dharmendra Textile Processor [2008] 306 ITR 277 (SC) pointing out that the finality has been reached on this controversy by the Supreme Court decision in CIT v. Reliance Petroproducts P. Ltd. [2010] 322 ITR 158 (SC), so that the departmental appeal against deletion of penalty was found to have no merit in CIT v. Vijay Kumar Jain [2010] 325 ITR 378 (Chhattisgarh). Penalty in estimate cases should be exigible only where such estimate is consequent to finding of concealment leading to such estimate.

4.4. In view of above discussion, I find that while estimating of income there is no concealment of income or its particular, by the AO hence penalty u/s 271(1)(c) is not exigible. In view of above discussion I hereby delete the penalty of Rs. 13,88,830/-“

7. As against the ld. CIT(A)’s reliance on the aforesaid decisions for the proposition that no concealment penalty is leviable in a case of estimation of income, the department states that in the following cases, the addition made was on estimate basis, but the penalty levied under section 271(1)(c) of the Act was upheld:

1. “Addl. CIT vs. Chandrakantaha and another”, 205 ITR 607 (All).

2 “Addl. CIT vs. Lakshmi Industries and Cold Storage Co. Ltd.”, 146 ITR 492 (All.)

3 “Sushil Kumar Sharad Kumar vs. CIT”, 232 ITR 588 (All)

4. “A.M. Shah & Co. vs. CIT”, 238 ITR 415 (Guj.)

5. “CIT vs. Swarup Cold Storage & General Mills”, 136 ITR 435 All.).

6. “CIT vs. Chandra Vilas Hotel”, 292 ITR 202 (Guj.)

9. With regard to the above decisions relied on by the department, it is seen as follows:

9.1. “Addl. CIT vs. Chandrakantaha and another” 205 ITR 607 (All), was a case where the assessee revised original return declaring loss of Rs.50,000/- to show income of Rs.7,500/-. Hence, not a case of estimation of income.

9.2. “Addl. CIT vs. Lakshmi Industries and Cold Storage Co. Ltd.” 146 ITR 492 (All.), was a case where penalty had been levied on account of unexplained cash credits and not on account of estimated additions.

9.3 “Sushil Kumar Sharad Kumar vs. CIT”, 232 ITR 588 (All) is a case where addition was made for low domestic personal expenses and not on account of estimation of income.

9.4. “A.M. Shah & Co. vs. CIT”, 238 ITR 415 (Guj.) was a case where discrepancies in the books of account were found and there was alleged suppression of closing stock, not a case of estimation of income.

9.5 “CIT vs. Swarup Cold Storage & General Mills”, 136 ITR 435 All.) was a case where it was held that their was gross or willful neglect on the part of the assessee and penalty was levied and not a case of estimation of income.

9.6. The Department has also sought to rely on “CIT vs. Chandra Vilas Hotel”, 292 ITR 202 (Guj). However, there is no such reported decision.

10. Thus, evidently, in none of the above cases, the income was assessed by way of estimate.

11. In the present case, as correctly noted by the ld. CIT(A), the addition was by way of estimating the income and such estimate was not a result of any finding of any concealment of income, or of furnishing of inaccurate particulars of income by the assessee. The estimation u/s 144 was of Rs.1,66,98,147/-. This was reduced to an estimate of Rs.39,22,515/-, vide order passed u/s 164. Even the AO has, in the penalty order, admitted the factum of estimation of income.

12. Thus, the ld. CIT(A) has correctly relied on the decisions for the proposition that in the case of estimation of income, no concealment penalty is leviable. No decision to the contrary has been placed before us.

13. Thus, finding no force in the grounds raised by the department, they are rejected. The order under appeal is confirmed.

14. In the result, the appeal is dismissed. Order pronounced in the open court on 04/03/ 2016.

(T.S. KAPOOR) ACCOUNTANT MEMBER  (A.D. JAIN) JUDICIAL MEMBER

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