Rajpal Yadav, Judicial Member:
1. Assessee is in appeal before the Tribunal against order of ld.CIT(A)-1, Rajkot dated 25.6.2015 passed for the Asstt.Year 2006-07.
2. Sole grievance of the assessee is that the ld.CIT(A) has erred in confirming penalty of Rs.10,53,590/- which was imposed by the AO under section 271(1)(c) of the Income Tax Act, 1961.
3. Brief facts of the case are that the assessee has filed its return of income on 18.10.2008 declaring NIL income after adjustment of brought forward loss of Rs.1,19,50,166/-. The case of the assessee was selected for scrutiny assessment and notice under section 143(2) was issued and served upon the assessee. On scrutiny of the accounts it revealed to the AO that it had made purchases of Rs.1,06,46,437/- from Shree Ganesh Oil Mill & Ginning Factory which is a sister concern of the assessee. The assessee has purchased Isabgut from this concern at average rate of Rs.35.05 per kg. According to the AO, Isabgut has been sold by the assessee at the rate of 25.34 per kg. on 28.9.2005. In other words, the purchases were made at Rs.35.05 per kg and the sales were made at Rs.25.34 per kg. or 24.96 per kg. Thus, the AO harboured a belief that the assessee has extended undue benefits to its sister concern. He made disallowance of Rs.30,52,678/- under section 40A(2)(a) of the Act out of the purchases. Apart from the above, he made addition of Rs.16,500/- with the aid of section 68 on account of unexplained credit.
4. It is also pertinent to mention that one more addition of Rs.1,23,498/- with the help of section 40A(2)(a) has been made. It relates to purchases made from M/s.Samarth Trading Co. The assessee has purchased cotton from this concern. According to the AO, the assessee has concealed particulars of income in this modus operandi, therefore, he issued notice under section 271(1)(c) r.w.s. 274. The assessee has contended that it has disclosed all relevant facts. Disallowance has been made by the AO on account of difference of opinion about purchase cost. There cannot be any element of concealment. However, the ld.AO was not satisfied with the explanation of the assessee. He imposed penalty of Rs.10,53,590/- which is equivalent to the tax sought to be evaded on these additions. Appeal to the ld.CIT(A) did not bring any relief to the assessee.
5. We have duly considered rival contentions and gone through the record carefully. Section 271(1)(c) of the Income Tax Act, 1961 has direct bearing on the controversy. Therefore, it is pertinent to take note of this section as under:
"271. Failure to furnish returns, comply with notices, concealment of income, etc. (1) The Assessing Officer or the Commissioner (Appeals) or the CIT in the course of any proceedings under this Act, is satisfied that any person
(a) and (b)** ** **
(c) has concealed the particulars of his income or furnished inaccurate particulars of such income.
He may direct that such person shall pay by way of penalty.
(i) and (Income-tax Officer,)** ** **
(iii) in the cases referred to in Clause (c) or Clause (d), in addition to tax, if any, payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or fringe benefit the furnishing of inaccurate particulars of such income or fringe benefits:
Explanation 1- Where in respect of any facts material to the computation of the total income of any person under this Act, (A) Such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the CIT to be false, or (B) such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then, the amount added or disallowed in computing the total income or such person as a result thereof shall, for the purposes of Clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed."
6. A bare perusal of this section would reveal that for visiting any assessee with the penalty, the Assessing Officer or the Learned CIT(Appeals) during the course of any proceedings before them should be satisfied, that the assessee has; (i) concealed his income or furnished inaccurate particulars of income. As far as the quantification of the penalty is concerned, the penalty imposed under this section can range in between 100% to 300% of the tax sought to be evaded by the assessee, as a result of such concealment of income or furnishing inaccurate particulars. The other most important features of this section is deeming provisions regarding concealment of income. The section not only covered the situation in which the assessee has concealed the income or furnished inaccurate particulars, in certain situation, even without there being anything to indicate so, statutory deeming fiction for concealment of income comes into play. This deeming fiction, by way of Explanation I to section 271(1)(c) postulates two situations; (a) first whether in respect of any facts material to the computation of the total income under the provisions of the Act, the assessee fails to offer an explanation or the explanation offered by the assessee is found to be false by the Assessing Officer or Learned CIT(Appeal); and, (b) where in respect of any fact, material to the computation of total income under the provisions of the Act, the assessee is not able to substantiate the explanation and the assessee fails, to prove that such explanation is bona fide and that the assessee had disclosed all the facts relating to the same and material to the computation of the total income. Under first situation, the deeming fiction would come to play if the assessee failed to give any explanation with respect to any fact material to the computation of total income or by action of the Assessing Officer or the Learned CIT(Appeals) by giving a categorical finding to the effect that explanation given by the assessee is false. In the second situation, the deeming fiction would come to play by the failure of the assessee to substantiate his explanation in respect of any fact material to the computation of total income and in addition to this the assessee is not able to prove that such explanation was given bona fide and all the facts relating to the same and material to the computation of the total income have been disclosed by the assessee. These two situations provided in Explanation 1 appended to section 271(1)(c) makes it clear that that when this deeming fiction comes into play in the above two situations then the related addition or disallowance in computing the total income of the assessee for the purpose of section 271(1)(c) would be deemed to be representing the income in respect of which inaccurate particulars have been furnished.
7. In the light of the above, let us examine the facts of the case. For making addition the AO has taken the help of section 40A(2)(a) of the Act. Section 40A(2)(a) contemplates that where the assessee incurs any expenditure in respect of which payment has been or is to be made to any persons referred to in clause (b) of this sub-section and the AO is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is considered by him to be excessive or unreasonable shall not be allowed as a deduction. In the present case, the assessee has maintained complete accounts which were audited. It has produced purchase bills. Now, the question is, whether purchase of Isabgut at the rate of Rs.35.05 per kg and disclosed in the accounts amounts to concealment of income ? How the assessee has concealed the income ? It has already disclosed its purchase cost, party from whom purchases were made. It is the AO who restricted the purchase cost on the basis of sales made by the assessee. He construed that the sale rate at MRP and restricted the purchase cost equivalent to that. The assessee did not challenge disallowance in further appeal, because it has brought forward loss against whom whatever addition made by the AO has been set off. The assessee has declared NIL income and ultimately it is assessed NIL income after set off of brought forward loss. To our mind, when the assessee has substantial brought forward loss, it would not indulge in such type of exercise, just for inflating the purchase cost. There cannot be any element of any concealment of income. The addition has been made on account of difference of opinion about the purchase cost of a particular item. As far as the addition of Rs.16,500/- under section 68 is concerned, the assessee has submitted that this amount has duly been accounted for in the accounts, somehow it could not be confirmed during the course of assessment proceedings. On due consideration of the facts qua this issue, we are of the view that the addition is the result of negligence at the end of the assessee in
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prosecuting its income-tax matters before the ld.Revenue authorities below. Probably this has happened because the assessee has NIL income after set off of brought forward loss, and even after making the addition it has NIL income. Under this misconception, the assessee did not bother to submit confirmation for small cash credit of Rs.16,500/- in the penalty proceedings. It has submitted that details were misplaced and therefore it could not be produced. It is pertinent to note that the assessee has an income of Rs.1,19,50,166/-. This income was set off against brought forward loss. Can the assessee try to manipulate a sum of Rs.16,500/- in such situation for which it should be visited with penalty ? To our mind, there cannot be any deliberate attempt on such aspect. Therefore, considering the facts and circumstances of the case, we are of the view that the assessee does not deserve to be visited with penalty. We allow this appeal of the assessee and quash penalty order. 8. In the result, appeal of the assessee is allowed.