2006 (9) TMI 455 - AT - Income Tax

Addition u/s 68 - Cash credits - Trading addition - GP rate of 13.58 per cent on sales - Penalty imposed u/s 271(1(c) for concealment of Income. Addition u/s 68 - HELD THAT - It is an admitted position that these were old credit balances brought forward from the year 1995-96. No addition u/s 68 could be made because such credits did not appear in the books of account of the assessee for the assessment year under consideration. Similarly, addition u/s 41(1) could also not be made because no deduction or allowance in respect of expenses, loss or trading liability had been allowed in the earlier assessment years. Thus, we are of the considered opinion that the learned CIT(A) was justified in deleting the impugned addition. We confirm his order and reject this ground of appeal of the revenue. Trading addition - GP rate of 13.58 per cent on sales - HEDL THAT - We find that trading addition made by the Assessing Officer on ad hoc basis was without any justification. It is not denied that the gross profit shown by the assessee at 13.58 per cent was better than gross profit shown at 13.33 per cent of the last year. None other defects in the books of account which could show either suppression of sales or inflation of expenses have been pointed out by the Assessing Officer. No doubt, the assessee had not produced or maintained the stock register. This itself could not be a ground for making an ad hoc addition of Rs. 20,000 without pointing out any specific defect or undervaluation of closing stock. No such enquiry was made by the Assessing Officer. Thus, we do not find any justification to interfere with the order of the CIT(A). The same is upheld and this ground of appeal is rejected. Disallowance out of telephone and travelling expenses - HELD THAT - We modify the order of the CIT(A) and direct the Assessing Officer to disallow 1/7th out of telephone expenses alone. Similarly, the disallowance out of travelling and conveyance expenses @ 1/7th not exceeding the disallowance made by the Assessing Officer would meet the ends of justice. We modify the order of the CIT(A) and direct the Assessing Officer to restrict the disallowance to 1/7th. These two grounds of appeal are treated as partly allowed. Penalty imposed u/s 271(1)(c) - For concealment of income - HELD THAT - From the facts, it is obvious that assessee had himself disclosed income of Rs. 40,000 In the return without there being any enquiry or detection by the Assessing Officer. It is, therefore, not understood as to how the Assessing Officer was justified in initiating penalty proceedings u/s 271(1)( c ) as the assessee had neither concealed the particulars of income nor furnished inaccurate particulars thereof when the income was included in the return voluntarily. Therefore, the action of the Assessing Officer does not appear to be in conformity with the provisions of the Act. Be that as it may, the Assessing Officer had only initiated penalty proceedings. The assessee is free to submit his reply and the Assessing Officer after considering his reply may drop the penalty proceedings. It is settled law that both penalty proceedings and assessment proceedings are separate and independent proceedings. The very fact that penalty proceedings have been initiated does not mean that it would automatically lead to levy of penalty u/s 271(1)( c ). Even if the penalty is levied, there is provision for filing an appeal against the said order. We are, therefore, of the opinion that the direction given by the CIT(A) to drop proceedings initiated u/s 271(1)( c ) was not correct. Accordingly, we set aside the order of the CIT(A) and restore that of the Assessing Officer. This ground of appeal is partly allowed. In the result, the appeal of the revenue is partly allowed.

Issues Involved:
1. Deletion of addition on account of cash credits.
2. Deletion of disallowance of interest paid to depositors under section 40A(2)(b).
3. Deletion of trading addition.
4. Reduction of disallowance out of telephone and traveling expenses.
5. Direction to drop penalty proceedings under section 271(1)(c).

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Cash Credits:
The first ground of appeal concerns the deletion of an addition of Rs. 2,84,425/- made by the Assessing Officer (AO) on account of cash credits. The AO found credits in the names of five persons in the assessee's books, dating back to 1995-96. Summons issued to these individuals either went unserved or resulted in denials of loans, leading the AO to deem the credits non-genuine and add them to the income. The CIT(A) deleted the addition, noting that these were old credits and no addition under section 68 could be made as they did not appear in the books for the assessment year under consideration. Additionally, no addition under section 41(1) could be made as no deduction or allowance had been allowed in earlier years. The Tribunal confirmed the CIT(A)'s order, agreeing that the credits were old and no benefit had been received by the assessee in the form of cessation of liability.

2. Deletion of Disallowance of Interest Paid to Depositors under Section 40A(2)(b):
The next issue pertains to the deletion of disallowance of Rs. 2,46,977/- being excess interest paid to depositors covered under section 40A(2)(b). The AO restricted the deduction of interest to 18% from the 24% paid to certain persons. The CIT(A) deleted this disallowance, citing the Tribunal's previous decisions where interest at 24% was deemed fair and reasonable. The Tribunal upheld the CIT(A)'s decision, noting that the interest rate had been consistently accepted by the revenue in past assessments and that the principle of consistency should apply.

3. Deletion of Trading Addition:
The third issue involves the deletion of a trading addition of Rs. 20,000/-. The AO made this addition due to the absence of a stock register and auditors' comments on the non-verification of closing stock details. The CIT(A) deleted the addition, noting that the gross profit rate was better than the previous year and that all transactions were properly vouched. The Tribunal agreed, stating that the ad hoc addition was unjustified without pointing out specific defects or undervaluation of closing stock.

4. Reduction of Disallowance Out of Telephone and Traveling Expenses:
The fourth issue relates to the reduction of disallowance out of telephone and traveling expenses. The AO disallowed Rs. 15,000/- out of Rs. 96,198/- for personal use of the telephone and Rs. 8,000/- out of Rs. 60,934/- for traveling expenses. The CIT(A) reduced these disallowances to 1/10th. The Tribunal modified the CIT(A)'s order, directing the AO to disallow 1/7th of the telephone expenses alone and similarly 1/7th of the traveling expenses, not exceeding the disallowance made by the AO.

5. Direction to Drop Penalty Proceedings under Section 271(1)(c):
The final issue concerns the CIT(A)'s direction to drop penalty proceedings under section 271(1)(c). The AO initiated penalty proceedings for an unexplained credit of Rs. 40,000/-, which the assessee claimed as miscellaneous income in the return. The CIT(A) directed the AO to drop the penalty proceedings, noting that the amount was disclosed in the return. The Tribunal found this direction incorrect, emphasizing that penalty proceedings are independent of assessment proceedings. The Tribunal set aside the CIT(A)'s order, restoring the AO's initiation of penalty proceedings, and noted that the assessee could still submit a reply and potentially avoid the penalty.

Conclusion:
The Tribunal partly allowed the revenue's appeal, confirming some of the CIT(A)'s deletions and modifications while restoring the AO's initiation of penalty proceedings.

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