2012 (10) TMI 1062 - AT - Income Tax

Summary

Issues Involved:
1. Legitimacy of penalties imposed u/s 271(1)(c) for AY 2003-04 and AY 2004-05.
2. Justification for non-production of evidence due to fraud by Vice President, Finance.
3. Applicability of penalty provisions in light of the fraud and subsequent defalcation.

Summary:

1. Legitimacy of penalties imposed u/s 271(1)(c) for AY 2003-04 and AY 2004-05:
The Revenue appealed against the orders of CIT(A)-21, Mumbai, which cancelled penalties of Rs. 87,05,126/- and Rs. 9,98,154/- imposed by the AO u/s 271(1)(c) for AY 2003-04 and AY 2004-05 respectively. The penalties were imposed due to various additions/disallowances made by the AO based on a special audit u/s 142(2A). The CIT(A) allowed partial relief and sustained some additions, leading to the initiation of penalty proceedings.

2. Justification for non-production of evidence due to fraud by Vice President, Finance:
The assessee, a pharmaceutical manufacturing company, faced a fraud/defalcation by its Vice President, Finance, Shri S.G. Teredesai, from 2001 to 2006. This led to the inability to produce supporting vouchers/bills/evidences during the special audit. The CIT(A) noted that the fraud was an admitted fact, accepted by the department in various assessment orders and by the ITAT in related cases. The CIT(A) held that the non-production of evidence was justified due to the fraud and that the AO was incorrect in not admitting evidence produced later.

3. Applicability of penalty provisions in light of the fraud and subsequent defalcation:
The CIT(A) concluded that the assessee's claims were bona fide and made under a bona fide belief, as the returns were filed before the fraud was detected. The CIT(A) emphasized that the penalty provisions were not attracted as the assessee provided a detailed and justifiable explanation for non-production of evidence, supported by facts on record. The CIT(A) also referenced the Supreme Court decision in CIT vs. Reliance Petro Product, stating that merely making an unsustainable claim does not attract penalty u/s 271(1)(c).

Tribunal's Decision:
The Tribunal upheld the CIT(A)'s orders, noting that the facts and circumstances were similar to the case of M/s Universal Medicare Pvt. Ltd., where the penalty u/s 271(1)(c) was found unsustainable. The Tribunal emphasized that the assessee was a victim of fraud, and the AO had allowed the defalcation amount in subsequent years. The Tribunal concluded that the assessee did not conceal income or furnish inaccurate particulars, and the penalties imposed by the AO were unjustified.

Conclusion:
Both appeals by the Revenue were dismissed, and the orders of the CIT(A) cancelling the penalties imposed u/s 271(1)(c) for AY 2003-04 and AY 2004-05 were upheld.