2012 (5) TMI 743 - AT - Income Tax

Levy of penalty u/s. 271(1) (c) - higher g.p. rate - Held that - For both the years, the clear finding by the tribunal for sustaining a higher g.p. rate is to plug a possible leakage of revenue on account of unverifiable purchases; the assessee having exhibited the purchase of goods against its unverifiable purchases. The assessee can under the circumstances only be considered as having substantiated it explanation, if not to the hilt, substantially so, with all the facts material to the computation of income being on record. Once it is accepted as a fact that the goods had indeed been purchased, an addition on account of a possibility of having incurred a higher expenditure than claimed, though definitely valid for effecting a disallowance of the claimed expenditure; the assessee having failed to prove their actual cost as incurred, cannot lead to the inference of a wrong claim, justifying the levy of penalty. That is, the very fact of the tribunal sustaining a higher g.p. rate only to plug a possible leakage of revenue on account of unverifiable purchases, proves the assessee s claim of absence of any charge of having not disclosed its correct income, and of having a plausible explanation in support of the returned income. The same, though, would not prove its case as regards the claim of expenditure (or income), yet remains a valid claim for the purpose of levy of penalty. No penalty is exigible in the instant case - Decided in favour of assessee.

Summary

Issues Involved:
1. Levy of penalty under section 271(1)(c) of the Income Tax Act, 1961.
2. Rejection of the assessee's book results and estimation of gross profit (g.p.) rate.
3. Validity of penalty when income is assessed based on estimation.

Issue-wise Detailed Analysis:

1. Levy of Penalty under Section 271(1)(c) of the Income Tax Act, 1961:
The primary issue in these appeals was the levy of penalty under section 271(1)(c) of the Income Tax Act, 1961, for the assessment years 2004-05 and 2005-06. The penalty was levied by the Assessing Officer (AO) and confirmed by the Commissioner of Income-tax (Appeals) [CIT(A)] for the alleged concealment of income or furnishing inaccurate particulars of income. The assessee argued that since the trading addition was based on an estimate, no penalty could be levied. However, the Revenue contended that the difference between the returned and assessed income, even if based on an estimate, could still attract penalty under section 271(1)(c).

2. Rejection of the Assessee's Book Results and Estimation of Gross Profit (g.p.) Rate:
The assessee, engaged in the manufacture and export of diamond and diamond-studded jewelry, disclosed a g.p. rate of 3.83% and 4.1% for the assessment years 2004-05 and 2005-06, respectively. These rates were significantly lower than the 13.99% disclosed for the previous year (2003-04). The AO rejected the assessee's book results under section 145(3) of the Act due to the non-verifiability of purchases and the absence of a stock register or quantitative details. The AO applied a g.p. rate of 11%, leading to a substantial trading addition. The CIT(A) reduced the g.p. rate to 8%, and further, the Tribunal directed the application of a 4.5% g.p. rate, sustaining a net trading addition.

3. Validity of Penalty When Income is Assessed Based on Estimation:
The Tribunal clarified that assessment under the Act could be made on an estimate basis under sections 143(3) or 144, provided the estimate is informed and reasonable. The Tribunal cited various case laws to support that penalty could still be levied even if the income was assessed based on an estimate. The Tribunal emphasized that the presumption under Explanation 1 to section 271(1)(c) is rebuttable, and the burden of proof shifts to the assessee to substantiate its case.

Conclusion:
The Tribunal concluded that no penalty was exigible in the instant case. The Tribunal noted that the assessee's explanation for the lower g.p. rate was plausible and substantially substantiated. The Tribunal observed that the addition was made to plug a possible revenue leakage due to unverifiable purchases, but it did not indicate a deliberate concealment of income or furnishing of inaccurate particulars. Therefore, the appeals by the assessee were allowed, and the penalty levied under section 271(1)(c) was cancelled.