2010 (5) TMI 519 - AT - Income Tax

Penalty - Survey - Concealment of income - When the assessee failed to discharge the onus laid down upon him in terms of explanation 1 to section 271(1)(c) of the Act, the order of the CIT(A) is upheld to the extent penalty is imposable in this case on the difference between the income worked out @ 7% of the receipts from security services and that returned by the assessee in its profit and loss account - The rule of mens rea has to be established beyond all reasonable doubt in criminal cases, but it is not so in the case of an economic offence - In the light of provisions of sec. 271(1)(c) of the Act read with explanation 1 thereto and the aforesaid judicial pronouncements, it is well established that whenever there is difference between the returned and assessed income, there is inference of concealment - In the case under consideration the desire to conceal is apparent when the assessee was not maintaining the accounts in the course of business and inflated expenses were being debited year after year in the books written well after the close of the year even when payments for such expenses was not being made It is thus clear that all the material facts and particulars relating to the assessee s computation of income were never disclosed by the assessee, and it is further clear that the explanation offered by the assessee has not been substantiated and as well as it is not found to be plausible and bona fide one and it is against all human probabilities, especially when the conduct of the assessee shows that he has been inflating expenses and had been writing books well after the close of the year not only in the year under consideration but even in the preceding three assessment years also - Decided against the assessee

Issues Involved:
1. Legitimacy of penalty under Section 271(1)(c) of the Income-tax Act, 1961.
2. Accuracy and reliability of the assessee's books of accounts.
3. Estimation of net profit and its basis.
4. Allegations of inflated expenses.
5. Applicability of Explanation 1 to Section 271(1)(c).
6. Onus of proof and rebuttal by the assessee.
7. Interpretation of "concealment of income" and "furnishing inaccurate particulars."

Detailed Analysis:

1. Legitimacy of Penalty under Section 271(1)(c):
The penalty of Rs.5,52,040/- was levied under Section 271(1)(c) of the Income-tax Act, 1961, for alleged concealment of income and furnishing inaccurate particulars. The assessee contended that the estimation of net profit at 10% of receipts was arbitrary and unsupported by comparable cases. However, the authorities upheld the penalty, citing deliberate manipulation of books and inflated expenses.

2. Accuracy and Reliability of the Assessee's Books of Accounts:
The survey conducted under Section 133A revealed that the books of accounts were not maintained regularly and were written after the financial year-end. Statements from employees and the assessee confirmed that expenses were debited without proper documentation, and books were manipulated to inflate expenses. The Assessing Officer (AO) rejected the books under Section 145(3) and estimated the net profit at 10%.

3. Estimation of Net Profit and Its Basis:
The AO estimated the net profit at 10% of the gross receipts due to discrepancies in the books and inflated expenses. This estimation was upheld by the CIT(A), who noted that the assessee's books were unreliable. The Tribunal later reduced the rate to 7%, aligning with the rate adopted by the Settlement Commission for previous years.

4. Allegations of Inflated Expenses:
The AO found that the assessee claimed expenses for overtime, leave encashment, salary, messing, bonus, PF contribution, etc., which were not actually paid. The assessee admitted that books were written post-financial year and expenses were debited based on estimates without proper bills or vouchers. The AO concluded that the assessee suppressed profits by inflating expenses.

5. Applicability of Explanation 1 to Section 271(1)(c):
Explanation 1 to Section 271(1)(c) raises a presumption of concealment if the assessee fails to offer a bona fide explanation or substantiate it. The assessee's failure to maintain regular books and inflated expenses led to the application of this explanation. The Tribunal and CIT(A) found that the assessee did not discharge the onus of proving the explanation bona fide.

6. Onus of Proof and Rebuttal by the Assessee:
The burden of proof was on the assessee to rebut the presumption of concealment under Explanation 1. The assessee's explanation was found to be unsubstantiated and not bona fide. The authorities noted that the assessee's practice of writing books post-financial year and inflating expenses year after year indicated deliberate concealment.

7. Interpretation of "Concealment of Income" and "Furnishing Inaccurate Particulars":
The terms "concealment of income" and "furnishing inaccurate particulars" were interpreted to include failure to disclose material facts leading to correct income computation. The authorities concluded that the assessee's actions amounted to deliberate concealment of income by inflating expenses and manipulating books. The penalty was upheld based on the assessee's failure to maintain accurate books and provide a credible explanation.

Conclusion:
The appeal was dismissed, and the penalty under Section 271(1)(c) was upheld. The Tribunal found that the assessee's practice of inflating expenses and writing books post-financial year indicated deliberate concealment of income. The assessee failed to provide a bona fide explanation, and the penalty was deemed justified under the strict liability framework for economic offences.

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