2015 (10) TMI 1493 - AT - Income Tax

Penalty levied u/s 271(1)(c) - enhancement of net profit on account of unproved labour payment - Held that - As the notice u/s 271(1)(c) of the Act was not served on the assessee, the assessee could not be expected to offer any plausible explanation before the Assessing Officer. When he started investigation, it was noted by him that letters u/s 133(6) of the Act could not be served on the labourers. However, no disallowance of labour expenses claimed was made by the Assessing Officer despite the non-verification of labour expenses. Instead of disallowing labour expenses, the Assessing Officer preferred to estimate Net Profit rate of 5%. Apart from the discussion on labour expenses in the assessment order, there is no reference to detection of any concealment of facts or income. In appeal, the CIT(A) reduced the addition made by the Assessing Officer. In Second Appeal, ITAT also reduced the Net Profit rate to 3%. Reduction in the rate of profit itself shows the fact that nothing could be certain with regard to profit which ipsofacto could not tantamount to concealment of income. The assessee cannot be said to have concealed the particulars of income merely because the books of accounts were rejected by the Assessing Officer and subsequently, the Assessing Officer and CIT(A) applied different Net Profit rate to estimate the income. In diamond job work, labourers keep on migrating one place to another and in most cases, they are not traceable as they normally do not have permanent establishment. In absence of details of labourers, it cannot be inferred that how much services have been rendered by them to the assessee. In the case before us, the assessee had submitted a party-wise list of sub-contractors with details of TDS. So, the expenses incurred cannot be said to be bogus; however, here in the case before us, the recourse of estimation of Net Profit was made because the assessee could not provide certain facts/details about labourers which cannot be a sound basis for levying penalty u/s 271(1)(c) - Decided in favour of assessee.

Summary

Issues:
1. Penalty levied under section 271(1)(c) for unproved labour payment.
2. Adequacy of explanation provided by the assessee.
3. Application of Net Profit rate in assessing income.

Analysis:

Issue 1: Penalty under section 271(1)(c) for unproved labour payment
The Revenue filed an appeal against the order of the Commissioner of Income Tax (Appeals) for Assessment Year 2005-06, challenging the penalty of Rs. 17,42,370 levied under section 271(1)(c). The Assessing Officer had rejected the books of accounts due to lack of details regarding labour payment made by the assessee, resulting in the application of a Net Profit rate of 5%. The CIT(A) confirmed the finding but applied a Gross Profit rate of 2%, reducing the addition. The ITAT, in the Second Appeal, upheld the Net Profit rate of 3%. The Revenue contended that the penalty should be upheld as the addition was confirmed, and the assessee failed to provide a satisfactory explanation. However, the ITAT found that the assessee's inability to provide certain details about labourers did not amount to concealment of income, as the estimation of Net Profit was based on lack of specific information rather than intentional concealment.

Issue 2: Adequacy of explanation provided by the assessee
The First Appellate Authority granted relief to the assessee, which was challenged by the Revenue. The Departmental Representative argued that the CIT(A) erred in deleting the penalty, emphasizing that the assessee did not respond to the show-cause notice before the penalty was levied. However, as the notice under section 271(1)(c) was not served on the assessee, the ITAT noted that the assessee could not be expected to offer an explanation at that stage. The ITAT further observed that the reduction in the profit rate indicated uncertainty rather than deliberate concealment, as the assessee had provided a list of sub-contractors with TDS details, suggesting genuine expenses.

Issue 3: Application of Net Profit rate in assessing income
The ITAT upheld the CIT(A)'s decision to reduce the Net Profit rate to 3% for assessing income related to diamond cutting and manufacturing job work. The ITAT reasoned that the lack of specific details about labourers did not justify the imposition of a penalty under section 271(1)(c), as the estimation of profit was based on incomplete information rather than intentional misrepresentation. The ITAT concluded that the penalty was not warranted in this case and dismissed the appeal of the Revenue.

In summary, the ITAT dismissed the Revenue's appeal, emphasizing that the lack of specific details about labourers did not constitute concealment of income, and the penalty under section 271(1)(c) was not justified based on the circumstances of the case.