2015 (11) TMI 936 - AT - Income Tax

Penalty u/s 271(1)(c) - addition sustained on account of GP addition of 2% of the alleged cash purchases and peak investment in the grey market purchases - Held that - So far as the assessment year 2002-03 is concerned, the penalty has been levied on the ground of surrender of peak investment made by the assessee on cash purchases in the return of income filed in response to notice u/s 153C. From the facts as discussed above, it is quite clear that the assessee was found to be engaged in making cash purchases of chemicals and materials from the grey market and to regularize the same, he was involved in getting the accommodation bills from Jitendra Doshi Group. It is also true that such modus operandi of regularizing cash purchase, would not have surfaced, had there not been any search or survey action. But it is equally borne out from the record, that nothing was found that assessee was making the purchases from the sources outside the books of account. Here the penalty has been levied mainly on the ground that assessee has not offered the peak investment voluntarily albeit only when he was cornered. This factum may have great probative value for initiation of penalty proceedings or arriving at a satisfaction, but that alone is not a conclusive fact to levy the penalty. Presumption as cast upon the assessee under Explanation 1 is a rebuttable presumption and if such a onus upon the assessee has been rebutted with proper explanation and facts, then no penalty can be levied, without any material evidence to controvert the assessee s explanation or facts. Such material facts which raises the presumption in favour of the assessee are that, firstly, the books of account and trading result for AY 2002- 03 has been accepted by the AO inasmuch as no defect whatsoever has been found either in the quantitative tally of the purchases made and the value of purchases; Secondly, the source of purchases have been explained from the books of accounts and there is no other material to show that assessee has made purchases outside the book other than rotating the cheque purchases to cash purchases; Lastly, one of the most crucial explanation which stands unrebutted is that, assessee had stated that all these purchases were made by various concerns belonging to the assessee and his family members / group, from which these trading of chemicals were carried out. If at all any peak investment was to be added then the same should have been examined in the hands of the firm. Be that as it may, all these material facts points out that preponderance of probability is in favour of the assessee, because all the probable factors given by the assessee has neither been disbelieved nor has been rebutted by any enquiry or evidence gathered by the AO. Thus, we are of the opinion that no penalty leviable on such peak investment made for the assessment year 2002-03. So far as levy of penalty on the gross profit additions made for the AYs 2003-04 to 2008-09, we agree with the contention of the assessee that no penalty can be levied; firstly, for the reason that addition on account of peak investment stands deleted in so far as it has been subsumed in the GP addition, which ultimately has been made on estimate basis and secondly, application of 2% of gross profit on cash purchases is purely on ad-hoc basis without there being any material on record to suggest that assessee has earned profit over and above what has been disclosed in the books of account. The Ld. CIT(A) in the course of the quantum proceedings, have given a very categorical finding of fact which stands unrebutted, assumes quite significance so far as penalty proceedings are concerned that, firstly, books of account have not been rejected; secondly, all the details of purchases including cash purchases and quantity as recorded in the books of accounts have not been disturbed; and lastly, no material or evidence whatsoever have been found suggesting that assessee was suppressing the gross profit on cash purchases. Another very important fact, which is borne out from the finding given in the quantum proceedings and also from the material on record is that, the assessee had disclosed all the purchases in the books i.e. instead of actual purchases made from party A in cash, the assessee has shown the purchases from party B in cheque. The amount encashed out of cheque has been utilized for making the payment of purchase. No variation in the quantity of purchase or the value has been pointed out by the AO. This inter alia means that, the gross profit shown in the book results too have been accepted. Thus, on these facts of the case no penalty can be levied for concealment of income on the addition made on ad-hoc basis/estimate basis by applying of 2% of the GP rates on cash purchases. Accordingly, penalty levied for the assessment year 2003-04 to 2008-09 stands deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Legitimacy of penalty proceedings under section 271(1)(c) for AYs 2002-03 to 2008-09.
2. Application of Explanation 5A to section 271(1)(c).
3. Estimation of gross profit on grey market purchases.
4. Telescoping of peak investment with gross profit additions.
5. Voluntariness of income disclosure by the assessee.

Detailed Analysis:

1. Legitimacy of Penalty Proceedings under Section 271(1)(c):
The assessee, a partner in various concerns of the Kothari Group, faced penalty proceedings for AYs 2002-03 to 2008-09 due to alleged bogus purchase bills from the Jitendra Doshi Group. The Assessing Officer (AO) levied penalties on the basis that the peak investment in grey market purchases was not voluntarily disclosed but was revealed only after being confronted with evidence during a search and seizure action. The AO invoked the provisions of Explanation 5A to section 271(1)(c), treating the case as one of "deemed concealment" of income. However, the CIT(A) and the Tribunal found that Explanation 5A was not applicable, as the search was not conducted on the assessee but on a third party, and the penalty should be considered under the main provisions of section 271(1)(c).

2. Application of Explanation 5A to Section 271(1)(c):
The CIT(A) clarified that Explanation 5A was not invoked by the AO in the penalty order but was mentioned to counter the assessee's claim of voluntary disclosure. The Tribunal concurred, noting that Explanation 5A applies to searches conducted on the assessee, which was not the case here. Therefore, the penalty provisions were examined under the main provision of section 271(1)(c).

3. Estimation of Gross Profit on Grey Market Purchases:
The AO initially estimated a 25% gross profit on grey market purchases, which was later reduced to 2% by the CIT(A) and upheld by the Tribunal. The Tribunal also allowed the telescoping of peak investment with the gross profit additions, effectively reducing the net addition. The Tribunal emphasized that the addition was based on an estimation of gross profit rather than concrete evidence of undisclosed income.

4. Telescoping of Peak Investment with Gross Profit Additions:
The Tribunal upheld the CIT(A)'s decision to telescope the peak investment with the gross profit additions, meaning that the income offered by the assessee as peak investment was subsumed within the gross profit addition. This approach was applied to AYs 2003-04 to 2008-09, while for AY 2002-03, the addition was based solely on the peak investment.

5. Voluntariness of Income Disclosure by the Assessee:
The CIT(A) and the Tribunal found that the assessee's disclosure of peak investment was not voluntary but made in response to the search findings. However, the Tribunal noted that the assessee's explanation regarding the modus operandi and the lack of concrete evidence of cash investments outside the books of accounts were plausible. The Tribunal concluded that the penalty for concealment of income could not be justified solely on the basis of the assessee's non-voluntary disclosure, especially when the books of accounts were not rejected, and no material evidence of undisclosed income was found.

Conclusion:
The Tribunal held that no penalty could be levied under section 271(1)(c) for AYs 2002-03 to 2008-09. The penalty for AY 2002-03 was deleted as the peak investment was not corroborated by any factual evidence. For AYs 2003-04 to 2008-09, the penalty was deleted as the gross profit additions were based on estimations and not supported by material evidence. The appeals for all assessment years were allowed, and the penalties were annulled.