2014 (11) TMI 1228 - AT - Income Tax

Penalty u/s 271(1)(c) - Disallowance of expenses - HELD THAT - Addition has been made purely on estimate without reference to any clinching evidence/material being on record and therefore, the penalty is not sustainable. This finding of CIT(A) could not be controverted by Revenue. We also find that in the penalty order also, it is noted by the AO that 25% disallowance was made out of various expenses - in the penalty order that the CIT(A), Kanpur after considering the facts of the case has restricted the disallowance to 5% of direct expenses which was worked out at ₹ 16 lac. This goes to show that the penalty was imposed only on ad hoc disallowance. This is by now a settled position of law that on ad hoc and estimated disallowance/addition, without bringing any clinching material on record suggesting concealment of income or furnishing of inaccurate particulars of income, imposition of penalty u/s 271(1)(c) is not justified. - Decided in favour of assessee. Rejection of books of accounts - net profit @8.28% of the training fee received by the assessee - HELD THAT - Rejection of books of account is not proper then he can examine the allowability of various expenses claimed by the assessee under various heads as noted by the AO the assessment order particularly in view of this fact that the amount of income and expenditure along with net profit as per return filed by the assessee and as per revised return filed by the assessee are different. In the revised return, the assessee has declared extra income on account of training fees and similarly has claimed extra expenses under the head direct training expenses. This is also seen that in the original return of income filed by the assessee, deduction was claimed on account of depreciation and in the revised return, no deduction was claimed under the head depreciation. It is also seen that in the assessment order, it is noted by the AO that as per the submission of the assessee, some bills and vouchers are not readily available and they are misplaced and cannot be produced. Hence, even if it is held that books of account are not rejected then also, the allowability of expenses has to be examined. CIT(A) should pass necessary order as per law as per above discussion after providing reasonable opportunity of being heard to both the sides.

Summary

Issues:
- Appeal against two separate orders of learned CIT(A)-I, Kanpur for assessment years 2006-07 and 2010-2011.
- Disallowance of expenses and cancellation of penalty.
- Imposition of penalty under section 271(1)(c) for ad hoc disallowance.
- Dispute regarding rejection of books of account and estimation of net profit.
- Allowability of various expenses claimed by the assessee.

Analysis:

Issue 1: Disallowance of Expenses and Cancellation of Penalty
- The Revenue filed appeals against two separate orders of the CIT(A)-I, Kanpur for assessment years 2006-07 and 2010-2011.
- In the appeal for 2006-07, the Revenue raised grounds related to disallowance of expenses and cancellation of penalty.
- The CIT(A) allowed relief without appreciating the lack of substantiation for expense claims by the assessee.
- The penalty was imposed on ad hoc additions, which the CIT(A) found unjustified without concrete evidence.
- The Tribunal declined to interfere in the CIT(A)'s order, as penalties for ad hoc disallowances without evidence of concealment are not justified.
- Consequently, the appeal for the assessment year 2006-07 was dismissed.

Issue 2: Dispute Regarding Rejection of Books of Account and Estimation of Net Profit
- In the appeal for 2010-2011, the Revenue contested the CIT(A)'s decision on the rejection of books of account and estimation of net profit.
- The CIT(A) noted the rejection of books by the Assessing Officer and estimated net profit based on training fees received.
- The CIT(A) decided the issue based on a chart of expenditure submitted by the assessee, which led to specific disallowances.
- The Tribunal found that the CIT(A) did not address the rejection of books of account and decided the issue ad hoc.
- The matter was remanded to the CIT(A) for a fresh decision on the rejection of books and examination of expenses claimed by the assessee.
- The CIT(A) was directed to provide a reasonable opportunity for both sides to be heard and pass a necessary order as per law.

Conclusion:
- The appeal for the assessment year 2010-2011 was allowed for statistical purposes, while the penalty appeal was dismissed.
- The Tribunal emphasized the importance of concrete evidence in disallowance of expenses and the proper examination of books of account for accurate estimation of income and expenses.