2016 (12) TMI 607 - AT - Income Tax

Penalty u/s 271(1)(c) - adhoc disallowance of expenses - Held that - In the present case, the income of the assessee was assessed after rejection of books of accounts and 10% of certain expenses have been disallowed on estimate basis. What is relevant is finding of fact or bringing on record any evidence supporting the estimate. If there is none, it is only a matter of one s person estimate against the other. In the instant case, there is no positive evidence as to why only 10% of the expenses have been disallowed. The AO has stated that since these expenses are not verifiable, he disallows 10% of these expenses and also made the basis for levy of penalty. This rather shows that the AO has not disputed the very incurrence or genuineness of the expenses at the first place. The non-verifiability of the expenses can be the basis for disallowance of expenses but the same cannot form the basis for levy of penalty without bringing on record any concrete evidence of furnishing inaccurate particulars of income or concealment of income. Further, the estimation done by the AO have been partially confirmed by ITAT by taking a macro view in terms of N. P rate instead of individual expenses and is again an estimation and nothing more. The Hon ble Rajasthan High Court in case of CIT vs. Mahendra Singh Khedla (2012 (3) TMI 568 - RAJASTHAN HIGH COURT) has held that the additions have been sustained by the Tribunal only on estimation and a fact or allegation based on estimation cannot be said to be correct only, it can be incorrect also. Therefore, penalty was wrongly levied by the AO. - Decided in favour of assessee.

Summary

Issues Involved:
1. Confirmation of penalty levied under Section 271(1)(c) of the IT Act, 1961.
2. Estimation of net profit rate and its application.
3. Verifiability of expenses and the genuineness of claims.
4. Basis for levy of penalty and the quantum of additions.

Issue-wise Detailed Analysis:

1. Confirmation of Penalty Levied under Section 271(1)(c):
The primary issue is whether the penalty of ?29,05,775/- levied under Section 271(1)(c) for concealment of income and furnishing inaccurate particulars of income was justified. The AO initiated penalty proceedings due to the inability of the assessee to substantiate the claimed expenses with supporting documentary evidence. The CIT(A) confirmed the penalty, noting specific defects in the accounts and the failure to produce necessary bills/vouchers. The Tribunal, however, found that the penalty was based on estimated additions and not on concrete evidence of concealment or inaccuracy. The Tribunal cited several precedents to support that penalty cannot be levied purely on estimated additions.

2. Estimation of Net Profit Rate and Its Application:
The Tribunal examined the net profit (N.P.) rate applied by the AO and CIT(A). The AO had disallowed various expenses and applied a higher N.P. rate of 11.5% against the declared 10.07%. The ITAT had earlier directed the AO to recompute the profit using the 11.5% N.P. rate, acknowledging the defects in the assessee's records but also considering past history. The Tribunal clarified that the N.P. rate applied was before depreciation, interest, and remuneration to partners, which was not correctly computed by the AO initially.

3. Verifiability of Expenses and the Genuineness of Claims:
The AO disallowed 10% of certain expenses due to unverifiability and lack of supporting vouchers. The CIT(A) upheld this, noting the appellant's failure to substantiate the expenses. However, the Tribunal observed that the disallowance was based on estimation without specific evidence of non-genuine or inflated expenses. The Tribunal emphasized that non-verifiability could justify disallowance but not penalty without concrete evidence of inaccurate particulars or concealed income.

4. Basis for Levy of Penalty and the Quantum of Additions:
The Tribunal scrutinized the quantum of additions used as the basis for the penalty. It noted that the AO incorrectly computed the addition at ?86,32,725/- without considering allowances for depreciation, interest, and remuneration. The correct addition, as per the Tribunal's direction, should be ?23,99,326/-. The Tribunal reiterated that penalty based on estimated additions, especially without evidence of deliberate concealment or inaccuracy, is unjustified. The Tribunal referenced multiple case laws where penalties were deemed inappropriate on estimated additions.

Conclusion:
The Tribunal concluded that the penalty levied was not justified as it was based on estimated additions without concrete evidence of concealment or inaccurate particulars. The Tribunal deleted the penalty, allowing the appeal filed by the assessee. The order was pronounced in the open court on 25/11/2016.