2017 (2) TMI 411 - AT - Income Tax

Penalty u/s 271(1)(c) - estimated trading additions - Held that - Books of accounts have been rejected and thereafter, the Assessing Officer has estimated a GP rate of 42.36% as against declared GP rate of 38.45% which has finally been sustained by the Coordinate Bench at 40.40%. This GP rate 40.40% has been applied by the CIT(A) following the GP rate of 40.34% in the immediately preceding A.Y. 2006-07 and considered the unusual business conditions prevalent during the subject matter in terms of profit margins getting effected by increase in cost of raw material, introduction of new products in the market and fact that some of the assessee s customers did not place orders during the year resulting in fall of the turnover and the view of the Ld. CIT(A) was held to be fair and reasonable which has factored in the business environment as well as guided by the assessee s past history. In the light of the findings of fact in the quantum proceeding, we do not see any linkage in terms of basis of rejection of the books of accounts and the estimation of GP rate by the Assessing Office at 42.36% which has been finally brought down to 40.40%. The additions have thus been confirmed on a pure estimation basis taken into consideration the prevalent business environment and the past history of the assessee and the same cannot be basis for levy of penalty. - Decided in favour of assessee

Summary

Issues Involved:
1. Confirmation of penalty under Section 271(1)(c) of the Income Tax Act, 1961 based on estimated trading additions.

Issue-wise Detailed Analysis:

1. Confirmation of Penalty under Section 271(1)(c) of the Income Tax Act, 1961 on Estimated Trading Additions:

Background:
The assessee, engaged in the manufacturing and export of artistic handicrafts, filed a return of income declaring a total income of ?612,73,640/-. During scrutiny, the Assessing Officer (AO) observed a fall in the gross profit rate from 40.34% to 38.45% compared to previous years and noted defects in the books of account. Consequently, the AO applied Section 145(3) of the Act and estimated a gross profit rate of 42.36%, resulting in a trading addition of ?11,79,652/-. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the rejection of books and estimated a gross profit rate of 40.40%, resulting in a reduced trading addition of ?5,92,194/-.

Tribunal's Findings:
The Tribunal upheld the CIT(A)'s decision, noting that the CIT(A) considered the unusual business conditions, such as increased raw material costs and the introduction of new products, which affected profit margins. The Tribunal found the CIT(A)'s estimation of a 40.40% gross profit rate reasonable and fair, guided by the assessee’s past history and business environment.

Penalty Proceedings:
The AO levied a penalty of ?2,00,043/- under Section 271(1)(c) based on the sustained trading addition. The assessee appealed, arguing that penalties based on estimated additions are not justified, citing precedents from the Rajasthan High Court and other judgments.

Assessee's Arguments:
The assessee contended that the defects pointed out were explained during assessment proceedings and that the explanations were not found false or lacking in bona fides. The assessee maintained that the additions were based on estimation rather than specific defects, and cited several judicial precedents where penalties on estimated additions were not upheld.

CIT(A)'s Position:
The CIT(A) confirmed the penalty, asserting that the defects in the books were established by positive evidence, making the estimation supported by evidence rather than plain estimation.

Judicial Precedents:
The assessee relied on various judicial precedents, including:
- Shiv Lal Tak (251 ITR 373): Penalties cannot be imposed where trading additions are purely based on estimation.
- Mahendra Singh Khedla (252 CTR 453): Estimations do not necessarily indicate concealment of income or furnishing inaccurate particulars.
- Upendra V. Mithani: If an explanation is unproved but not disproved, no penalty can be imposed.
- National Textiles (2001) 249 ITR 0125 (Guj-HC): Similar stance on penalties based on estimation.

Distinguishing Cases:
The CIT(A) relied on several cases to justify the penalty, but the assessee distinguished these cases based on differing facts, such as non-filing of returns, lack of books of accounts, and clear findings of concealment in those cases.

Supreme Court's Observations:
The Supreme Court in Union of India v. Rajasthan Spg. & Wvg. Mills and CIT v. Reliance Petroproducts (P.) Ltd. emphasized that penalties under Section 271(1)(c) require proof of concealment or furnishing inaccurate particulars, and mere disallowance of claims does not attract penalties.

ITAT's Conclusion:
The ITAT concluded that the penalty could not be justified as the additions were based on pure estimation, considering the business environment and past history. The Tribunal referred to the Rajasthan High Court's decision in Mahendra Singh Khedla, which held that penalties cannot be levied on estimated trading additions without positive evidence of concealment or furnishing inaccurate particulars.

Order:
The ITAT directed the AO to delete the penalty on the estimated addition, allowing the assessee's appeal.

Result:
The appeal of the assessee is allowed, and the penalty of ?2,00,043/- under Section 271(1)(c) is deleted. The order was pronounced in the open court on 16/01/2017.