2017 (3) TMI 889 - AT - Income Tax

Penalty u/s. 271(1)(c) - quantum addition of estimated gross profits after rejection of books - Held that - Assessee s gross profits are @42.99% as against 45.77% in the immediate preceding assessment year. The case file indicates that its gross profits at much lower rates of 40.90% have been assessed in assessment year 2001-02, very high rate of 50.25% in assessment year 2007-08 and again a very low figure of 32.59% in assessment year 2010-11; respectively as disclosed and accepted in scrutiny assessments. The assessee had sought to justify its decline in gross profit as compared to the preceding assessment year by placing on record all necessary details which formed the necessary basis for the Assessing Officer to reject its book and arrive at estimated GP @45%. It has also come on record that he examined all the raw material items, their purchase prices, consumption as well as all other heads of expenses stated in the record at assessee s behest only. It is evident that the Assessing Officer is very fair in admitting in his assessment order that the assessee could not get verified key component of its excess consumption of raw material in the impugned assessment year. All this indicates that the assessee s supportive evidence justifying the above low GP ratio in the impugned assessment year lacked verification rather than being in the nature of an altogether false explanation. We thus conclude that the above estimation of gross profits after rejection of books in quantum proceedings neither amounts to furnishing of inaccurate particulars nor concealment of income for the purpose of imposing Section 271(1)(c) penalty under challenge. The same is accordingly deleted. See Reliance Petroproducts case 2010 (3) TMI 80 - SUPREME COURT - Decided in favour of assessee.

Summary

Issues:
1. Assessment of penalty under section 271(1)(c) of the Income Tax Act, 1961 based on the estimated gross profits.
2. Justification of the decline in gross profits by the assessee.
3. Appeal against the penalty imposed by the Assessing Officer.

Detailed Analysis:

1. The judgment pertains to an appeal against the penalty imposed under section 271(1)(c) of the Income Tax Act, 1961, based on the estimated gross profits for the assessment year 1997-98. The Assessing Officer had imposed a penalty of &8377; 41,37,740, which was upheld by the CIT(A). The quantum addition was made after rejecting the books of the assessee and estimating the gross profits at 45%, resulting in an addition of &8377; 96,22,650. The penalty proceedings were initiated based on this addition.

2. The assessee, a glass manufacturer, attributed the decline in gross profits to an increase in the purchase price of raw materials and a declining trend in the average sale price of finished goods. The Assessing Officer conducted a detailed comparative analysis of the raw materials consumption, yields, purchase prices, and other expenses. The CIT(A) had initially deleted the quantum addition after considering the reasons provided by the assessee for the decline in gross profits.

3. The Revenue appealed the CIT(A)'s decision, and a co-ordinate bench restored the quantum addition based on the detailed analysis conducted by the Assessing Officer. The co-ordinate bench found that the fall in gross profits was not adequately explained by the assessee and reinstated the addition. However, the ITAT Ahmedabad, in the penalty proceedings, considered the distinction between quantum and penalty proceedings. The ITAT emphasized that not every addition in the quantum proceedings automatically attracts the penalty provision under section 271(1)(c). The ITAT concluded that the estimation of gross profits after rejecting the books did not amount to furnishing inaccurate particulars or concealing income, and hence, the penalty was deleted.

In conclusion, the ITAT Ahmedabad allowed the assessee's appeal, stating that the penalty imposed under section 271(1)(c) was not justified based on the estimation of gross profits after rejecting the books. The judgment highlighted the importance of distinguishing between quantum and penalty proceedings and emphasized the need for proper justification in cases of estimated profits.