2017 (9) TMI 475 - AT - Income Tax

Levy of penalty under section 271(1)(c) - wrongly deducted tax on service tax - higher TDS is shown in 26AS - whether gross receipts as per 26AS which refers to TDS claim can be made the basis for an addition - Held that - The assessee filed reply before A.O. at the penalty stage explaining that his contractee M/s. Pioneer Urban Land 9, 65, 75, 290. The reconciliation and details of the same are filed which shows the billing amount of 9, 65, 75, 290 work done at 9, 27, 53, 831 service tax was of 38, 21, 460 and the total comes to 9, 65, 75, 290 on which TDS @ 2% has been deducted in a sum of 19, 31, 506 and after other deductions the net amount comes to 8, 61, 43, 082. It therefore clearly proved that assessee filed reply before A.O. at the penalty stage supported by the reconciliation certificate. The assessee thus has been able to explained that his contractee M/s. Pioneer Urban Land & Infrastructure Ltd. had erroneously deducted TDS on the gross billing amount including service tax. This was the reason when higher TDS is shown in 26AS and the A.O. had taken item of service tax to the higher receipts. Thus the assessee has explained the above difference in the receipts as per the details submitted before A.O./CIT(A) and the details noted in 26AS. The assessee also explained that since service tax is not income of the assessee which is also not disputed by the Ld. D.R therefore it would not form part of total receipts of the assessee and has to be given treatment separately in the Balance Sheet. It is well settled law that quantum and penalty proceedings are independent and distinct proceedings. Even if the addition is agreed by the assessee if the assessee is able to explain the addition then penalty may not be leviable in the facts and circumstances of the case. The above facts clearly indicate that the explanation of assessee at the penalty stage was factually correct based on the material on record and assessee successfully explained the addition so made which is the basis for levy of the penalty. Since the difference is reconciled at the penalty stage and claim of assessee have not been doubted or rejected therefore Ld. CIT(A) was not justified in confirming the levy of penalty merely because assessee conceded for addition of the amount in question. - Decided in favour of assessee.

Issues Involved:
1. Levy of penalty under section 271(1)(c) of the I.T. Act, 1961.
2. Difference in gross receipts as per reconciliation and 26AS.
3. Inclusion of service tax in gross receipts.
4. Applicability of Board Circulars regarding TDS on service tax component.
5. Distinction between quantum and penalty proceedings.
6. Specificity in the penalty order regarding the limb under which penalty is levied.

Issue-wise Detailed Analysis:

1. Levy of penalty under section 271(1)(c) of the I.T. Act, 1961:
The primary issue in this case is the imposition of penalty under section 271(1)(c) of the I.T. Act, 1961. The assessee filed a revised return declaring a loss and during assessment, a difference of ?38,39,628 in gross receipts was noted. The A.O. initiated penalty proceedings, alleging that the assessee furnished inaccurate particulars of income. The assessee contended that the difference was due to erroneous TDS deduction by the contractee, which included service tax. Despite the explanation, the A.O. levied the penalty, which was upheld by the CIT(A).

2. Difference in gross receipts as per reconciliation and 26AS:
The discrepancy arose from the difference between the gross receipts reported by the assessee and those reflected in Form 26AS. The assessee explained that the difference of ?38,21,458 was due to service tax included in the gross billing amount by the contractee, which was not part of the income. The assessee provided a reconciliation statement, which the A.O. did not find satisfactory, leading to the addition and subsequent penalty.

3. Inclusion of service tax in gross receipts:
The assessee argued that the service tax component should not be included in the gross receipts as it is not income but a liability. The service tax was shown separately in the balance sheet and not routed through the P&L account. The assessee cited the CBDT Circular No.1 of 2014, which clarifies that TDS should not be deducted on the service tax component if it is indicated separately in the agreement. This was reiterated in Circular No.23 of 2017 post-GST enactment.

4. Applicability of Board Circulars regarding TDS on service tax component:
The Board Circulars (No.1 of 2014 and No.23 of 2017) were pivotal in the assessee's argument, clarifying that TDS should not be deducted on the service tax component. The assessee's contractee, however, deducted TDS on the gross amount including service tax, leading to the discrepancy. The Tribunal acknowledged these Circulars, supporting the assessee's claim that the service tax should not form part of the gross receipts for TDS purposes.

5. Distinction between quantum and penalty proceedings:
The Tribunal emphasized the distinction between quantum and penalty proceedings, noting that an addition in assessment does not automatically justify a penalty. The assessee's explanation was found to be bonafide, factually correct, and supported by documentary evidence. The Tribunal held that the explanation provided at the penalty stage was sufficient to negate the penalty, as the difference was reconciled and the claim was not doubted or rejected.

6. Specificity in the penalty order regarding the limb under which penalty is levied:
The Tribunal noted a procedural lapse in the penalty order, where the A.O. failed to specify under which limb of section 271(1)(c) the penalty was levied—whether for concealment of income or furnishing inaccurate particulars. Citing precedents, the Tribunal held that such an omission renders the penalty order liable for cancellation. This procedural defect further supported the decision to cancel the penalty.

Conclusion:
The Tribunal concluded that the penalty under section 271(1)(c) was not justified as the assessee provided a reasonable explanation for the discrepancy, supported by reconciliation statements and relevant Circulars. The procedural lapse in the penalty order also contributed to the decision to cancel the penalty. The appeal was allowed, and the penalty was set aside. The findings were clarified to have no bearing on the quantum matter.

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