2017 (9) TMI 574 - AT - Income Tax

Levy of penalty u/s 271(1)(c) - trading additions applying G.P rate of 15% - proof of mensrea - Held that - The Coordinate Bench in the quantum proceedings has upheld the rejection of books of accounts on account of certain discrepancies and the trading additions have been sustained by applying G.P rate of 15%, as against G.P rate of 30% applied by the AO and G.P rate of 11.60% offered by the assessee in its return of income, holding that the same will meet the ends of justice. It is a situation where one estimate is replaced by another estimate. The same can form the basis for addition in the quantum proceedings but the same cannot form the sole basis for levy of penalty. There is no positive act or finding recorded by the authorities which proves the act of concealment of income or furnishing inaccurate particulars of income on part of the assessee. Further, there is no finding that bogus purchases have been detected during the course of search operations and even the additions of ₹ 15,903/- made by the AO on this account has also been deleted by the Coordinate Bench in the quantum proceedings. Even looking at the quantum of bogus purchases of ₹ 15,703 vis- -vis trading addition of ₹ 6,96,990 so sustained, there is a fundamental fallacy in the very basis for levy of penalty by the AO where he says that penalty has been levied on account of unverifiable purchases whereby the assessee has failed to prove the genuineness thereof. It is thus a case for levy of penalty purely on trading addition on an estimate basis which cannot be sustained. Appeal of the assessee is allowed.

Summary

Issues Involved:
1. Confirmation of levy of penalty imposed by the Assessing Officer under section 271(1)(c) of the Income Tax Act.
2. Rejection of books of accounts under section 145(3) of the Income Tax Act.
3. Application of Gross Profit (G.P.) rate for trading additions.
4. Treatment of unverifiable and bogus purchases.
5. Mens rea and its relevance in penalty proceedings.

Issue-wise Detailed Analysis:

1. Confirmation of Levy of Penalty Imposed by the Assessing Officer under Section 271(1)(c) of the Income Tax Act:

The appeals were filed by the respective assesses against the order of the CIT(A), Jaipur, challenging the confirmation of levy of penalty imposed by the Assessing Officer under section 271(1)(c) of the Act. The Tribunal noted that the penalty was imposed based on trading additions sustained on an estimate basis. The Tribunal emphasized that penalty proceedings are distinct from assessment proceedings and require clear proof of concealment or furnishing of inaccurate particulars of income, which was not established in this case. As a result, the penalty was deleted for all the assessment years under consideration.

2. Rejection of Books of Accounts under Section 145(3) of the Income Tax Act:

The Tribunal upheld the rejection of books of accounts under section 145(3) due to discrepancies found during search operations, such as incomplete books, excess stock, and unverifiable purchases. The Tribunal noted that the books of accounts were not complete, and there were discrepancies, which justified the rejection under section 145(3).

3. Application of Gross Profit (G.P.) Rate for Trading Additions:

The Tribunal considered the application of the G.P. rate for trading additions. In the case of Ravi Haldia, the Tribunal directed to apply a G.P. rate of 15% as against the declared G.P. rate of 11.60% and the G.P. rate of 30% applied by the Assessing Officer. The Tribunal held that applying a G.P. rate of 15% would meet the ends of justice. Similar adjustments were made for other assesses, reducing the G.P. rate applied by the Assessing Officer and CIT(A).

4. Treatment of Unverifiable and Bogus Purchases:

The Tribunal addressed the issue of unverifiable and bogus purchases. The Tribunal deleted the additions made on account of unverifiable purchases, noting that the trading additions were sustained based on the application of a higher G.P. rate. The Tribunal emphasized that there was no positive finding of bogus purchases during the search operations, and the additions were primarily on an estimate basis.

5. Mens Rea and Its Relevance in Penalty Proceedings:

The Tribunal extensively discussed the concept of mens rea in penalty proceedings. The Tribunal referred to several judicial pronouncements, including the Supreme Court's decision in CIT vs. Anwar Ali, which held that penalty proceedings are quasi-criminal in nature and require proof of guilty mind. The Tribunal concluded that the revenue failed to prove mens rea or ill intention on the part of the assesses. The Tribunal emphasized that penalty cannot be imposed solely based on estimated trading additions without clear evidence of concealment or furnishing of inaccurate particulars of income.

Conclusion:

The Tribunal allowed the appeals of the respective assesses, deleting the penalties imposed under section 271(1)(c) of the Act. The Tribunal held that the penalties were not justified as the trading additions were based on estimates, and there was no clear evidence of concealment or furnishing of inaccurate particulars of income. The Tribunal emphasized the distinct nature of penalty proceedings and the requirement of proving mens rea for imposing penalties. The Tribunal's decision was consistent across all the appeals, leading to the deletion of penalties for the impugned assessment years.