2019 (1) TMI 655 - HC - Income Tax

Penalty u/s 271(1)(c) - Failure to furnish returns, comply with notices, concealment of income - disallowance of expenses - Held that - On the question of full and true disclosure, we would like to refer the accounts of the appellant-assessee that were audited. The audit report placed on record had stated that the appellant-assessee had recognized revenue from the projects based on PoC Method in relation to sold areas on the basis of percentage of actual construction and other related costs incurred thereon excluding land cost as against the total estimated cost of the project under execution subject to such actual cost being 30% or more of the total estimated cost. Similarly, there were disclosures under the heading 'inventory and cost of construction/development' to the effect that 'work in progress' was valued at lower of the cost than net realizable value, cost of pricing of land including development rights, material services and other overheads. Costs of construction/development incurred would be discharged to the profit and loss accounts proportionate to the project area sold, in cases where threshold of 30% had been exceeded. Full details with regard to the expenses claimed under selling, administrative and another expenses had been disclosed. As noticed above, the figures given in columns and heads have not been disturbed by the Assessing Officer and no addition has been made by doubting and disturbing the figures and amounts mentioned. The Tribunal has also not stated that full and complete disclosure of material facts was not made by the appellant-assessee. Given the aforesaid facts, i.e. the relevant clauses of AS-7, applicable Guidance Notes, the fact that the accounts were duly audited and the disclosures made in the audit notes, the loss income as declared, small taxable income as assessed even after the additions were made and that the expenses as claimed were otherwise eligible and allowed in the next assessment year, we would accept that the appellant-assessee had shown that they had acted bonafidely. Thus, the appellant-assessee should not have been burdened with penalty for concealment of income under Section 271(1)(c) of the Act. - decided in favour of assessee.

Issues Involved:
1. Admission of additional documents.
2. Imposition of penalty under Section 271(1)(c) of the Income Tax Act.
3. Bona fides of the appellant-assessee in making the claim.
4. Full and true disclosure by the appellant-assessee.

Issue-wise Detailed Analysis:

1. Admission of Additional Documents:
The court allowed the application for placing additional documents on record without opposition from the respondent-Revenue. The documents included income-tax returns, computation of income, audited financial statements, assessment and rectification orders, and reconciliation of figures for the relevant assessment years. The court clarified that the legal effect of these documents would be decided in the main appeal.

2. Imposition of Penalty under Section 271(1)(c) of the Income Tax Act:
The appeals were against the order of the Income Tax Appellate Tribunal (ITAT) which upheld the Assessing Officer's imposition of penalty for concealment of income. The Tribunal had reversed the Commissioner of Income Tax (Appeals) [CIT (Appeals)] order which had deleted the penalty. The primary question was whether the ITAT erred in holding that the penalty was leviable when the appellant-assessee claimed it had commenced business at the relevant time.

The Tribunal justified the penalty under Section 271(1)(c) by stating that the appellant-assessee's claim for expenses was inconsistent with the applicable 2006 Guidance Notes issued by the ICAI, and not bona fide. The Tribunal cited several precedents to support that voluntary disclosure does not absolve an assessee from penalty if the claim was not bona fide.

3. Bona Fides of the Appellant-Assessee in Making the Claim:
The court examined whether the appellant-assessee's explanation for claiming 'indirect' expenses was bona fide. The appellant-assessee followed the Percentage of Completion Method (PoC Method) for accounting, recognized under AS-7. The appellant-assessee argued that the expenses were claimed based on the 2012 Guidance Notes, which were not applicable at the time of filing returns. The court noted that the expenses were later allowed in subsequent assessment years, indicating a timing issue rather than a false claim. The court highlighted that the appellant-assessee did not gain substantial benefit by shifting expenses, suggesting the claim was made in good faith.

4. Full and True Disclosure by the Appellant-Assessee:
The court noted that the appellant-assessee's accounts were audited and disclosures were made regarding the PoC Method and the expenses claimed. The audit report and financial statements provided detailed disclosures about the accounting methods and expenses. The court found no evidence that the appellant-assessee failed to make full and true disclosures of material facts. The Tribunal did not dispute the figures or the nature of the expenses claimed.

Conclusion:
The court concluded that the appellant-assessee had acted bona fidely and should not have been penalized under Section 271(1)(c). The substantial question of law was answered in favor of the appellant-assessee, and the penalty for concealment of income was set aside. The court emphasized that the expenses claimed were otherwise eligible and allowed in subsequent years, and the appellant-assessee had made full and true disclosures. The appeals were allowed, and no costs were imposed.

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