2022 (3) TMI 17 - AT - Income Tax

Penalty u/s 271(1)(c) - bogus purchases @ 25% on total purchase - HELD THAT - CIT(A) applied G.P. rate of 16% as against 15.23% declared by the assessee for estimation the income of the assessee. In this way, the ld. CIT(A) has restricted the addition. Although, according to the ld. AR, the ld. CIT(A) has not given any specific finding in this regard and has only mentioned that to plug to leakage of the revenue and in the interest of justice the ld. CIT(A) applied 16% GP rate in the given circumstances and thus, according to the ld. AR, it is a case of estimation only where the AO has estimated the profit and these estimates were further reduced by ld. CIT(A). After analyzing the order of the A.O. as well as the ld. CIT(A), we also found that both the lower authorities had made respective additions on the basis of estimation and it is settled law that no penalty can be levied on disallowance made on the ground of unverifiable purchases. Hon ble Jurisdictional High Court in the case of CIT Vs. Malpani House of Stones 2017 (3) TMI 1885 - RAJASTHAN HIGH COURT has categorically held that on the basis of bogus purchases/enhancement of GP rate and the addition was made in quantum proceedings cannot be made basis for levy of penalty u/s 271(1)(c) of the Act. Tribunal have considering these facts deleted the penalty. We found merit in the contention raised by the ld. AR and no new facts and circumstances has been put forth by the ld. DR to controvert or rebut the contentions made by the ld. AR, therefore, we direct to delete the penalty. Addition u/s 41(1) of the Act on account of cessation of liability of trade creditors by treating the payments as doubtful - HELD THAT - We observed that the cash payment amount of ₹ 5,90,320/- was sustained by the ld. CIT(A). In this count the ld. CIT(A) has not given any specific finding with regard to the concealment of income or it has not been established that the payments were not genuine. The purchases made were accepted against which these cash payments were made. When purchases are not doubtful and they have been accepted so there is no reason to doubt on the payments. Since this was a small issue, therefore the assessee has not agitated further. But in penalty proceedings lenient view should be taken and no penalty should be levied on the quantum addition which has been sustained only on doubts and surmises and nothing has been brought on the record to prove the concealment of income or furnishing of inaccurate particulars of income. In Section 271(1)(c) of the Act, the authority is given the discretion to levy a penalty if there is concealment of particulars of income and even as regards the quantum of the penalty there is a discretion of greater importance is the necessity for a definite finding that there is concealment, as without such a finding of concealment, there can be no question of imposing any penalty. The mere revision of the income to a higher figure by the assessing authority does not automatically warrant an inference of concealment of the expenditure on the construction. The addition to the income of the assessee based on estimate basis. Concealment implies some deliberate act on the part of the assessee in withholding the true facts from the authorities. The fact that the valuer assessed the building at a figure higher than the one reported by the assessee does not by itself lead to the inference that there had been concealment We also observed that it is a case where the assessee has disclosed all the material facts for the purposes of assessment. The A.O. has applied the provision of section 145(3) merely on ground of non maintenance of stock register or kachha bills. Kachha bills are subject to verification. However despite this the A.O. rejected the books of account and applied GP rate of 10%. A.O. has failed to point out in the assessment order any item of income which was concealed by the assessee. A.O. himself has resorted to estimate for making addition. Thus this is not a case where there was any specific item of income which is concealed by the assessee. It would be appropriate to refer the latest decision of SC in the case of Dharmendra Textiles 2008 (9) TMI 52 - SUPREME COURT wherein it has been held-(i) the Explanations appended to section 271(1)(c) indicate the element of strict liability,(ii) the object behind the enactment shows that it provides for remedy for loss of revenue,(iii)that penalty under the section is civil liability,(iv)willful concealment is not an essential ingredient for attracting penalty (v) no discretion with the authority imposing penalty. Hence, revenue is not required to prove the element of mens rea on the part of assessee. This decision was understood to mean that levy of penalty is automatic. Penalty is imposed only when there is some element of deliberate default and not when there is merely a mistake or bona fide claim. Considering the above case laws it is clear that the explanation offered by the assessee was possible one which were rejected by the revenue authorities without assigning any reason or without examining the evidences submitted by the assessee. The A.O. has not proved any mens rea of the assessee in this regard. Therefore penalty is not leviable under the given circumstances and facts of the case of the assessee. Considering the totality of the facts and circumstances of the case, we direct to delete the penalty made and confirmed by the ld. CIT(A). - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the penalty order under Section 271(1)(c) of the Income Tax Act, 1961.
2. Legality of the penalty imposed without specific findings on concealment of income or furnishing inaccurate particulars.
3. Justifiability of the penalty imposed on estimated additions and unverifiable purchases.
4. Applicability of penalty on additions sustained under Section 41(1) of the Income Tax Act, 1961.

Detailed Analysis:

1. Validity of the Penalty Order under Section 271(1)(c):
The assessee contended that the penalty order under Section 271(1)(c) was void ab initio as no specific satisfaction was recorded regarding the concealment of income or furnishing inaccurate particulars. The Karnataka High Court in CIT vs. Manjunath Cotton and Ginning Factory held that a notice under Section 274 should specifically state whether the penalty is being imposed for concealment of income or furnishing inaccurate particulars. The Tribunal found that the show-cause notice issued by the Assessing Officer (AO) was routine and lacked specific grounds for imposing the penalty, thus vitiating the initiation of penalty proceedings.

2. Legality of Penalty Without Specific Findings:
The assessee argued that the penalty was imposed without a clear finding of concealment or furnishing inaccurate particulars. The Gujarat High Court in New Sorathia Engineering Co. vs. CIT held that the absence of a specific finding on the nature of the default renders the penalty unsustainable. The Tribunal observed that both the AO and the CIT(A) made additions based on estimates without specific findings on concealment, thereby supporting the assessee's contention that the penalty was unjustified.

3. Penalty on Estimated Additions and Unverifiable Purchases:
The Tribunal noted that the AO made an addition of ?11,12,645 on account of alleged bogus purchases by estimating 25% of total purchases. The CIT(A) reduced this by applying a gross profit (GP) rate of 16% instead of 15.23% declared by the assessee. Citing the jurisdictional High Court in CIT vs. Malpani House of Stones, the Tribunal held that penalties cannot be levied on additions made on the basis of unverifiable purchases or GP rate enhancement. The Tribunal further referenced various cases, including Gulraj Vaswani vs. ACIT, which supported the view that penalties on estimated additions are not justified.

4. Penalty on Additions Under Section 41(1):
The Tribunal examined the addition of ?32,38,590 under Section 41(1) for cessation of liability of trade creditors, which was reduced to ?5,90,320 by the CIT(A) based on payments made in cash. The Tribunal found no specific finding of concealment or non-genuine payments. It emphasized that the purchases were accepted, and the addition was based on doubts and surmises. Relying on CIT vs. K.R. Chinni Krishna Chetty, the Tribunal reiterated that penalties require a definite finding of concealment, which was absent in this case.

Conclusion:
The Tribunal concluded that the penalty imposed under Section 271(1)(c) was not justified as the additions were based on estimates and lacked specific findings of concealment or furnishing inaccurate particulars. The Tribunal directed the deletion of the penalty, allowing the assessee's appeal. The Tribunal also highlighted that penalty proceedings are penal in nature, and the burden of proving mens rea lies with the revenue, which was not established in this case.