2012 (5) TMI 74 - AT - Income Tax

Canceling the penalty u/s 271(1)(c) holding that there was no positive concealment detected by the AO Held that - There has to be concealment of particulars of income by the assessee or the assessee must have furnished inaccurate particulars of income - addition sustained was based on ad hoc estimation of income by applying a flat rate of 8% of profit which can neither be held as concealment of income or filing of inaccurate particulars of income - disparity between the assessed income and the returned income it can be said that the addition was purely on ad hoc estimation of net profit ratio, the AO applied a particular flat rate of 11% against the declared profit rate of 3% by the assessee -the assessee s offering of the profit rate was a conditional proposal to buy peace and not to enter into dispute with revenue authorities - the circumstances under which the advances to Directors have been made required for meeting out the contingencies of the business - CIT (A) was justified in deleting the penalty levied in favour of assessee.

Summary

Issues Involved:
1. Justification of canceling penalty under section 271(1)(c) imposed at Rs.24,00,977/-.
2. Alleged concealment of income in the form of illegal payment to Railway Officials, inflated payments, and undisclosed benami investment.
3. Disparity between assessed income and returned income.

Issue-wise Detailed Analysis:

1. Justification of Canceling Penalty under Section 271(1)(c):
The appeal by the revenue challenges the order of the CIT (A) which deleted the penalty imposed under section 271(1)(c) of Rs.24,00,977/-. The CIT (A) concluded that the estimation of income by applying a flat net profit ratio does not amount to concealment or filing inaccurate particulars. The CIT (A) noted that the Assessing Officer (AO) did not provide a basis for the estimation nor gave the appellant a chance to rebut it. The ITAT supported this view, stating that the estimation of net profit at 8% was reasonable, and that penalty proceedings are separate from assessment proceedings. The AO failed to prove positive concealment or that the explanation provided by the appellant was not bona fide.

2. Alleged Concealment of Income:
The revenue's grounds for appeal included reliance on the statement of Shri A.K. Solanki, which alleged a net profit ratio of 11.64%, and allegations of illegal payments to Railway officials, inflated payments, and undisclosed benami transactions.

- Net Profit Ratio of 11.64%: The ITAT found that the reliance on Shri A.K. Solanki's statement was misplaced as the circumstances under which the statement was made were not clear, and no verification of the statement's correctness was done. The ITAT noted that the AO did not strictly apply the rate stated by Solanki and failed to provide a basis for the 11% rate applied.

- Illegal Payment to Railway Officials: The ITAT observed that the AO treated these payments as extortion payments, which are considered business necessities and thus deductible. The AO did not provide a finding that these payments were made willfully or illegally by the assessee.

- Inflated Payments: The ITAT struck down the allegation of inflated payments of Rs.38 lakhs as baseless and unsubstantiated. The advances made to directors were accounted for and used to meet business contingencies. The AO failed to prove any inflation of expenses or suppression of profits.

- Undisclosed Benami Transactions: Similar to the inflated payments, the ITAT found no evidence to support the allegation of undisclosed benami transactions. The advances were accounted for, and the AO did not provide proof of any suppression of profits.

3. Disparity Between Assessed Income and Returned Income:
The disparity between the assessed income of Rs.1,38,79,261/- and the returned income of Rs.88,91,700/- was due to an ad hoc estimation of the net profit ratio. The AO applied an 11% flat rate, which was reduced to 8% by the ITAT. This reduction was also based on ad hoc estimation and not on concrete evidence of concealment or inaccurate particulars. The ITAT concluded that the sustained addition was due to an estimation of income, which cannot be considered concealment or inaccurate particulars.

Conclusion:
The ITAT upheld the CIT (A)'s decision to cancel the penalty under section 271(1)(c), concluding that the estimation of income by applying a flat net profit rate does not constitute concealment or filing inaccurate particulars. The allegations of illegal payments, inflated payments, and undisclosed benami transactions were found to be baseless and unsubstantiated. The disparity between assessed and returned income was due to ad hoc estimation, which cannot be considered concealment. The appeal by the revenue was dismissed.