2012 (10) TMI 808 - HC - Income Tax

Penalty u/s 271(1)(c) - Whether the disclosure/admission of Assessee of taxing the income @ 8% when faced with detailed enquiry is a voluntary surrender and not liable for penalty under section 271(1)(c) of the Act - The assessee was asked to explain as to why the cash payments made ought not to be disallowed under Section 40A(3). It was also asked to explain the substantial expenses claimed in the P&L account with the aid of vouchers and bills. Held that - The offer made by the assessee was on the basis that it could not give the details of the parties, and in order to buy peace, the AO was requested to tax the gross receipts on net profits basis. This, as noticed earlier, resulted in addition of over Rs. 51 lakh, which represented more than the amount disallowable under Section 40A(3). The assessee s cash payments were concededly not the amount which was disallowed, they had no co-relation to what could not be established, and were disallowable. The assessee did provide particulars, but could not back up its claim with confirmation with the explanation that the payees insisted on immediate payment, to fulfill their contractual commitment to their suppliers. Considering a case for business expediency, the material which led to the penalty order i.e. absence of the payees at their places or address provided, was gathered after notice under Section 271 (1) (c) was issued. Thus assessee ought to have been provided with opportunity in this regard during the assessment and that material which did not exist at time of initiation of the penalty proceeding ought not to have been put against it. Thus addition on the basis of the assessee s offer to be taxed at 8% on gross receipts cannot be concluded that it had provided inaccurate particulars in its returns & the imposition of penalty was not justified - in favour of the assessee

Issues Involved:
1. Whether the disclosure/admission of Assessee of taxing the income @ 8% when faced with detailed enquiry is a voluntary surrender and not liable for penalty under section 271(1)(c) of the Act?

Issue-wise Detailed Analysis:

1. Voluntary Surrender and Penalty under Section 271(1)(c):
The primary issue revolves around whether the assessee's admission of taxing income at 8% during a detailed enquiry constitutes a voluntary surrender, thereby exempting it from penalty under Section 271(1)(c) of the Income Tax Act. The assessee, involved in the construction business, filed its return for the Assessment Year 2004-05. During the enquiry, the Assessing Officer (AO) noted that the assessee made substantial cash payments and payments through bearer cheques to small suppliers. The AO questioned the genuineness of these transactions and the substantial expenses claimed. In response, the assessee proposed that its income be computed by applying a net profit rate of 8%, a rate typically applied by the department to building contractors, provided no penalty proceedings under Section 271(1)(c) were initiated.

2. AO's Acceptance and Initiation of Penalty Proceedings:
The AO accepted the assessee's proposal and computed the net profit at 8% of the gross receipts. However, the AO initiated penalty proceedings under Section 271(1)(c), contending that the assessee's offer was not a voluntary surrender but an admission of concealed income. The AO's investigation revealed that the suppliers to whom payments were made were non-existent, leading to the conclusion that the assessee had filed inaccurate particulars to inflate purchases and conceal income. Consequently, a minimum penalty of Rs. 18,33,000 was imposed.

3. CIT(A) and ITAT's Observations:
The CIT(A) upheld the AO's penalty imposition, emphasizing that the assessee had deliberately furnished inaccurate particulars of income. The CIT(A) noted that the likelihood of escaping scrutiny by furnishing inaccurate particulars was high, and the detailed scrutiny revealed the concealment of income. However, the ITAT allowed the assessee's appeal, reasoning that the addition was made by applying an 8% net profit rate, not based on specific disallowed items. The ITAT observed that the AO did not reject the assessee's books and accepted the offer as reasonable, implying that the explanation was not mala fide.

4. Tribunal's Reasoning and Revenue's Argument:
The Tribunal concluded that the AO's acceptance of the 8% net profit rate and the subsequent imposition of penalty were inconsistent. The Tribunal found no evidence of inaccurate particulars furnished by the assessee, as the AO did not investigate the bills and vouchers in detail. The Revenue argued that the Tribunal misappreciated the law, asserting that the assessee's offer to be taxed at 8% was an attempt to evade detection of concealed income. The Revenue cited the case of Electrical Agencies Corporation v. CIT to emphasize the presumption against withholding material particulars.

5. Assessee's Argument and Court's Analysis:
The assessee contended that the penalty was unwarranted, highlighting that the AO accepted the 8% net profit rate as reasonable. The assessee argued that the AO's penalty imposition was based on material gathered after the assessment order, which was unfair. The Court noted that the AO had no material to conclude that the assessee had concealed income when initiating penalty proceedings. The Court emphasized that the AO should base his opinion on available materials and that the subsequent inspection report could not be used against the assessee.

6. Conclusion and Judgment:
The Court concluded that the AO's initiation of penalty proceedings was unjustified, as it was based on material obtained after the assessment order. The assessee's offer to be taxed at 8% was accepted by the AO as reasonable, and there was no evidence of inaccurate particulars furnished. The Court upheld the Tribunal's order, answering the question of law against the revenue and in favor of the assessee. The appeal was dismissed with no costs.

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