2014 (4) TMI 679 - HC - Income Tax

Cancellation of penalty u/s 271(1)(c) of the Act Concealment of income Acceptance of profits @ 11% - Projects on turn-key basis taken by the assessee contractor Held that - The decision in MAK Data P. Ltd. Versus Commissioner of Income Tax-II 2013 (11) TMI 14 - SUPREME COURT followed - The number of discrepancies and irregularities listed by the special auditor in his report which are reproduced in the assessment order bear testimony to the fact that the books of accounts maintained by the assessee were wholly unreliable - there can be no sanctity attached to the figure of gross contract receipts on which the assessee estimated 3% as its income - the AO did not enhance the figure of gross receipts but that is not because he gave a clean chit to the books of accounts maintained by the assessee. He could not have given a clean chit in the face of the defects, discrepancies and irregularities reported by the special auditor - the mere fact that the estimate was reduced by the Tribunal to 8% would in no way take away the guilt of the assessee or explain its failure to prove that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on its part - the assessee was taking a chance - sitting on the fence - despite the fact that there was a search towards the close of the relevant accounting year in the course of which incriminating documents were found - the intention of the assessee was to take a risk and disclose a lesser income than what it actually earned and rely upon the minor variations in the rate of profits adopted by the taxing authorities and the Tribunal as a defence in the penalty proceedings - The plea - accepted by the Tribunal - that the assessee agreed to be assessed at 11% of the gross receipts only to buy peace and avoid litigation cannot be accepted - the Tribunal was in error in upholding the order of the CIT (Appeals) cancelling the penalty Decided in favour of Revenue.

Issues Involved:
1. Legality of the Tribunal's decision to uphold the CIT (Appeals) order cancelling the penalty for concealment of income.
2. Reasonableness of the Tribunal's view that the assessee's acceptance of the profit rate of 11% was a conditional proposal to buy peace and avoid disputes.

Issue-wise Detailed Analysis:

1. Legality of the Tribunal's Decision to Uphold the CIT (Appeals) Order Cancelling the Penalty for Concealment of Income:

The appeal by the revenue under Section 260A of the Income Tax Act, 1961, challenges the order of the Income Tax Appellate Tribunal (Tribunal) dated 29.03.2012, which confirmed the CIT (Appeals) decision to cancel the penalty of Rs.24,00,977/- imposed under Section 271(1)(c) for concealment of income. The assessee, a contractor for Indian Railways, was subject to a search on 14.03.1995, revealing discrepancies in transactions, cash and journal vouchers, and payments without proper documentation. The assessing officer, based on a special audit, estimated the net profit at 11% of the gross receipts, leading to a total business income of Rs.2,36,72,451/- before depreciation.

The Tribunal reduced the income by adopting an 8% profit rate on gross receipts, subject to depreciation and interest, and deleted a separate addition of Rs.13,34,308/-. Penalty proceedings were initiated for concealment, and the assessing officer imposed a penalty, stating that mere estimation of profits does not negate the charge of concealment. The CIT (Appeals) cancelled the penalty, arguing that the assessing officer did not provide a basis for the 11% estimate or allow the assessee to rebut it. The Tribunal upheld this decision, leading to the revenue's appeal to the High Court.

2. Reasonableness of the Tribunal's View on the Assessee's Conditional Proposal to Buy Peace and Avoid Disputes:

The High Court considered whether the Tribunal was correct in its view that the assessee's acceptance of the 11% profit rate was a conditional proposal to avoid disputes. The revenue argued that after the Supreme Court's judgment in MAK Data P. Ltd. vs. CIT, there is no concept of offering income "to buy peace." The special audit report disclosed discrepancies justifying a higher profit estimate. The assessee contended that different income estimates by authorities indicate no concealment and that the higher profit rate was adopted to cover discrepancies, not concealment.

The High Court noted that when incriminating materials are found during a search and discrepancies are reported by a special audit, it is not merely a case of differing estimates. The assessing officer is justified in concluding concealment if discrepancies are unexplained. The assessing officer's estimate of 11% was to cover discrepancies, and the assessee failed to justify its lower estimate. The High Court cited precedents where penalties were upheld despite higher profit estimates by tax authorities, emphasizing the assessee's responsibility to file accurate returns.

The High Court held that the Tribunal erred in upholding the CIT (Appeals) decision to cancel the penalty. The discrepancies and irregularities reported by the special auditor rendered the assessee's books unreliable, justifying the assessing officer's higher profit estimate. The Tribunal's reduction of the profit rate to 8% did not negate the assessee's failure to return the correct income. The plea of agreeing to the 11% rate to "buy peace" was rejected based on the Supreme Court's judgment in MAK Data P. Ltd.

Conclusion:

The High Court answered the substantial questions of law against the assessee and in favor of the revenue, allowing the revenue's appeal and reinstating the penalty for concealment of income. The appeal was allowed with no order as to costs.

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