2016 (11) TMI 1149 - AT - Income Tax

Penalty levied u/s 271(1)(c) - Held that - A.O. was not correct in coming to the conclusion that the assessee has concealed particulars of his income or furnished inaccurate particulars of income, as the undisclosed income determined by the A.O. based on the directions of the ITAT is on estimation basis. The ITAT has estimated the work in progress for the assessment year 2005-06 and re-apportioned the gross profit on equitable gross profit distribution method based on the assessee s own book results. There is no factual difference in contract receipt admitted by the assessee and contract receipt determined by the A.O. from the MIMS project. Except preponement of recognition of revenue, there is no difference in income admitted by the assessee from the MIMS project, therefore, we are of the view that the A.O. was erred in levying penalty for concealment of particulars of income or furnished inaccurate particulars of income under the provisions of section 271(1) of the Act, hence, we direct the A.O. to delete the penalty levied u/s 271(1)(c) of the Act for the assessment year 2003-04 to 2005-06.

Issues Involved:
1. Validity of penalty proceedings under Section 271(1)(c) of the Income Tax Act.
2. Whether the assessee concealed particulars of income or furnished inaccurate particulars of income.
3. Estimation of gross profit on MIMS project and its impact on penalty.
4. Revenue neutrality of the additions made by the Assessing Officer (A.O.).

Detailed Analysis:

1. Validity of Penalty Proceedings under Section 271(1)(c):
The assessee challenged the validity of the penalty proceedings, arguing that the notice issued under Section 274 read with Section 271 of the Act was vague and invalid. The assessee contended that the A.O. failed to specify whether the penalty was for concealment of particulars of income or for furnishing inaccurate particulars of income. The tribunal noted that since the assessee succeeded on merits, the legal issue regarding the validity of the notice was academic in nature and did not require adjudication.

2. Concealment of Particulars of Income or Furnishing Inaccurate Particulars:
The A.O. levied penalty on the grounds that the assessee had not disclosed true and correct income from the MIMS project on an accrual basis, despite following the mercantile system of accounting. The A.O. argued that the ITAT's determination of undisclosed income based on the equitable gross profit distribution method indicated willful concealment. However, the tribunal found that the income assessed by the A.O. was based on estimation and reworking of work-in-progress, which was revenue-neutral. The tribunal concluded that the assessee had not willfully concealed income or furnished inaccurate particulars, as the difference arose from the timing of revenue recognition rather than actual undisclosed income.

3. Estimation of Gross Profit on MIMS Project:
The ITAT had previously directed the A.O. to rework the income from the MIMS project using an equitable gross profit distribution method. This resulted in additional undisclosed income for the assessment years 2003-04 to 2005-06. The A.O. levied penalties based on this estimation. The tribunal noted that the ITAT's methodology was based on the accounting standard 7 issued by the ICAI, which required revenue recognition on a percentage completion method. The tribunal emphasized that the difference in income was due to the preponement of revenue recognition and not due to any factual discrepancy in the contract receipts. Consequently, the tribunal held that penalties based on such estimations were not justified.

4. Revenue Neutrality of Additions:
The assessee argued that the additions made by the A.O. were revenue-neutral, as the same income was recognized in subsequent years (2008-09 and 2010-11). The tribunal agreed, noting that the net effect of the additions was neutralized by the deductions allowed in later years. The tribunal referenced the Supreme Court's decision in CIT Vs. Realest Builders and Services Ltd. (2008) 307 ITR 202, which held that when the entire exercise is revenue-neutral, the addition itself cannot be sustained, and consequently, penalties based on such additions are not justified.

Conclusion:
The tribunal concluded that the A.O. was incorrect in levying penalties under Section 271(1)(c) for the assessment years 2003-04 to 2005-06. The penalties were based on estimated income and reworked revenue recognition, which did not constitute willful concealment or furnishing of inaccurate particulars. The tribunal directed the A.O. to delete the penalties, emphasizing the revenue-neutral nature of the additions and the lack of factual discrepancies in the assessee's contract receipts. The appeals filed by the assessee were partly allowed.

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