2024 (6) TMI 405 - AT - Income Tax

Levy of penalty u/s 271(1)(c) - Validity of Notice u/s 274 - unexplained difference between the trading sale and the average cost of purchase - HELD THAT - Notice u/s. 274 not striking off one of the two limbs attracting penalty u/s. 271(1)(c), charging it therefore of being vague - The Revenues sole case is of the assessee s inability to prove his accounts, inferring, on the basis of the available material, the cost of the goods sold for the year (Rs.247/kg) to have been recovered in-so-far as it relates to cashew kernels sold to sister concerns, at an average of Rs. 205/kg, inclusive of the cost of containers. The assessee renders no substantiated explanation, making a false plea as to absence of quality-wise grading. During hearing before us, however, he provides one with reference to the purchase cost, which appears plausible, and for consideration of which the matter stands restored to the file of the AO, also noting, at the same time, of it being inconsistent with the assessee s both original and revised claims, which would therefore need to be reconciled, only which would render the explanation acceptable to that extent. There is thus a clear understanding of the said case by the assessee, also apparent from the detailed replies in the assessment and the penalty proceedings; in fact; offering a sum of Rs. 1.8 crores in assessment proceedings, reiterated in penalty proceedings. Why, his case remains the same year after year, which it pleads for acceptance, as by the Tribunal in the quantum proceedings for the later years. No prejudice, whatsoever, stands caused, or in fact even suggested, as was questioned by the Bench during hearing. To say, therefore, that the charge is vague, is ludicrous. Reference in this context may be made to the decision in T.A. Abdul Khadar v. CWT 2006 (10) TMI 78 - KERALA HIGH COURT ; and Sundaram Finance Ltd. 2018 (5) TMI 259 - MADRAS HIGH COURT the facts of which be noted. Much less being raised in good faith and for bona fide reasons, we find the said legal ground as, rather, an abuse of the process of law. We therefore decline admission, relying thereon, as indeed on Jute Corp. of India 1990 (9) TMI 6 - SUPREME COURT Burden of Proof and Quality of Goods - There have to be, it may be appreciated, strong reasons for selling goods at rate/s below par, much less recovering indirect cost as well, as also including an element of profit, more so where it is on a regular basis and, further, from sister concerns. This is precisely what the assessee seeks to justify without material though, stating of having sold inferior grade cashew kernels. That apart, valuation of goods varying in quality and price, de hors the same, i.e., at the average cost for the year across all varieties, obfuscates and distorts the correct operating result, and toward which the assessee s explanation, i.e., absence of such a practice in the industry, is equally misplaced. Couple these debilitative facts with the omission to record purchase and sale worth several crores, it seriously undermines the credibility of the assessee s accounts, ostensibly audited; more so when the omission admittedly had a chain reaction, resulting in revising initial claims u/ss. 80-IA/HHC, and not merely an addition of Rs. 1.02 lac in trading profit. The accounts, much less of sister concerns even whose identity is not disclosed, equally under cloud, are not produced at any stage. Penalty stands accordingly imposed and confirmed in appeal, as was the relevant adjustment to the returned income in quantum proceedings up to the second appeal, not stated to have been contested further. He, before us in second appeal in penalty proceedings, while not improving his case in any manner, seeks to capitalize on the alleged defect in the notice u/s. 274, claiming it as vague, not conveying the basis for the initiation of penalty proceedings. The same is wholly misplaced on facts; rather, a false statement and, accordingly, only needs to be stated to be rejected, which is done at the threshold, denying admission to the charge. If the adjustment is reasonable, consistent with the facts and circumstances of the case - How could an assessment made inferring recovery of direct cost, implying nil gross profit, be said to be excessive? No case of it being excessive or not reasonable stands made in either quantum or penalty proceedings. Two things, however, need to be made clear. Firstly, that penalty, imposable in principle, would be w.r.t. the assessee s revised return, to the extent the adjustment qua the trading profit on sale of 61,266 tins (Rs. 14,24,30,582), including revised claims u/ss. 80IA and 80HHC, incident thereon, remain unexplained. Though generally levied with reference to the original return, as rightly argued by Sri.Vijayaraghavan, no penalty in the instant case has been proposed on the additional income of Rs. 1.02 lakh offered in reassessment. Two, even as the assessee shall be allowed incidental deductions u/ss. 80IA and 80HHC, i.e., to the extent consistent with the assessee s explanation, penalty shall have to be necessarily computed in accordance with law. This is as the quantification of penalty is subject to Explanation 4 to section 271(1)(c). Finally, we have explained, even if broadly, as to why the assessee s legal challenge to the notice u/s. 274 is de hors the facts and, thus, invalid and, even otherwise, without merit. Accepting the assessee s explanation of having purchased the omitted goods sold for Rs. 6.10 cr., at Rs. 6.09 cr., i.e., of the same being also bought at like prices, subject to being verified, does raise the inference of they being of the same, inferior grades. Why, we wonder, this was not stated earlier, resulting in no finding in its respect. The assessee, nevertheless, has some explaining to do; his revised claims u/ss. 80IA 80-HHC being inconsistent therewith, as indeed per the original return, i.e., of having sold inferior grades goods through sister concerns at marginal gross profit. Having claimed deduction u/s. 80HHC qua his total export sale (52671 tins) for the year per his original return, no modification in his claims for deduction u/s. 80HHC, as indeed u/s. 80IA, ought to have followed per the revised return, particularly considering that the only omission in the original return, as stated, was to account for purchase and sale of the same (quantity of) goods, at Rs. 6.09 cr. and Rs. 6.10 cr. respectively. The assessee s case rests critically on the truth and validity of his explanation, made presumably w.r.t. his accounts. Each of the observations made herein, as indeed by the AO, have to be addressed, and toward which reference is also made to para 6.5 of this order. The AO also contradicts himself. While charging the assessee to have diverted profit to sister concerns, i.e., under-reporting it, seeking to neutralize the inferred deficit of Rs. 321.15 lacs, even without proportionate administrative cost, and which the assessee works at Rs. 180.40 lacs, he determines the trading net profit on export at Rs. 327.40 lacs That is, goes by the reported figures, which, he, in the same breath, claims as inflated. This is in view of a clear lack of transparency in the assessee s claims and working, which is to be necessarily w.r.t. his accounts, duly substantiated. That apart, he allows deduction u/c. VI-A in a sum higher than that originally claimed, which cannot be in view of it being reassessment proceedings, i.e., other than where it is in respect of and w.r.t. a higher profit. Deduction u/s. 80- HHC, being consequential to the acceptance, to whatever extent, of the assessee s claim of export trading profit, would need to be revisited, toward which we may refer to decisions, inter alia, in Topman Exports 2012 (2) TMI 100 - SUPREME COURT and IPCA Laboratory Ltd. v. Dy. CIT 2004 (3) TMI 9 - SUPREME COURT Where and to extent accepted, the higher of the two sets of income, i.e., net of deductions, u/ss. 80-IA 80-HHC, shall prevail inasmuch as the reassessment proceedings are for the benefit of the Revenue (Sun Engg. Works Pvt. Ltd. 1992 (9) TMI 1 - SUPREME COURT ). Further, again, penalty would stand to be finally restricted to the sum, i.e., qua the adjustment, net of incidental deductions, as finally assessed, for which reference, apart from the decisions afore-cited, be made to s. 80-AB. Needless to add, the assessee s objections to the proposed re computation, i.e., consistent with the manufacturing trading export profit as finally accepted by the AO, on the basis of evidence furnished, be sought, to eliminate both, the scope for error, as well as comply with the principles of natural justice. His order shall be a speaking order, meeting the assessee s objections, which we expect would conform to the clear provisions of law, as explained by the higher courts of law. We decide accordingly. We are conscious that some of our observations may not be in agreement with the case of either party before us. That, however, would be to no moment inasmuch as it is the correct legal position that is relevant, and not the view that the parties may take of their rights in the matter CIT v. C. Parakh Co. (India) Ltd. 1956 (3) TMI 1 - SUPREME COURT Assessee s appeal is partly allowed for statistical purposes.

Summary

Issues Involved:
1. Levy of penalty u/s 271(1)(c) of the Income Tax Act, 1961.
2. Validity of notice u/s 274 for initiating penalty proceedings.

Summary:

1. Levy of Penalty u/s 271(1)(c):
The appeal contests the dismissal of the assessee's appeal against the levy of penalty u/s 271(1)(c) for Assessment Year 2000-01. The assessee, engaged in the manufacture and export of cashew kernels, filed a return of income on 16.03.2001, which was later revised following a notice u/s 148. The revised return included previously omitted transactions of purchase and sale with sister concerns in Andhra Pradesh, leading to an increased income declaration. The Assessing Officer (AO) made several adjustments to the returned income, including rejecting the claim for deduction u/s 80IA, assessing bank interest as 'Income from Other Sources', and re-working the deduction u/s 80HHC, among others. Penalty proceedings u/s 271(1)(c) were initiated primarily due to the addition on account of under-pricing of sales to sister concerns.

In penalty proceedings, the assessee reiterated that the omission was not deliberate and offered an additional amount voluntarily. The AO, however, found the explanation unsatisfactory and levied the penalty, which was upheld by the CIT(A). The Tribunal noted that the assessee failed to substantiate his claims regarding the sale of inferior grade cashew kernels and the valuation method adopted. The Tribunal observed that the burden of proof lies on the assessee to justify his return and claims. The matter was remitted to the AO for further verification of the assessee's claims regarding the purchase and sale of inferior grade goods.

2. Validity of Notice u/s 274:
The assessee raised a legal ground challenging the validity of the notice u/s 274, arguing that it did not specify the limb of section 271(1)(c) under which the penalty was levied. The Tribunal found this argument to be without merit, noting that the assessee had understood the reasons for the penalty and had been given adequate opportunity to explain his case. The Tribunal held that the notice u/s 274 is an administrative device to seek the assessee's explanation and does not annul the proceedings if it does not specify the exact limb of section 271(1)(c). The Tribunal declined to admit this legal ground, considering it an abuse of the process of law.

Conclusion:
The Tribunal partly allowed the assessee's appeal for statistical purposes, directing the AO to verify the assessee's claims regarding the purchase and sale of inferior grade goods and to re-compute the penalty accordingly. The legal challenge to the notice u/s 274 was rejected. The order emphasized the importance of substantiating claims with proper evidence and maintaining transparent accounts.