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TMI Blog2010 (10) TMI 1197X X X X Extracts X X X X X X X X Extracts X X X X ..... ue is about sustaining addition of ₹ 39,30,000/- made by AO u/s 41(1) of the Act. (5) This issue is about addition of ₹ 80,000/- made under section 69C. 3. The facts of the case are that the assessee is running a proprietary concern of civil contractorship under the name of Quality Construction . It is carrying out construction activities with various public limited listed companies. During the course of assessment proceedings the AO noted that in the audit report auditors have mentioned that assessee is not maintaining any quantitative details regarding stock. This fact was also accepted by the ld. AR during the course of assessment proceedings. The AO then issued a show cause notice to the assessee asking why the books be not rejected. It was pointed out that books of account cannot be rejected merely on the ground that assessee is not maintaining quantitative stock register. The AO did not agree and held that assessee s stock details are not available because of non-maintenance of quantitative details. In absence of quantitative details, the books of accounts cannot be relied upon and, therefore, section 145 can be invoked. 4. The ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties or otherwise with the final output. Accordingly it is not possible to fairly deduce the income of the assessee in absence of quantitative stock register and verification of closing stock. Our view is also supported by the decision in Ramchandra Ramniklal vs. CIT (1961) 42 ITR 780 (Pat). We accordingly uphold the finding of authorities below in rejecting the books. This ground of assessee is accordingly rejected. 6. Ground No.1, 2 3 are about rejection of books and estimation of net profit. The AO found that assessee has shown a net profit of 1.13% on a gross receipt of ₹ 4,63,01,650/-. Since in a case gross receipts are less than ₹ 40 lacs a net profit rate of 8% is applied under section 44AB. Considering this fact the AO applied net profit of 5% and enhanced the income by 3.87% resulting in addition of ₹ 17,91,873/-. The ld. CIT(A) confirmed the addition holding that application of net profit rate of 5% is reasonable. 7. We have heard the parties and carefully perused the material on record. In our considered view the authorities have not brought out any definite material for applying net profit rate 5% except estimating the net profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 41(1). Further, there is no allegation that these liabilities are not genuine. 10. After considering the rival submissions and going through the material on record, we are of the view that this addition is not called for. The reasons are that for taxing the amount under section 41(1) it has to be shown that concerned amounts have been taken into account in profit and loss account or trading account in an earlier year. Secondly the creditor remits the liability in favour of the assessee i.e. he foregoes his claim thereon, or the liability has ceased to exist on account of some contractual agreement between the parties or because of operation of law and accordingly assessee derives benefit from such remission or cessation. In the present case there is no overt act on behalf of the creditor or the assessee so as to infer that there is a remission by the creditor or cessation of liability by agreement or by operation of law. It is only a change of head from trading liability to unsecured loan. The genuineness of the trading liabilities have not been doubted either in the year when they were debited in the profit and loss account or in the current year. Therefore, it ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T. V. Sundaram Iyengar and Sons Ltd. (1996) 222 ITR 344 has been cited by ld. Counsel for the appellant. We find no relevance of this decision to the determination of the question involved in the present case. The factual matrix and the provision of law considered therein is entirely different. (ii) CIT v. Chetan Chemicals Pvt. Ltd. [2004] 267 ITR 0770-[Guj] On a reading of section 41(1) of the Income-tax Act, 1961, it is apparent that before the section can be invoked an allowance or a deduction must have been granted during the course of assessment for any year in respect of loss, expenditure or trading liability which is incurred by the assessee, and subsequently during any previous year the assessee obtains, whether in cash or in any other manner, any amount in respect of such trading liability by way of remission or cessation of such liability. In that case, either the amount obtained by the assessee or the value of the benefit accruing to the assessee can be deemed to be the profits and gains of business or profession and can be brought to tax as income of the previous year in which such amount or benefit is obtained. Held,_ that it was an admit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount in respect of such trading liability by way of remission or cessation of such liability. Unless and until the liability which has ceased or been remitted during the assessment year, has been debited and claimed to the profit and loss account and allowed in earlier years, it cannot be treated to be an income under section 41(1). If that liability was not allowed or its deduction was not granted in earlier years, it would not assume the character of income chargeable to tax in a later year by virtue of section 41(1). (vi) Narayanan Chettiary Industries vs. ITO 277 ITR426 (Mad) All the income tax authorities treated the amount of ₹ 23,66,695 (the amount which was written off by the sister concern of the assessee) as income in the hands of the assessee and taxed it under section 41(1) of the Income-tax Act, 1961. On appeal the assessee contended that there was no finding that there was deduction of allowance made in the assessment of the assessee for any year and hence the provisions of section 41(1) had no application. Held that section 41(1) creates a legal fiction and hence has to be strictly complied with if any addition to the income i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lastly the toolings constituted capital assets and not stock-in-trade. Therefore, taking into account all the above facts, section 41(1) of the Act was not applicable. Following the above authorities and after applying the principles laid down in these authorities on the facts of the present case, we hold that there is no case for taxing this conversion of trading liability into unsecured loan as income of the assessee. This ground of assessee is, therefore, allowed. 11. The next addition is about estimation of household expenditure. The ld. AR has submitted that telescoping effect should be given in case some trading addition is confirmed. Since while disposing of ground No.1 we have directed to apply net profit rate of 3.5% it will result into some addition. The AO will give telescoping effect. If net profit addition is more then no addition on account of household expenditure should be made. Accordingly, this ground of assessee is disposed of. The appeal filed by the assessee is partly allowed. ITA No.3372/Ahd/2008 Asst. Year 2005-06 (Assessee s appeal) 12. In this year the assessee has raised following issues one is about estimation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of the addition made on account of net profit addition ₹ 1791873/- 2. The ld. CIT(A) XV, Ahmedabad has erred in law and on facts in deleting the penalty levied in respect of addition made on account of household withdrawals of ₹ 80000/- ITA No.2797/Ahd/2009 Asst. Year 2004-05 (Assessee s appeal) 18. The assessee has raised the following grounds :- 1. On facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in sustaining the penalty u/s 271(1)(c) of the Act on addition of ₹ 39,30,000/- on the ground of alleged remission of trading liability, even though the ld. AO CIT(A) had accepted the fact that the trading liabilities were not remitted but existed in the books and were classified as unsecured loans. 2. On facts and in the circumstances of the case and in law, the ld. CIT(A) has while sustaining the penalty erred in treating the act of the appellant of classifying trade liabilities as unsecured loans as remission of trade liabilities. 19. The ld. CIT(A) confirmed the penalty in respect of addition of ₹ 39,30,000/- whereas he has deleted the penalty in respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en if it is held that two views are possible, the inference drawn by the Tribunal, being the final fact finding authority, could not be held to be perverse. The cancellation of penalty was valid. Similar view has been taken in the following judgments also: Addl. CIT v. Badri Kashi Prasad (1993] 200 ITR 0206 (All) Prabhat Oil Traders v. ITO(No. 3) (1996) 218 ITR (A.T.) 0039 ITAT, Ahd. City Dry Fish Company v. CIT (1999) 238 ITR 0063 (A.P.) CIT vs. Mohd. Bux Sokat Ali (2004) 265 ITR 326 (Raj) ACIT vs. VIP Industries (2009) 122 TTJ 289 (Mum) 22. Our view that no penalty is leviable if impugned amount is disclosed in the return of income is supported by the decision of Hon. Allahabad High Court in the case of Smt. Govinda Devi vs. CIT (2008) 304 ITR 0340 (All). In that case assessee received lottery prize money in January, 1992 and disclosed the same in the return filed for Asst. Year 1992-93 and paid the taxes. The assessing authority passed an ex parte assessment order and ex parte penalty order in Asst. Year 1991-92. It was held by the Hon. Court that once prize money has been disclosed in the return of income fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lment, penalty cannot be imposed. Since no specific form of disclosure has been contemplated by the Income-tax Act, 1961 or the Rules there-under and the form of return prescribed, an assessee cannot be held guilty of non disclosure of income which was determined by applying the provisions of section 40A(2)(b). The assessee had made payments to its sister concern for a job work done. The Assessing Officer held that the assessee had made payment with a view to reduce its tax liability on the ground that the payment was far in excess of the actual expenditure incurred by the sister concern. The Assessing Officer imposed penalty. The Commissioner (Appeals) upheld the order. On further appeal, the assessee, inter alia, contended that penalty could not be imposed when the amount had been disallowed by invoking the provisions of section 40A(2)(b) of the 1961 Act ; that the quantum of the amount paid had been restricted by the Assessing Officer on estimation and there was no concealment of any income or furnishing of inaccurate particulars to invite penalty under section 271(1)(c) : Held, allowing the appeal, that the Assessing Officer had doubted only the reasonablene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aving been made. However, if you are inclined not to drop the penalty proceedings, we hereby request as an alternate to keep the penalty proceedings in abeyance till the issue is settled in the appellate forum. Therefore, explanation 1(A) to section 271(1)(c) would not be applicable. Further it is not found that the explanation of the assessee is not bona fide or that he has suppressed any material fact necessary for assessment. There is also no finding that assessee has not substantiated his explanation. The explanation of the assessee that assessee could not maintain quantitative details in this type of business cannot be said to be bona fide or any mis-representation. In view of this, explanation 1(B) to section 271(1)(c) would also not be applicable. Under these circumstances, no penalty could survive on addition made on application of net profit rate. As a result, we uphold the order of ld. CIT(A) in respect of deleting the penalty on addition made by applying net profit rate. 27. As a result, appeal filed by the Revenue is dismissed whereas the appeal filed by the assessee is allowed. 28. In the result ITA No.4544/Ahd/2007 and ITA No.3372/Ahd/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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