C I T JAIPUR-II JAIPUR vs. M/S KIRAN INFRA ENGINEERS

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ITA/49/2014HC RajasthanRJHC02070762201325 May 201610 pages
AI SummaryDismissed

What did the High Court hold?

The Tribunal rightly upheld the deletion of penalty under Section 271(1)(c) of the Income Tax Act, 1961. The penalty was levied on account of estimated additions/disallowances which were reduced by appellate authorities. While the AO rejected the books of accounts, the additions were ad-hoc and estimated. The Court noted that the assessee's business involved contract work across various locations, potentially leading to difficulties in obtaining fully satisfactory vouchers, especially from local labor. The Court emphasized that penalty proceedings are quasi-criminal and require more than mere suspicion or an ad-hoc addition. There must be a positive finding of concealment of income or furnishing of inaccurate particulars. Relying on the High Court's decision in Shiv Lal Tak vs. CIT and the Supreme Court's decision in CIT vs. Reliance Petroproducts Pvt. Ltd., the Court held that merely making a claim not sustainable in law or facing disallowances on a difference of opinion does not automatically attract penalty under Section 271(1)(c). The Court found no error or perversity in the Tribunal's order, stating that no substantial question of law arose.

What were the facts?

The appeals by the Commissioner of Income Tax (Revenue) challenge the Income Tax Appellate Tribunal's order upholding the deletion of penalties under Section 271(1)(c) of the Income Tax Act, 1961. The penalties were levied by the Assessing Officer (AO) for assessment years 2007-08 and 2006-07. The AO had invoked Section 145(3) due to defects in the assessee's (M/s. Kiran Infra Engineers Ltd. and M/s. Kiran Udyog) books of accounts, particularly regarding expenditure on wages and material. The AO made ad-hoc disallowances on raw material, wages, and other expenses. The Commissioner of Income Tax (Appeals) [CIT(A)] restricted these additions, and the Tribunal upheld the CIT(A)'s order. The AO then initiated penalty proceedings due to the significant difference between declared and assessed income, levying penalties of Rs. 20,11,194/- and Rs. 12,75,548/- respectively.

What were the issues?

1. Whether the Tribunal erred in upholding the deletion of penalty under Section 271(1)(c) of the Income Tax Act, 1961, when substantial additions/disallowances were made in the assessment proceedings due to the assessee's failure to maintain proper books of accounts and vouchers? Assessee's Contention: The penalty is a separate proceeding, and mere ad-hoc disallowances do not constitute concealment of income or furnishing of inaccurate particulars. The accounts were audited, vouchers were maintained, and the disallowances were estimated and reduced by appellate authorities. Therefore, no penalty is leviable on estimated additions. Revenue's Contention: Year after year, additions are made due to the assessee's habit of not maintaining proper books of accounts and vouchers. Deleting the penalty is incorrect, especially when substantial additions were sustained (Rs. 37,89,508/- for AY 2006-07 and Rs. 59,75,032/- for AY 2007-08). The assessee is not showing real income, and huge additions are made.

Which sections of the Income-tax Act were involved?

Section 271(1)(c),Section 145(3),Section 260A

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
1 IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR (1) DB Income Tax Appeal No.49/2014 Commissioner of Income Tax Vs. M/s. Kiran Infra Engineers Ltd. (2) DB Income Tax Appeal No.50/2014 Commissioner of Income Tax Vs. M/s. Kiran Udyog Date of Order :::: 25/05/2016 Hon'ble Mr. Justice M.N. Bhandari Hon'ble Mr. Justice J.K. Ranka Mr. RB Mathur with Mr. Nikhil Simlote, counsel for the appellant BY THE COURT (Per: Hon'ble J.K. Ranka, J.) 1. Instant appeals under Section 260A of the Income Tax Act, 1961 (for short, 'Act') are directed against the order dt.16/01/2013 passed by the Income Tax Appellate Tribunal, Jaipur Bench, Jaipur 'A' Jaipur (for short, 'Tribunal'). It relates to the assessment years 2007-08 & 2006-07 respectively where the penalty under Section 271(1)(c) of the Act was deleted by the Commissioner of Income Tax (Appeals) [for short, 'CIT(A)''] which was upheld by the Tribunal. 2. Brief facts noticed for disposal of both these appeals are that the respondent-assessee is engaged in manufacturing of railway signaling equipments and so also engaged in contract work with Indian Railways, other Government agencies and with some private 2 companies. The assessee was also engaged in the activity of generation and sale of electricity through wind mill. The assessee had undertaken contract work in various parts of the country and it is claimed that the accounts were audited, however, the books of accounts were not found proper and defects were noticed by the Assessing Officer (for short, 'AO') particularly on account of expenditure claimed on wages, material purchased and the AO invoked provisions of Section 145(3) of the Act. In the assessment, the AO disallowed 1% of the raw material purchased, 30% out of wages expenses on adhoc basis and 30% on account of other expenses. It was found that the CIT(A) restricted the addition in both the assessment years and such disallowance was also upheld by the Tribunal. Since there was wide gape and difference in between the income declared in the return of income vis-a-vis the income finally assessed after order of the Tribunal, the AO initiated proceedings under Section 271(1)(c) of the Act. The AO sought explanation from the assessee and the assessee contended that the penalty is distinct and separate proceedings and merely because some expenditure was disallowed on adhoc basis, it does not come within the definition of either concealment of income or furnishing inaccurate particulars of income. On the contrary, it was claimed that the accounts were audited, all possible 3 vouchers were maintained and noticing certain discrepancies, the disallowance was made and such disallowance though made by the AO was reduced substantially by the CIT(A) and the Tribunal and therefore, on adhoc estimated addition/disallowance no penalty in law is leviable as there is no positive finding about concealment of income. However, the AO levied the penalty to the extent of Rs.20,11,194/- and Rs.12,75,548/- respectively. 3. The matter was carried in appeal before the CIT(A) who was satisfied with the explanation offered and deleted the penalty. 4. On an appeal by the Revenue before the Tribunal, the Tribunal upheld the order passed by the CIT(A) and dismissed the appeal. 5. Learned counsel for the appellant contended that year after year the additions are being made and the assessee is in a habit of non-maintaining proper books of accounts and vouchers and merely because application of net profit rate on adhoc basis or/and disallowance of expenses, has been made is no ground for deleting the penalty. He contended that it is not that small addition was sustained rather the disallowance/addition in the assessment year 2006-07 resulted into addition/disallowance to the extent of Rs.37,89,508/- and the addition/disallowance in the assessment year 4 2007-08 to the extent of Rs.59,75,032/-. He contended that the assessee on the one hand does not maintain proper books of accounts and is not showing the real income, on the other hand, in almost all the years including the years under appeal, books of accounts are being rejected and huge additions are made and penalty was not required to be deleted at least in a case like this. He contended that substantial questions of law arise. 6. We have heard learned counsel for the Revenue

and have perused the impugned order.

7.

Admittedly, the penalty in the instant case has been levied on account of certain estimated additions/ disallowance which were finally sustained by the Tribunal, however, the fact remains that the AO made adhoc addition which was reduced in appeal by the appellate authorities and that too on adhoc/estimated basis. It may be a factor that the books of accounts were rejected primarily on the basis that the assessee being a manufacturer of railway signaling equipment and so also engaged in contract work with Indian Railways, other Government agencies and with some private companies and it may be possible that the vouchers received from various quarters as the work admittedly is in different parts of the country and in so far as the said vouchers are concerned, may not be full

5 proof but that does not mean that the assessee concealed the income or furnished inaccurate particulars. The findings in quantum proceedings though relevant and admissible but in so far as the penalty is concerned, it is distinct and separate proceedings and the penalty being quasi-criminal in nature, merely because an addition has been sustained and the assessee does not file an appeal is no ground to impose penalty. Something more is required to be brought into by the AO to prove that there was some concealment of income. Even when the books of accounts are to be rejected and profit has to be estimated, then it should also be based on some cogent material and it must be something more than mere suspicion and should have reasonable nexus to the material available on record and circumstances of the case. It was claimed by the assessee that majority of the work in various States throughout the country was completed by engaging local labour and on account of various factors and the labour class being such may not be having banking facilities/bank accounts, small payments was required to be made in cash. Admittedly, in a case of contract or the business being run by the assessee, the entire activity was labour intensive and engaging contractual labour or/and illiterate labour and therefore, there is quite possibility that the vouchers may not have been maintained to the satisfaction of the 6 Revenue but then the fact prove that even the AO had no basis except to estimate certain percentage of expenses.

8.

If we take into consideration the assessment year 2006-07, the addition which was sustained in quantum appeal, is namely: (a) addition of Rs.37,89,508/- by application of net profit rate of 7% on gross contract receipts; (b) adhoc addition of Rs.80,000/- in manufacturing activity and (c) adhoc disallowance of expenses of Rs.6,130/- and in the assessment year 2007- 08: (a) addition of Rs.59,75,032/- by application of net profit rate of 7% on gross contract receipts; (b) addition of Rs.1,04,465/- made in manufacturing activity by adhoc addition. In our view, the estimated addition as noted herein above, cannot be said to fall within the domain of imposition of penalty under Section 271(1)(c). In order to impose penalty under the said section, there has to be concealment of particulars of income by the assessee and the assessee must have furnished accurate particulars of his income. The meaning of word “particulars” used in Section 271(1)(c) would embrace the meaning of the details of the claim made. Admittedly, no information given in the return of income was found to be incorrect or inaccurate, the assessee cannot be held guilty of furnishing of inaccurate particulars in order to expose the assessee to 7 penalty unless the case is strongly covered by the provision, the penalty provisions cannot be invoked.

9.

This Court in the case of Shiv Lal Tak Vs. Commissioner of Income-Tax (2001) 251 ITR 373 had an occasion to consider the case of a building contractor where also the AO noticed various defects in the maintenance of accounts and finding unvouched nature of expenditures, the assessee agreed for application of gross profit rate at 12% on contract receipts so declared Petroproducts Pvt. Ltd.: [2010] 322 ITR 158 (SC) had an occasion to consider penalty under Section 271(1)(c) when in the said case an addition in respect of interest expenditure was made. The said expenditure was claimed by the assessee on the basis of expenditure made for paying the interest on the loss incurred by it by which amount the assessee purchased some IPL shares by way of its business policies. However, admittedly the assesseee did not earn any income by way of dividend from those shares and such claim of interest to the extent of Rs.28,77,242/- was disallowed. The claim of the assessee was that all the details given in the return were correct. There was no concealment of income nor there was any inaccurate particulars of such income furnished and the disallowance made by the AO in the assessment year of interest was solely on account of different views taken on the same set of facts and therefore, they could at the most be termed as difference of opinion but nothing to do with the concealment of income or furnishing of inaccurate particulars of such income. It was further claimed that merely disallowance of the claim in the assessment proceedings could not be the sole basis for levying penalty under Section 271(1)(c) of the Act. The Apex Court, taking into consideration the meaning of the words “inaccurate” and “particulars”, opined that the 9 said words should mean the details supplied in the return which are not accurate, not exact or correct, not according to the truth and erroneous and there being no finding that any detail supplied by the assessee in return of income was found to be incorrect or erroneous or being false. No question arose for invoking penalty under Section 271(1)(C) and further observed that merely making a claim not sustainable in law by itself will not amount to furnishing inaccurate particulars having regard to the income of the assessee. It further observed merely because the assessee had claimed the expenditure which claim was not accepted or was not acceptable to the Revenue, that by itself would not attract the penalty under Section 271(1)(c) and dismissed appeal of the Revenue.

11.

Taking into consideration the above, in our view, the penalty was rightly deleted by the appellate authorities and in our view, is based on finding of facts based on material on record and no question of law much less substantial question of law can be said to emerge out of the order of the Tribunal so as to call for interference. We find no error, adversity or perversity in the order impugned.

12.

Consequently, the appeals, being devoid of merit, are hereby dismissed.

10 [J.K. Ranka],J. [M.N. Bhandari],J. Raghu/p.10/ Certificate:All corrections made in the judgment/order have been incorporated in the judgment/order being e-mailed. Raghu, Sr. PA.

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