COMMISSIONER OF INCOME TAX DELH-II vs. KALINDI RAIL NIRMAN ENGG. LTD

This appeal filed by the revenue under Section 260A of the Income Tax Act, 1961 (hereinafter referred as the “Act”) is directed against the order passed by the Income Tax Appellate Tribunal (“Tribunal”, for short) on 29.03.2012 in ITA No.322/Del/2008 confirming the order of the Commissioner of Income Tax (Appeals) dated 26.10.2007 by which he cancelled the penalty of Rs.24,00,977/- imposed on the assessee under Section 271(1)(c) of the Act for concealment of income. 2014:DHC:1965-DB

The assessee, a contractor undertaking projects of Indian Railways on turn key basis, filed its return of income for the assessment year 1995- 96 on 29.11.1995 declaring a total income of Rs.88,91,700/-. On the basis of the materials gathered by the income tax authorities in the course of a search carried out in the assessee’s premises on 14.03.1995 as well as in the premises of the directors and trusted persons, the assessing officer referred the matter to a special audit in terms of Section 142(2A) of the Act. The special audit report, inter alia, reported that there were large number of transactions for which no supporting vouchers were available, that several discrepancies in cash and journal vouchers and changes in the dates of the vouchers were noticed, that there were discrepancies in the adjustments of cash books with cash vouchers, that there were payments made to the Railway staff which were not allowable as deduction under the Act, that several payments were made without obtaining any signature of the recipients, that the assessee did not maintain any stock register and did not disclose any work-in-progress in the balance sheet, that several items of capital expenditure were passed off as revenue expenditure and so on and so forth. In response to the queries raised by the assessing officer on the basis of special audit report the assessee could not give any proper explanation and wherever an explanation was sought to be given, it was found to be evasive. The assessee was also allowed inspection of 2014:DHC:1965-DB

Penalty proceedings were initiated by the assessing officer for concealment of income and after rejecting the assessee’s explanation, a minimum penalty of Rs.24,00,977/- was imposed for concealment of income under Section 271(1)(c) of the Act. The assessing officer held, overruling the assessee’s explanation that merely because the profits were estimated, it does not follow that the assessee was not guilty of any fraud or gross or wilful neglect on his part to return the correct income, as provided in the Explanation below Section 271(1)(c) of the Act, as it stood at the material period. 5. The penalty order was taken in appeal to the CIT (Appeals) who cancelled the same on the ground that the assessing officer has not stated the basis of this estimate nor did he give an opportunity to the assessee to rebut the proposal to estimate the profits at 11% of the gross receipts. He held that the assessee made a counter proposal which was a conditional offer as to the taxability of the profits and even if it is assumed that there was an agreement on the part of the assessee for being taxed at the rate of 11% of the gross receipts, it does not follow automatically that the assessee concealed its income. The revenue’s appeal to the Tribunal having been dismissed, it is in further appeal before this Court. 2014:DHC:1965-DB

In our opinion the following questions of law arise for consideration: - (i) Whether on the facts and in the circumstances of the case the Tribunal was right in law in upholding the order of the CIT (Appeals) cancelling the penalty imposed on the assessee for concealment of income under Section 271(1)(c) of the Act? (ii) Whether the view of the Tribunal that the assessee’s acceptance of the profit rate of 11% was only a conditional proposal and made with a view to buy peace and avoid disputes, is a reasonable view or is it perverse?

We have considered the rival contentions. While the revenue assails the order of the Tribunal on the ground that after the judgment of the Supreme Court in the case of MAK Ltd. Data P. Ltd. vs. CIT, (2013) 358 ITR 593 there is no question of the assessee offering income “to buy peace” and that in any case the seized material and the special audit report disclose several discrepancies to cover which a higher estimate of the profits was resorted to, the learned counsel for the assessee vehemently contended that the Tribunal committed no error in upholding the order passed by the CIT (Appeals) cancelling the penalty. He would contend that it was a mere case of different estimates of income being adopted by different authorities which itself would show that there is no merit in the charge of concealment of income. He further contended that the revenue is wrong in saying that a higher rate of profit was adopted to 2014:DHC:1965-DB

The learned counsel for the assessee is not right in his contention that whenever an assessment is made by applying a flat rate of profit to the declared turnover or receipts, which is higher than the rate adopted by the assessee in the return of income, there can be no inference that the assessee concealed his profits. There is no such absolute proposition and this has been brought out by the Madras High Court in Bashu Sahib vs. CIT, (1977) 108 ITR 736. There the assessee who was a bus operator filed a return in which he estimated the income at Rs.8,000/- per bus which was on the basis of the income determined by the Tribunal in his own case for an earlier assessment year. In the course of the assessment proceedings he denied having maintained books of accounts and also did not produce the trip sheets, invoices and correspondence with the regional transport authorities. The assessing officer, therefore, enhanced the income from each bus to Rs.19,245/-. Such estimated assessments were made for two assessment years and in the later assessment year the income was estimated at Rs.22,000/- per bus. Penalty proceedings were initiated for concealment of income. The Madras High Court held that the assessee did not produce the relevant evidence despite being called upon and there was a finding by the Tribunal that the assessee chose to withhold the books of accounts. The assessee knew that the method adopted by him did not disclose the real income. Though he was in a 2014:DHC:1965-DB

A Division Bench of this Court was seized with the question in Qammar-ud-din & Sons vs. CIT, (1981) 129 ITR 703, Ranganathan, J. (as he then was) held as follows: - “The obligation of filing of a return is a solemn and important one and should not be undertaken in a lighthearted and careless manner. It may be that, in some circumstances, an assessee may have to estimate its income, but if so, such estimate should have some basis therefor. An assessee cannot escape its responsibility or escape penal action merely by filing a return showing an estimated income but without there being any real basis for that income.” (underlining ours)

In that case the penalty was ultimately cancelled by this Court on the ground that there was no fraud or gross or wilful neglect on the part of the assessee and that the Tribunal’s finding to the contrary was vitiated by failure to consider certain material facts. 12. We are bound by ratio of the decision of this Court. 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. If they were so, there can be no sanctity attached to the figure of gross contract receipts of Rs.20,30,74,024/- on which the assessee estimated 3% as its income. It is true that the assessing officer did not enhance the figure of gross receipts but that is not because he gave a clean chit to the books of accounts allegedly 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. In order to take care of those discrepancies he resorted to a much higher estimate of the profits by adopting 11% on the gross contract receipts. He gave due opportunity to the assessee to explain the discrepancies and also to show why the profit rate of 11% cannot be adopted but these opportunities were not availed of by the assessee. He also has recorded in 2014:DHC:1965-DB

The appeal of the revenue is allowed with no order as to costs.