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Facts
The assessee declared agricultural income. The AO made an addition to the income by estimating agricultural expenses at 60% of the gross receipts, disallowing certain claimed expenses. Subsequently, a penalty was levied under Section 271(1)(c) for concealment of income.
Held
The Tribunal held that penalty under Section 271(1)(c) cannot be levied when the addition to income is based on estimation. The Tribunal also noted that making an incorrect claim in law does not attract penalty for concealment.
Key Issues
Whether penalty under Section 271(1)(c) is sustainable when the primary addition to income is based on estimation and whether making an incorrect claim in law attracts penalty.
Sections Cited
143(3), 271(1)(c), 69C, 274, 271
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Income Tax Appellate Tribunal, ‘C’ BENCH: CHENNAI
Before: SHRI ABY T. VARKEY & SHRI JAGADISH
आदेश / O R D E R
PER ABY T. VARKEY, JM:
1. This is an appeal preferred by the assessee against the order of the Learned Commissioner of Income Tax (Appeals)/NFAC, (hereinafter referred to as “the Ld.CIT(A)”), Delhi, dated 10.12.2024 for the Assessment Year (hereinafter referred to as "AY”) 2013-14 confirming the penalty of Rs.5,12,615/- imposed by the AO u/s.271(1)(c) of the Income Tax Act, 1961 (hereinafter referred to as "the Act”).
The brief facts are that the assessee in the year under consideration had filed her return of income (RoI) declaring Rs.25,78,160/- which according to the assessee was sourced from company as salary, income from house property, salary as a working-partner from firm and interest income. Apart from the above, assessee had also shown agricultural income of Rs.20,35,953/-. The AO after scrutiny framed the assessment u/s.143(3) of the Act, wherein, he made an addition of Rs.16,57,216/- which amount was estimated by the AO as agricultural expenses @60% of the gross agricultural income declared as Rs.33,33,843/-, by holding as under:-
Assessee has filed a cash book for the agricultural activity which contains date-wise amounts received from sale of agricultural produce, as also the expenditure incurred. No evidences/documents are filed supporting the entries in this cash book. The gross receipts from agricultural activity is stated to be Rs.33,33,843/-, expenditure Rs.8,47,890/4, and lease rent to sons at Rs.4,50,000/- for the year under consideration.
The details furnished are analyzed and tabulated below;
Crop cultivated Sales realisation Specific expense incurred Sesame 4,70,395/- Seed 2,250/- Coconut 11,91,300/- Cutting and 95,304/- Transportation Groundnut 3,15,350/- Seed 16,800/- Sugarcane 1,35,708/- Nil - Tapioca 6,80,010/- Nil - Paddy 3,05,480/- Seed 9,500/- Banana 2,35,600/- Nil - Total 33,33,843/- 1,23,854/- Common expense Labour 1,19,236/- Fertiliser 1,00,000/- Rent paid to sons 5/9/12 4,50,000/- 28/2/13 5,04,800/- Grand Total 33,33,843/- 12,97,890/- Net Agri. Income 20,35,953/-
In the submission dated 5/10/15 it was stated that assessee had taken on lease her sons agricultural lands and she had paid lease rent of Rs.4,50,000/-. Vide order sheet noting dated 10/3/16 the Representative was requested to clarify as to how and from which source the lease amounts were paid. In response to this query a written submission is filed on 18/3/16 stating that the lease rent was paid by making journal entries by debiting the assessee's capital account and crediting her two sons accounts on 6/4/13. Copy of the capital account is filed. Perusal of the journal entry dated 6/4/13 mentions that the amount is debited on account of lease rent for the year 2012-13. Surprisingly, assessee has already debited twice lease rent payment to the sons in the agricultural cash book of F.Y. 2012-13 on 5/9/12 and 28/2/13. Without noticing this the capital account is furnished stating that the amounts are debited by passing journal entry in the beginning of the subsequent financial year. This clearly brings to light the fact that assessee is manipulating and preparing the financial statements to suit her requirements. Copy of the submission dated 18/03/16 and agricultural cash book carrying the entries of 05/9/12 and 28/2/13 are annexed to this order.
7. Coming to the point of reasonableness of the agricultural income, it can be seen from the table in para -5 above that the labour expense shown is very meager compared to the land claimed to be cultivated. Even a single labour would cost not less than Rs.1,20,000/- per annum. Assessee claims to have paid even less than this for cultivating the total of 44.51 acres of land, which is unbelievable. Labour cost forms almost 50 percentage of the total realization from cultivating a land. Only if the crops are properly developed/looked after and maintained regularly will there be proper yield. This can be done only by deploying proper number of labourers, who are presently scarcely available and have to be paid good salary to be retained. Assessee has shown a paltry sum on account of expenses for labour/wages. It therefore appears that assessee has incurred major part of the labour expense/wages out of her unexplained source of income.
Further, no expenses are shown for electricity and water. This is another important head of expense for cultivating a land. Due to power cuts diesel expense will be more. However, no expense is shown under this head. These expense too are incurred by assessee out of her, unaccounted source of income.
Thus, assessee has understated her expenses, which are incurred out of her unexplained source of income, while declaring the income under the head agriculture
The total direct expense would generally be around 60 percent of the agricultural receipts, if not more. This would be excluding any interest expense and lease rent. Assessee has shown receipts of Rs. 33,33,843/-, therefore, the approximate expenses would have been around Rs.20,00,306/-. Assessee has shown direct expenses of Rs. 3,43,090/- only (1,23,854/- + 1,19,236/- + 1,00,000). Thus, expense of around Rs. 16,57,216/- (2000306-343090) is met by assessee out of her unexplained source of income The said amount is being added to the total income as per provisions of section 69C of the Income-tax Act, 1961.
Thus, it is noted that the quantum addition of Rs.16,57,216/- has been made based on the estimation @60% of the agricultural receipts i.e. Rs.33,33,843/- which is Rs.20,00,306/- and after deducting direct expenses shown by the assessee to the tune of Rs.3,43,090/- estimated the undisclosed expenses of Rs.16,57,216/-. The AO is noted to have also disallowed Rs.1,733/- which was claimed by the assessee as expenses incurred for paying water-tax. After framing the quantum assessment by order dated 21.03.2016, the AO issued notice to the assessee dated 21.03.2016 u/s.274 r.w.s.271 of the Act proposing levy of penalty for concealment of particulars of income and furnishing of inaccurate particulars of such income in respect of the aforesaid two (2) additions/disallowances; and after hearing the assessee, levied penalty of Rs.5,12,165/-. Aggrieved, the assessee preferred an appeal before the Ld.CIT(A) who has confirmed the action of the AO. Aggrieved, the assessee is before us.
We have heard both the parties and perused the material available on record. The aforesaid facts are not repeated for the sake of brevity.
The assessee has challenged the penalty levied, inter alia, that the penalty levied is bad in law since addition of Rs.16,57,216/- was based on the estimation, and the other disallowance of Rs.1,733/- was made by the AO denying the expenses claimed of Rs.1,733/-, which according to the Ld.AR, is not leviable since rejection of claim in no manner would attract the penalty u/s.271(1)(c) of the Act [i.e., for concealment of particulars of income and furnishing of inaccurate particulars of such income]. In respect of quantum-addition of Rs.16,57,216/-, it is noted that the assessee had shown net-agricultural income of Rs.20,35,953/- by showing total sales realization of Rs.33,33,843/- and claimed incurring of expenses of Rs.12,97,890/-, whereas according to the AO, the expenses claimed for earning agricultural income of Rs.33,33,843/- was too meager. Therefore, he estimated direct expenses at 60% of the agricultural receipts [i.e. 60% of Rs.33,33,843/-] which works out to Rs.20,00,306/- and after deducting direct expenses of Rs.3,43,090/-, computed the expenses at around Rs.16,57,216/-, which according to the AO, was supposed to be expended by the assessee out of her unexplained source of income and made an addition of Rs.16,57,216/-. Thus, it is noted, the quantum addition of Rs.16,57,216/- was purely based on estimation and therefore, the question is whether penalty levied by the AO u/s.271(1)(1)(c) of the Act is sustainable or not?. In this regard, it has been brought to our notice that this Tribunal has consistently held that penalty u/s.271(1)(c) of the Act need not be imposed wherein additions have been made on estimation basis. For such a proposition, we rely on the decision of the Hon’ble Madras High Court in the case of CIT v. P. Rojes [2013] taxmann.com 253 [Madras]; and also rely on the decision of the Hon’ble Punjab & Haryana High Court in the case of CIT v.
Sangrur Vanaspati Mills Ltd., reported in [2008] 171 Taxman 320, wherein the Hon’ble High Court upheld the action of the Tribunal deleting penalty u/s.271(1)(c) of the Act on the ground that the AO had made quantum additions on the basis of the yield of phak and chhilka and observed that an estimate of the price would not ipso facto lead to penalty.
5. Though, the Ld.DR submitted that the assessee didn’t contest the quantum addition and justified the penalty, we note the settled position of law in this regard that the quantum proceedings and penalty proceedings are independent & distinct proceedings; and merely because the quantum assessment is upheld or assessee didn’t contest the quantum addition, the penalty is not automatic. The charge against the assessee must be proved by the AO in the penalty order. For such a proposition, we rely on the decision of the Hon’ble Calcutta High Court in the case of Durga Kamal Rice Mills v. CIT reported in [2004] 265 ITR 25/[2003] 130 Taxman 553 (Cal.) And also the decision of the Hon’ble Allahabad High Court in the case of CIT v. Norton Electronics Systems (P.) Ltd., reported in [2014] 41 taxmann.com 280 (Allahabad-HC), wherein their lordships held that when the addition is made on the estimate basis, no penalty is sustainable. Since in the present case also, estimation of Rs.16,57,216/- has been purely made on guess work [i.e. undisclosed expenses were computed for earning agricultural income @60% of the total receipt of Rs.33,33,843/-], we are of the view that no penalty u/s.271(1)(c) of the Act was attracted. And moreover, it is common knowledge that estimated quantum addition involves inherent subjectivity, therefore, we direct the AO for deletion of penalty levied on the estimated quantum addition of Rs.16,57,216/-.
6. Coming to the quantum addition of Rs.1,733/- on the basis of which also penalty was levied u/s.271(1)(c) of the Act, we are of the considered opinion that by making an incorrect claim in law, it can’t attract the charge of furnishing of inaccurate particulars of income and concealment of income as held by the Hon’ble Supreme Court in the case of CIT v. Reliance Petro Products (P) Ltd., reported in 328 ITR 158. Therefore, in the light of the above discussion, the penalty levied by the AO is directed to be deleted.
In the result, appeal filed by the assessee is allowed.