ITO 32 (1)(5), MUMBAI vs. EMPEE ENGINEERING CORPORATION, MUMBAI

O R D E R PER C.N. PRASAD (JM)

2 ITA.NOs. 6797 & 6798/MUM/2019 (A.Ys: 2009-10 & 2010-11) M/s. Empee Engineering Corporation 2. Briefly stated the facts are that, assessee a firm engaged in the business of metal flanges etc., which involves cutting of metal sheets into different shapes/sizes and sales thereof. Assessments were reopened u/s.147 of the Act and re-assessments were completed by making an addition of ₹.1,68,59,313/- and ₹.1,16,81,990/- for the A.Y. 2009-10 and A.Y. 2010-11 respectively. Assessee preferred an appeal before Ld.CIT(A) against the addition and the Ld.CIT(A) restricted the addition GP @14.33% and 12.63% for the A.Y. 2009-10 and A.Y.2010-11 respectively. On further appeal before ITAT the Tribunal restricted the addition to 10% of the alleged bogus purchases instead of 14.33% and 12.63% estimated by the Ld.CIT(A). Subsequently, Assessing Officer initiated penalty proceedings and levied penalty of ₹.5,10,837/- and ₹.3,53,964/- u/s.271(1)(c) of the Act for the A.Y.2009-10 and 2010-11 respectively, stating that the assessee has furnished inaccurate particulars of its income and concealed its income within the meaning of section 271(1)(c) r.w. Explanation 1 of the Act. On appeal the Ld.CIT(A) deleted the penalty since the disallowance was made by making estimation of Gross Profit on the purchases. Against this order of the Ld.CIT(A), revenue is in appeal before us.

3 ITA.NOs. 6797 & 6798/MUM/2019 (A.Ys: 2009-10 & 2010-11) M/s. Empee Engineering Corporation 3. Assessee filed letter dated 16.03.2021 requesting two months’ time for necessary preparation of the documents and to contact the consultant for appearing in this matter. However, on a perusal of the grounds raised by the revenue we observe that the penalty was levied on disallowance of alleged bogus purchases by estimating the Gross Profit element. This bench is consistently taking a view that the penalty is not attracted when the Gross Profit is estimated on adhoc basis on bogus purchases. The adjournment sought by the assessee is rejected and we proceed to dispose off this appeal on merits, on hearing Ld.DR.

5. On identical situation the Coordinate Bench in the case of Shri Deepak Gogri v. Income Tax Officer in ITA.No. 1396/MUM/2017 dated 23.11.2017 held that no penalty is leviable observing as under: - “6. We have heard the rival submissions, perused the orders of the authorities below. In so far as the penalty levied on estimation of profit element on purchases is concerned, we are of the view that Assessing Officer had made only adhoc estimation of profit on certain 4 ITA.NOs. 6797 & 6798/MUM/2019 (A.Ys: 2009-10 & 2010-11) M/s. Empee Engineering Corporation purchases treated as unexplained expenditure. Assessing Officer did not doubt the sales made by the assessee from out of such purchases. Assessing Officer based on the decision of the Hon'ble Gujarat High Court in the case of CIT v. Simit P. Seth [356 ITR 451] estimated the profit element in such purchases at 12.5% and by reducing the Gross Profit already declared by the assessee. In the circumstances, we hold that there is no concealment of income or furnishing of inaccurate particulars as the profit element was determined by way of adhoc estimation. Coming to the interest, the assessee furnished complete details in the return of income and made a claim and simply because the claim is denied and cannot lead to furnishing of inaccurate particulars or concealment of income. No allegation by Assessing Officer that the assessee failed to disclose the particulars relating to its claim in the return of income. Thus we hold that there is no concealment of income or furnishing of inaccurate particulars of income. Thus we direct the Assessing Officer to delete the penalty levied u/s. 271(1)(c) of the Act.”

6 ITA.NOs. 6797 & 6798/MUM/2019 (A.Ys: 2009-10 & 2010-11) M/s. Empee Engineering Corporation Premanand (2008)(25 SOT 11)(Jodh), wherein it has been held that where the AO has made addition merely on the basis of observations made by the Sales tax dept and has not conducted any independent enquiries for making the addition especially in a case where the assessee has discharged its primary onus of showing books of account, payment by way of account payee cheque and producing vouchers for sale of goods, such an addition could not be sustained. The Ld CIT(A) has also appreciated the contentions of the assessee that he was not provided with an opportunity to cross examine the sellers, which is required to be given as per the decision of Hon’ble Kerala High Court in the case of Ponkunnam Traders (83 ITR 508 & 102 ITR 366). Accordingly, the Ld CIT(A) has deleted the impugned addition. On a careful perusal of the decision rendered by Ld CIT(A) would show that the first appellate authority has analysed the issue in all angles and applied the ratio laid down by the High Courts and Tribunals in deciding this issue. Hence, we do not find any reason to interfere with his order on this issue. “ We also find that in the following cases the Tribunal has taken similar view in some of the case that on the basis of third party evidence, addition made by the AO cannot be held as good law and deleted the addition which are as under: - a) Ramesh Kumar and Co V/s ACIT in (AY-2010-11) dated 28.11.2014; b) DCIT V/s Shri Rajeev G Kalathil in ITA No.6727/Mum/2012 (AY-2009-10) dated 20.8.2014; and c) Shri Ganpatraj A Sanghavi V/s ACIT in ITA No. 2826/Mum/2013 (AY-2009-10) dated 5.11.2014 10. In all the above said cases, the Co-ordinate Benches of the Tribunal has held that the AO was not justified in making the addition on the basis of statements given by the third parties before the Sales Tax Department, without conducting any other investigation. In the instant case also, the assessing officer has made the impugned addition on the basis of statements given by the parties before the Sales tax department. Considering the facts as discussed hereinabove, we are of the considered opinion that in view of the ratio in the various decisions as above penalty cannot be sustained. It is also a settled legal position of law that penalty cannot be levied wherein the assessment is made on estimation basis. Accordingly, we are inclined to uphold the order passed by the ld.CIT(A) by dismissing the appeal of the revenue.”

7 ITA.NOs. 6797 & 6798/MUM/2019 (A.Ys: 2009-10 & 2010-11) M/s. Empee Engineering Corporation 7. Further, the Hon'ble Punjab & Haryana High Court in the case of Harigopal Singh v. CIT [258 ITR 85] held as under: - “3. On further appeal, the Tribunal reduced the addition to Rs.1,50,000. Hence, the income was finally assessed at Rs.1,50,000 against the declared income of Rs. 52,000. The Assessing Officer initiated penalty proceedings against the assessee by invoking Section 271(1)(c) along with the Explanation 1(B) of the Act on the plea that he had concealed the particulars of his income. A show-cause notice was issued to him under Section 274 read with Section 271(l)(c) of the Act. In reply thereto, the assessee pleaded that since no positive concealment had been detected by the Department and the addition was made in his income only on estimate basis, no penalty under Section 271(1)(c) of the Act could be imposed because the assessee's income on estimate basis keeping in view his household expenses as well as the statement of accretion to his assets during the year under consideration, was bona fide. The Assessing Officer did not accept the reply and found that since the assessee had not filed any fresh evidence in penalty proceedings to prove that there was no attempt on his part to conceal his income, he, by his order dated March 10, 1992, imposed a penalty of Rs. 50,000. Feeling aggrieved by this order, the assessee filed an appeal before the Commissioner of Income- tax (Appeals), Patiala, who allowed the same holding that there was indeed no positive evidence whatever to show that the appellant's income during the year in question was, in fact, more than the income returned by him and that estimated additions in the returned income do not attract penalty under Section 271(1)(c)of the Act. The Revenue went up in appeal before the Income-tax Appellate Tribunal which was allowed by order dated May 30, 2001. It is against this order that the present appeal has been filed which raises the aforesaid question of law.

4. In order to attract Clause (c) of Section 271(1) of the Act, it is necessary that there must be concealment by the assessee of the particulars of his income or if he furnishes inaccurate particulars of such income. What is to be seen is whether the assessee in the present case had concealed his income as held by the Assessing Officer and the Tribunal. He had not maintained any accounts and he filed his return of income on estimate basis. The Assessing Officer did not agree with the estimate of the assessee and brought his income to tax by increasing it to Rs. 2,07,500. This, too, was on estimate basis. The Tribunal agreed that the income of the assessee had to be assessed on an estimate of the turnover but was of the view that the estimate as made by the Assessing Officer was highly excessive and it fixed the total income of the assessee at Rs. 1,50,000 for the year under appeal.

8 ITA.NOs. 6797 & 6798/MUM/2019 (A.Ys: 2009-10 & 2010-11) M/s. Empee Engineering Corporation It is, thus, clear that there was a difference of opinion as regards the estimate of the income of the assessee. Since the Assessing Officer and the Tribunal adopted different estimates in assessing the income of the assessee, it cannot be said that the assessee had "concealed the particulars of his income" so as to attract Clause (c) of Section 271(1) of the Act. There is not even an iota of evidence on the record to show that the income of the assessee during the year under appeal was more than the income returned by him. Additions in his income were made, as already observed, on estimate basis and that by itself does not lead to the conclusion that the assessee either concealed the particulars of his income or furnished inaccurate particulars of such income. There has to be a positive act of concealment on his part and the onus to prove this is on the Department. We are also of the considered view that the Tribunal grossly erred in law in relying on Explanation 1(B) to Section 271(1)(c) of the Act to raise a presumption against the assessee. The assessee had justified his estimate of income on the basis of household expenditure and other investments made during the relevant period. It is not the case of the Revenue that he had, in fact, incurred expenditure in excess of what he had stated. In this view of the matter, it cannot be said that the explanation furnished by the assessee had not been substantiated or that he had failed to prove that such explanation was not bona fide.