SHRI SHYAM CONSTRUCTION COMPANY,JAIPUR vs. ITO WD 1(1), JAIPUR, JAIPUR

The penalty order passed by the AO reveals penalty to have been levied on account of the addition made to the income of the assessee by disallowing expenses on lump sum basis and disallowing interest expenses for non-deduction of tax at source u/s 40(a)(ia) of the Act. The lump sum disallowance of expenses amounted to Rs.5 lacs and deduction claimed of donation disallowed amounts to Rs.38,226/-. The assessee is noted to be engaged in the business of carrying the work of construction on contract basis for the Government/semi-government and private organization and also carries out the work of supply of building material. During assessment proceedings the AO noted the GP of the assessee to have decreased, while the NP showed at marginal increase.

The Assessing Officer finding no record of material consumed, labour employed, stock register, site wise details of work-in-progress, quantitative and qualitative details of opening stock, expenses vouchers along with bills and work in progress, he held that the authenticity of expenses incurred to have remained unverifiable.

The assessee was show caused as to why the books of account maintained by the assessee should not be rejected by invoking Section 145(3) of the Act and the lump sum disallowance of Rs.5 lacs of expenses be not made. The assessee merely submitted impossibility of maintaining site-wise accounts considering the nature of business of the assessee. Accordingly, the disallowance of Rs.5 lacs of expenses was made to the income of the assessee and penalty proceedings initiated u/s. 270A of the Act for ‘underreporting of income’.

Similarly, the AO noted the assessee to have made interest payment of Rs.1,27,420/- without deducting tax at source thereon. The assessee admitted to have mistakenly failed to do the needful and therefore the AO, invoking the provisions of section 40(a)(ia) of the Act, disallowed 30% of the interest amounting to Rs.38,226/-. Penalty proceedings u/s. 270 A of the Act for ‘underreporting of income’ pertaining to the same was also initiated.

It was submitted before me during the course of hearing that the addition/disallowance made while computing the income of the assessee were not challenged in appeal. However, it was contended that since the addition was made to the income of the assessee on estimate basis only, no penalty for ‘underreporting of income’ was leviable in terms of the provision Section 270A of the Act. Learned counsel for the assessee contended that this pleading of the assessee had been wrongly rejected by the ld. CIT(A).

At this juncture the attention of the learned counsel for the assessee was drawn to the provision of Section 270A of the Act and it was pointed out that as per the provision of Section 270A(2)(a) of the Act the addition made to the income of the assessee qualified as ‘underreporting of income’. The provisions of Section 270A(2) of the Act are reproduced hereunder:-

The attention was thereafter drawn to sub-Section (6) of Section 270A of the Act which provided for exclusions of ‘underreporting of income’ for the purpose of levy of penalty more particularly sub-clause (b) thereof which reads as under:-

………… ………… (6) The under-reported income, for the purposes of this section, shall not include the following, namely:— …….. …….. (b) the amount of under-reported income determined on the basis of an estimate, if the accounts are correct and complete to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, but the method employed is such that the income cannot properly be deduced therefrom;

It was pointed out that as per the law any ‘underreported income’ determined on the basis of estimate is to be excluded for the levy of penalty u/s. 270A of the Act only if the accounts are correct and complete to the satisfaction of the AO but the method employed is such that the income cannot be properly deduced therefrom. Learned counsel for the assessee was pointed out from the assessment order that the AO had categorically noted the accounts of the assessee to be not correct and complete, since he found several discrepancies in the same with regards to maintenance of proper registers and records as also vouchers being not duly supported. Learned counsel for the assessee was unable to controvert the above facts.

In the light of the same I have no hesitation in holding that the assessee’s case clearly qualifies as ‘underreporting of income’ in terms of Section 270A(2) of the Act and is not excluded from the same as per Section 270A(6) of the Act. The assessee has been unable to demonstrate as to how still addition made to Further with respect to the penalty levied on the addition made to the income of the assessee on account of disallowance of expense u/s 40(a)(ia) of the Act, no submissions were advanced against the same before me.

In view of the above the order of the ld. CIT(A) confirming the levy of penalty u/s. 270A of the Act for ‘underreporting of income’ stands confirmed.