VIKRAM SINGH,JAIPUR vs. DCIT, JAIPUR

आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR Jh dqy Hkkjr] U;kf;d lnL; ,oa Jh foØe flag ;kno] ys[kk lnL; ds le{k BEFORE: SHRI KUL BHARAT, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA No. 143/JP/2016 fu/kZkj.k o"kZ@Assessment Year :2007-08 cuke Shri Vikram Singh, The Dy.C.I.T., Vs. 1, Thaltara, Sirsi Road, Circle-3, Jaipur Khatipura, Jaipur LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AFPPS 1181 J vihykFkhZ@Appellant izR;FkhZ@Respondent fu/kZkfjrh dh vksj ls@ Assessee by : Shri Rajeev Sogani (CA) jktLo dh vksj ls@ Revenue by : Shri Rajendra Jha (Addl. CIT)

lquokbZ dh rkjh[k@ Date of Hearing : 12/01/2017 mn?kks"k.kk dh rkjh[k@Date of Pronouncement: 16/01/2017 vkns'k@ ORDER

PER: VIKRAM SINGH YADAV, A.M. This is an appeal filed by the assessee against the order of Ld. CIT(A) dated 17.12.2015 for A.Y. 2007-08. The sole ground of appeal taken by the assessee is as under:- “1. In the facts and circumstances of the case and in law the ld. CIT(A) has erred in confirming the penalty amounting to Rs.2,00,043/- u/s 271(1)(c) of the Income Tax Act, 1961 on estimated trading additions. The action of ld. CIT(A) is illegal, unjustified, arbitrary and against the

ITA No.143/JP/2016_ 2 Shri Vikram Singh Vs. DCIT, Circle-3, Jaipur

facts of the case. Relief may please be granted by deleting the said additions of Rs.2,00,043/-”

business of manufacturing and export of all type of artistic handicrafts

items mainly made of wood. The return of income was filed by the

assessee on 30-10-2007 through E-filing declaring total income of

Rs.612,73,640/-. The case of the assessee was selected for scrutiny u/s

143(2) of the Act. On scrutiny of the details/information produced by

the assessee the AO observed that the business results shown by the

assessee in comparison to immediately last two years are as under:-

Asstt. Year Turnover Gross profit (Rs. In lacs) rate 2007-08 302.00 38.45% 2006-07 375.70 40.34% 2005-06 472.20 44.39%

The AO from the trading results observed that the gross profit rate has

fallen down from 40.34% to 38.45% and the AO asked for the reasons

from the assessee for fall in gross profit rate. The assessee submitted

that the fall in gross profit rate was due to not getting the orders from

the foreign buyers and the assessee had to introduce new items to

sustain in the market which affected the profits margins of the

ITA No.143/JP/2016_ 3 Shri Vikram Singh Vs. DCIT, Circle-3, Jaipur

assessee. Further, the assessee submitted that there was escalation of

input costs like raw material, labour etc. Considering the submission of

the assessee and documents available on record at the time of

assessment proceedings, the AO observed that there are defects in the

books of account of the assessee and therefore, he applied the

provision of Section 145(3) of the Act and the AO took the mean of last

two years of gross profit rate and applied the gross profit rate of

42.36% against the gross profit rate of 38.45% shown by the assessee

which resulted in trading addition of Rs.11,79,652/-.

CIT(A) who confirmed the rejection of books of account u/s 145(3) and

also estimated the gross profit rate of 40.40% which resulted into

trading addition of Rs.5,92,194/-.

of the ld CIT(A) and operative part of its order is as under:

“We have heard the rival contentions and perused the material on

record. The Ld AR has not pressed the ground relating to

rejection of books of account. Therefore, the limited issue for

consideration is what should the reasonable basis for estimation

of G.P. rate and whether estimation done by the lower authorities

ITA No.143/JP/2016_ 4 Shri Vikram Singh Vs. DCIT, Circle-3, Jaipur

call for any interference. The A.O. has applied average G.P. rate

of last two years @ 42.36%. The ld. CIT(A) by following the G.P.

rate of last year has brought the same down and applied G.P.

rate of 40.40%. Apparently, both the AO as well as ld. CIT(A) are

guided by assessee’s past history. At the same time, it is

observed from the order of the ld. CIT(A) that he has considered

the unusual business conditions prevalent during the subject

matter in terms of profit margins getting effected by increase in

cost of raw material, introduction of new products in the market

and fact that some of the assessee’s customers did not place

orders during the year resulting in fall in turnover from Rs.375.70

lacs to Rs.302 lacs during the year. In our view, the view of the

ld. CIT(A) is fair and reasonable which has factored in the

business environment prevalent during the year and at the same

guided by assessee’s past history, applied gross profit rate of

40.40% as against 42.36% applied by the AO. In light of above,

we do not see any infirmity in the order of the ld. CIT(A) which

calls for our interference. Thus Ground No.1 of the assessee as

well as Ground No.1 of the Revenue are dismissed.”

ITA No.143/JP/2016_ 5 Shri Vikram Singh Vs. DCIT, Circle-3, Jaipur

the Coordinate bench, the AO levied penalty u/s 271(1)(c) amounting to

Rs.2,00,043/-.

the ld. CIT(A). The assessee contended that no penalty can be imposed

where the trading additions are purely based on an estimation and

reliance was placed on the decision of the Hon’ble Rajasthan High Court

in case of Shiv Lal Tak (251 ITR 373) & Mahendra Singh Khedla (252

CTR 453), besides other decisions. The ld. CIT(A), however, rejected

the contention of the assessee and stated that since specific defects

have been established in the books of account, therefore, estimation is

not just plain estimation but is supported by positive evidence and

accordingly, penalty u/s 271(1)(c) was confirmed.

called defects pointed out by the ld. AO, complete explanation was

furnished during the course of assessment proceedings. Wood is a

natural product and its specific variety/quality determines its net

realizable value. Even the rate of teak wood or yellow oak wood vary

widely depending on its variety. The explanation offered by the

assessee was not found false. The explanation, even though was not

ITA No.143/JP/2016_ 6 Shri Vikram Singh Vs. DCIT, Circle-3, Jaipur

accepted, was not held to be lacking in bona-fides. Needless to mention

that all facts were placed before the ld. AO. In view of this provision of

Explanation 1 to section 271(1) are not attracted. Otherwise also,

additions are not based on any specific defects but are on ad-hoc basis

by applying a GP Rate. This estimation has also undergone change in

favour of assessee by ld. CIT(A) in quantum appeal. Hon’ble Rajasthan

High Court in the case of Mahendra Singh Khedla (supra) has held that

“Fact or allegation based on estimation cannot be said to be correct

only, it can be incorrect also.”

(L) No.1860 of 2009, decided on 05.08.2009 observed in the matter of

levy of penalty under section 271(1)(c) of the Act, that if the assessee

gives an explanation which is unproved but not disproved i.e it is not

accepted but circumstances do not lead to the reasonable and positive

inference that the assessee’s case is false, then no penalty can be imposed in such case. Same ratio was laid down by the Hon’ble Gujarat

High Court in the case of National Textiles (2001) 249 ITR 0125 (Guj-

HC)

ITA No.143/JP/2016_ 7 Shri Vikram Singh Vs. DCIT, Circle-3, Jaipur

taxman.com 471 (Delhi) (Case Law Page 21), in which it has been held

that “…Head Notes – Section 271(1)(c), read with sections 40A(3) and

44AD of the Income-tax Act, 1961 – Penalty – For concealment of

income (Agreed additions) – Assessment year 2004-05 – Assessee

carried on construction business – It had issued large number of bearer

cheques to small suppliers of building material – In response to notice

issued by Assessing Officer seeking to disallow said payments under

section 40A(3), assessee offered that its income might be computed by

applying net profit rate of 8 per cent of gross receipts – Assessing

Officer having accepted assessee’s offer, made addition in terms of

section 44AD – He also passed a penalty order under section 271(1)(c)

– Tribunal, however, set aside said penalty order – Whether since at

time to initiating penalty proceedings Assessing Officer did not have any

material on record showing that payments made to suppliers were

bogus, he could not have merely on basis of assessee’s offer to be

taxed on estimate basis, concluded that assessee had provided

inaccurate particulars in its return – Held, yes – Whether, therefore,

Tribunal was justified in setting aside impugned penalty order – Held,

yes [Para 14] [In favour of assessee]…”

ITA No.143/JP/2016_ 8 Shri Vikram Singh Vs. DCIT, Circle-3, Jaipur

out at Page 14 of his order, as the facts of those cases are totally

different from the facts of the case at hand. Below mentioned paras

highlight such difference:-

10.i In this case of Swarup Cold Storage & General Mills

(Supra), the assessee had not even filed its return of

income before the due date. The same was filed, in

response to the notice under section 142. Further, the

assessment was made by the AO ex-parte and assessee at

no point of time, during the assessment and appellate

proceedings, produced its books of accounts. The appellate

authorities even doubted the assertion, of the assessee,

that the return of income was filed on the basis of regularly

maintained books of accounts.

Whereas, in the present case, the assessee has been

regularly maintaining his books of accounts which are duly

audited which have nowhere been doubted by the lower

authorities. These books of accounts were even produced

before the ld. AO for his examination during the

assessment proceedings.

ITA No.143/JP/2016_ 9 Shri Vikram Singh Vs. DCIT, Circle-3, Jaipur 10.ii In the case of A.K. Bashu Sahib (Supra), assessee himself

denied the maintenance of any books of accounts including

the trip sheets, or correspondences with the regional

transport authority. The assessee himself estimated his

income on the basis of assessment of earlier years.

Whereas, in the present case, the assessee has been regularly

maintaining his books of accounts which has nowhere been

doubted by the lower authorities. The books of accounts were

even produced before the ld. AO for his examination during the

assessment proceedings. Even the return was filed, by the

assessee, based on the books of accounts regularly maintained

and not on the basis of any estimation.

10.iii In this case of DR. (MRS) K.D. ARORA (Supra) the assessee

did not file her return of income, for the relevant

assessment year, but the same was filed in response to

notice under section 148. During the course of assessment

proceedings, it was noted by the AO that the assessee had

made certain unexplained investments over the

construction of the house. When the assessee was

confronted with this aspect, she did not deny that the

house was constructed by her in the name of her minor

ITA No.143/JP/2016_ 10 Shri Vikram Singh Vs. DCIT, Circle-3, Jaipur

son. She even explained the investments. AO then

estimated the amount of expenditure for the construction

of such house. The judicial authorities even questioned the

mental attitude of the assessee in not filing the return u/s

139(1).

The facts in the present case are totally different as this is not a

case where the assessee tried, even minutely, to conceal the

particulars of his income. It is a case where the ld. AO not being

satisfied by the percentage of Gross Profit declared by the

assessee as compared to the past years estimated a GP rate. 10.iv In the case of MD. WARASAT HUSSAIN (Supra) there was a

clear finding by the AO that the assessee had concealed his

capital gains on sale of land. The assessee calculated

Capital Gains, but, however failed to provide the

documents for such sale before the AO and even asked the

revenue authorities to determine the Capital Gains on

estimate basis.

The present case is not related to capital gains. In this case,

assessee has provided all the relevant documents/records

prepared by him. However, the same, not being made to the

ITA No.143/JP/2016_ 11 Shri Vikram Singh Vs. DCIT, Circle-3, Jaipur

satisfaction of the AO, books were rejected by him and income

was estimated.

10.v In the case of BALAKRISHNA TEXTILES & ORS. (Supra)

there was a raid, on the business premises, of the assessee

by the Economic Offences Wing and as a result, the

assessee came forward with certain disclosures under

section 68. The assessee even admitted to have

manipulated his books of accounts at the time of filing the

return of income.

Whereas, in the case at hand, it is not the allegation of the

departmental authorities that assessee has manipulated the

books of accounts at any point of time.

Hon’ble Supreme Court in the case of Dharmendra Textile Processors &

Others [2008] 306 ITR 277 (SC). Ld. CIT(A) has misread the judgment.

Hon’ble Apex Court has not at all held that mens rea is not essential.

Rajasthan Spg. & Wvg. Mills [2009] 224 CTR 1 (SC) and in CIT v.

Reliance Petroproducts (P.) Ltd. [2010] 322 ITR 158 (SC) observed that

conditions in section 271(1)(c), namely, concealment and furnishing of

inaccurate particular, must be proved to levy penalty, demonstrated its

ITA No.143/JP/2016_ 12 Shri Vikram Singh Vs. DCIT, Circle-3, Jaipur

intention that one’s ‘state of mind’ had to be taken into account to see

if that person wanted to contravene law by concealing income. Relevant

extracts of the Hon’ble Supreme Court judgments have been set out for

the sake of convenience:-

12.i Union of India v. Rajasthan Spg. & Wvg. Mills [2009] 224 CTR 1

(SC)

“…..we need to examine the recent decision of this court in

Dharmendra Textile Processors’ case (supra). In almost every

case relating to penalty, the decision is referred to on behalf of

the revenue as if it laid down that in every case of non-payment

or short payment of duty the penalty clause would automatically

get attracted and the authority had no discretion in the matter.

One of us (Aftab Alam, J.) was a party to the decision in

Dharamendra Textile Processors’ case (supra) and we see no

reason to understand or read that decision in that manner. In

Dharamendra Textile Processors’ case (supra) the court framed

the issues before it, in paragraph 2 of the decision…..”

“…..we fail to see how the decision in Dharamendra Textile

Processors’ case (supra) can be said to hold that section 11AC

would apply to every case of non-payment or short payment of

duty regardless of the conditions expressly mentioned in the

ITA No.143/JP/2016_ 13 Shri Vikram Singh Vs. DCIT, Circle-3, Jaipur

section for its application. There is another very strong reason

for holding that Dharamendra Textile Processors’ case (supra)

could not have interpreted section 11AC in the manner as

suggested because in that case that was not even the stand of

the revenue.” CIT v. Reliance Petroproducts (P.) Ltd. [2010] 322 ITR 158 (SC) 12.ii

“…..We do not agree, as the assessee had furnished all the

details of its expenditure as well as income in its Return, which

details, in themselves, were not found to be inaccurate nor

could be viewed as the concealment of income on its part. It

was up to the authorities to accept its claim in the Return or

not. Merely because the asseessee had claimed the expenditure,

which claim was not accepted or was not acceptable to the

revenue, that by itself would not, in our opinion, attract the

penalty under section 271(1)(c). If we accept the contention of

the revenue then in case of every Return where the claim made

is not accepted by Assessing Officer for any reason, the

assessee will invite penalty under section 271(1)(c). That is

clearly not the intendment of the Legislature….”

been done by the Hon’ble ITAT Pune Bench in the case of Kanbay

Software India (P.) Ltd. Vs. DCIT [2009] 31 SOT 153 (PUNE). The

ITA No.143/JP/2016_ 14 Shri Vikram Singh Vs. DCIT, Circle-3, Jaipur

relevant extracts are reproduced below for proper appreciation of the

position:

“..The views expressed by Their Lordships in Daramendra Textile Processors’

case (supra) cannot be viewed as an authority for the proposition that a

penalty under section 271(1)(c) is an automatic consequence of an addition

being made to income of the taxpayer, for the reason that whether it is a civil

liability or a criminal liability, penalty under section 271(1)(c) can only come

into play when the conditions laid down under that section are to be satisfied.

In view of the elaborate discussions in the preceding paragraphs, by no

stretch of logic or rationale it could be said that imposition of penalty under

section 271(1)(c) has a cause and effect relationship with addition being

made to the returned income per se. An addition being made to income does,

because of impact of Explanation 1, effectively does raise a presumption

against the assessee but that is an entirely rebuttable presumption and the

scheme of rebuttal is provided in the Explanation itself…” In the light of the

above discussions, and for the detailed reasons set out above, we are of the

considered view that even post Dharamendra Textile Processors’ judgment

(supra) by the Hon’ble Supreme Court, merely because an addition is made to

the income declared by the assessee, penalty under section 271(1)(c) cannot

be imposed. In our considered view, Hon’ble Supreme Court’s judgment in the

case of Dharmendra Textile Processors (supra) does not bring about any

radical change in the scheme of section 271(1)(c) though it does nullify the

ITA No.143/JP/2016_ 15 Shri Vikram Singh Vs. DCIT, Circle-3, Jaipur

earlier Division Bench judgment on Hon’ble Supreme Court in the case of Dilip

N. Shroff judgment (supra) to the extent that it held that the onus was on the

tax authorities to establish mens rea before a penalty under section 271(1)(c)

can be imposed – a proposition which, in the esteemed views of the larger

Bench, did not take into account the correct scheme of things as these were –

more particularly of Explanation 1, as it exists now, to section 271(1)(c). Their

Lordships have indeed held that a penalty under section 271(1)(c) is a civil

liability but that expression is used in contradistinction with criminal liability

and, as held by the Hon’ble Supreme Court itself in the case of Om Prakash

Shiv Prakash (supra), there is no conflict in a liability being a civil liability and

at the same time being penal in character. In effect, therefore, liability under

section 271(1)(c) continues to have its basic penal character even as it is held

to be a civil liability…”

decisions. Therefore, ld. ICT(A) has erred in not following the same.

proceedings, that the assessee was indulged in bogus purchases.

penalty should be levied on estimated additions. Below mentioned are

some of the cases in which such view has been followed by the Hon’ble

Jaipur Bench.

ITA No.143/JP/2016_ 16 Shri Vikram Singh Vs. DCIT, Circle-3, Jaipur

16.i Indus Jewellery Private Limited, ITA. No.933/JP/13 (Cse Law Page 30) 16.ii Vijay Solvex Ltd., ITA No.641/JP/14 (Case Law Page 34-35) 16.iii Deepshree Buildcon Ltd., ITA 310/JP/12 (Case Law Page 41-42) 16.iv Deepak Dalela, ITA No.1027/JP/2013 (Case Law Page 43–48)

In view of the above, penalty levied by the ld. AO and confirmed by the

ld. CIT(A), on trading additions sustained on estimated basis, may

please be deleted.

and submitted that since specific defects have been pointed out, the

levy of penalty was justified and rightly confirmed by the CIT(A).

available on record. In this case, books of accounts have been rejected

and thereafter, the Assessing Officer has estimated a GP rate of

42.36% as against declared GP rate of 38.45% which has finally been

sustained by the Coordinate Bench at 40.40%. This GP rate 40.40% has

been applied by the CIT(A) following the GP rate of 40.34% in the

immediately preceding A.Y. 2006-07. As we have noted above, the

coordinate bench while sustaining the GP rate of 40.40% has held that

the Ld. CIT(A) has considered the unusual business conditions prevalent

during the subject matter in terms of profit margins getting effected by

increase in cost of raw material, introduction of new products in the

ITA No.143/JP/2016_ 17 Shri Vikram Singh Vs. DCIT, Circle-3, Jaipur

market and fact that some of the assessee’s customers did not place

orders during the year resulting in fall of the turnover and the view of

the Ld. CIT(A) was held to be fair and reasonable which has factored in

the business environment as well as guided by the assessee’s past

history. In the light of the findings of fact in the quantum proceeding,

we do not see any linkage in terms of basis of rejection of the books of

accounts and the estimation of GP rate by the Assessing Office at

42.36% which has been finally brought down to 40.40%. The additions

have thus been confirmed on a pure estimation basis taken into

consideration the prevalent business environment and the past history

of the assessee and the same cannot be basis for levy of penalty.

Further, the assessee has relied on the decision of Shiv Lal Tak wherein

the Hon’ble High Court has held that :

“in making computation of total income where the income returned has been

rejected by rejecting the trading results, finding some discrepancy in the

books of account and substituting the same by an estimated figure, in the

strict sense, can neither be said to be addition of any amount in the returned

income nor disallowance of any amount as deductions claimed. The word

“amount” of which additions made or deductions disallowed also denotes

reference to specific item of amount added or disallowed as deduction in

contrast to substitution of altogether a new estimated sum in place of the

ITA No.143/JP/2016_ 18 Shri Vikram Singh Vs. DCIT, Circle-3, Jaipur

income returned. It is a case neither of addition or disallowance but a case of

substitution.”

High Court in case of Mahendra Singh Khedla wherein the High Court

has confirmed the findings of the Tribunal at Para-8 which are as

under:-

“Under these circumstances when in the present case there was no

positive evidence beyond doubt regarding estimated trading addition that the

amount in difference between the result shown by the assessee and that

estimated by the AO was resultant of concealment of particulars of income or

furnishing inaccurate particulars thereof on the part of the assessee, penalty

under section 271(1)(c) of the Act cannot be levied. The AO had rejected the

books of account and estimated the trading addition on the basis that the

assessee had not maintained site-wise account, no head-wise details of

claimed purchases were furnished, no separate head of expenses was

maintained, work in progress was not declared, some wages were shown

outstanding without complete details of creditors, stock register was not

maintained and misc. expenses on water transportation etc. were not

verifiable and purchase vouchers of sand, steel, bajri etc. were self made etc.

Assessee explained reasons for the above defects which were not accepted by

the AO as not found satisfactory. The AO accordingly made estimate. The

circumstances suggest that it may be just and proper case of making

ITA No.143/JP/2016_ 19 Shri Vikram Singh Vs. DCIT, Circle-3, Jaipur

estimated trading addition but an inference therefrom cannot be drawn

beyond doubt especially keeping in mind the nature of work in not

maintaining those books and details supported with proper vouchers etc. that

there was concealment of particulars of income or furnishing inaccurate

particulars thereof on the part of the assessee to attract the penal provisions.

In view of above discussion and keeping in mind the fact and circumstances

of the present case, we are of the view that the ld. CIT(A) was justified in

deleting the penalty in absence of positive evidence with the department that

there was concealment of particulars of income or furnishing inaccurate

particulars thereof on the part of the assessee towards the addition in

question. The first appellate order on the issue is thus upheld.”

While affirming the above findings of the Tribunal, the High Court further held as under: “The above finding of the Tribunal makes it clear that additions made by the Assessing Officer were based on estimation only. A fact or allegation based on estimation cannot be said to be correct only, it can be incorrect also. Therefore, in the facts and circumstances of the case, penalty was wrongly levied by the Assessing Officer. The basis for levying penalty in the present case is only estimation, which is purely a question of fact and there is a concurrent finding of fact recorded by first appellate authority as well as the appellate Tribunal both.

decisions of the Hon’ble Jurisdictional High Court referred supra, we

ITA No.143/JP/2016_ 20 Shri Vikram Singh Vs. DCIT, Circle-3, Jaipur hereby direct the Assessing Officer to delete the penalty on the estimated addition. In the result, appeal of the assessee is allowed.

Order pronounced in the open court on 16/01/2017.

Sd/- Sd/- ¼dqy Hkkjr ½ ¼foØe flag ;kno½ (Kul Bharat) (Vikram Singh Yadav) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member Tk;iqj@Jaipur fnukad@Dated:- 16/01/2017. *Sanjeev. आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. vihykFkhZ@The Appellant- Shri Vikram Singh, Khatipura, Jaipur. 2. izR;FkhZ@ The Respondent- The D.C.I.T, Circle-3, Jaipur. 3. vk;dj vk;qDr@ CIT 4. vk;dj vk;qDr@ CIT(A) 5. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत 6. xkMZ QkbZy@ Guard File {ITA No. 143/JP/2016}

vkns'kkuqlkj@ By order,

सहायक पंजीकार@Aेेज. त्महपेजतंत