VISHWAKARMA ENTERPRISES,MUMBAI vs. ITO 25(2)(4), MUMBAI

The brief facts of the case extracted from are that the assessee, a partnership firm, is engaged in the business of civil construction, filed its return of income for A.Y. 2003-04 and 2004-05 on 28.11.2003 and 01.11.2004 declaring total income of ` 15,000/- and ` Nil respectively. The assessment for A.Y 2003-04 has been completed u/s. 144 r.w.s. 143(3) of the Income tax Act, 1961, on 29.12.2005, determining the total income at ` 4,22,210/-, inter alia, making additions towards estimation of net profit on total turnover from the business @8% by applying the provisions of section 44AD of the Income tax Act, 1961. The assessment for A.Y. 2004-05 has been completed u/s. 143(3) of the Act on 29.11.2006, determining total income at ` 40,70,510/- by making additions towards difference in contract receipts, disallowance of expenses, unexplained cash credits in respect of capital introduction and unexplained investment in fixed assets u/s. 69C of the Income tax Act, 1961. The assessee has preferred appeal against the orders of the Assessing Officer for both the assessment years before the first appellate authority. For the assessment year 2003-04, the learned CIT(A) has upheld the estimation of net profit made by the Assessing Officer. However, he directed the Assessing Officer to allow deduction towards remuneration to partners and interest on capital account. In respect of additions made towards difference in interest on Fixed Deposits, the CIT(A) confirmed the additions made by the Assessing Officer. In so far as assessment year 2004-05, the learned CIT(A) has allowed partial relief towards additions made by the Assessing Officer on account of difference in gross receipts and scaled down the disallowance of expenses to 10% as against Assessing Officer’s disallowance of 25% of expenses. However, the CIT(A) confirmed the additions made by the Assessing Officer towards unexplained credits in respect of capital introduction by partners and unexplained expenses in respect of purchase of fixed assets.

Against the orders of the learned CIT(A) for A.Y. 2003-04, the department filed further appeal before the ITAT. The ITAT, ‘SMC’ Bench, in for A.Y. 2003-04, has allowed the appeal filed by the Revenue and reversed the findings of the CIT(A) in respect of further deductions towards remuneration to partners and interest on capital. In respect of A.Y. 2004-05, the assessee preferred further appeal before the ITAT. The ITAT vide its order dated 14.11.2014, in ITA No.3425/Mum/2009, partly allowed the appeal filed by the assessee, wherein it confirmed the additions sustained by the CIT(A) in respect of difference in gross contract receipts, additions towards unexplained cash credits in partners capital account. However, the additions made by the Assessing Officer towards unexplained expenditure in respect of purchase of fixed assets were deleted and the disallowance of expenses was scaled down to 10%.

The Assessing Officer initiated penalty proceedings u/s. 271(1)(c) for A.Ys. 2003-04 and 2004-05 and called upon the assessee to explain as to why penalty should not be levied for concealment of particulars of income or furnishing inaccurate particulars of income. In response to show cause notice, the assessee has filed reply and submitted that the assessee has neither concealed particulars of income nor furnished inaccurate particulars of income, which is evident from the fact that the assessment has been completed u/s. 144 r.w.s. 143(3) of the Act for A.Y. 2003-04, wherein, the Assessing Officer has made additions towards disallowance of income by estimating net profit @8% of gross contract receipts and also interest income on the basis of AIR information. The determination of income on estimation and addition towards interest income on the basis of AIR information neither amounts to concealment of income nor furnishing of inaccurate particulars of income. In so far as A.Y. 2004-05, the assessee submitted that additions made by the Assessing Officer is on adhoc basis towards expenses and disallowance of fixed assets, therefore, it cannot be considered as the assessee has deliberately concealed particulars of income, which comes within the ambit of provisions of section 271(1)(c). In respect of additions on gross contract receipts, the ITAT finally sustained the additions to the extent of ` 6.17 lacs only, on the ground that the assessee could not satisfactorily explain the reconciliation filed with the Assessing Officer. But the fact remains that the assessee had filed necessary explanation with regard to the contract receipts. Similarly, in respect of addition towards capital account, the assessee has filed necessary details. The Assessing Officer after considering the relevant submissions of the assessee opined that the assessee has deliberately furnished inaccurate particulars of income in respect of A.Y. 2003-04 and, accordingly levied penalty of ` 1,42,524/- which is 100% of the tax sought to be evaded. Similarly, for A.Y. 2004-05, the Assessing Officer levied penalty of ` 6 lacs, which is 100% of the tax sought to be evaded.

Aggrieved by the penalty order, the assessee preferred appeal before the learned CIT(A) for both the assessment years. Before the CIT(A) the assessee neither appeared nor filed any submissions to justify its case, which is evident from the fact that the learned CIT(A) has given numerous opportunities to which the assessee failed to comply. Therefore, the CIT(A) has passed exparte order and upheld the penalty levied by the Assessing Officer for A.Ys 2003-04 and 2004-05. Aggrieved by the orders of the CIT(A) the assessee is in appeal before us.

The learned AR for the assessee, at the time of hearing, filed a letter seeking adjournment of hearing by giving reasons that the firm is a defunct entity, which was originally managed by two partners - Shri Kantilal P Sutar and his son Shri Mahendra Sutar. Shri Kantilal P Sutar expired on 8.10.2011 and his son became the proprietor and continued the business. However, later on he also became mentally unwell therefore, there was no body to look after the business and the litigation matters before the CIT(A). The AR further submitted that the brother of Shri Kantilal P Sutar is making an attempt to comply with and complete the pending tax matters. Therefore, an opportunity may be given to collect necessary papers to explain his case. The learned AR further submitted that even on merits, the AO has levied penalty u/s. 271(1)(c) in respect of A.Y. 2003-04 on estimation of net profit by applying 8% net profit rate as per the provisions of section 44AD and difference in interest income on the basis of AIR information. Similarly, penalty has been levied for A.Y. 2004-05 on the basis of adhoc disallowance and unreconciled contract receipts, unexplained credit and unexplained expenditure. The AR further submitted that although the ITAT has confirmed the additions made towards A.Y. 2003-04, the additions sustained by the ITAT finally on account of estimation of net profit does not empower the Assessing Officer to levy penalty u/s. 271(1)(c) for concealment of particulars of income or furnishing inaccurate particulars of income. Similarly, for A.Y. 2004-05 also although the AO has made various additions, the ITAT has partial disallowance on account of un-reconciled contract receipts and additions towards unexplained cash credits, however, it scaled down the estimation of adhoc disallowance to 10% and also deleted the additions made by the Assessing Officer towards fixed assets u/s. 69C of the Act. Since the Assessing Officer has made additions on adhoc basis, the penalty contemplated u/s. 271(1)(c) is not applicable and, therefore, the AR requested for deleting the penalty so levied.

The learned DR, on the other hand, strongly supported the orders of the learned CIT(A).

We have heard both the parties, perused the material available on record and gone through the orders of the authorities below. The Assessing Officer levied penalty u/s. 271(1)(c) for A.Y. 2003-04 on estimated net profit additions towards business income and difference in interest from fixed deposits on the ground that assessee has concealed particulars of income. Similarly, for A.Y. 2004-05, the Assessing Officer levied penalty u/s. 271(1)(c) in respect of additions made towards un-reconciled contract receipts, adhoc disallowances of expenses and unexplained cash credit and disallowance of expenditure incurred towards acquisition of fixed assets u/s. 69C of the Act. For A.Y. 2003-04, although ITAT has confirmed estimation of net profit by the Assessing Officer, such estimation does not empower the Assessing Officer to levy concealment penalty u/s. 271(1)(c) as estimation of net profit does not amount to concealment of particulars of income or furnishing of inaccurate particulars of income. In so far as additions towards interest income on the basis of AIR information, the assessee has explained reasons for difference in itnerst income as per AIR Information and its books of account, which is on account of following mercantile system of accounting wherein, the assessee has accounted interest income on accrual basis, whereas TDS has been deducted on credit basis as and when bank has credited interest. Therefore, we are of the considered view that the Assessing Officer erred in levying penalty u/s. 271(1)(c) for estimated additions towards business income and additions towards difference in interest income. Although the learned CIT(A) does not discuss the issue on merits, dismissed the appeal filed by the assessee for want of prosecution. Before us, the assessee has explained the reasons for not appearing before the CIT(A). Therefore, considering the fact that none is available for representing the assessee before the appellate authorities because of sudden death of one of the partner and mental ill health of another partner and also the fact that the additions made by the Assessing Officer are on estimate basis, we are of the view that penalty levied by the Assessing Officer u/s. 271(1)(c) cannot survive. Accordingly, we direct the Assessing Officer to delete the penalty for A.Y 2003-04.

Coming to A.Y. 2004-05, the Assessing Officer levied penalty u/s. 271(1)(c) on the basis of various additions made in the assessment proceedings. The additions made by the Assessing Officer towards difference in contract receipts have been partially sustained by the ITAT. In respect of disallowance of expenses, the ITAT has sustained to the extent of 10% of disallowance and other additions made by the Assessing Officer towards unexplained expenditure have been fully deleted. In so far as additions towards unexplained cash credit on account credit found in partners’ capital account, although the ITAT has confirmed the additions, the assessee has filed explanations before the Assessing Officer that the partners have enough source to explain credits found in capital account. Therefore, we are of the considered view that the Assessing Officer was incorrect in levying penalty on adhoc disallowance of expenses, un-reconciled contract receipts, unexplained cash credit when the assessee has explained with necessary evidences. Therefore, considering the fact that none is available for representing the assessee before the appellate authorities because of sudden death of one of the partner and mental ill health of another partner and also the fact that the additions made by the Assessing Officer have been partially sustained by the ITAT that too on account of assessee’s failure to explain the reconciliation, cannot be ground for levying concealment penalty u/s. 271(1)(c). Hence, we direct the Assessing Officer to delete penalty for A.Y. 2004- 05.

In the result, the appeals filed by the assessee for A.Ys 2003-04 and 2004-05 are allowed.