DIAMOND TOOLS INDUSTRIES,MUMBAI vs. 31(1), MUMBAI
Facts
The assessee, engaged in manufacturing stone-cutting tools, paid commission to its sister concern at 5% while paying other parties at 1.5%. The AO disallowed the excess commission payment (3.50%) under section 40A(2)(a) of the Act, considering it excessive. Subsequently, penalty proceedings were initiated under section 271(1)(c) of the Act.
Held
The Tribunal held that the penalty under section 271(1)(c) was not justifiable. Following the Supreme Court's decision in CIT v/s Reliance Petroproducts (P) Ltd., the Tribunal stated that merely making a claim which is not sustainable in law does not amount to furnishing inaccurate particulars. The AO had not established that the particulars supplied by the assessee were inaccurate or erroneous.
Key Issues
Whether the levy of penalty under section 271(1)(c) is justified when the disallowance of commission payment was based on excessive payment to a related party and not on furnishing of inaccurate particulars.
Sections Cited
271(1)(c), 40A(2)(a), 40A(2)(b), 143(2), 142(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, MUMBAI BENCH “D”, MUMBAI
Before: SHRI NARENDRA KUMAR BILLAIYA & SHRI SANDEEP SINGH KARHAIL
Per Sandeep Singh Karhail, Judicial Member:
The present appeals have been filed by the assessee challenging the
separate impugned orders of even date 30/04/2024, passed under section
250 of the Income Tax Act, 1961 ("the Act") by the learned Commissioner of
Income Tax (Appeals), National Faceless Appeal Centre, Delhi, [“learned
CIT(A)”], which in turn arose from the penalty order passed under section
271(1)(c) of the Act, for the assessment years 2010-11 and 2011-12.
Since both appeals pertain to the same assessee and involve similar
issues arising out of a similar factual matrix, these appeals were heard
ITA Nos. 3254 & 3333/Mum/2024 Diamond Tool Industries
together and are being decided by way of this consolidated order. The
assessee has raised similar grounds in both appeals, therefore the grounds
raised in ITA no.3254/Mum./2024 are reproduced as follows:–
“1. That the learned National Faceless Appeal Centre (NFAC), Delhi, has erred both in law and on facts in confirming penalty of Rs. 3,59,638/ levied by assessing officer under section 271(1)(c) of Income Tax Act, 1961.
That the learned National Faceless Appeal Centre (NFAC), Delhi, has erred both in law and on facts in confirming penalty of Rs. 3,59,638/- levied by assessing officer under section 271(1)(c) of Income Tax Act, 1961 without affording proper opportunity of being to appellant.
That on the facts and circumstances of the case and in law the Learned National Faceless Appeal Centre (NFAC), Delhi, erred in upholding levying penalty of Rs. 3,59,638/- u/s 271 (1)(c) of Income Tax Act. 1961, levied by Ld. Assessing Officer in absence of any satisfaction drawn that the disallowances forming basis of penalty made at assessment stage are on account of deliberate, malafide intention of the assessee to conceal the particulars or nor furnished inaccurate particulars.
That That on the facts and circumstances of the case and in law the learned National Faceless Appeal Centre (NFAC), Delhi, erred in upholding levying penalty of Rs. 3,59,638/- u/s 271 (1)(c) without appreciating that the Ld. A.O. levied penalty without establishing that the explanation furnished by the appellant was false.
That on the facts and circumstances of the case and in law the Learned National Faceless Appeal Centre (NFAC) Delhi, erred in upholding penalty order pervasive to binding decisions interpreting provision explained by courts.
That without prejudice and in the alternative the order passed by the Ld. Assessing Officer and confirmed by Learned National Faceless Appeal Centre (NFAC), Delhi, is bad in law.
That the appellant craves to add, amend, alter or forgo any ground(s) either before or at the time of hearing of the appeal."
ITA Nos. 3254 & 3333/Mum/2024 Diamond Tool Industries
The brief facts of the case are that the assessee is in the business of
manufacturing all types of stone-cutting tools at its factory in Goa, where it
has two units. For the assessment year 2010-11, the assessee filed its
return of income on 24/09/2010 declaring a total income of INR 27,46,570
and for the assessment year 2011-12 the assessee filed its return of income
on 23/09/2011 declaring a total income of INR 78,29,972. The returns filed
by the assessee were selected for scrutiny and statutory notices under
section 143(2) as well as section 142(1) of the Act along with a
questionnaire were issued and served on the assessee. The assessee
claimed commission on sale amounting to INR 49,63,799 during the
assessment year 2010-11 and INR 56,76,580 during the assessment year
2011-12. On verifying the details, it was found that the assessee has paid
commission on sales at different rates to different parties. On perusal of the
details during the assessment proceedings, it was noticed that the assessee
firm has paid commission @5% amounting to INR 29,09,689 during the
assessment year 2010-11 and INR 23,43,702 during the assessment year
2011-12 to the sister concern of the assessee firm, i.e. Shatul Commercial
Co. Pvt. Ltd. Further, it was noticed that the assessee has paid commission
to another party, i.e. M/s Shanthi Udyog @1.5%. Since the assessee paid an
excess commission of 3.50% to the sister concern, the assessee was asked
to show cause as to why excess payment made to the sister concern should
not be disallowed as per the provisions of section 40A(2)(a) of the Act. The
Assessing Officer (“AO”) did not agree with the submissions of the assessee
ITA Nos. 3254 & 3333/Mum/2024 Diamond Tool Industries
and held that the commission payment shown by the assessee to the sister
concern is excessive and there is no documentary evidence to show that the
related party had rendered any extra service or there exist any
extraordinary circumstances which could justify such higher rate of
commission to related party. The AO further noted that the Tribunal vide its
order dated 02/12/2012 while deciding this issue has stated that
commission to the extent of 3% is reasonable and any excess commission of
more than 3% is unreasonable. Accordingly, following the decision of the
Tribunal, the payment of commission in excess of 3% given to the sister
concern, i.e.Shatul Commercial Co. Pvt. Ltd was considered excessive and
the payment amounting to INR 11,63,876 in the assessment year 2010-11
and payment of INR 12,89,480 in the assessment year 2011-12 was
disallowed under section 40A(2)(a) of the Act. In further appeal, the learned
CIT(A) dismissed the quantum appeal filed by the assessee.
In the meanwhile, penalty proceedings under section 271(1)(c) of the
Act were initiated and vide order dated 27/03/2018 for the assessment year
2010-11 and order dated 28/03/2018 for the assessment year 2011-12, the
AO levied a penalty of INR 3,59,638 and INR 3,98,499, respectively, on the
basis that the assessee has concealed the particulars of his income to the
extent of excess payment of commission paid to the sister concern, as the
assessee has failed to furnish the explanation for excessive payments made
to related party.
ITA Nos. 3254 & 3333/Mum/2024 Diamond Tool Industries
The learned CIT(A), vide separate impugned orders, upheld the
penalty levied under section 271(1)(c) of the Act for the assessment years
2010-11 and 2011-12. Being aggrieved, the assessee is in appeal before us.
We have considered the submissions of both sides and perused the
material available on record. Ostensibly, in the present case, the addition
resulting in the impugned penalty is arising out of disallowance made under
section 40A(2)(b) of the Act. During the assessment proceedings, on
verifying the details submitted by the assessee it was noticed that the
assessee has paid commission at different rates to different parties. On one
hand commission @5% was paid to the sister concern, however, on the
other hand, the assessee paid a commission to another party @1.5%.It is
evident from the record that the assessee filed its response to the show
cause notice issued during the assessment proceedings on the issue of why
the excess payment made to the sister concern should not be disallowed as
per the provisions ofsection 40A(2)(b) of the Act. It is discernible that the
submissions filed by the assessee were not accepted by the AO, and
accordingly by relying upon the decision of the Tribunal, the AO held
that commission to an extent of 3% is reasonable and any excess
commission over and above the same is disallowable under section
40A(2)(b) of the Act. It is pertinent to note that the AO has not given any
finding that the expenditure on commission paid to the sister concern is
excessive having regard to either the market value or the fair market value
ITA Nos. 3254 & 3333/Mum/2024 Diamond Tool Industries
of the services or the legitimate needs of the business or the benefit derived
by the assessee. It is further worth noting that considering a 3%
commission to be reasonable is also based on the previous judicial
precedent, which is not of the years under consideration. Therefore, it is
sufficiently evident that it is not a case where the particulars of income or
expenditure were found to be inaccurate. However, the AO disagreeing with
the submissions of the assessee found the commission paid to the sister
concern to be excessive. We find that while examining the meaning of the
term “particulars” in section 271(1)(c) of the Act, the Hon’ble Supreme
Court in CIT v/s Reliance Petroproducts (P) Ltd.; [2010] 322 ITR 158 (SC)
held that mere making of the claim, which is not sustainable in law, by itself,
will not amount to furnishing inaccurate particulars regarding the income of
the assessee. The relevant findings of the Hon’ble Supreme Court, in the
case cited supra,are as follows:–
“9. We are not concerned in the present case with the mens rea. However, we have to only see as to whether in this case, as a matter of fact, the assessee has given inaccurate particulars. In Webster's Dictionary, the word "inaccurate" has been defined as :—
"not accurate, not exact or correct; not according to truth; erroneous; as an inaccurate statement, copy or transcript."
We have already seen the meaning of the word "particulars" in the earlier part of this judgment. Reading the words in conjunction, they must mean the details supplied in the Return, which are not accurate, not exact or correct, not according to truth or erroneous. We must hasten to add here that in this case, there is no finding that any details supplied by the assessee in its Return were found to be incorrect or erroneous or false. Such not being the case, there would be no question of inviting the penalty under section 271(1)(c) of the Act. A mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such claim made in the Return cannot amount to the inaccurate particulars.”
ITA Nos. 3254 & 3333/Mum/2024 Diamond Tool Industries
Therefore, respectfully following the decision of the Hon’ble Supreme
Courtin Reliance Petroproducts (P) Ltd. (supra), we are of the considered
view that the levy of penalty under section 271(1)(c) of the Act in the facts
of the present case is not justifiable, and accordingly the same is deleted. As
a result, the impugned order in both appeals is set aside and grounds raised
by the assessee are allowed.
In the result, the appeals by the assessee for the assessment year
2010-11 and 2011-12 are allowed.
Order pronounced in the open court on 3rd September, 2024
Sd/- Sd/- (Narendra Kumar Billaiya) (Sandeep Singh Karhail) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date : 3rd September, 2024. SA
Copy to :
1) The Appellant 2) The Respondent 3) The CIT(A) concerned 4) The CIT concerned 5) The D.R, “D” Bench, Mumbai
By Order
(Assistant Registrar) Income Tax Appellate Tribunal, Mumbai
