MOHD. SHAMIM AHMAD,MUZAFFARNAGAR vs. ITO, SHAMLI

Briefly stated the facts of this case are : on the basis of completed assessment under section 143 (3) of the Act of the assessee qua Assessment Year 2009-10 at Rs.27,31,750/-, the penalty proceedings u/s 271(1)(c) of the Act were initiated. Aggrieved with the order passed by the Assessing Officer, assessee filed an appeal before the ld. CIT (A) who has partly allowed the appeal by giving a relief of Rs.21,43,360/-. So, the AO came to the conclusion that since the assessee has furnished inaccurate particulars of his income by not disclosing income from business to the tune of Rs.4,15,665/-, provisions contained u/s 271(1)(c) read with Explanation 1 are attracted and show cause notice was issued. Assessee filed reply dated 19.07.2012 to the show cause notice. But AO, being unsatisfied, imposed a penalty of Rs.81,700/- i.e. 100% of the tax evaded u/s 271(1)(c) of the Act.

Assessee challenged the penalty order by way of an appeal before the ld. CIT (A) who has affirmed the penalty order by dismissing the appeal. Feeling aggrieved, the assessee has come up before the Tribunal by challenging the penalty order passed u/s 271(1)(c) of the Act. 4. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. 5. AO, after considering the reply filed by the assessee, levied the penalty to the tune of Rs.81,700/- by making following observations :- “7. Aggrieved with the order passed by me, the assessee preferred appeal before Ld. CIT(A), Mzr, who vide order dated 06-06-2012 partly allowed the appeal filed by the assessee. Ld. CIT(A), Mzr adopted the N.P. ratio of 6% on sales made out of books by the assessee and given relief of Rs.21,43,360/-. 8. The assessee has furnished inaccurate particulars of his income as he has not taken into account income from business to the tune of Rs.4,15,665/-. Therefore, provisions of section 271 (1)(c) read with Explanation 1 are attractable in the case and hence penalty proceedings u/s 271 (l)(c) were initiated vide show cause notice u/s 271(1)(c) dated 23.12.2011 fixing date for compliance on 02.01.2012. In response to the notice on 02.01.2012 the counsel of the assessee moved adjournment application on ground that the assessment order has been received on 30.12.2012 and the appellant mandatory time of 30 days to file an appeal against such order and accordingly the appeal will be filed and stay of proceeding against penalty notices will be taken in time till the disposal of first appeal. The counsel of the assessee vide reply dated 19.07.2012 submitted that he Lei. CIT(A), Mzr has assessed the income by applying adhoc N.P. rate on the estimated sale and on this basis penalty u/s 271(1)(c) could not be levied. The plea of the assessee is not acceptable as the addition was made by the A.O. after detection of sales made out of the books. The CIT(A) has only adopted the N.P. ratio on the undisclosed sales made out of the books by the party.

In view of the above facts, it cannot be denied that the assessee has deliberately furnished inaccurate particulars within the meaning of Explanation 1 (B) read with section 271 (1)(c) of the I.T. Act, 1961 by not showing accurate particulars of income for the previous year under consideration to the tune of Rs.4,15,665/-. I, therefore, hold the assessee in default under Explanation 1(B) read with section 271(l)(c) of the I.T. Act, 1961 and the assessee is liable for penalty u/s 271(1)(c).

However, on the other hand, ld. DR for the revenue to repel the arguments advanced by the ld. AR for the assessee contended that since the quantum in this case has already been confirmed, having not been challenged by the assessee, the revenue is justified in imposing ht penalty and relied upon the penalty order.

Undisputedly, the AO has made addition of Rs.20,95,489/- on the premise that the assessee has not maintained his books of account properly and purchases amounting to Rs.20,95,489/- had been made out of books; that during the appellate proceedings, ld. CIT (A) in the quantum proceedings extended the relief to the assessee by returning findings that the AO should have estimated and applied net profit on undisclosed sales and determine the capital deployed outside books transaction on the same and thereby held the addition of Rs.20,95,489/- on account of undisclosed sales as untenable; that the CIT (A) by applying the net profit @ 6% on the total undisclosed sales of Rs.20,95,489/- made an addition to the tune of Rs.1,04,105/-; that the AO levied the penalty of Rs.81,700/- at 100% of the tax evaded.

Bare perusal of the assessment order, penalty order and the order passed by the ld. CIT (A) in quantum proceedings apparently goes to prove that the AO has made an addition on the basis of discrepancies noticed by him in the books of account, that too, without rejecting the books of account; that CIT (A) has partly allowed the appeal by adopting the net profit ratio of 6% of the sales made out of books by the assessee and given relief of Rs.21,43,360/- and to our mind, when the ld. CIT (A) has applied ad hoc net profit rate on the estimated sales, the assessee cannot be held to be guilty for furnishing inaccurate particulars of income to attract the provisions contained u/s 271(1)(c) of the Act.

Not only this, bare perusal of the penalty notice, available at page 66 of the paper book, on the basis of which penalty proceedings were initiated against the assessee, it does not indicate “as to whether the assessee has been called upon to show cause that he has concealed the particulars of income or furnished inaccurate particulars of such income.” The penalty notice has failed to specify as to whether this is a case of concealment of particulars of income or case of furnishing of inaccurate particulars of income.

Not only this, perusal of the assessment order dated 23.12.2011 on the basis of which penalty proceedings have been initiated apparently shows that the same has been passed on the basis of conjectures and surmises because when books of account have been produced by the assessee the AO made an addition merely on the ground that the assessee has failed to turn up to explain the discrepancies meaning thereby the discrepancies were not enough to reject the books of account.

Moreover, when the ld. CIT (A) has partly allowed the appeal of the assessee vide order dated 06.06.2012, available at page 29 of the paper book, by extending the relief of Rs.21,43,360/- he has nowhere directed the AO to initiate the penalty proceedings u/s 271(1)(c). Had there been any concealment of income or furnishing of inaccurate particulars of income on the part of the assessee, the ld. CIT (A) would have directed the AO to initiate the penalty proceedings vide/ order 06.06.2012 (supra).

So, in view of what has been discussed above, we are of the considered view that AO has failed to make out the case of concealment of income or furnishing of inaccurate particulars of such income by the assessee rather it is a case of imposing penalty on the basis of subjective satisfaction without completing necessary ingredients to initiate penalty proceedings u/s 271(1)(c) of the Act as has been held by the Hon’ble Supreme Court in Reliance Petro Products Pvt. Ltd. (supra). Consequently, we hereby delete the penalty by allowing the appeal filed by the assessee.