SONALI A. SHAH,MUMBAI vs. I.T.O 14(3) (3), MUMBAI

This appeal is filed by the assessee against the order of the Commissioner of Income Tax (Appeals)-25, Mumbai [(hereinafter referred to as the CIT(A)] dated 31.07.2013 for the assessment year 2007-08 in sustaining the penalty levied under section 271(1)(c) of the Act on the addition made estimating the gross profit in respect of textile business and iron and steel business of the assessee.

Briefly stated the facts are that the assessee, engaged in the business of dealers in fabrics, cloths, iron and steel products, filed her return of income on 12.10.07 declaring the income at Rs.1,91,917/-. The assessment was completed under section 144 read with section 145 of the act determining the income of the assessee at Rs.2,87,58,580/-. The Assessing Officer while

The assessee preferred appeal before the Ld. CIT(A) and the Ld. CIT(A) sustained the addition. Subsequently, the matter was carried to the Tribunal by the assessee and the co-ordinate bench sustained the addition partly by reducing the gross profit rate by 5% for both textile business and iron and steel business. The Assessing Officer initiated penalty proceedings under section 271(1)(c). In response to the penalty notice, assessee filed reply on 29.03.12. The assessee contended before the Assessing Officer that addition was made only on estimation basis as the GP was estimated by rejecting books of accounts and there is no concealment of income or furnishing of inaccurate particulars. It was further contended that as far as iron and steel business are concerned all the confirmations were submitted and none of the notices issued under section 133(6) sent to the parties in respect of iron and steel were not returned and all the parties responded to the notices. The notices returned pertained only for textile business and the assessee has produced the confirmations, sale bills and purchase bills. Therefore, it was contended that rejection of books is not justified merely because some parties did not respond to notices under section 133(6) of the Act. It was further contended that all purchases and sales were through account payee cheques and all invoices of sales and purchases in respect of the said businesses were produced, therefore

On appeal, the Ld. CIT(A) sustained the penalty on the gross profit estimated on the textile business and iron and steel business of the assessee. While sustaining the penalty the Ld. CIT(A) was of the view that assessee has been resorting to unfair means and submitting inaccurate particulars of income whereby concealing the income, therefore there is no scope for any relief to be granted to the assessee. Ld. CIT(A) placed reliance on the decision of Hon’ble Supreme Court in the case of Union of India vs. Dharmendra Textile Processors (306 ITR 277).

The Ld. Counsel for the assessee submits that the assessee is into trading of iron and steel and fabrics on a wholesale basis. The addition was made in the assessment order by estimating the gross profit at 20% from these two businesses i.e. textile and iron and steel by rejecting the books of accounts. The addition was made on estimate basis without any cogent materials. The Ld. Counsel for the assessee inviting our attention to para 6.1 of the Ld. CIT(A)’s order submits that a remand was called for by the Ld. CIT(A) and in response to the remand report assessee also filed reply which is at para 6.2. The Ld. Counsel further invited our attention to page 9 of the Ld. CIT(A)’s order and the observations which were recorded by the Ld. CIT(A). The Ld.

CIT(A) vs. Metal Products of India 150 ITR 714 (P & H) 2. CIT vs. S. Rahamat Khan Birbalkhan Badruddin and Party 240 ITR 778 (Rajasthan) 3. Harigopal Sing vs. CIT 258 ITR 85 (P & H) 4. Shri Narayansingh J. Deora vs. ACIT (ITA No.5895/Mum/2010 dated 09.12.2011)

The Ld. D.R. vehemently supported the orders of the authorities below. The Ld. D.R. further referring to page 2 of the assessment order submits that there was a survey action under 133 A of the Act on 13.03.07 in the residential cum office premises of the assessee and the survey report shows that the assessee was showing gross profit at 1.30% approximately for both textile as well as iron and steel business on the turnover of about Rs.15 crores for the 5 Mrs. Sonali A. Shah assessment year 2006-07. During the course of survey, assessee in spite of repeated directions to furnish godowns and warehouse addresses no details were furnished by the assessee. The office premises of the assessee was a sharing accommodation where the assessee was paying a meager rent of Rs.1000/- per month and there was no furniture of the assessee to conduct the business properly and further it came to light that assessee is not maintaining any opening or closing stock of both the businesses since as and when the orders received from the parties either through brokers directly assessee places these orders with their members who supplied and delivered the materials directly to the assessee’s client. Thereafter assessee has raised sale bills on her client and in the similar manner her suppliers also raised the bills on the assessee. It was also stated in the report that while raising the sale bills on clients assessee used to keep her margin. The Ld. D.R. further referring to page 3 of the assessment order submits that the assessee has shown very low GP and is maintaining GP at 1% to 1.5 % on the margin of sales and this is very low margin in textile and iron and steel businesses. The Ld. D.R. further submits that in order to verify the genuineness of sales and purchase transactions as the assessee was showing very low GP, notices were issued to various parties from where the assessee has stated to have made purchases. The Ld. D.R. submits that many of the notices have been returned back by the postal authority with endorsements like left, wrong address, incomplete address etc. The Ld. D.R., however, submits that the assessee’s husband submitted the confirmations of the parties where the notices could not be served by postal authorities. He submits that on verification of the confirmations the AO found that they are self made and they are not on letter head, there is no date, seal, name and designation of the authority who has signed the confirmations and therefore they are dubious and not genuine. He further submits that the Assessing Officer has found that there was no complete address i.e. plot number, room number, floor number, road name, pin code etc. on the confirmations. The Assessing Officer further noticed that the 6 Mrs. Sonali A. Shah pen and ink used for signatures by the signatories is almost the same. Therefore, by virtue of all these defects the books were rejected by the AO and estimated the gross profit of the assessee as the books were not reliable. The Ld. D.R. therefore submits that since surrounding circumstances prove that the assessee has furnished inaccurate particulars of income or there is concealment of income the Assessing Officer left with no option and rightly imposed penalty under section 271(1)(c) of the Act.

We have heard the rival submissions and perused the orders of the authorities below and the case law relied on. In this case the assessee is into the business of textiles, iron and steel. There was a survey in the premises of the assessee and in the course of survey it was noticed that the assessee was showing very low gross profit on the turnover from the business of textiles as well as iron and steel. The Assessing Officer when requested for furnishing the details of godowns and warehouses addresses the assessee seems to have given evasive replies. The survey party has also found that the assessee is operating her business in a small place on a sharing accommodation without even any furniture/staff etc. The survey party also recorded a statement from assessee’s husband who has stated that they did not have any opening stock or closing stock in both the business as they receive orders from the parties they place orders with the members directly and the material is supplied to the parties. The assessee raises bills on her client and in turn her suppliers also raise bills on the assessee. In the course of assessment proceedings, the Assessing Officer issued notices to various parties who have sold materials to the assessee. Many of the notices were returned unserved. However, assessee seems to have produced the confirmations before the Assessing Officer whereas notices were returned unserved. The Assessing Officer after noticing various discrepancies in the confirmations he treated such confirmations as dubious and non genuine. In view of all these discrepancies the Assessing Officer rejected the books of accounts of the assessee and estimated the gross

The Assessing Officer levied penalty holding that there is concealment of income or furnishing of inaccurate particulars which the Ld. CIT(A) sustained. On a reading of the orders of the lower authorities i.e. the assessment order and the Ld. CIT(A)’s order, we find that the books of accounts were rejected on noticing various discrepancies such as no proper confirmations from the parties, low GP rate, no proper stock records, no details of warehouses, godowns etc. We notice that it was not concretely established that there is concealment of income or furnishing of inaccurate particulars in this case. The books were rejected as they are not reliable and the addition was made by estimating the gross profit. The activity of the assessee in doing these businesses by placing orders with the dealers who supply the materials directly to the clients of the assessee and the assessee raising invoices on the clients and the dealers on the assessee is also not in dispute. In fact it is the finding in the survey report that assessee is keeping some margin from such sales. Therefore the lower authorities could not concretely prove that there is furnishing of inaccurate particulars or concealment of income in showing less GP in the businesses. Mere estimation of gross profit will not lead to furnishing of inaccurate particulars or concealment of income.

In the case of Commissioner of Income Tax vs. M.M. Rice Mills (2002) 253 ITR 17 (P & H) following the decision of Hon’ble Punjab High Court in the case of CIT vs. Metal Products of India (150 ITR 714) held as under:

In the case of Harigopal Singh vs. CIT (258 ITR 85) the Hon’ble Punjab & Haryana High Court held that where the assessment is made on estimate basis, no penalty under s. 271(1)(c) can be imposed. The Hon’ble High Court observed that there was a difference of opinion as regards the estimate of income of the assessee. Since the Assessing Officer and the Tribunal adopted different estimates in assessing the income of the assessee, it could not be said that the assessee had concealed the particulars of his income so as to attract cl. (c) of s. 271(1)(c) of the IT Act, 1961.

In the case of CIT vs. Nawab and Bros. (1977) 107 ITR. 681 (All), the Hon'ble Allahabad High Court held as under: "that the only reason why his books were rejected was that the assessee was not maintaining a day-to-day stock register. The correct income was determined by merely applying a flat rate on the returned turnover. In view of these facts, it could not be said that the assessee was guilty of either fraud or willful neglect in the matter and the assessee had discharged the burden that lay on him. The Tribunal was justified in law in cancelling the penalty."

In the case of Commissioner of Income Tax vs. K.L. Mangal Sain (107 ITR 598) the Hon’ble Allahabad High Court held as under: “on appeal before the Tribunal it was urged on behalf of the assessee that it has been established that it was not guilty of fraud or gross or willful neglect. It was submitted on behalf of the assessee that the book version was rejected and profit was determined by applying a flat rate for want of proper verification. The Tribunal held that these facts may constitute sufficient material for making certain addition in the assessment but it does not follow that there was any fraud or gross or willful neglect on the part of the assessee. The mere fact that the book version has not been accepted could not lead to any finding to the effect that there was any fraud or gross or willful neglect on the part of the assessee. On this view the penalty order was cancelled. The only fact proved was that the assessee had not maintained the accounts regularly, for which reason they were rejected. The correct income was estimated by applying a flat rate. On these facts the Tribunal held that it could not be said that the assessee was guilty of fraud or gross or willful neglect.”

In view of the above discussion, we hold that in the case on hand before us there is no concrete evidence of concealment of income or furnishing of inaccurate particulars of income within the meaning of section 271(1)(c) of the Act and the addition was made based on estimating Gross Profit by rejecting books of accounts hence no penalty is attracted. Thus we reverse the orders of the authorities below and delete the penalty levied under section 271(1)(c) of the Act on estimated addition.

Appeal of the assessee is allowed.