MOTTA CONSTRUCTION P.LTD,MUMBAI vs. ACIT CEN CIR 15 & 16, MUMBAI

Briefly stated facts are that a search and seizure action was conducted by the Department on Vijay Group and along with that on one CA firm namely M/s. N. M. Associates u/s. 132 of the Act on 22.9.2005. During the course of search various documents, papers, relating to the assessee, i.e., various unaccounted and unexplained expenses incurred by the assessee company were found and seized. The details of such expenditure claim the return year-wise reads as under: Asstt. Year Total Expenses Expenses claimed as allowable in the P (Unaccounted) & L A/c filed with the Return u/s. 153C 2000-01 49,02,781 38,97,825 2001-02 23,75,693 7,74,874 2002-03 23,47,337 12,00,430 2003-04 89,62,914 34,55,356 2004-05 70,85,795 27,41,482 2005-06 7,50,000 6,00,000 2006-07 50,000 50,000

In both the assessment years, the Assessing Officer (A.O.), instead of disallowing these unaccounted expenses, representing cash expenditure to the tune of Rs.30,65,633/- in the A.Y. 2005-06 and Rs.31,15,633/- in the A.Y. 2006-07, the A.O. on account of additional cost estimated the additional profit @ 26.52% and made addition to the return of income of the assessee. Similar additions were made in the A.Y. 2005-06. Finally, the tribunal in both the years directed the A.O.to reduce the estimate at 23% by observing in (A.Ys. 2005-06 & 2006-07) Motta Construction Pvt. Ltd. vs. ACIT para 4 in Motta Construction (in 4795, 4604 & 4065/Mum/2010 dated 06.06.2012): ‘4. Before us, Authorised Representative (AR) submitted that estimate made by the CIT(A) was on higher side, that no seizure was made from the assessee’s premises, that during 153C proceedings, assessee had filed full details of his income. Departmental Representative (DR) supported the orders of the FAA. After hearing the rival submission and perusing the material available on record, we find that assessee had shown 19.27% Gross Profit (GP). AO fixed the GP at 26.52%. FAA reduced it to 25%. 4.1 Thus, basically it is a matter of estimation and that also in a search and seizure related matter. Assessee has admitted that expenses outside the books were incurred. Considering all these facts, AR agreed that if rate of estimate of the FAA is reduced to a reasonable level, assessee would have no grievance. Considering the facts and circumstances of the case, we are of the opinion that 2% reduction in the formula adopted by the FAA will meet the end of justice. AO is directed to recalculate the income of the assessee @ 23% of the cost of the sales (sales minus profit). AO is directed not to consider 40 A(3) disallowances.’ Accordingly, the A.O. started penalty proceedings u/s. 271(1)(c) of the Act and levied the penalty for furnishing of inaccurate particulars of such income at Rs.9,12,679/- in A.Y. 2006-07. Similar penalty was levied in A.Y. 2005-06 at Rs.36,40,057/-.

Aggrieved, the assessee preferred an appeal before the CIT(A) who also confirmed the action of the A.O., on the basis that the action of search and seizure leading to issuance of notice u/s. 158BC, which could detect the unexplained cash expenditure not accounted in the regular books of accounts. The CIT(A) finally observed in para 7 as under:

We have heard the rival contentions and gone through the facts and circumstances of the case. Before us, the ld. Counsel for the assessee argued that in view of the order of the tribunal in quantum, the addition is made on estimate basis by applying rate of estimation of profit and formula adopted by lower authorities directing to reduce the profit rate at 23% of the cost of sales. The ld. Counsel for the assessee argued that once the estimation is made, there is no finding by the lower authorities that there is concealment of income or the assessee has furnished inaccurate particulars of income. According to the ld. Counsel once the estimation is made, the penalty u/s. 271(1)(c) of the Act cannot be levied. Hence, he requested for deletion of the same. On the other hand, the ld. Sr. DR supports the orders of the lower authorities.

We find that the authorities below have noticed that the assessee has incurred cash expenditure in both the assessment years, the basis for this finding was the documents recovered during the course of search by the Revenue from the premises of third party. But finally the lower authorities have not made any addition on the basis of these cash expenditure but estimated the profit rate on gross receipts as the assessee is engaged in the business of the construction activity, i.e., the Civil Contractor. Even the Tribunal has accepted the estimation of income and reduced the profit rate from 25% to 23%. The observations of Tribunal in quantum appeal is reproduced in above para 5 of this order. In all, now the issue arises whether the estimate on penalty can be levied because (A.Ys. 2005-06 & 2006-07) Motta Construction Pvt. Ltd. vs. ACIT assessment is finally made on estimating the profit rate. The lower authorities has initiated the penalty for the reason that the assessee has incurred cash expenditure and for this, evidences were found during the search proceedings on Chartered Accountant firm of the assessee. We also find that the profit rate applied on cost of sale as per the working of sale adopted by the Department can at the best be the basis for quantum addition but it cannot attract penalty for furnishing of inaccurate particulars of income because the assessment is made not on the issue of unaccounted cash expenditure but on estimate of profit rate. Accordingly, in our view, as per rule of evidence there is distinction between set of facts not proved and facts disproved and facts proved. Here we have to give benefit to the assessee because there is a doubt for the reason that mere non-satisfactory explanation furnished by the assessee cannot amount proof of falsity of explanation furnished. Accordingly, we are of the view that the lower authorities have erred in levying penalty for furnishing of inaccurate particulars of income on income estimated after applying profit rate. We delete the penalty and allow the appeal of the assessee.

Similar are the facts in other assessment year, i.e., A.Y. 2005-06, hence taking a consistent view, the penalty for concealment in this year also deleted.

In the result, both the appeals of the assessee are allowed. प"रणामतः "नधा"रती क" अपील" "वीकृत क" जाती है ।