BABUL PRODUCTS PVT. LTD.,AHMEDABAD vs. THE DY. CIT, CIRCLE-1(1)(1), AHMEDABAD

The grounds raised

1. The learned Commissioner of Income Tax (Appeals) has erred in confirming the Penalty of Rs.2,36,7620/- levied by the Assessing Officer u/s.271(1)(c) the L.T. Act, 1961 which is illegal and bad in law. Hence the same should be cancelled.

2. The Appellant craves leave to add, alter, amend or modify any of the grounds of appeal on or before the date of hearing of appeal.”

The ld. DR, on the other hand, countered by saying that though the rendering of services by employees to the assessee is not disputed, but as a matter of fact, even the ITAT noted the fact that these employees had also rendered services to other group concerns of the assessee and, based on this finding, had held that reasonable disallowance should be 50% of the expenditure incurred, thus restricting it to Rs.7,89,206/-. The ld. DR contended that considering this fact noted by the ITAT that the employees had also rendered services to some other companies of the group concern, it is evident that the assessee had furnished inaccurate particulars/concealed particulars of income relating to salary paid to these employees and, therefore, the penalty was rightly levied u/s 271(1)(c) of the Act.

We have heard the contentions of both the parties. The issue before us is levy of penalty on disallowance of salary paid to employees of the assessee- company to the tune of Rs.7,89,206/-. The fact that these employees had rendered services to the assessee is not in dispute and has been concurrently noted by both the Assessing Officer and also by the ITAT. In fact, during the assessment proceeding itself, three employees’ statements were recorded who had confirmed rendering services to the assessee. Therefore, the fact of rendering of services by the employees to the assessee is an undisputed and admitted fact. The disallowance, therefore, is only in relation to the quantum of salary which can be solely attributed to the services rendered by them. The ITAT has held that since these employees were rendering services to other companies of the group also, therefore, 50% of the salary paid to them was held to be reasonable for services rendered to the assessee company. It is evident that 50% of the salary claimed by the assessee as paid to the employees was disallowed merely on the basis of estimation. There is no evidence on record to establish that 50% of the salary could not be attributed as paid for services rendered to these employees by the assessee. We agree with the ld. Counsel for the assessee that the disallowance is a mere estimate. In such circumstances, there can be no case of charging the assessee to have concealed or furnished inaccurate particulars to the tune of salary disallowed in its hands of Rs.7,89,206/-. The reliance placed by the assessee on the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs Valimkbhai H Patel (2006) 280ITR 487 (Guj) is apt wherein it was held that any addition/disallowance on estimate basis could not be visited with penalty u/s 271(1)(c) of the Act. In the facts of the said case the loss on account of cyclone of salt kept in open heaps was subject matter of varying estimations by AO & CIT(A). And in the light of this fact, the Hon’ble High Court held that the assessee could not be visited with penalty on the addition made to his income on account of estimation of loss.

In view of the same, we agree with the ld. Counsel for the assessee that the penalty levied in the present case u/s 271(1)(c) of the Act is not tenable in law and we accordingly direct deletion of the same.

In effect, the appeal of the assessee is allowed.