ITAT confirms Penalty on admitted bogus purchase to Inflate work in progress

Centaur Mercantile P. Ltd. Vs ACIT (ITAT Mumbai)

It is undisputed that the assessee has booked bogus purchases thereby inflating work-in-progress. Hence, it is clear that the assessee was owner of undisclosed income during the year. It was because of the system of accounting followed by the assessee being percentage completion method, that there was no change in the figure of income offered in the year. However, the resultant impact of bogus purchases resulting in bogus inflation of work-in-progress was subsequently reversed and given effect in A.Y. 2011-12, in which year there was increase in corresponding income. Hence, we find that the assessee has been found to be in possession of undisclosed income during the year and on which penalty u/s. 271(1)(c) is exigible.

In this regard, we may refer to the provisions of section 5A of section 271(1)(c),  makes it clear that as per clause (ii) of explanation 5A when during the course of search conducted on or after first day of June 2007, the assessee is found to be the owner of any income based on any entry in books of account which has not been disclosed for any previous year which has ended before the date of search, then he shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars of income. We find that this provision is clearly applicable on the facts of this case. The search in this case has been conducted after the first day of June 2007. In the course of search, assessee has been found and has clearly accepted to have booked bogus purchases and, thus, admitted inflation of expense resulting in assessee being actually owner of the income to that extent. Even if the assessee subsequently discloses the income in any return of income furnished afterwards has been specified to be of no consequence. Hence subsequent disclosure or nondisclosure of income in any return of income furnished subsequently has been specifically referred to be of no consequence. Thus as per a specific provision of explanation 5A assessee has been found to be owner of undisclosed income by furnishing inaccurate particulars of income, based upon entry of bogus purchases in its books of account.

When the assessee has been found to have indulged in furnishing of inaccurate particulars of income penalty under section 271(1)(c) is leviable up to the extent of three times of the amount of tax sought to be evaded by reason of such furnishing of inaccurate particulars of such income. In the present case, the amount of income which the assessee is seeking to evade is clearly and unambiguously represented by the bogus purchase booked in the concerned year. Hence, there is no ambiguity in the amount of income which the assessee sought to evade by furnishing of inaccurate particulars of income by way of booking bogus purchases.

Accordingly, the orders of the learned CIT(A) confirming the levy of penalty on merits is sustained and affirmed.

FULL TEXT OF ITAT ORDER IS AS FOLLOWS:

These are appeals has been filed by the assessee against respective orders of the learned CIT(A), in which following penalty, levied u/s 271(1)(c) have been confirmed:

2. The assessee has also filed common additional ground, which reads as under :

“The learned CIT(A) ought to have held that the penalty order passed by the Assessing Officer u/s. 271(1)(c) of the Act was bad in law since the relevant limb under which penalty has been levied has not been struck off in the notice issued u/s 271(1)(c) of the Act. ”

3. The facts involved in all the assessment years under consideration being identical, for the sake of brevity, we refer to that involved in A.Y. 2009­10. Briefly stated, the facts of the case are that the assessee company belongs to Kanakia Group of cases, where a search and seizure action u/s. 132(1) of the Act was carried out on 29.03.2011. During the course of search, it was gathered that the assessee was debiting bogus purchases to the books of account. This fact was accepted by the Managing Director of the assessee company Shri Rasesh Kanakia, in his statement recorded on oath u/s. 132(4) on 30.03.2011. He further surrendered a total amount of Rs. 42 crores in the group as a whole, on account of bogus purchases out of which an amount of Rs. 17.05 was admitted in the hands of the assessee company, as under:

The assessment u/s.143(3) read with Sec. 53A of the Act was completed vide order dated 28/3/2013 in each of the assessment year, in which the Assessing Officer reduced the respective amount of bogus purchases for the year, out of the closing work-in-progress and, as such, no addition was made in the hands of the assessee for the year. However, in the assessment order, the Assessing Officer clearly mentioned that the assessee has furnished inaccurate particulars of its income within the meaning of section 271(1)(c) of the Income tax Act and, therefore, penalty proceedings u/s. 271(1)(c) of the Act was initiated. The assessee did not file any appeal against the assessment orders, wherein bogus purchases were disallowed and work-in-progress were reduced. The assessee’s books of account for the year were closed at the time of search therefore it could not give effect of such bogus purchases in that particular year. To give effect to bogus purchases, the assessee reduced opening work-in-progress in A.Y. 2011-12 by admitting the amount of bogus purchases.

4. In the penalty order, the Assessing Officer noted that the assessee had furnished inaccurate particulars in its return of income filed u/s. 139(1) of the Income tax Act since it had debited bogus purchases in its books of account and, thereby inflated its work-in-progress. He further noted that the
assessee had admitted bogus purchases and false entries in the books of account, therefore, penalty proceedings u/s. 271(1)(c) of the Act were initiated during the time of assessment proceedings. In response, the assessee contended that since there is no difference in the income declared and the income assessed, there is no tax sought to be evaded. However, the Assessing Officer was not convinced. He held that the assessee had debited bogus bills in its regular books of account; that to this extent the assessee had inflated its cost of construction of the project; that the assessee was following percentage completion method of accounting and based on this method the assessee offers income to tax and that during the year the project of the assessee was not completed and had offered the income to tax based on the method of accounting regularly employed by it. He further observed that the said bogus entries were reversed in the books only for A.Y. 2011-12, which were open at the time of search. It is to the extent of such bogus entries that the assessee has furnished inaccurate particulars of income within the meaning of section 271(1)(c) of the Income tax Act. Accordingly, the Assessing Officer proceeded to levy penalty on the bogus amount of purchases booked and accepted by the assessee, which were subsequently reversed in A.Y. 2011 -2012.

5. On appeal, the CIT(A) elaborately considered the submissions of the assessee. He referred to Explanation 5A to section 271(1)(c) and found that assessee’s case to be falling under the same. In this regard the observations of the learned CIT(A) are as under:

I have considered the arguments of the assessee. It is to be noted that the appellant’s case is covered by Explanation 5A to Sec.271(1) of the Act. Explanation 5A has been introduced by the Finance Act, 2009, with retrospective effect from 1/6/2007, as per which the levy of penalty in the cases where search was carried out u/s.132(1) of the Act after 1/6/2007, will be governed by this Explanation 1 Sec.271(1)(c) of the Act. These are special provisions for levy of penalty in search cases and have been made operative with retrospective effect. For clarity, the provisions of Explanation 5A to Sec.271 (1) of the Act are reproduced as under :-

“Explanation 5A. – Where, in the course of a search initiated under section 132 on or after the 1^st day of June, 2007, the assessee is found to be the owner of –

(i) any money, bullion, jewellery or other valuable article or thing (hereafter in this Explanation referred to as assets) and the assessee claims that such assets have been acquired by him by utilizing (wholly or in part) his income for any previous year; or

ii) any income based on any entry in any books of account or other documents or transactions and he claims that such entry in the books of account or other documents or transactions represents his income (wholly or in part) for any previous year,

which has ended before the date of search and, –

(a) where the return of income for such previous year has been furnished before the said date but such income has not been declared therein; or

(b) the due date for filing the return of income for such previous year has expired but the assessee has not filed the return,

then, notwithstanding that such income is declared by him in any return of income furnished on or after the date of search, he shall, for the purposes of imposition of penalty under clause of sub-section (1) of this section be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income.” (emphasis supplied)

8. It would be seen that as per clause (ii) of Explanation 5A to Sec.271 (1) of the Act, where, in the course of a search initiated under section 132 on or after the 1^st day of June, 2007, the assessee is found to be the owner of any income based on any entry in any books of account or other documents or transactions and he claims that such entry in the books of account or other documents or transactions represents his income (wholly or in part) for any previous year, which has ended before the date of search, then, he shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income. The above provisions will apply in cases where the return of income for such previous year has been furnished before the date of search but such income has not been declared therein, as also the cases where the due date for filing the return of income for such previous year has expired but the assessee has not filed the return, even if such income is declared by him in any return of income furnished on or after the date of search. ”

6. Further the learned CIT(A) referred to the statement of Shri Rasesh B Kanakia, Managing Director of the assessee company, obtained under search. He observed that during the course of search the assessee was found to be owner of income (undisclosed) amounting to ` 17,05,48,209/- based on the entries of bogus purchases in the books of account. The respective years to which the said income represented were clearly admitted during the course of search and the same were surrendered. Therefore, the learned CIT(A) held that the assessee was deemed to be liable for penalty u/s. 271(1)(c) to the extent of income represented by bogus purchases booked for the year. The learned CIT(A) further observed as under:

“10. Thus, during the course of search, the appellant company was found to be the owner of income (undisclosed) of Rs.17,05,48,209/-based on the entries of bogus purchases in its books of account. Further, Shri Rasesh Kanakia, Managing Director of the appellant company, claimed/admitted that out of the above income of Rs.17,05,48,209/-, an amount of Rs.8,74,81,769/- represents the income of the appellant company for the year under consideration. He also surrendered such income. Therefore, as per Explanation 5A to Sec.271 (1) of the Act, the appellant is deemed to have concealed the particulars of its income or furnished inaccurate particulars of income of Rs.8,74,81,769/-, for the year under consideration. Consequently, the appellant is liable for penalty u/s.271(1)(c) of the Act. In fact, in the submissions dated 13/2/2015, the learned AR has himself admitted that the appellant’s case is covered by Explanation 5A to Sec.271 (1) of the Act.

11. It may be true that no addition was made by the AO, while completing the assessment and the returned income and the assessed income remains the same. However, it has to be noted here that the appellant company was found to be debiting bogus expenditure in its books of accounts. The fact that the company was debiting bogus expenditure was very clearly and categorically admitted by the Managing Director of the company, Shri Rasesh Kanakia, in his statement on oath, recorded u/s.132(4) of the Act. Thereafter, i.e. subsequent to the search, the appellant has reversed the relevant entries in the books of accounts for the year and has also reduced the closing work in progress by such amount of bogus purchases. Such reduction, in normal course, would have resulted into increase in profits. However, as the appellant was following project completion method and the project was not completed, the entire expenditure was being shown towards work-in-progress, but the reduction in the work-in-progress will have effect of increasing the profits or reducing the loss in the year in which the project will be completed. This is on account of Accounting Standard followed by the assessee, but it in no way changes the character of the bogus purchases and falsification of the accounts by the assessee, which has ultimately resulted into reduction in closing work-in-progress. In fact, closing WIP is akin to the loss incurred by the assessee during the year and as closing WIP has been reduced by the assessee on account of bogus purchases, it is akin to reduction in loss, as envisaged under Explanation 4 to Sec.271 (1), which says that even if the assessment results in reduction of loss returned, then the quantum of loss reduced will be treated as quantum of concealment and on such difference penalty u/s.271(1)(c) may be levied.

12. Be that as it may, since the appellant’s case is covered by Explanation 5A to Sec 271(1), the appellant should be deemed to have concealed the particulars or furnished inaccurate particulars of income of Rs.8,74,81,769/-. Once the concealed income or income in respect of which inaccurate particulars have been furnished is there, then the AO can very well compute the penalty leviable u/s. 271(1)(c), by working out the tax payable by the assessee on such income. Explanation 5A has been introduced in order to enable the Assessing Officer to levy penalty for concealment or furnishing of inaccurate particulars of income in cases where a search action u/s.132(l) was initiated (after 1/6/2007). Therefore, these provisions are special provisions brought on the statute by the Legislature, with an intention to punish assessees in special cases. It cannot be the intention of the Legislature that penalty should not be levied on an assessee, if there was no difference in the amount of tax payable as per the return of income and as per the assessment order, in spite of the fact that the assessee has concealed the particulars or furnished inaccurate particulars of his income within the meaning of Sec.271(1)(c) of the Act. Such a proposition would defeat the very purpose behind the introduction of Sec.271(1)(c) and Explanation 5A, in particular. It is important to note here that even in cases where the assessment results in reduction of returned loss and still no tax is payable by the assessee, penalty u/s.271(1)(c) of the Act can still be levied, if there is concealment or furnishing of inaccurate particulars of income on the part of the assessee, as per clause (a) of Explanation 4 to Sec.271(1). It shows that the intention of the Legislature is to levy penalty in all cases where the assessee is found to have concealed or furnished inaccurate particulars of income. In the present case, the appellant has itself admitted to have concealed and furnished inaccurate particulars of its income, by debiting bogus purchase expenses to its books of accounts for the year under consideration.

13. The learned AR has also relied upon various case laws, which are discussed as under. In the case of Ruchi Strips & Alloys, the Hon’ble ITAT directed to delete the penalty by holding that as there was no tax sought to be evaded, as finally the assessment was completed u/s. 115JB and not under the normal provisions. Similarly, in the case of Nalwa Sons Investment Ltd. also, the assessment had been completed under MAT provisions. As against the same, the assessment in the present case is done under normal provisions and not under MAT provisions u/s.115JB. Therefore, the facts are distinguishable to those cases. Further, the present case is covered under Explanation 5A, and in fact, the assessee has itself admitted concealment and furnishing inaccurate particulars of income, by debiting bogus purchases

expenses to its books of accounts. In fact, Shri Rasesh Kanakia, the Managing Director of the appellant company, in his statement on oath u/s. 132(4) dated 30/3/2011, explained the modus operand! also, in debiting bogus purchases and generation of huge cash, which may have been used to make unaccounted expenditure. Therefore, this case is on a different footing. Further, in the other cases relied upon by the assessee also, Explanation 5A was not applicable, and, therefore, all the cases relied upon by the appellant are distinguishable from the facts of the present case.

14. In view of the discussion in the foregoing paragraphs, I hold that the appellant is deemed to have concealed the particulars of income and furnished inaccurate particulars of income of Rs.8,74,81,769/-, within the meaning of Explanation 5A to Sec.271(1) of the Act, and, consequently, it is liable for penalty u/s.271(l)(c) of the Act. Accordingly, the levy of penalty of Rs.2,70,31,866/- u/s.271(l)(c) on the appellant, vide order dated 25/9/2013, is upheld and the grounds taken by the assessee are rejected.

On similar ground the penalty was levied and confirmed for A.Ys 2007-08, 2008-09 and 2010-11 also.

7. The learned CIT(A) further distinguished that assessee’s reliance on the decision of this Tribunal in the case of CIT vs. Nalwa Sons Investment Ltd.(327 ITR 543). He observed that in that case the assessment has been completed under MAT provision whereas, in the present case was done under normal provision and not under the MAT provisions of section 115JB. Therefore, he found the facts distinguishable. Further he observed that the present case is covered under Explanation 5A to section 271(1)(c) and the Managing Director of the assessee company, in his statement on oath, has explained the modus operandi in debiting the bogus purchases and generating huge cash. Accordingly, the learned CIT(A) confirmed the levy of penalty.

Aggrieved, against this order, the assessee is in appeal before us.

8. The assessee has also raised additional ground of appeal as mentioned above.

9. We have heard both the parties and perused the record. The learned counsel for the assessee has submitted that if no income has been assessed in the relevant previous year, either by way of enhancing the income declared or reducing the losses as shown in the return of income, penalty u/s. 271(1)(c) cannot be levied. It has further been submitted that tax sought to be evaded also cannot be computed as per the provisions of Explanation 4(a) or (c) to section 271(1) of the Act and that if the machinery section fails to determine the tax sought to be evaded, no penalty u/s. 271(1)(c) can be levied. He further submitted that the issue of tax sought to be evaded arises only in the year in which income is assessable. He further referred to the provisions of Explanation 5A to section 271(1) and submitted that “any previous year” used in clause (ii) of Explanation 5A refers to the relevant assessment year in which such income is assessable and not merely in the previous year in which entry is passed in the books of account. That although bogus purchases have been accounted for in the books of account, income arising there from is assessable in the year in which the project is substantially executed as per the percentage completion method followed by the assessee. That since as per the method of accounting followed by the assessee, income has not arisen in the impugned assessment year and, therefore, the case of the assessee is not covered by Explanation 5A to section 271(1)(c). The learned counsel further submitted that the parallel of Explanation 4 to section 271(1) referred by learned CIT(A) is also not applicable as reduction in value of work in progress does not result into any income taxable for the year. In this regard, learned counsel referred to the Delhi High Court judgment in the case of Nalwa Sons Investment Ltd. 327 ITR 543 and, further submitted that SLP filed by the Revenue against the decision has been dismissed by the Hon’ble Apex Court. Accordingly, the learned counsel submitted that no penalty is leviable in this case.

10. Per contra, the learned DR submitted that it is undisputed the assessee has booked bogus purchases in the impugned assessment years and the same were duly accepted by the Managing Director of the assessee company and the assessee has not filed any appeal against the treatment of the purchases as bogus by the Assessing Officer. Hence, the learned DR submitted that having booked bogus purchases, the assessee has admittedly furnished inaccurate particulars of income and the penalty u/s. 271(1)(c) is clearly exigible. He further submitted that the decision of Delhi High Court in the case of Nalwa Sons Investments P Ltd. (supra), relied upon by the learned counsel for the assessee, was not applicable in the facts of the present case as that decision was rendered in the case where assessment was done u/s. 115JB. Hence, the learned counsel pleaded that the said decision does not apply to the case of the assessee. The learned DR further submitted that the CIT(A) is quiet correct in his finding and the penalty levied was justified.

11. We have carefully considered the submissions and perused the record.

12. We find that it is undisputed that the assessee has booked bogus purchases thereby inflating work-in-progress. Hence, it is clear that the assessee was owner of undisclosed income during the year. It was because of the system of accounting followed by the assessee being percentage completion method, that there was no change in the figure of income offered in the year. However, the resultant impact of bogus purchases resulting in bogus inflation of work-in-progress was subsequently reversed and given effect in A.Y. 2011-12, in which year there was increase in corresponding income. Hence, we find that the assessee has been found to be in possession of undisclosed income during the year and on which penalty u/s. 271(1)(c) is exigible. In this regard, we may refer to the provisions of section 5A of section 271(1)(c), which even at the expense of repetition, is reproduced below for the sake of emphasis.

“Explanation 5A. – Where, in the course of a search initiated under section 132 on or after the 1^st day of June, 2007, the assessee is found to be the owner of –

(i) any money, bullion, jewellery or other valuable article or thing (hereafter in this Explanation referred to as assets) and the assessee claims that such assets have been acquired by him by utilizing (wholly or in part) his income for any previous year; or

(ii) any income based on any entry in any books of account or other documents or transactions and he claims that such entry in the books of account or other documents or transactions represents his income (wholly or in part) for any previous year,

which has ended before the date of search and, –

(a) where the return of income for such previous year has been furnished before the said date but such income has not been declared therein; or

(b) the due date for filing the return of income for such previous year has expired but the assessee has not filed the return, then, notwithstanding that such income is declared by him in any return of income furnished on or after the date of search, he shall, for the purposes of imposition of penalty under clause (c) of sub-section (1) of this section be deemed to hove concealed the particulars of his income or furnished inaccurate particulars of such income.”

A reading of the above makes it clear that as per clause (ii) of explanation 5A when during the course of search conducted on or after first day of June 2007, the assessee is found to be the owner of any income based on any entry in books of account which has not been disclosed for any previous year which has ended before the date of search, then he shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars of income. We find that this provision is clearly applicable on the facts of this case. The search in this case has been conducted after the first day of June 2007. In the course of search, assessee has been found and has clearly accepted to have booked bogus purchases and, thus, admitted inflation of expense resulting in assessee being actually owner of the income to that extent. Even if the assessee subsequently discloses the income in any return of income furnished afterwards has been specified to be of no consequence. Hence subsequent disclosure or nondisclosure of income in any return of income furnished subsequently has been specifically referred to be of no consequence. Thus as per a specific provision of explanation 5A assessee has been found to be owner of undisclosed income by furnishing inaccurate particulars of income, based upon entry of bogus purchases in its books of account.

13. When the assessee has been found to have indulged in furnishing of inaccurate particulars of income penalty under section 271(1)(c) is leviable up to the extent of three times of the amount of tax sought to be evaded by reason of such furnishing of inaccurate particulars of such income. In the present case, the amount of income which the assessee is seeking to evade is clearly and unambiguously represented by the bogus purchase booked in the concerned year. Hence, there is no ambiguity in the amount of income which the assessee sought to evade by furnishing of inaccurate particulars of income by way of booking bogus purchases.

14. The case law from the Nalwa Sons Investments Ltd. from Hon’ble Delhi High Court (supra), referred by the learned counsel of the assessee is not at all applicable on the facts of the present case. The decision of Nalwa Sons Investments Ltd was rendered in the context of computation of income under MAT provisions under section 115 JB. And it was not in the context of normal computation of income which is the present case here. Moreover, in the said case before the Hon’ble Delhi High Court there was no question of invoking explanation 5A to section 271(1)(c) and it was not a case of search after 1st day of June 2007. Hence, this case law doesn’t help the case of the assessee. Accordingly, the orders of the learned CIT(A) confirming the levy of penalty on merits is sustained and affirmed.

15. Now we deal with the admission of the additional ground raised by the assessee which has been reproduced hereinabove. In the additional ground, it has been argued that the penalty order was bad-in-law since the relevant limb under which penalty has been levied has not been struck of in the notice issued u/s. 271(1)(c) of the Act. Opposing the admission of additional ground, the ld. Departmental Representative submitted that this ground was never raised by the assessee at any stage, either before the Assessing Officer in the penalty proceedings or before the ld. Commissioner of Income Tax (Appeals). The ld. Departmental Representative further contended that the Assessing Officer has unambiguously mentioned that the assessee has furnished inaccurate particulars of income in the return filed u/s. 139(1).

Since, it has booked bogus purchases; that since the assessee has furnished inaccurate particulars of its income, the penalty proceedings are initiated. He further submitted that in the penalty order also, the Assessing Officer has clearly noted that the penalty was levied for furnishing inaccurate particulars of income. Hence, the ld. Departmental Representative submitted that neither during the stage of assessment proceedings, nor during the stage of penalty proceedings, it can be said that there was any doubt as to for what purpose the penalty was initiated, i.e., for furnishing of inaccurate particulars of income or for concealment of income. The ld. Departmental Representative further submitted that the assessee has not filed this additional ground even before the ITAT in its appeal and that it is now that the assessee raising this ground which does not deserve to be admitted. The ld. Counsel of the assessee in this regard has submitted that the original ground raised by the assessee duly covers this aspect and this additional ground has been raised only by way of abundant precaution.

16. We have carefully considered the submissions. We find that the aforesaid ground was never taken up by the assessee at any stage either before the Assessing Officer during the penalty proceedings nor before the ld. Commissioner of Income Tax (Appeals). Even before the ITAT, the appeal was filed on 23.4.2015 and this additional ground has been raised only on 15.9.2017. In between, the matter was once fully heard by the Tribunal, but was released for fresh hearing on 03.4.2017 due to transfer of one of the Members comprising the Bench who had heard the case. In the original ground, the assessee has only contended that the ld. Commissioner of Income Tax (Appeals) erred in law and on facts in confirming the penalty u/s. 271(1)(c) of the Act. This, by no stretch of imagination, can be said to be covering the additional ground now being raised by the ld. Counsel of the assessee. Be that as it may, we find that the ld. Commissioner of Income Tax (Appeals) had never an opportunity to give a finding on this aspect now being raised by the ld. Counsel of the assessee. Hence, on the facts and circumstances of the case, and in the interest of justice, we remit this issue to the file of the ld. Commissioner of Income Tax (Appeals). The ld. Commissioner of Income Tax (Appeals) shall give a finding on this additional ground being now raised by the ld. Counsel of the assessee after giving the assessee an opportunity of being heard.

17. In the result, all the appeals by the assessee stand allowed for statistical purposes.

Order pronounced in the open court on 11^th December, 2017.