Penalty proceedings are independent of assessment proceedings

Bistro Hospitality Pvt. Ltd. Vs ACIT (ITAT Delhi)

ITAT Delhi held that imposition of penalty u/s 271(1)(c) of the Income Tax Act on the mere allegation that assessee failed to justify the revenue nature of the expenditure is unsustainable as penalty proceedings are independent of assessment proceedings.

Facts-

In the instant case the AO vide assessment order dated 29.12.2016 passed u/s 143(3) of the Act, made three additions i.e. (i) disallowance of service tax claimed in the P& L a/c at Rs. 40,45,470/-; (ii) addition on account of rejection of consumption of foods & beverages claimed at Rs. 4,07,09,028/-; and (iii) disallowance on account of certain expenses claimed as revenue at Rs. 22,27,702/-. The Assessee being aggrieved preferred first appeal before the Ld. Commissioner, who vide impugned order partly affirmed the additions, against which the Assessee has preferred the instant appeal.

Thereafter the AO vide penalty order dated 31.3.2019 passed u/s 271(1)(c) of the Act levied a penalty of Rs. 7,26,800/- in respect of affirmation of the addition of Rs. 2,03,54,514/- on account of disallowance (rejection of consumption claimed) and Rs. 22,27,702/-on account of disallowance (capital expenses), for concealment of income/furnishing of inaccurate particulars of income, on the ground that the Assessee has failed to justify the ‘revenue nature’ of the expenses and it is prima facie evident that the expenditure claimed are of enduring nature.
The penalty proceedings was deleted by Commissioner. Being aggrieved, revenue preferred the instant appeal.

Conclusion-

AO vide assessment order dated 29.12.2016 initiated the penalty proceedings u/s 271(1)(c) of the Act for furnishing of inaccurate particulars of income and for concealment of the income and ultimately levied the penalty of Rs. 73,26,800/- on account of affirmation of the additions of Rs. 2,03,54,514/- and Rs. 22,27,702/- on account of disallowance qua rejection of consumption claimed and capital expenses respectively for concealment of income/furnishing of inaccurate particulars which goes to show that AO while imposing the penalty was not clear under which limb the penalty was supposed to be levied. This peculiar fact entails the penalty order as void-ab-initio.

FULL TEXT OF THE ORDER OF ITAT DELHI

1. The Assessee has preferred ITA no. 1117/Del/2018 as quantum appeal against the order dated 20.12.2017 passed by the Ld. Commissioner of Income-tax (Appeals)-2, New Delhi u/s 250 of the Income Tax Act, 1961 (in short “the Act”), pertaining to the assessment year 2014-15, whereas the Revenue/Department has preferred ITA No. 1335/Del/2020 against the order dated 12.02.2020 passed by the Ld. Commissioner of Income tax (Appeals)-2, New Delhi (in short “Ld. Commissioner”), whereby the penalty order dated 31.03.2019 u/s 271(1)(c) of the Act by the Assessing Officer was upheld.

2. Despite sending various notices of hearingincluding for the date of hearing i.e. 04.10.2022 as well to the Assesseeat the address mentioned in Form no. 36, the Assessee neither appeared nor filed any adjournment application, therefore, in the constrained circumstances, we deem it appropriate to decide the appealsunder consideration as ex-parte after hearing the learned DR and on the basis of the material available on record and.

ITA no. 1117/Del/2018 (quantum appeal):

3. In the instant case the AO vide assessment order dated 29.12.2016 passed u/s 143(3) of the Act, made three additions i.e. (i) disallowance of service tax claimed in the P&L a/c at Rs. 40,45,470/-; (ii) addition on account of rejection of consumption of foods & beverages claimed at Rs. 4,07,09,028/-; and (iii) disallowance on account of certain expenses claimed as revenue at Rs. 22,27,702/-. The Assessee being aggrieved preferred first appeal before the Ld. Commissioner, who vide impugned order partly affirmed the additions, against which the Assessee has preferred the instant appeal.

4. The Assessee has raised following grounds of appeal:

1. The CIT (A) has erred in confirming the disallowance of Rs.2,03,54,514/-.

2. The CIT (A) has erred in disallowance of Rs.2,03,54,514/- on estimation basis.

3. Based on facts and evidence on record, the CIT (A) should have deleted the entire / disallowance of 20% of purchases as against deleting only 10% of purchases.

4. The stock records were produced before the assessing officer thus the lower authorities have erred in holding that stocks records were not maintained.

5. The lower authorities have erred in holding that sum of Rs.22,27,702/-incurred on repairs & maintenance was “Capital” in nature.

6. The CIT (A) has erred in confirming addition of Rs.22,27,702/- as Capital Expenditure.

7. The above grounds of appeal are independent and without prejudice to one another.

8. Your appellant craves leave to add, amend, alter, or vary any of the aforesaid grounds of appeal before or at the time of hearing.

5. Ground nos. 1 to 2 are inter connected. The Assessing Officer by observing “that the Assessee has not maintained, kept, or furnished any quantitative details/ stock register for the goods credited/ consumed. Further there is no evidence to verify the basis of valuation of the closing stock; the Assessee failed to furnish item-wise trading results and quantitative details or opening and closing stock, leaving apart the details of such items location-wise/ head-wise, therefore correct picture of the profit earned by the Assessee could not be determined. Even the tax auditors against item no. 35 of form no. 3CD i.e. quantitative details of goods traded and raw-material etc. has not provided any details but has mentioned that this is not applicable”, ultimately rejected the books of account and disallowed 20% of the consumption on foods and beverages mainly on the ground that in the absence of evidence to tally the purchases with sales quantitative wise and quality wise, the true and correct picture of the profits could not be determined and in the result on rejection of consumption claimed the amount of Rs. 4,07,09,028/- being 20% of Rs. 20,35,45,141/- is added to the trading results of the Assessee.

6. The Assessee being aggrieved also challenged the said addition before the learned Commissioner and in support of its claim claimed:

“That stock registers were produced and details of purchases were furnished before the AO. The list of creditors and purchase were also filed independently. Specific confirmations of suppliers were submitted except with two cases namely, M/s Libra Enterprises and M/s Dairychem Corporation. The ledger account and postal addresses of these two parties were also filed and the AO was also requested to issue notice u/s 131 of the Act to collect the relevant information. Though the Assessee submitted the details, however, the Assessee could not furnish the details in the manner required by the AO as the Assessee maintains complete excise record in the format prescribed under the law for each location in respect of liquor. However, AO has not pointed out any defects in the books of account. Mere absence of stock records or quantitative details is not a sufficient ground to reject the books of account.”

7. The Ld. Commissioner by considering the above submissions and the observation of the AO observed “that the tax auditors in Item no. 35 of form no. 3CD which relates to quantitative details of goods traded and raw material etc.,has not provided any details but has mentioned that this is not applicable. This does not appear to be justified particularly in view of the fact that some of the items like liquor, soft-drinks, tobacco etc. are sold in terms of the quantity. The Ld. Commissioner also held that the quantitative details could have been provided in respect of beverages, soft-drinks, tobacco etc. The Assessee has failed to furnish such details. Even the reason for not providing any such details remained unexplained. The details of item-wise sales are also not available. The Ld. Commissioner ultimately by considering the fact in totality restricted the disallowance from 20% to 10% of the consumption on food and beverages and consequently allowed the relief to the extent of Rs. 2,03,54,514/- and affirmed the remaining amount.

8. The Assessee being aggrieved also challenged the addition in hand before us. Though in grounds of appeal the Assessee claimed that stock registers were produced before the AO and therefore the ld. CIT(A) should have deleted the entire disallowance of 20% of the purchases as against deleting only 10% of the purchases. We observe that from the orders of the authorities below it nowhere appears that the Assessee has duly produced the stock records as claimed by the Assessee. It is a fact that in Item no. 35 of form no. 3CD, the Assessee instead of providing quantitative details of goods traded and raw-material etc. simply stated that Item no. 35 of Form 3CD is not applicable. The Assessee failed to demonstrate before the authorities below as to how the Assessee was not required to provide quantitative details of goods traded and raw-material etc. in Item no. 35 of Form no. 3CD before the authorities below. We also do not find any material and/or reason to controvert the findings of the authorities below. We further observe that for the ends of justice the ld. Commissioner has given substantial relief to the Assessee by reducing the disallowance from 20% to 10%. Hence in cumulative effects, no interference is warranted. Consequently, the decision of the learned Commissioner in affirming the disallowance @ 10% of the consumption on foods and beverages is affirmed. Ground nos. 1 to 4 are dismissed.

9. Ground nos. 5 & 6 are related to each other and pertains to addition of Rs. 22,27,702/- which was added on account of disallowance of expenses incurred on repairs by treating the said expenditure as capital in nature. We observe that the AO made the addition/disallowance of Rs. 22,27,702/- which was claimed by the Assessee on account of repairs and maintenance with respect to plant & machinery as well as leased building by treating as ‘revenue in nature’. The claim of the Assessee was disallowed by the AO on the ground that the Assessee had not been able to state as to how the repairs so done extensively are only current repairs and not renovation, the details sought as per point no. 26 of the detailed questionnaire have also not been furnished. The expenditure claimed was admittedly on renovation, ‘capital in nature’ and would, therefore stand to be capitalized.

10. The Ld. Commissioner affirmed the said disallowance, by concluding as under:

“15.1 The Assessing Officer held that the expenditure is on installation of SS Tiles,Renovation work, supply of kitchen equipments and installation charges of five line units in respect of Restaurant at Bangalore, where fire broke out and the Restaurant was renovated and, therefore, the expenditure was for enduring benefit and hence capital expenditure in nature. The Appellant has pleaded that the expenditure was in nature of repair & maintenance and is not I respect of new unit and, therefore, is allowable expenditure. The Appellant also submitted that alternatively, without being prejudice to the main submission, the depreciation should be allowed on the expenditure.

15.2 I have carefully considered the observation of the Assessing Officer and submission of the Appellant. I agree with the observations of the Assessing officer that the expenditure was incurred after fire, and, therefore, the same cannot be considered as current repair. The Appellant itself submitted that Rs.9,59,510/-was incurred for replacement of 10 Air Conditioner outdoor units, which were stolen. By no stretch of imagination, the expenditure incurred on purchase of Air Conditioners can be called revenue in nature. Besides, the expenses were also incurred on pipes, cables and accessories. These items also provide enduring benefits, not confined to the use of one year only Rs. 1,47,249/- was incurred for compressor, miscellaneous accessories, dryer. PVC Cable, wooden crate boat etc. I find that these items were also not of the recurring nature. I he expenditure includes purchase for kitchen equipments, which cannot be said to be repairs, in view of the above facts and in the circumstances, the disallowance made by the Assessing Officer is hereby confirmed. However, the Assessing Officer shall allow depreciation on the said expenditure before computing the income.

11. The Assessee being aggrieved also challenged the said addition in the instant appeal.

12. We observe that the AO specifically held that the Assessee has incurred the expenses on purchase of Air Conditioners outdoor units which were stolen, pipes, cables and accessories, compressor, miscellaneous accessories, dryer, PVC Cable, wooden crate boat, kitchen equipments etc. which provides enduring benefits and not confined to the use of one year only and also not of the ‘recurring nature’. The Ld. Commissioner though affirmed the addition on these items, however allowed the depreciation on the said expenditure before computing the income.

We have given thoughtful consideration to the determination made by the Ld. Commissioner and the AO and do not find any infirmity in determination made by the Ld. Commissioner on the issue in hand. Even otherwise also we do not find any material/reason to controvert the findings of the ld. Commissioner. Hence, in our view, the addition under challenge does not require any interference. Consequently ground nos. 5 & 6 are also dismissed.

13. Ground nos. 7 & 8 are formal in nature, hence do not require any independent adjudication.

14. In the result, appeal filed by the Assessee stands dismissed. ITA No. 1335/Del/2020 (penalty appeal):

15. Coming to ITA no. 1335/Del/2020, we observe that the AO vide assessment order dated 29.12.2016 passed u/s 143(3) of the Act also made the addition of Rs. 4,07,09,028/- on account of rejection of consumption on foods and beverages claimed and Rs. 22,27,702/- on account of disallowance qua capital expenses. The ld. Commissioner in appeal vide order dated 20.12.2017 in quantum appeal sustained the addition of Rs. 2,03,54,514/- out of Rs. 4,07,09,028/- and disallowance on account of capital expenses of Rs. 22,27,702/-. Thereafter the AO vide penalty order dated 31.3.2019 passed u/s 271(1)(c) of the Act levied a penalty of Rs. 7,26,800/- in respect of affirmation of the addition of Rs. 2,03,54,514/- on account of disallowance (rejection of consumption claimed) and Rs. 22,27,702/-on account of disallowance (capital expenses), for concealment of income/furnishing of inaccurate particulars of income, on the ground that the Assessee has failed to justify the ‘revenue nature’ of the expenses and it is prima facie evident that the expenditure claimed are of enduring nature.

16. On appeal, the ld. Commissioner deleted the said penalty by observing that the penalty proceedings are independent of assessment proceedings. Therefore, the yardstick of evidence in penalty proceedings stand on a different footing vis a vis assessment proceedings.

“5.6 From the facts of the case enumerated hereinabove, it is not the case of A.O that the appellant did not disclose the facts which had a material bearing on computation of income. In fact, at no stage Assessing Officer has rejected the books of account of the appellant. The nature of disallowance was purely based on an estimated basis which was limited to 10% (from 20%) by the Ld. CIT(A). The disallowance was predicated on the appellant, not being able to explain its purchases to the satisfaction of the A.O. During the course of penalty proceedings, the appellant has offered to explain the said purchases with reference to peculiar characteristics to its business. Further, as has been held in CIT vs. Rajbans Singh 276 ITR 351, CIT vs. Ajaib Singh & Co. 253 ITR 630 (P&H) and other related cases on identical facts, penalty is liable to be cancelled, where an amount has been enhanced on an estimated basis. In the said judgment the Hon’ble ITAT had relied the decision in the case of CIT vs. Aero Traders P. Ltd., wherein it has been held that the penalty u/s 271(1 )(c) cannot be imposed when income is determined on an estimation basis. Therefore, in the light of the facts that the A.O levied penalty on an income which was arrived at on an estimation basis, no presumption of concealment arises. The explanation of the appellant needs to be accepted. The penalty levied on this ground has to be cancelled.

6. The other ground relates to disallowance made on account of the classification of the nature of expenditure. While the A.O treated the expenditure as capital in nature, the appellant contends that the same was essentially in the nature of revenue. The CIT(A) has confirmed the addition made by the A.O in this regard. The appellant has contended that he did not furnish any inaccurate particulars of income and that it was merely in the nature of different opinion and therefore penalty u/s 271(1 )(c) was not exigible in this case. It is not in dispute from the facts of the case that penalty was levied on an item which was classified as revenue, whereas the A.O as well as Ld. CIT(A) had held it to be capital in nature. In the case of CIT vs. Reliance Petroproducts Pvt. Ltd. 322 ITR 158 (SC) the Hon’ble Supreme Court, it is held that

“that glance at this provision would suggest that in order to be covered, there has to be concealment of the particulars of the income of the assessee. Secondly, the assessee must have furnished inaccurate particulars of his income. Making an incorrect claim in law is not tantamount to furnishing inaccurate particulars. Further, the Court has also held that mere making of the claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such claim made in the return cannot amount to inaccurate particulars.”

6.1 It is an admitted position that in the present case no information given in the return was found to be inaccurate. It is not as if any statement made or any detail supplied was found to be factually incorrect. Hence, the assessee cannot be held guilty of furnishing inaccurate particulars. A claim was advanced regarding classifying a particular expenditure as revenue. The action of the Assessing Officer can be justified at the assessment stage. But, penalty proceedings, the principle of law are on a different footing.

7. Accordingly, the appeal of the appellant is allowed and the penalty imposed is cancelled.”

17. The Revenue, being aggrieved, preferred the instant appeal.

18. Heard the ld. DR and perused the material available on record. Though the ld. Commissioner in this case deleted the penalty under consideration on merits by accepting the explanation of the Assessee and by relying upon various judgments passed by the higher authorities/counts, including the Hon’ble Apex Court in the case of CIT Vs. Reliance Petro products Pvt. Ltd. 322 ITR 158 (SC), however, it is a fact that the AO vide assessment order dated 29.12.2016 initiated the penalty proceedings u/s 271(1)(c) of the Act for furnishing of inaccurate particulars of income and for concealment of the income and ultimately levied the penalty of Rs. 73,26,800/- on account of affirmation of the additions of Rs. 2,03,54,514/- and Rs. 22,27,702/-on account of disallowance qua rejection of consumption claimed and capital expenses respectively for concealment of income/furnishing of inaccurate particulars which goes to show that AO while imposing the penalty was not clear under which limb the penalty was supposed to be levied. This peculiar fact entails the penalty order as void-ab-initio.

Coming to the merits of the case, the Ld. Commissioner categorically held that it is admitted position that in the present case, no information given in the return was found to be inaccurate. Further it is not as if any statement made or any detail supplied was found to be factually incorrect. Hence, the Assessee can not be held guilty of furnishing inaccurate particulars. The Ld. Commissioner further held that a claim was advanced regarding classifying a particular expenditure as ‘revenue’. The action of the Assessing Officer can be justified at the assessment state, but penalty proceedings, the principle of law are on a different footing.

We have given thoughtful consideration to the decision of the Ld. Commissioner and find that the impugned order is not only based on logical reasoning but also based on the peculiar facts of the case and dictums laid down by the Higher Courts. Even otherwise we do not find any material/reason to controvert the findings of ld. Commissioner in deleting the penalty under consideration. Therefore, the appeal of the Revenue/Department is liable to be dismissed.

19. In the result, both the appeals filed by the Assessee as well as the Revenue stands dismissed.

Order pronounced in open court on 19/X/22.