ITAT’s Deletion of Addition Invalidates related Section 271(1)(c) Penalty

Raj Auto Wheels Pvt. Ltd. Vs DCIT (ITAT Jaipur)

ITAT’s Deletion of Addition Invalidates related Section 271(1)(c) Penalty – Raj Auto Wheels Pvt. Ltd. Vs DCIT (ITAT Jaipur)

Introduction: In a recent decision, the Income Tax Appellate Tribunal (ITAT) in Jaipur, in the case of Raj Auto Wheels Pvt. Ltd. vs. DCIT, addressed the issue of penalty under Section 271(1)(c) of the Income Tax Act, 1961. The ITAT’s order, dated 26th September 2023, highlights the significance of the deletion of additions in the quantum assessment process in determining the validity of related penalties.

Background:

Raj Auto Wheels Pvt. Ltd., a Maruti Suzuki dealer in Ajmer District, filed its return of income for the assessment years 2010-11 and 2011-12. The Assessing Officer (AO) completed the assessment, making additions and disallowances, and initiated penalty proceedings under Section 271(1)(c) of the Act.

Key Grounds of Appeal:

The appellant raised several grounds challenging the penalty imposed, including:

1. Jurisdictional issues and procedural irregularities.
2. Alleged hasty order by the Commissioner of Income Tax (Appeals) [CIT(A)] without proper opportunity.
3. Vagueness in the show cause notice regarding the specific limb of Section 271(1)(c).
4. Dispute over the quantum of penalty imposed under Section 271(1)(c).
5. Request for the addition, amendment, or alteration of grounds of appeal.

Arguments and Findings:

The appellant’s arguments primarily revolved around the contention that the penalty was unjustified, considering the deletion of the entire addition of Rs. 20,28,74,955 made during the assessment for advances paid to customers. The ITAT’s key findings and observations are summarized below:

1. Separate Proceedings for Assessment and Penalty: The ITAT emphasized the principle that assessment and penalty proceedings are distinct. It noted that the AO imposed the penalty solely based on findings in the assessment order without conducting independent inquiries. The lack of material to support the concealment of income or furnishing inaccurate particulars was highlighted.
2. Quasi-Criminal Nature of Penalty: The ITAT stressed that the order imposing a penalty is quasi-criminal, placing the burden on the department to establish intentional concealment. It pointed out that the AO failed to bring positive material showing deliberate concealment or furnishing inaccurate particulars.
3. Disallowance of Expenses not Grounds for Penalty: Referring to legal precedents, the ITAT highlighted that penalty cannot be levied merely for the disallowance of expenses or the denial of deductions. It underlined that a disagreement on claims does not imply concealment of income.
4. Deletion of Additions by ITAT: The ITAT acknowledged that in the second appeal, it had deleted the entire addition of Rs. 20,28,74,955, concluding that the appellant was not liable for the alleged advances to customers. Consequently, it held that the penalty imposed in connection with this addition deserved deletion.
5. Excessive Commission Disallowance: Regarding the disallowance of excess commission, the ITAT considered the mode of payment through banking channels and the absence of a confrontation of material gathered from a third party with the appellant. It concluded that disallowance alone does not warrant a penalty.
6. Validity of Trading Addition: The ITAT noted the reduction of the trading addition to Rs. 2,00,000 in the second appeal. However, it highlighted that this amount represented an estimated addition to cover potential income leakage, not concealment. The sustenance of ad hoc additions does not justify the imposition of a penalty.

Conclusion:

In light of the ITAT’s findings, it concluded that the penalty imposed under Section 271(1)(c) was unjustified. The deletion of the entire addition related to advances paid to customers, coupled with the non-conclusive nature of the trading addition, rendered the penalties invalid. The appeals of Raj Auto Wheels Pvt. Ltd. were allowed, highlighting the importance of the ITAT’s decisions in the quantum assessment process in determining the validity of penalties under Section 271(1)(c).

FULL TEXT OF THE ORDER OF ITAT JAIPUR

These are two appeals filed by the assessee against the order of the Learned Commissioner of Income Tax, Ajmer [hereinafter referred to as “CIT(A)”], both dated 02.01.2018 for the assessment years 2010-11 & 2011-12 respectively.

2. Since the issues involved in these appeals of the assessee for all years are almost identical and common, therefore, these appeals were heard together with the agreement of both the parties and are being disposed off by this consolidated order.

3. At the outset, the Id. AR has submitted that the matter pertaining to M/s Raj Auto Wheels (P) Ltd. in ITA No. 494/JPR/2018 may be taken as a lead case for discussions as the issues involved in the lead case are common and inextricably interlinked or in fact interwoven and the facts and circumstances of other cases are exactly identical except the difference in the amount of levy of penalty in other assessment year. The Id. DR did not raise any specific objection against taking that case as a lead case. Therefore, for the purpose of the present discussions, the case of ITA No. 494/JPR/2018 is taken as a lead case.

4. In ITA No. 494/JPR/2018, the assessee has raised the following grounds:-

“1. The impugned penalty order u/s 271(1) (c) of the Act dated 22.03.2017 is bad in law and on facts of the case, for want of jurisdiction and various other reasons and hence the same kindly be quashed.

2. The Id. CIT(A) erred in law as well as on the facts of the case in passing the impugned order in a haste without affording adequate and reasonable opportunity of being heard. The impugned order having been framed in gross breach of natural justice, kindly be quashed or alternatively be restored to the file of the Id. CIT(A).

3. That the impugned show cause notice issued u/s 274 r/w 271(1)(c) of the Act, is quite vague and did not at all specify which limb of Section 271(1)(c) of the Act, the penalty proceedings had been initiated i.e., whether for concealment particulars of income or furnishing of inaccurate particulars of income. The impugned penalty based on such a notice being contrary to the provisions of law & facts kindly be quashed.

4. Rs.6,90,30,620/-: The Id. CIT(A) erred in law as well as on the facts of the case in confirming the imposing a penalty u/s 271(1) (c) of the Act of Rs.6,90,30,620/-. The penalty so imposed by the AO & confirmed by the Id. CIT(A) being totally contrary to the provisions of law and facts kindly be deleted in full.

5. The appellant prays your honour indulgences to add, amend or alter of or any of the grounds of the appeal on or before the date of hearing.”

5. The brief facts of the case are that assessee is a dealer of Maruti Suzuki in Ajmer District and engaged in the business of Sale & Service of Maruti Motor Car. During the year under consideration the assessee filed his ROI on 08.11.2011 declaring total income at Rs. 25,15,760/-. However, the assessment was completed vide order dated 28.03.2014 at Rs. 21,64,37,958/- u/s 143(3) by making various additions and disallowances. The Id. AO also initiated penalty while passing the Assessment order. Thereafter the Id. AO imposed penalty to the tune of Rs. 6,90,30,620/- u/s 271(1)(c), which was then confirmed by the CIT(A). Hence, this appeal.

6. The AO simply stated that the assessee was unable to satisfy the CIT(A) in quantum proceedings regarding additions made. Therefore, the AO levied the penalty and the findings of the AO in penalty proceedings are reproduced here:

“In this case the advances of Rs. 20,28,74,955/- received from customers was added to the total income as the assessee failed to furnish any evidences except sale bills which were also defective. Moreover, assessee failed to bifurcate financial year-wise advances received. Before CIT(A) also, the assessee was not able to show that the advances from customers are genuine advances which shows that obviously the assessee has not been able to discharge onus which lies on him regarding the advances shown in the books of accounts.

Further, the explanation put forth by the assessee in its defense during the course of assessment proceedings and appellate proceedings have not been found satisfactory.

10. In view of totality of the facts and keeping in view the provisions of section 271(1)(c) as well as judicial pronouncements discussed above, the assessee is found guilty of furnishing of inaccurate particulars of income to the extent of Rs. 20,30,90,955/- within the meaning of Section 271(1)(c) and therefore, penalty u/s is imposed as per working giving below:

Calculation of penalty

7. In first appeal the ld. CIT(A) confirmed the disallowance made by AO by observing as under:-

” 3.1 It is seen that the penalty has been levied in respect of the addition made for unproved advances of Rs. 20,28,74,955/- and excess commission of Rs. 2,16,000/-. The CIT(A), Ajmer vide his order dated 31.03.2015 (Appeal No. 09/2013-14) has confirmed both the additions. The appellant either during the course of penalty proceedings or appellate proceedings has not furnished any explanation as to why the penalty should not have been imposed in respect of the above additions made by the AO. I have goine through the penalty order carefully. I find no infirmity in the order passed by the AO. Therefore, in view of the facts discussed by the AO in the penalty order, the penalty of Rs. 6,90,30,620/- in respect of the income of Rs. 20,30,90,955/-, in respect of which in accurate particulars of income were filed by the appellant, is hereby confirmed.

4.0 In the result, the appeal is dismissed.”

8. Being aggrieved by the Id. CIT(A)’s order, the assessee is in appeal before us and the Id. AR for the assessee submitted a detailed written submissions which are as under:-

“General Facts: The assessee is a dealer of Maruti Suzuki in Ajmer District and engaged in the business of Sale & Service of Maruti Motor Car. During the year under consideration the assessee filed his ROI on 08.11.2011 declaring total income at Rs.25,15,760/-. However, the assessment was completed vide order dated 28.03.2014 at Rs.21,64,37,958/- u/s 143(3) by making various additions and disallowances. The Id. AO also initiatedpenalty while passing the Assessment order. Thereafter the Id. AO imposed an penalty to the tune of Rs. 6,90,30,620/- u/s 271(1)(c), which was then confirmed by the CIT(A). Hence this appeal.

The impugned penalty was imposed w.r.t. addition of Rs. 20,28,74,955 u/s 68 on account of advances paid to the customers and disallowance of excess commission of Rs. 2,16,000/-, this matter reached upto the stage of the Hon’ble ITAT. The Hon’ble ITAT deleted the addition of Rs. 20,28,74,955 but confirmed the disallowance of Rs. 2,16,000/-. For convenience, and at a glance chart is enclosed with this Written submission.

Submission:

1. Legal arguments:

1.1 Assessment and penalty – separate proceedings: It is pertinent to note that the AO has levied the penalty for concealment of income only & only on the basis of findings recorded by the AO in the assessment order. It is a settled principle of law that assessment and penalty proceedings are separate and distinct from each other. Kindly refer Durga Kamal Rice Mills v/s CIT (2004) 265 ITR 25 (Cal.), CIT &Anr. v/s Anwar Ali (1970) 76 ITR 696 (SC), CIT v/s Ishtiaq Hussain (1998) 232 ITR 673 (All). The AO after reproducing the relevant portion of CIT(A) order for quantum and discussing the provisions u/s 271(1)(c), merely alleged but failed to bring any material whatsoever by making independent inquires to support the finding of concealment of income & furnishing of inaccurate particulars.

The Id. AO simply stated that the assessee was unable to satisfy the CIT(A) regarding additions made, the finds of the AO in penalty proceedings are reproduced here:

“In this case the advances of Rs. 20,28,74,955/- received from customers was added to the total income as the assessee failed to furnish any evidences except sale bills which were also defective. Moreover, assessee failed to bifurcate financial year-wise advances received. Before CIT(A) also, the assessee was not able to show that the advances from customers are genuine advances which shows that obviously the assessee has not been able to discharge onus which lies on him regarding the advances shown in the books of accounts. “

1.2. Penalty so imposed being totally contrary to the provisions of law:The order imposing penalty is quasi-criminal in nature and, thus, the burden lies, on the department to establish that the assessee had concealed his income. Since the burden of proof in penalty proceeding varies from that in the assessment proceeding, a finding in an assessment proceeding that a particular receipt is income or that a deduction has wrongly been claimed, cannot automatically be adopted, though a finding in the assessment proceedings constitutes good evidence in the penalty proceeding. In the penalty proceedings, thus, the AO is required to bring positive material showing intentional concealment.

1.3 No penalty on mere disallowance of expenses — being debatable: It is settled that there can’t be any penalty on mere disallowance of expenses or on the denial of a deduction- Kindly refer CIT v/s Ajyab Singh 253 ITR 630 (P&H) and A.R.Enterprises(P) Ltd. v/s CIT (2008) 215 CTR 306 (Raj.). Also CIT v/s Modi Industrial Corporation (2010) 34 DTR 158 (P&I-I) and CIT v/s Reliance PetroproductsPvt. Ltd. (2010) 322 ITR 158 (SC).

Merely because the Revenue refused to accept the claim it cannot be said that the assessee had concealed its income — Thus, penalty under Sec. 271(1) (C) cannot be levied — National Textiles v/s CIT (2001) 249 ITR 125 (Guj), CIT v/s Santosh Financiers (2001) 247 ITR 742 (Ker) and Balaji Vegetable Products (P) Ltd. v/s CIT (2007) 290 ITR 172 (Kar).

1.4. Under these facts & circumstances, it cannot be a case of imposition of penaltyu/s 271(1)(c) for the reason that neither there was any concealment nor furnishing of inaccurate particulars. All the necessary facts were already disclosed and were available on record. It was only a matter of difference of opinion amongst the authorities below at different level. The assessee did submit its explanation which is bonafied and has also substantiated the same. Thus, it was neither a case of concealment nor a case of deemed concealment.

2. On merits:

2.1 Disallowance of Rs.2,16,000/- on account of commission expenses.

Facts: During the year under consideration, the AO noticed that as per ledger account of commission, it is seen that commission expenses of Rs.3,76,000/- was claimed out of which an amount of Rs.3,20,000/- was paid to Smt. Kamlesh Devi. However, on inquiry u/s 133(6) she has filed computation of income vide reply dated 21.03.2013, wherein the commission was shown at Rs.1,04,000/- only. Therefore, the AO alleged that the assessce claimed excess commission of Rs.2,16,000/- (Rs.3,20,000/- less Rs.,1,04,000/-) and accordingly, disallowed the same and also imposed penalty on the same.In the first appeal the Id. CIT(A) confirmed the action of the AO.

The above matter reached upto the Fion’ble [TAT. The following submissions were made before the Hon’ble ITAT:

“Firstly, we strongly rely upon the submissions filed before the CIT(A) and those reproduced at Pg. 22 & 23 of CIT(A) order. The same are been reproduced hereunder:

“The A.O. has observed that out of total commission expenses claimed of Rs. 3,76,000.00 details below:-

Based on enquiry u/sec. 133(6) of Smt. Kamlesh Devi since has confirmed for commission received Rs. 1,04,000.00 only hence has preferred to disallow the balance of Rs. 2,16,000.00 (3,20,000.00-1,04,000.00) doing commission expenses; no care for following facts granted.

a. That the computation sheet as forming part of AO’s order (Annexure H) is neither signed by any one nor has any cross verification been made by assessee.

b. That on going through the account statement of party (Smt. Kamlesh) complete TDs of Rs. 32,648.00 on total commission paid Rs. 3,20,000.00 has been deducted & almost all payments made by account payee cheques as evident from account statement.

c. That TDS has also been deducted under the PAN AOCPD0688R of Smt. Kamlesh Devi; copy of sworn affidavit of Smt. Kamlesh Devi & details of vehicles sold under her agency & total commission chart are as enclosed. (Page 79 to 82)

Thus without making any cross — verification of facts or granting opportunity of justification (for shake of natural justice) no addition should be sustained.”

The vital fact that TDS of Rs. 32,648/- on the total amount of the commission paid of Rs. 3,20,000/- has not been denied by the authorities below. This very fact prove the genuineness of the transaction and also the fact of the payment made to the payees. There apart, most of the payments have been made by A/c payee cheques. It is not denied that the subjected expenditure has been incurred exclusively for business purposes. Hence the same deserves to be allowed in full. “

We strongly rely upon above submissions against the imposition of the penalty also. The facts and evidences submitted clearly speaks of the genuineness of the claim made as also establish the fact of making payment hence even though these set disallowances might have been confirmed by the Hon’ble ITAT. Yet however, it is not the case fit for penalty in view of the settled legal positions submitted above. Also in view of the fact that no opportunity of cross examination of Smt. Kamlesh Devi was provided to the assessee whose statements are alleged to be contradictory. Hence the imposed penalty deserves to be quashed.

2.2 Unexplained customer Advanced of Rs.20,28,74,955/-:The Hon’ble ITAT vide order 396/JPR/2015 dated 09.11.2022 has deleted the addition. Hence the imposed penalty deserves to be quashed.

9. The Id. AR for the assessee filed additional written Submission on 21.03.2023 which reads as under:-

^”Surprisingly, even the material gathered at back of the assessee was not even confronted to the assessee which is mandatorily required under S.142(1) and supported by several case laws. What third party says cannot be accepted blindly even for making an addition what to talk of imposition of penalty in relation there to, which is the height of lawlessness. Copy of her ledger account shows complete details of number of vehicle sold, rate of commission, TDS etc. The fact of service is not denied. The factual assertions made by the appellant the three stages completely remain uncontroverted by bringing any contrary evidence by the revenue. No such Disallowance is reported in past or in later years. A full and true disclosure of all relent fact is admittedly made hence no case of furnishing of inaccurate particulars has been made out. Therefore, imposition of patently is beyond imagination. Kindly refer Commissioner of Income Tax Vs. Reliance Petro products (P) LTD (2010) 322 [TR 158 (SC).”

10. Per contra, the Id. DR relied on the order of the lower authorities in both the appeals.

11. As regards the appeal of the assessee for the assessment year 2010-11, the Bench has heard both the parties, and perused the material available on records and gone through the judicial decisions relied upon by the parities. The assessee is a dealer of Maruti Suzuki in Ajmer District and engaged in the business of Sale & Service of Maruti Motor Car. During the year under consideration the assessee filed his ROI on 08.11.2011 declaring total income at Rs.25,15,760/-. However, the assessment was completed vide order dated 28.03.2014 at Rs.21,64,37,958/- u/s 143(3) by making various additions and disallowances. The additions and disallowances were agitated in the first appeal however, the Id CIT(A) confirmed the same. Against the order of the CIT(A), the assessee approached the ITAT and in the meanwhile, the AO imposed penalty to the tune of Rs. 6,90,30,620/- u/s 271(1)(c) w.r.t. addition of Rs. 20,28,74,955 u/s 68 w.r.t advances paid to the customers and disallowance of excess commission of Rs. 2,16,000/-. It is not disputed that in the second appeal the coordinate bench vide its order dated 09.11.2022 in ITA No. 396/JP/2015 deleted the entire addition of Rs. 20,28,74,955/-. We have gone through the detailed finding recorded in para 3.6 at pages 25-33 of the ITAT order, a copy of which is placed on record. Thus, once the ITAT has deleted the entire addition then the penalty imposed so cannot continue and therefore, deserves to be deleted in full with reference to aforesaid the addition. It is however noticed that the AO imposed the penalty also with reference to the disallowance made on account of the excess payment of commission of Rs. 2,16,000/-which was confirmed also by the Tribunal vide the same very order dated 09.11.2022 in para 4.6 at page 36 of the order. However, considering the fact that the payment of the entire amount of commission was made through banking channels, on which even TDS was made, the inquiry was made at the back of the Assessee from Smt. Kamlesh Devi, was not confronted to the Assessee, who is alleged to have confirmed receipt of Rs 1,04,000/- only, as against the claimed payment of Rs 3,20,000/- to her, is not a valid ground, at least for imposition of penalty. The law is well settled that the penalty proceedings and assessment proceedings are separated and distinct, and the finding recorded in the assessment order are not conclusive. A mere, disallowance of expenditure is not a good basis for imposition of penalty as held in the case of CIT v/s Reliance Petroproducts Pvt. Ltd.(2010) 322 ITR 158 (SC). Thus, the penalty imposed with reference to the disallowance of Rs 2,16,000/- is also vacated. As a result, appeal of the Assessee is allowed.

12. Now we take up the appeal of the assessee for the assessment year 2011-12 wherein similar ground is raised by the assessee but the penalty amount is Rs.89,42,450/- u/s 271(1)© of the Act.

13. As regards the appeal of the assessee for the assessment year 2011-12, the Bench has heard both the parties, and perused the material available on records and gone through the judicial decisions relied upon by the parities. The assessee is a dealer of Maruti Suzuki in Ajmer District and engaged in the business of Sale & Service of Maruti Motor Car. During the year under consideration the assessee filed his ROI on 29.03.2013 declaring total income at Rs.18,29,270/-. However, the assessment was completed vide order dated 28.03.2014 at Rs.3,68,96,316/- u/s 143(3) by making various additions and disallowances. The additions and disallowances were agitated in the first appeal however, the Id. CIT(A) confirmed the same. Against the order of the Id. CIT(A), the assesse approached the ITAT and in the meanwhile, the AO imposed penalty to the tune of Rs. 89,42,450/- u/s 271(1)(c) w.r.t. addition of Rs. 2,26,41,521/-and Rs. 62,98,437/- u/s 68 w.r.t advances paid to the customers and disallowance of financial charges Rs.6,96,201/-u/s 40(a) (ix). It is not disputed that in the second appeal the coordinate bench vide its order dated 09.11.2022 in ITA No. 397/JP/2015 deleted the entire addition of Rs. 62,98,437/- and disallowance of Rs.6,96,201/-. We have gone through the detailed findings recorded in the ITAT order, a copy of which is placed on record. Thus, once the ITAT has deleted the entire addition and disallowance based for imposition of penalty, the penalty imposed so cannot continue and therefore, deserves to be deleted in full with reference to aforesaid the addition & disallowance. It is however noticed that the AO imposed the penalty also with reference to the trading addition but the same was reduced to Rs. 2,00,000/-only vide the same very order dated 09.11.2022. It is not disputed that the trading addition of Rs. 2,26,41,521/-, which was based for imposition of penalty has been virtually deleted by the Tribunal vide its order dt.09.11.2022 in ITA No. 397/JP/2015 and detailed findings have been recorded in pr. 2.6 from pages 27-32 of the order which we have carefully gone through and find that the Tribunal has sustained a small addition of Rs. 2 Lakh just to “cover up the possible leakage of the income, if any.” Hence, what the Tribunal has confirmed is the estimated addition which can not be concealed income so as to justify imposition of penalty u/s 271 (1) (c). The sustenance of ad hoc addition is otherwise a case of estimation of income on which basis no penalty can be imposed as per the law settled by the various decisions of Hon’ble Rajasthan High Court cited before us. Thus, the penalty imposed with reference to the estimated trading addition is also vacated. As a result, appeal of the Assessee is allowed.

13. In the result, both the appeals of the assessee are allowed. Order pronounced in the open Court on 26 /09/2023.