No Penalty on Income bonafidely disclosed during Scrutiny

Full Text of the ITAT Order is as follows:-

These three appeals by assessee are directed against the orders of the Commissioner of Income Tax (Appeals) – 4, Hyderabad, all dated, 13/10/2015 for the AYs. 2008-09, 2010-11 & 2011-12 levying penalty u/s 271(1)(c). As identical issue is involved in these appeals, they were clubbed and heard together and therefore a common order is passed for the sake of convenience.

2. The facts as emanated from AY 2011-12 are that the assessee is a proprietor of M/s L.N. Motors, Mahabubnagar and is dealing in trading of autorikshaws and spare parts. Assessee filed his return of income for AY 2011-12 on 30/09/2011 declaring total income of Rs. 49,79,920/-, which was processed u/s 143(1) of the IT Act and subsequently the case was selected for scrutiny under CASS.

2.1 During the scrutiny proceedings, the AO asked the assessee to furnish bills and vouchers for the expenditure debited to P&L A/c in respect of his business places at Mahabubnagar and at Bellari and the details of accounts maintained in ING Vysya Bank, Axis Bank and HDFC Bank. In response, the assessee has declared the peak of net cash deposits for AY 2011-12 Rs. 36,90,956/-, for AY 2010-11 Rs. 30,88,645/- and for AY 2008-9 Rs. 28,10,263/-.

2.2 The AO after considering the above disclosures made by the Assessee during the scrutiny proceedings, accepted the peak credits disclosed and assessment was completed bringing the peak credits to tax.

2.3 While completing the assessment, the AO initiated penalty proceedings u/s 271(1)(c) of the Act on the ground that the assessee has concealed his income or furnished inaccurate particulars of his income and called for explanation from the assessee. In response, the assessee submitted a detailed submission as under:

“During the course of assessments proceeding, I voluntarily offered for taxation the Peak credit of Rs. 36,90,956/- in the Bank accounts, which was omitted to be shown! declared in the Original Return of Income filed by me. I also offered for taxation Bank interest and other income credited in Bank accounts amounting. to Rs.82,235/- and Rs.2, 16,730/- respectively for the assessment year 2011-2012. I also submitted all Bank account copies which did not find place in the original return of income filed. The Bank accounts missed my attention while filing the original return due to mental tension and worry caused due to financial and managerial problems in the business. I have two business places one at Mahabubnagar (Andhra Pradesh) and the other at Bellary (Karnataka State). The distance between these two places is about 350 Kms. I depended upon agents, Salesman, accountants and other staff members to run my business . I have to frequently move from one business place to the other to run the business which effected my health and caused mental worry and tension. As soon as. I found omissions in the original return, i.e during assessment proceedings for the assessment year 2011-2012, I filed true and correct particulars of Bank transactions and other incomes like. Bank interest etc., voluntarily in my letter dated 27- 12-2013 for the assessment year 2011-2012 as well as for the previous assessment years 2008-2009, 2009-20 10, 2010-2011 and also for the subsequent assessment years 2012-2013.”

2.4 After considering the said explanation, the AO observed that the explanation given by the assessee cannot be accepted for the reason that, but, for the selection of the case for scrutiny, the assessee would not have filed the details and disclosed the correct income. Accordingly, AO levied the penalty u/s 271(1)(c) of the Act.

3. When the assessee carried the matter in appeal before the CIT(A), the CIT(A) confirmed the order of the AO by observing that assessee has not disclosed the correct income in the original return of income and also not filed revised return of income.

4. Being aggrieved, the assessee is in appeal before us.

5. Before us, ld. Counsel for the assessee submitted that though the assessee has not disclosed the details of bank accounts in the return of income, he has explained the reasons before the AO, but, the AO simply rejected the explanation offered by the assessee without examining the genuineness of the explanation. He also submitted that it is not a case of the AO that the explanation given by the assessee is neither false nor bonafide and, therefore, submitted that the penalty u/s 271(1)(c) is not warranted in the case of the assessee. He relied on the following cases:

1. CIT & Anr. Vs. Manjunatha Cotton & Ginning Factory, [2013] 359 ITR 565.

2. Price Waterhouse Coopers Pvt. Ltd. Vs. CIT, Civil Appeal No. 6924 of 2012., 348 ITR 306.

3. CIT Vs. M/s Gem Granites (Karnataka), [2014] 55 (I) ITCL 406.

5. DR, on the other hand, submitted that the assessee has not disclosed details of bank accounts and interest income as well as certain miscellaneous income in the return of income filed and, therefore, it is a clear cut case of concealment of income. Therefore, penalty levied by the AO is proper and the same may be upheld. She relied on the decision the case of MAK Data (P.) Ltd. Vs. CIT, 358 ITR 593.

6. Considered the rival submissions and perused the material facts on record as well as the decisions cited. It is observed that the AO has initiated penalty proceedings u/s 271(1)(c) on the ground that the assessee has furnished inaccurate particulars of income and but for the selection of the case for scrutiny the undisclosed income of the assessee would not have seen the light of the day. Accordingly, the net cash deposits disclosed by the assessee for the years under consideration was brought to tax by the AO and accordingly penalty u/s 271(1)(c) was levied on the ground of not furnishing the full particulars in the original return of income. However, the assessee offered an explanation vide letter dated 27/12/13, but, the same was rejected by the AO on the ground that if the scrutiny assessment is not taken place, the assessee would not have disclosed the details of bank According to the assessee, it is not a case of the AO that the explanation given by the assessee is neither false nor bonafide and once the details have been disclosed and paid taxes, though no revised return is filed, on technical grounds penalty cannot be levied u/s 271(1)(c) of the Act. In this context, whether the case of the assessee is attracted penalty u/s 271(1)(c) or not, we refer to the following cases, on which reliance placed by the assessee:

6.1 In the case of Manjunatha Cotton & Ginning Factory (supra), the Hon’ble Karnataka High Court has observed that the condition precedent for levying the penalty is the satisfaction of the authority that there is a concealment of the particulars of the income or inaccurate particulars are furnished to avoid payment of tax. Once the authority comes to such conclusion, the law mandates that before imposing penalty, the assessee must be heard. The assessee is given the opportunity to offer his explanation. Once such an opportunity is given and the assessee fails to offer the explanation or offers explanation which is found to be false, then the penalty will follow as prescribed under sub-clause (iii) of clause (c) of sub-section (1) of section 271. Where the assessee offers an explanation and substantiate the explanation, the question of imposing penalty would not arise. Even in cases where he fails to substantiate the explanation but if he proves that the explanation offered is a bona fide one and all the facts relating to the same and material to the computation of his total income as been disclosed by him, then, in law, a discretion is vested with the authority not to impose penalty. In other words, if the assessee offers explanation but fails to substantiate the same, but if he proves that explanation offered is bonafide but is not Sufficient to substantiate the explanation and discloses all material for the computation of his total income, the question of imposing penalty would not arise.

6.1.1 In the present case, the assessee though declared all the details of income during the course of scrutiny proceedings, but, explained the reasons for non-disclosure at the time of filing of original return of income. In this case, The AO simply rejected the explanation offered by the assessee. However, it is not the case of the AO that explanation offered by the assessee is neither false nor bonafide. The only ground for rejection of explanation by the AO is that disclosure was made by the assessee in the scrutiny assessment proceedings. Therefore, it cannot be presumed that the explanation given by the assessee neither false nor bonafide. Unless the AO specifically mentions that explanation offered by the assessee is false and not bonafide. Therefore, the explanation offered by the assessee is presumed to be a genuine one. In the present case, such observation was not made by the AO.

6.2 In the case of Price Waterhouse Coopers Pvt. Ltd. (supra), the Hon’ble Supreme Court observed that the contents of the Tax Audit Report suggest that there is no question of the assessee concealing its income. There is also no question of the assessee furnishing any inaccurate particulars. It appears to us that all that has happened in the present case is that through a bona fide and inadvertent error, the assessee while submitting its return, failed to add the provision for gratuity to its total income. This can only be described as a human error which we are all prone to make. The calibre and expertise of the assessee has little or nothing to do with the inadvertent error. That the assessee should have been careful cannot be doubted, but the absence of due care, in a case such as the present, does not mean that the assessee is guilty of either furnishing inaccurate particulars or attempting to conceal its income.

6.2.1 In the present case, the assessee has disclosed all the particulars before completion of the assessment u/s 143(3), though the details were filed in the scrutiny proceeding. Further, scrutiny assessment proceedings have taken for AY 2011 -12, but, the assessee has disclosed all the details in respect of 2008-09, 2009-10 and 2010- 11 also. Therefore, the attempt made by the assessee to disclose the particulars of income shows the bonafides of assessee.

6.4 So far as the case law relied on by the assessee in the case of MAK Data (P.) Ltd. (supra) is concerned, the very same judgment has been considered by the Hon’ble Madras High Court in the case of CIT Vs. M/s Gem Granites (supra), observed that the Hon’ble Supreme Court while considering the Explanation to section 271(1), held that the question would be whether the assessee had offered an explanation for concealment of particulars of income or furnishing inaccurate particulars of income and the Explanation to section 271(1) raises a presumption of concealment, when a difference is noticed by the assessing officer between the reported and assessed income. The burden is then on the assessee to show otherwise, by cogent and reliable evidence and when the initial onus placed by the explanation, has been discharged by the assessee, the onus shifts on the Revenue to show that the amount in question constituted their income and not otherwise. Factually, we find that the onus cast upon the assessee has been discharged by giving a cogent and reliable explanation. Therefore, if the department did not agree with the explanation, then the onus was on the department to prove that there was concealment of particulars of income or furnishing inaccurate particulars of income.

6.4.1 In the present case, the assessee has discharged the burden by giving detailed explanation before the AO. The AO simply rejected the explanation without discharging the burden cast upon him, as the assessee has disclosed the particulars of income in the scrutiny assessment.

6.5 We find that neither the AO nor the CIT(A) has dealt with the issue in correct perspective.

6.6 In view of the above discussion as well as the ratios laid down by the Hon’ble courts as above, we are of the view that the case of the assessee is not a fit case to attract the provisions of section 271(1)(c) and accordingly, we direct the AO to delete the penalty imposed u/s 271(1)(c) of the Act.

7. As the issue in AYs 2008-09 and 2010-11 are materially identical to that of AY 201 1-12, following the conclusions drawn therein, we direct the AO to delete the penalty levied in these years also.

8. In the result, all the appeals of the assessee under consideration, are allowed.

Pronounced in the open court on 26^th May, 2017.