Assessing Officer, in the penalty order, has observed that the assesseee had concealed the income and has furnished inaccurate particulars. However, the penalty order is woefully silent on the issue as to how this satisfaction of concealment/furnishing of inaccurate particulars was arrived at. The penalty was imposed on the quantum addition which was estimated by applying the net profit rate of 5% as against the net profit rate of 3.65% declared by the assessee. Thus, the addition was, at best, an estimate of the profit by the AO which the assessee would have earned.
Therefore, the quantification of the alleged concealment/inaccurate particulars is only an estimate and it is settled law that penalty is not attracted on estimated additions.
FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-
This appeal has been preferred by the assessee against the order passed by the Ld. Commissioner of Income Tax (Appeals) – 20, New Delhi wherein vide order dated 26/05/2015, the Ld. CIT (Appeals) has confirmed the imposition of penalty amounting to Rs. 4,21,040/- imposed under section 271(1)(c) of the Income Tax Act, 1961 for assessment year 2009 –10.
2. The facts of the case are that the return of income was filed declaring income at Rs. 33,08,421/- and subsequently the assessment under section 143 (3) read with section 144 of the Income Tax Act, 1961 was completed after making an addition of Rs. 12,38,711/- after invoking provisions of section 145 (3) of the Income Tax Act, 1961 and applying a net profit rate of 5% on the gross turnover. The AO also made a disallowance of Rs. 41,000/-out of donations which were claimed as expenses. Subsequently, penalty proceedings were initiated under section 271 (1) (c) of the Income Tax Act, 1961 on the addition made on account of net profit rate and a penalty of Rs. 4,21,040/- was imposed, which, on appeal, was confirmed by the Ld. First Appellate Authority. Now the assessee is before the ITAT and has challenged the confirmation of the penalty by raising the following grounds of appeal –
“1. That the learned Commissioner of Income Tax has (Appeals) has grossly erred both in law and on facts in sustaining imposition of penalty under section 271(1)(c) of the Income Tax Act amounting to Rs. 4, 21,040/-.
2. That the learned Commissioner of Income Tax (Appeals) has failed to appreciate the fact that, there was neither furnishing of any inaccurate particulars of income nor could it be validly held that there was any concealment of income on the facts of the case, neither there was any specific satisfaction/finding by learned assessing officer regarding furnishing of inaccurate particulars or concealment of income and as such, the penalty so levied is unsustainable in law and is liable to be deleted as such.
2.1 That further the learned Commissioner of Income Tax (Appeals) has ignored the basic fact that penalty proceedings are separate and independent proceedings, thus, reliance placed by learned assessing officer solely on the order of assessment is wholly misconceived and misplaced in law and as such, the penalty order is liable to be quashed as such.
3. That the learned Commissioner of Income Tax (Appeals) has erred in law and on facts in overlooking the basic fact that penalty was imposed by the learned assessing officer on the addition made, in the order of assessment on account of low net profit (5% instead of 3.65% declared by assessee) and that too, after rejecting the books of accounts, which addition was merely a deemed addition and as such, the penalty so sustained is highly unjust, as no penalty should be levied on the basis of deemed addition.
3.1 That the learned CIT(A) has also erred in proceeding to uphold the levy of penalty on wholly irrelevant, extraneous and immaterial considerations and as such, penalty sustained is not in accordance with law.”
3. The Ld. Authorised Representative submitted that the addition on which the penalty was imposed was estimated after applying the net profit rate and that it was a settled law that penalty on ad hoc disallowance or addition made on estimate basis was not attracted. The Ld. Authorised Representative placed reliance on a plethora of case laws in support of his contention and prayed that the penalty levied be deleted.
4. The Ld. Senior Departmental Representative, on the other hand, vehemently argued that the books of accounts of the assessee were rejected as there were inherent defects in the same and, therefore, the AO had no option but to apply the net profit rate so as to determine the correct income of the assessee. It was submitted that the assessee was unable to provide various details related with the determination of income during the course of assessment proceedings and, therefore, the penalty was correctly imposed. It was submitted that the penalty imposed should be upheld.
5. We have heard the rival submissions and perused the material on record. The Hon’ble Supreme Court, in the case of Hindustan Steel Ltd. v. State of Orissa 83 ITR 26, had laid down the position of law by holding that the Assessing Officer is not bound to levy penalty automatically simply because the quantum addition has been sustained. Also in case of CIT v. Khoday Eswara (83 ITR 369) (SC), incidentally reported in same ITR Volume, it is held that penalty cannot be levied solely on basis of reasons given in original order of assessment. The Hon’ble Supreme Court has recently reiterated the law in case of Dilip N. Shroff v. Jt. CIT  291 ITR 519 by holding in Para 62 that finding in assessment proceedings cannot automatically be adopted in penalty proceedings and the authorities have to consider the matter afresh from different angle. 5.1 The statute requires a satisfaction on the part of the Assessing Officer. He is required to arrive at a satisfaction so as to show that there is primary evidence to establish that the assessee had concealed the amount or furnished inaccurate particulars and this onus is to be discharged by the Department. While considering whether the assessee has been able to discharge his burden the Assessing Officer should not begin with the presumption that he is guilty. Since the burden of proof in penalty proceedings varies from that in the assessment proceedings, a finding in the assessment proceedings that a particular receipt is income cannot automatically be adopted, though a finding in the assessment proceedings constitutes good evidence in the penalty proceedings. In the penalty proceedings the authorities must consider the matter afresh as the question has to be considered from a different angle. It is important to keep in mind the fundamental legal proposition that Assessment proceedings are not conclusive. Assessment proceedings and penalty proceedings are separate and distinct. Findings in the assessment proceedings do not operate as res judicata in penalty proceedings and it was so held by the Hon’ble Bombay High Court in the case of CIT vs. Dharamchand L. Shah reported in 204 ITR 462 (Bom). Further, in Vijay Power Generators Ltd vs. ITO reported in DTR 64 (Del) it was held that “It is well settled that though they constitute good evidence, they do not constitute conclusive evidence in penalty proceedings.” Thus, it is well settled that during penalty proceedings, there has to be reappraisal of the very same material on the basis of which the addition was made and if further material is adduced by the assessee in the course of the penalty proceedings, it is all the more necessary that such further material should also be examined in an attempt to ascertain whether the assessee concealed his income or furnished inaccurate particulars. Thus, under penalty proceedings assessee can discharge his burden by relying on the same material on the basis of which assessment is made by contending that all necessary disclosures were made and that on the basis of material disclosed there cannot be a case of concealment of income or furnishing inaccurate particulars of income. Further, if there is any material or additional evidence which was not produced during assessment proceedings, the same can be produced in penalty proceedings as both assessment and penalty proceedings are distinct and separate.
5.2 In CIT vs. M/s Sidhartha Enterprises reported in 184 Taxman 460 (P & H), the Hon’ble Punjab & Haryana High Court held that the judgment in Dharmendra Textile cannot be read as laying down that in every case where particulars of income are inaccurate, penalty must follow. Even so, the concept of penalty has not undergone change by virtue of the said judgment. Penalty is imposed only when there is some element of deliberate default.
5.3 At this juncture it may be also worthwhile to refer to the judgment of the Hon’ble Supreme Court in the case of CIT v. Reliance Petroproducts (P.) Ltd. reported in 322 ITR 158 wherein the Hon’ble Apex Court, while interpreting the provisions of section 271(1)(c) of the Act, held that a glance at the said provision would suggest that in order to be covered by it, 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. In the facts of that case, the court found that it was not a case of concealment of the particulars of the income, nor was it the case of the revenue either. However, the counsel for the revenue suggested that by making an incorrect claim for the expenditure on interest, the assessee had furnished inaccurate particulars of income. The Hon’ble Apex Court observed that it had to only see as to whether in that case, as a matter of fact, the assessee had given inaccurate particulars. The Hon’ble Apex Court noted that as per Law Lexicon, the meaning of the word “particular” is a detail or details (in the plural sense); the details of a claim, or the separate items of an account. Therefore, the word “particular” used in section 271(1)(c) would embrace the meaning of the details of the claim made. The Hon’ble Apex Court further observed that in Webster’s Dictionary, the word “inaccurate” has been defined as: “not accurate, not exact or correct; not according to truth; erroneous; as an inaccurate statement, copy or transcript.” The Hon’ble Supreme Court observed that by reading the words “inaccurate” and “particulars” in conjunction, they must mean the details supplied in the return, which are not accurate, not exact or correct, not according to truth or erroneous. The Hon’ble Supreme Court further noted that it was an admitted position that no information given in the return was found to be incorrect or inaccurate. It was not as if any statement made or any detail supplied was found to be factually incorrect and, accordingly, held that, prima facie, the assessee could not be held guilty of furnishing inaccurate particulars. The Hon’ble Apex Court also rejected the contention raised by the counsel for the revenue that “submitting an incorrect claim in law for the expenditure on interest would amount to giving inaccurate particulars of such income”. The Hon’ble Apex Court held that in order to expose the assessee to the penalty, unless the case is strictly covered by the provision, the penalty provision cannot be invoked. It was the Hon’ble Apex Court’s observation that by any stretch of imagination, making an incorrect claim in law cannot tantamount to furnishing inaccurate particulars and that it must be shown that the conditions under section 271(1)(c) must exist before the penalty is imposed. The Hon’ble Apex Court further observed that there can be no dispute that everything would depend upon the return filed because that is the only document, where the assessee can furnish the particulars of his income.
5.4 Reverting to the facts of the present case, the Assessing Officer, in the penalty order, has observed that the assesseee had concealed the income and has furnished inaccurate particulars. However, the penalty order is woefully silent on the issue as to how this satisfaction of concealment/furnishing of inaccurate particulars was arrived at. The penalty was imposed on the quantum addition which was estimated by applying the net profit rate of 5% as against the net profit rate of 3.65% declared by the assessee. Thus, the addition was, at best, an estimate of the profit by the AO which the assessee would have earned. Therefore, the quantification of the alleged concealment/inaccurate particulars is only an estimate and it is settled law that penalty is not attracted on estimated additions.
5.5 The Hon’ble Delhi High Court in CIT vs. Aero Traders Pvt. Ltd., reported in 322 ITR 316 (Del), has held that no penalty u/s 271(1)(c) can be imposed when income is determined on estimate basis. Similar view has been taken by the Hon’ble Punjab & Haryana High Court in the case of Harigopal Singh vs. CIT reported in 258 ITR 85 (P&H) and the Hon’ble Gujarat High Court in the case of CIT vs. Subhash Trading Company reported in 221 ITR 110 (Guj). In view of the foregoing precedents including the one from the Hon’ble Jurisdictional High Court, it is apparent that when the bedrock of instant penalty is the estimate of net profit, the same cannot be sustained. Accordingly, we set aside the order of the Ld. CIT (Appeals) and direct the AO to delete the penalty.
6. In the final result, the appeal of the assessee is allowed.
The order is pronounced in the open court on 31st October, 2017.