Case Law Details
N.B. Builders & Promoters (P) Ltd Vs CIT (ITAT Chandigarh)
The case of N.B. Builders & Promoters (P) Ltd Vs Commissioner of Income Tax (CIT) heard by the Income Tax Appellate Tribunal (ITAT) Chandigarh, presents an important ruling regarding the imposition of penalties for lower gross profit. The tribunal ruled that penalties cannot be imposed for mere lower gross profit based on assumptions and conjectures.
The case stems from a series of appeals filed by the Assessee (N.B. Builders & Promoters) against orders of Ld. CIT(A)-3, pertaining to Assessment Years 2015-16 & 2016-17. The core issue revolved around the imposition of a penalty of Rs. 1,83,917/- u/s 271(1)(c) of the Act, which the Assessee claimed was unjustified. The Assessee maintained that there was no concealment of income or furnishing of inaccurate particulars of income, rendering the imposed penalty invalid.
Despite their contentions, both the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) upheld the penalty, mainly due to certain discrepancies in the assessee’s accounts during a search and seizure operation and later, during the assessment proceedings.
The Assessee’s main argument was that the lower gross profit could be a reason for making an enquiry or addition but it cannot be a basis for the levy of a penalty for concealment of income. It was also argued that the AO has not recorded any finding in terms of rejection of books of account and therefore, if the book results have been accepted, and a higher gross profit rate has been declared than usual, it cannot form the basis for penalty imposition.
The ITAT Chandigarh concluded that the case was complex and required further evaluation. Consequently, the matter was remanded to the CIT(A) for a fresh review.
FULL TEXT OF THE ORDER OF ITAT CHANDIGARH
These are two appeals filed by the Assessee against the respective orders of Ld. CIT(A)-3, each dt. 26/10/2022 pertaining to Assessment Years 2015-16 & 2016-17 respectively.
2. Since common issues are involved in both these appeals, they were heard together and are being disposed off by this consolidated order.
3. With the consent of both the parties, the case of the Assessee in ITA No. 700/Chd/2022 was taken as a lead case wherein the assessee has raised the following grounds of appeal:
“1. That the Ld. Commissioner of Income Tax(Appeals) has erred in law as well as on facts in upholding the imposition of penalty of Rs. 1,83,917/- u/s 271(1)(c) of the Act which is illegal, arbitrary & unjustified.
2. That the penalty imposed under section 271(1)(c) of the Act is not imposable in as much as there is neither any concealment of income nor furnishing of any inaccurate particulars of income and as such the order passed and upheld under section 271(1)(c) of the Act is illegal, arbitrary & unjustified.
3. That the Ld. Commissioner of Income Tax (Appeals) has further erred in upholding the levy of penalty based on estimated additions which is not imposable and as such the order passed is arbitrary and unjustified.
4. That the order of the Ld. Commissioner of Income Tax upholding the imposition of penalty under section 271(1)(c) of the Act is erroneous, arbitrary, opposed to law and facts of the case and is, thus, untenable.”
4. Briefly the facts of the case are that a search & seizure action was carried out under section 132 at the premises of the assessee on 03/10/2019. During the course of search & seizure, it was found that the assessee company has maintained several bank accounts in Federal Bank, Sector-8C, Chandigarh in the name of its employees / laborers and the amount credited in this bank account have not been shown by the company in its turnover. Further, during post search investigation, these facts were confronted to the Director of the assessee company and in his statement recorded on oath under section 131(1A) dt. 21/01/2020, he admitted the fact that the cash withdrawal made from these bank accounts should have ideally been part of the turnover of the company and that he shall be revising the return of income of the assessee company.
4.1 Subsequently, in response to notice under section 153A, the assessee company filed its return of income on 24/09/2020 showing an income of Rs. 7,12,660/- as against original returned income of Rs. 3,15,860/- under section 139(1) which was filed on 16/09/2015. Thereafter during the course of assessment proceedings, notice under section 142(1) was issued dt. 15/12/2020 asking the assessee to furnish complete details of all such receipts which have not been accounted for in its regular books of account and to show cause as to why this receipt may not be added to its income as undisclosed receipt.
4.2 The assessee filed its submission which were considered by the AO and thereafter in para 5.1 of the assessment order passed under section 153A dt. 24/09/2021, the AO has recorded his finding stating that the assessee has deposited gross receipt of Rs. 49,60,000/- in the bank account of its employee / laborers and in the return of income, the assessee has shown net profit of Rs. 3,96,800/- on these transactions @ 8%. It was stated by the AO that the assessee has not furnished complete details of the expenses claimed by it against these receipts along with bills and vouchers, thus, the profit rate of 8% was not found justifiable and a show cause vide order sheet entry dt. 15/09/2021 were issued as to why in absence of complete bills & vouchers, profit rate of 12% may not be applied instead of 8% applied by the assessee in the return filed under section 153A of the Act. In absence of any explanation furnished by the assessee, the AO considering the facts and circumstances of the case applied profit rate of 12% on the undisclosed turnover of Rs. 49,60,000/- and profit on these receipts was estimated at Rs 5,95,200/- as against Rs 3,96,800/- declared by the assessee in its return of income and addition of Rs 1,98,400/- was made in the hands of the assessee company.
5. Separately, penalty proceedings under section 271(1)(c) were initiated by the AO in respect of Rs 5,95,200 as not shown in its original return of income for concealment of particulars of income and notice under section 271(1)(c) r.w.s 274 was issued to the assessee on 24/09/2021 and thereafter during the course of penalty proceedings, another show cause dt. 05/03/2022 was issued to the assessee. Thereafter, after considering the submission of the assessee but not finding the same acceptable, the AO levied the penalty @ 100% on the income of Rs. 5,95,200/- holding the same as concealment of particulars of income by the assessee company.
5.1 It was held by the AO that the assessee has not revised its return of income suo-moto/ voluntarily for offering additional income of Rs. 3,96,800/- in the ITR filed under section 153A, that the assessee has not shown its income properly in spite of knowing the fact that the income shown by it in its ITR is inaccurate, that the Assessee has accepted the assessment order passed under section 153A and has not filed any further appeal before the Ld. CIT(A) and had the case not been selected for scrutiny, then the evasion of tax may not have come to the notice of the Department and therefore it is clear case of attempt on the part of the assessee to conceal the particulars of its income to evade payment of taxes. It was further held by the AO that the assessee has failed to furnish any corroborative evidence regarding non-disclosure of correct net profit during the assessment proceedings. Thereafter relying on various Hon’ble Courts decisions, it was held by the AO that the assessee has concealed the income in respect of lower net profit declared and accordingly the AO recorded his satisfaction that the assessee has concealed particulars of its income thereby making it liable for penalty under section 271(1)(c) of the Act.
6. Being aggrieved, the assessee carried the matter in appeal before the Ld. CIT(A) who has since sustained the levy of penalty under section 271(1)(c) of the Act. Against the said findings and the direction of the Ld. CIT(A), the assessee is in appeal before us.
7. During the course of hearing, the Ld. AR submitted that the limited issue involved in the present appeal relates to levy of penalty on estimation of net profit by the AO. It was submitted that in the return of income filed under section 153A, the assessee has declared a reasonable and generally accepted net profit rate of 8% drawing support from the provisions of Section 44AD of the Act even though the net profit as per the P&L Account was declared @ 3.16%. It was submitted that the AO has verified the books of account and has not pointed out any particular discrepancy in the vouchers / bills but vaguely made an opinion based on surmises and conjectures that the profit rate is quite low and made the addition without any basis. It was submitted that the net profit declared in respect of his regular income was much below the estimated net profit rate of 8% and the AO has not brought on record any cogent material to prove otherwise. It was submitted that the lower gross profit can be a reason for making an enquiry or for making the addition, however the same cannot be a basis for levy of penalty for concealment of income. It was submitted that the AO has not recorded any finding in terms of rejection of books of account and therefore where the book results have been accepted and the assessee has declared a higher gross profit rate than the declared as per its regular books of account, the same cannot be the basis for levy of penalty. It was accordingly, submitted that the penalty so levied and sustained by the Ld. CIT(A) be directed to be deleted.
8. Per contra, the Ld. DR has relied on the findings of the AO as well as the Ld. CIT(A) and our reference was drawn to the findings of the Ld. CIT(A) which are contained in para 4 of the impugned order and the contents thereof reads as under:
“4. Grounds of appeal no. 1-6
In this case search and seizure proceedings were carried out u/s 132(1) of the Act on 03.10.2019. Assessment u/s 153A for the year under consideration was completed on 24.09.2021. Penalty proceedings were initiated for concealment of income on account of profit embedded in the concealed turnover and for furnishing inaccurate particulars of income on account of under valuation of stock. During the penalty proceedings after considering the reply of the appellant, it was observed by the AO that the appellant has concealed its contracts receipts by Rs. 49,60,000/-. The appellant in the return furnished subsequent to the search proceedings declared profit of Rs. 3,96,800/- @ 8%, filed on 21.01.2020. However, in the absence of supporting documents the AO assessed the profit @ 12% from such turnover and made addition of Rs. 1,98,200/-. Further the AO made disallowance of Rs. 3,69,500/- from the cost of closing stock. The appellant did not prefer any appeal against the above addition/ disallowance.
After considering the facts of the case, the AO inferred that the appellant has concealed the particulars of its income and has filed inaccurate particulars on account of suppression of profit and under valuation the closing stock. On such facts the AO levied penalty of Rs. 1,83,917/-. During the appellate proceedings it was represented by the appellant that the case was covered under explanation -5 to section 271(1)(c) of the Act which provides immunity from the penalty. Further profit @ 8% has been reflected in the ITR furnished u/s 153A of the Act voluntarily and corresponding tax alongwith interest have been paid. Moreover the AO has made adhoc addition; this does not warrant any penalty. The appellant has agreed to the additions subject to no penal action to buy peace of mind. Reliance is hereby placed upon the decision of Hon’ble Supreme Court in the case of CIT vs Reliance Petro Products.
Facts of the case have been considered. It is found that the appellant has concealed its contract receipts by Rs. 49,60,000/- and therefore corresponding profit has been also suppressed. Therefore there is no merit in the submission of the appellant that it has revised its return voluntarily. Moreover case of the appellant is not covered by Explanation-5 as explanation -5 was applicable for the search proceedings initiated before 01.06.2007. The addition/ disallowance has been made as per the facts of the case. Such particulars of income have been concealed from the ITR. Though the additions have been made on estimation basis but the basis of the same was concealment in the form of contract receipts. In a given facts the case of the appellant is covered by the provisions of section 271(1)(c) of the Act. Therefore in the given facts it is found that there is no merit in the submission of the appellant. Accordingly penalty levied u/s 271(1)(c) by the AO is hereby confirmed. Ground of appeals nos 1-6 are dismissed.”
9. We have heard the rival contentions and purused the material available on record. The ld CIT(A) has returned a finding that assessee is not eligible for immunity as provided under Explanation 5 to section 271(1)(c) as Explanation 5 was applicable for the search proceedings initiated before 01.06.2007, however, while deciding the same, the ld CIT(A) has failed to consider the Explanation 5A which is applicable for the search proceedings initiated on or after 01.06.2007 and how the case of the assessee is covered by the said explanation especially where the assessee has pleaded that it has filed its return u/s 153A and disclosed the income and paid taxes voluntarily though after the date of search, a situation which has been specifically envisioned and provided for in the Statue in terms of Explanation 5A to section 271(1)(c). It is a settled legal proposition that section 271(1)(c) is a penal provision and such a provision has to be strictly construed and unless the case of the assessee falls under the four corners of the said provision, penalty u/s 271(1)(c) cannot be imposed. In view of the same, we deem it appropriate to remand the matter to the file of the ld CIT(A) to decide the same afresh as per law and taking into consideration as to how the case of the assessee satisfies the requirement of Explanation 5A to section 271(1)(c) of the Act. The other contentions raised by the ld AR are thus left open and the assessee is at liberty, as so advised to raise the same before the ld CIT(A) who shall consider the same and decide as per law.
10. In the result, the appeal of the assessee is allowed for statistical purposes.
11. Both the parties fairly submitted that the facts and circumstances in ITA No. 701/Chd/2022 are identical and similar contentions as raised supra may be considered. In light of submissions made by both the parties, our findings and directions in ITA no. 701/Chd/2022 shall apply equally in this case and the matter is reminded to the file of the ld CIT(A) to decide the same afresh as per law after providing reasonable opportunity to the assessee.
12. In the result, appeals of the assessee are allowed for statistical purposes.
Order pronounced in the open Court on 21/06/2023.
