Per Sanjay Arora, AM: These are the two set of Appeals by the Assessee directed against separate Orders by the Commissioner of Income-tax (Appeals)-I, Jaipur (CIT(A) for short) of even date,
Per Sanjay Arora, AM: These are the two set of Appeals by the Assessee directed against separate Orders by the Commissioner of Income-tax (Appeals)-I, Jaipur (CIT(A) for short) of even date, i.e., 05-12-2011, confirming the levy of penalty u/s. 271(1) (c) of the Income Tax Act, 1961 (the Act hereinafter) by the Asstt. CIT, Circle- 1, Jaipur for the assessment years (A.Y.) 2004-05 and 2005-06 vide separate penalty orders, again of even date, i.e., 29-01- 2010, at the minimum rate of one hundred per cent. of the tax sought to be evaded, being at Rs. 1,74,772/- and Rs. 1,70,600/- for the two consecutive years respectively. 2.1 The facts and circumstances for the two years, as also the issue/s arising in appeals, being the same, the appeals were heard together, and are being decided by a common, consolidated order. It would be relevant to, however, before proceeding to discuss the merits of the case, recount the background facts of the case, stating the figures for assessment year 2004-05 for the sake of convenience. The assessee, an individual, is in the business of manufacture and export of diamond and diamond studded jewellery. For the years under reference, it disclosed a gross profit (g.p.) rate of 3.83% and 4.1% on sales of Rs. 11.32 lacs and Rs. 10.30 lacs for the two consecutive years respectively. The same being drastically below the g.p. rate of 13.99% disclosed for the assessment year 2003-04, the assessee was called upon to explain the decline during the course of the assessment proceedings. No justifiable reasons for the huge decline in the g.p. rate were, however, put forth by the assessee. On an examination of the books of account, it was noticed that the assessee had shown purchases in its accounts from, among others, twelve concerns, and which were found to be entry providers on the basis of the investigation carried out by the BCTT Wing of the Department. The assessee was required to produce the parties, but failed to do so. Notices u/s. 133(6) were issued to the said parties for verification of the purchases, i.e., as stated to be made from them, which were received back through the postal department; the parties being not available at the given addresses. The Inspector in the office of the Assessing Officer (AO) was deputed to locate the parties, but he also reported the non-existence of the said parties at the given addresses. The assessee had also not maintained any stock register or quantitative details in respect of its trading transactions. Moreover, the assessee had claimed deduction for Rs. 32.87 lacs on account of wages, for which no proper details/vouchers could be produced for verification. In view of the same, invoking the provision of section 145(3) of the Act, the AO rejected the assessee's book results, and assessed her income by applying the g.p. rate of 11% on the disclosed sales after considering the past history of the case; the assessee having disclosed a g.p. rate of 14% for the immediately preceding assessment year. A trading addition of Rs. 81.12 lacs was made. In appeal there-against, the first appellate authority sustained a g.p. rate at 8%, reducing the addition to Rs. 41.10 lacs vide order dated 28-03-2008 (in ITA No. 684/2006-07). In further appeal before the Tribunal, the assessee secured substantial relief. The tribunal directed for application of a g.p. rate at 4.5% as against declared g.p. rate of 3.83% and 4.10% for the two consecutive years respectively, thereby sustaining a net trading addition, i.e., net of relief u/s. 80HHC, at Rs. 5,29,610/- and Rs. 5,06,686/- for the two consecutive years respectively vide its combined order dated 26-06-2009, deciding the cross appeals by the assessee and the Revenue (in ITA Nos.1018 & 1212/JP/2008 Assessee and ITA Nos. 1101 & 1279JP/2008 Revenue - PB pages 10-15), holding as under vide para 13 of its order:
13. So far as reasonableness of GP rate shown by the assessee .. Undisputedly, the declared sales have not been doubted by the lower authorities in the present case of the assessee thus, claimed purchases cannot be denied but the doubt has been raised that those purchases might have been made from someone else by paying lesser than the declared purchase amount. To plug the possible leakage in his regard, we are of the view that application of g.p. rate at 4.50% on the declared sales will met the end of justice keeping in mind the overall facts and circumstances of the present case especially the showing of the substantial increase in turnover during the year in comparison to the last year. We thus while setting aside orders of the lower authority for A.Y. 2004-05 direct the AO to apply g.p. rate of 4.50% on the declared sales to estimate the profit and the resultant amount in difference between the estimated profit and the declared profit be added in the income earned on the trade. The findings for the assessment 2005-06 at para 14 (page 11 and 12) of the order by tribunal are again on the same lines, as follows:
14. So far as the reasonableness of G.P. rate shown and applied by the lower authorities ..We are thus of the view that keeping in mind the result shown and to plug the possible leakage due to unverifiable purchases, it would be reasonable to apply g.p. rate of 4.50% on the declared sales. The AO is directed accordingly to work out the resultant trading addition during the year. The Ground No. 2 of the appeals preferred by the assessee is thus partly allowed and the related ground of the appeals of the Revenue is rejected. 2.2 The quantum proceedings have concluded thus, the AO proceeded with the penalty proceedings initiated at the time of framing the assessment. The assessee relying upon case laws, would submit that the trading addition having been finally confirmed by estimating the trading profit, i.e., on the basis that it may have earned over and above the disclosed trading profit in view of its books of account being not reliable, no penalty could be levied. The same, however, did not find favour with the Revenue. There is no law that where the difference between the returned and the assessed income is by, or in consequence, of an estimate, applicability of section 271(1)(c) read with Explanation 1 thereto, would abate. Where the assessee is unable to substantiate its disclosed profit, and the trading result is found to be under-reported, the inference as to concealment of, or furnishing inaccurate, particulars of income could certainly be drawn and, indeed, would follow, given the mandate of Explanation 1 to the provision. In fact, taking such a view as being urged, the assessee may well not produce the books of account or, rather, even not maintain them or maintain irregular books of account, impelling the Revenue to take recourse to best judgement assessment, and which would stand to be excluded from the levy of penalty. The assessment by way of an estimate, which is a well accepted method known to the world of taxation, would fall outside the ambit of section 271(1)(c) of the Act. The tribunal had in the case of Som Engineering Corporation (infra) confirmed the levy of penalty under such circumstances, and which was upheld by the hon'ble Allahabad High Court (reported at 277 ITR 92). The decision by the hon'ble jurisdictional high court in the case of Shiv Lal Tak vs. CIT, 251 ITR 373, cited by the assessee in advancing its case, was discussed and found distinguishable. The assessee in that case was a building contractor, and being unable to substantiate its books of account, gross profit addition was sustained. The hon'ble court held that since no deliberate false entry had been found to have been made in the books of account, it could not be said that there was a bona fide failure on the part of the assessee to substantiate its explanation. The said case was decided by the hon'ble court by relying on the proviso to Clause B to Explanation 1 to section 271(1)(c) of the Act, which stands since omitted, i.e., w.e.f. 10- 09-1986. The purchases claimed per the books of account had been found to be false as the parties were found to be non-existent, and the assessee has not brought any material on record to substantiate her claim of the impugned purchases as genuine, leading to the enhancement in income in assessment. Aggrieved, the assessee is in appeal.
3. We have heard the parties, and perused the material on record. 3.1 We may firstly wish to clarify the law in the matter; the assessee's sole case being that the addition as finally sustained in its case being on the basis of an estimate, no penalty u/s. 271(1)(c) of the Act could at all be levied for that reason. We are unable to subscribe to such a broad statement of law. Assessment under the Act can be made only either under section 143(3) or u/s. 144, both of which authorize or sanction the framing of assessment on the basis of an estimate. The only condition is that the estimate should be informed and reasonable, and not arbitrary or capricious. Indeed, accounts, which form the basis of the return, are themselves finalized by applying estimates, termed accounting estimates in the accounting parlance. Besides, the estimation in the instant case only follows the rejection of the books of account, having been found as not reliable. The case law in the matter is legion [viz. 291 ITR 202 (Guj.); 238 ITR 415 (Guj.); 232 ITR 588 (All.); 146 ITR 492 (All.); 219 ITR 157 (Mad.); 205 ITR 607 (MP); 171 ITR 405 (Patna)]; the same in fact follow the trite law in the matter, as explained time and again by the apex court, as in the case of CIT v. Mussadilal Ram Bharose, 165 ITR 14 (SC); CIT v. Jeevan Lal Shah, 205 ITR 244 (SC); B.A. Balasubramaniam & Bros. Co., 236 ITR
977 (SC); CIT v. K.P.Madhusudhanan, 251 ITR 99; and lately in Union of India v. Dharmendra Textile Processors & Othrs. (2008) 306 ITR 277 (SC). In fact, in the case of Som Engineering Corporation v. CIT, 277 ITR 92 (All.), which was only in the context of a trading addition/disallowance on account of unverifiable purchases, it was held, on a review of the precedents, including all the decisions by the apex court cited supra, with the exception of the last, being subsequent, that the onus was on the assessee, which it had failed to discharge as no explanation had been given before the assessing authority. Similar was case in the case of Vidhya Shankar Dixit vs. CIT (2005) 277 ITR 285 (All.), where the penalty was again in respect of confirmed disallowance on account of unverifiable purchases. Clearly, therefore, it cannot be said that merely because the enhancement in income in assessment is sustained on account of applying an estimate, no penalty for that reason could be levied. Wilful concealment is not an essential ingredient for the invocation of sec. 271(1)(c), and neither is Explanation 1 thereto to be specifically pressed; the same being an integral part of the section, of which the assessee is put to notice when show caused in the matter, and the Department at this stage is not obliged to bring some positive evidence. The decision by the hon'ble jurisdictonal High Court in the case of Shiv Lal Tak vs. CIT, 251 ITR 373, also stands rightly distinguished by the Revenue. The same is for assessment year 1978-79, with the law amended since, by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 w.e.f. 10-09-1986, omitting the relevant proviso, though incorporating the same in almost in the same form by way of Clause B to Explanation 1 to section 271(1)(c) of the Act, effectively therefore shifting the onus from the Revenue to the assessee. The same, thus, would not be of assistance to the assessee. 3.2 However, it is also trite, that penalty is not automatic. The presumption raised under Explanation to the section is though rebuttable. It merely shifts the burden of proof from the Department to the assessee. When the question of concealment is decided by evidence on record, the question of burden of proof becomes immaterial: CIT vs. Devendra Singh (S) (1977) 108 ITR 314 (All.). Explanation 1 to the section 271(1)(c) of the Act being applicable to the case of levy of penalty there-under, whether based on an estimate or otherwise, the question thus boils down to the facts, i.e., the extent to which the assessee is able to substantiate its case, or the reliability of evidence available on the basis of which a higher estimate has been upheld. This is as plausible explanation saves penalty, and more cogent the reasons and more definite the materials supporting the higher estimate, the weaker - generally speaking - the assessee's case for the non levy of penalty on account of an addition made by making an estimate, and vice versa. 3.3 Coming to the facts of the case, the assessments for both the years stand finalised qua facts, i.e., by the tribunal; its relevant finding/s having been extracted hereinabove, on the basis of a possible leakage, given the decline in the gross profit rate, and the unreliability of the assessees books, which in effect and substance is its explanation in support of the returned income/s. As against a disclosed g.p. rate of 3.83% and 4.10% (for A.Y. 2004-05 and 2005-06 respectively), the assessment though initially made at 11% in view of the past history, stood finalised only at 4.50%. Even so, the penalty having been levied only with reference to the sustained difference, we are not suggesting and do not imply that penalty could not levied in view of the low difference, which per se it can be, signify as it does the volume of unexplained difference. What is paramount, and of essence, is the finding of the fact supporting the higher estimate. If there is none, as we find in the instant case, it is only a matter of one persons estimate against the other. For both the years, the clear finding by the tribunal for sustaining a higher g.p. rate is to plug a possible leakage of revenue on account of unverifiable purchases; the assessee having exhibited the purchase of goods against its unverifiable purchases. The assessee can under the circumstances only be considered as having substantiated it explanation, if not to the hilt, substantially so, with all the facts material to the computation of income being on record. Once it is accepted as a fact that the goods had indeed been purchased, an addition on account of a possibility of having incurred a higher expenditure than claimed, though definitely valid for effecting a disallowance of the claimed expenditure; the assessee having failed to prove their actual cost as incurred, cannot lead to the inference of a wrong claim, justifying the levy of penalty. That is, the very fact of the tribunal sustaining a higher g.p. rate only to plug a possible leakage of revenue on account of unverifiable purchases, proves the assessees claim of absence of any charge of having not disclosed its correct income, and of having a plausible explanation in support of the returned income. The same, though, would not prove its case as regards the claim of expenditure (or income), yet remains a valid claim for the purpose of levy of penalty. It is in fact in such situations; the matter being factual; that the decisions, as in the case Harigopal Singh vs. CIT, 258 ITR 85 (P&H); CIT vs. Dhillon Rice Mills, 256 ITR 209 (P&H); CIT vs. Aero Traders Pvt. Ltd., 322 ITR 316 (Del.), et. al. become squarely applicable. 3.4 Under the given facts and circumstances, in our clear view, no penalty is exigible in the instant case. We decide accordingly.
4. In the result, both the appeals by the assessee are allowed. Sd/- Sd/- (R.K. GUPTA) (SANJAY ARORA) JUDICIAL MEMBER ACCOUNTANT MEMBER Place: Jaipur Dated: May 16 , 2012 *Mishra Copy to:
1. Smt. Kamlesh Dangayach, Jaipur
2. The ACIT, Circle- 1, Jaipur
3. The CIT (Appeals) - I, Jaipur
4. The CIT concerned
5. D.R., I.T.A.T
6. Guard File (ITA Nos. 18 & 19/JP/2012) By Order AR, ITAT, Jaipur