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Checkmate Services P. Ltd. Ground Floor, Amar Towers Fatehgunj, Baroda v. Dcit, Cir. 1(1) Baroda .
Factual and Procedural Background
The assessee-company, engaged in providing security personnel, filed its return of income electronically for the Assessment Year 2009-10 declaring a total income of Rs. 42,25,34,110/-. The Assessing Officer (AO) passed the assessment order under section 143(3) of the Income Tax Act, determining the taxable income at Rs. 46,38,36,613/- after making various additions. Two additions were relevant for the penalty proceedings: (a) disallowance of Rs. 1,30,577/- related to dress material and stitching charges claimed by the assessee, and (b) an addition of Rs. 18,39,463/- due to a discrepancy between revenue receipts shown in the books and amounts reflected in TDS details.
The AO disallowed Rs. 1,30,557/- on the ground that stitching charges were not recovered from group companies, and added Rs. 18,39,463/- for the short receipt of revenue based on TDS discrepancies. On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] directed the AO to seek confirmation from the deductors of TDS under sections 133(6) or 131 of the Act to verify whether the amounts credited were actually paid to the assessee. The AO reduced the second addition to Rs. 13,80,000/- but initiated penalty proceedings for furnishing inaccurate particulars of income, ultimately imposing a penalty of Rs. 5,20,000/-. The assessee appealed against this penalty order.
Legal Issues Presented
- Whether the penalty under section 271(1)(c) of the Income Tax Act, 1961, for furnishing inaccurate particulars of income, was rightly imposed on the assessee for the disallowance related to dress material and stitching charges?
- Whether the penalty was justified for the addition made on account of the difference in revenue receipts vis-à-vis TDS details, given the assessee's claim of non-receipt and no right to receive the disputed amounts?
Arguments of the Parties
Assessee's Arguments
- The assessee contended that the recovery from employees was a lump sum amount including stitching charges and dress material, and that stitching charges were not recovered separately from group companies.
- Regarding the TDS discrepancy, the assessee argued that although certain companies showed deduction of tax and credited amounts in their books, the assessee had neither received these amounts nor had any right to receive them.
- The assessee maintained that the additions were made without proper verification and that no inaccurate particulars were furnished, as the differences were matters of accounting and reconciliation.
- The assessee also pointed out that the show cause notice did not specify the exact charge for penalty initiation, thus invalidating the penalty imposition.
Revenue's Arguments
- The AO considered that since third parties showed deduction of tax and credited amounts to the assessee, it was to be presumed that the assessee had received the amounts, justifying additions and penalty for inaccurate particulars.
- The AO imposed penalty on the basis that the assessee had furnished inaccurate particulars of income in relation to both the dress material/stitching charges and the TDS discrepancy.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| New Sorathiya Engg. Co. v. CIT, 282 ITR 642 | Principle that penalty cannot be imposed without a clear and specific charge in the show cause notice. | The Court relied on this precedent to hold that the penalty could not be sustained as the AO's show cause notice did not specify the exact charge for penalty under section 271(1)(c). |
Court's Reasoning and Analysis
The Court examined the two issues separately. Regarding the TDS discrepancy, the Court noted that the AO made additions without verifying the facts despite the assessee's specific plea that the amounts were neither received nor due. The Court emphasized that the AO should not have presumed receipt merely because third parties showed TDS deductions. The Court highlighted that the assessee declared a substantial income and would have no reason to fudge small amounts. The Court criticized the AO for imposing penalty without fulfilling the obligation to assess income correctly and for prematurely visiting the assessee with penalty proceedings.
On the issue of dress material and stitching charges, the Court observed that the assessee consistently maintained that stitching charges were not recovered separately and that the amounts claimed were routine business expenses. The Court found this to be a difference of opinion on expenditure, not furnishing inaccurate particulars.
Furthermore, the Court found procedural infirmity in the AO's show cause notice, which failed to specify the exact charge for penalty initiation. The Court reiterated the importance of quasi-judicial authorities acting fairly and judiciously to remove injustice rather than legalizing it on technical grounds.
Holding and Implications
The appeal of the assessee is allowed and the penalty imposed under section 271(1)(c) is deleted.
The direct effect of this decision is the relief of penalty liability for the assessee in respect of the disputed additions. The Court did not set any new precedent but reaffirmed the principles requiring proper verification before additions and the necessity of clear charges in penalty notices. The decision underscores the obligation of tax authorities to act fairly and not impose penalties where factual disputes and procedural deficiencies exist.
Rajpal Yadav, J.M.:— The assessee is in appeal before us against the order of the ld. CIT(A)-1, Vadodara dated 4.8.2015 passed for the Assessment Year: 2009-10.
2. Solitary grievance of the assessee is that the ld. CIT(A) has erred in confirming the penalty of Rs. 5,20,000/- imposed by the AO under section 271(1)(c) of the Income Tax Act, 1961.
3. Brief facts of the case are that the assessee-company is engaged in the business of providing security personnel. It has filed its return of income electronically on 29.9.2009 declaring total income at Rs. 42,25,34,110/-. The ld.AO has passed the assessment order on 21.12.2011 under section 143(3) of the Income Tax Act. He determined total taxable income of the assessee at Rs. 46,38,36,613/-. The AO has made various additions. For the purpose of present penalty proceedings, we are concerned with two additions viz. (a) disallowances of Rs. 1,30,577/- out of dress material/stitching charges claimed by the assessee, and (b) addition of Rs. 18,39,463/- for difference in revenue receipts shown in the books viz-a-vis available in TDS details.
4. Brief facts with respect to these issues are that the assessee company has purchased cloth in bulk and provided dress material to its employees and also transferred to its group companies. As per the ledger account, the assessee had shown total purchase of Rs. 4,06,51,838/- towards dress material, and it recovered Rs. 2,89,86,650/- from the employees, and Rs. 8,61,220/- from its group companies. The assessee had claimed deduction of Rs. 61,62,660/-towards dress materials. With regard to the recovery from its employees, it was contended by the assessee that a lump sum recovery including stitching charges was made. According to the AO, on an investigation, it revealed that from the group companies the assessee did not recover stitching charges. The assessee had recovered a sum of Rs. 8,61,220/-. It was meant for dress material. Therefore, disallowed a sum of Rs. 1,30,557/-. With regard to the second issue, it emerges out that on verification of TDS details, the ld.AO has observed that various companies have deducted TDS and credited the accounts of the assessee, but the figure of receipt disclosed by the assessee in the books does not tally with the amounts on which TDS was deducted. The assessee has reported a short receipt of Rs. 18,39,463/-. The AO accordingly made addition.
5. On appeal, the ld. CIT(A) directed the AO to get information under section 133(6) or 131 of the Act from the concerned parties who have deducted the taxes and credited the amounts, because, the stand of the assessee was that it has not received the payment and it was not meant for it. Therefore, if those parties have shown the deduction of TDS, then it was an error committed at their end. While giving effect to the CIT(A)'s order, the ld.AO made the following observation:
“With regard to disallowance of Rs. 18,39,463 on account of difference in revenue receipt, the Id. CIT Baroda directed to seek confirmation u/s. 133(6) or 131 from the parties concerned whether remaining amounts appearing inform 26AS of appellant were paid by them to appellant towards services tendered by appellant or not. In compliance to the same direction notices have been issued and no reply has been received yet. If any reply receives the same will be incorporated in due course and accordingly the fatal income will be determined.”
6. The AO reduced the disallowance to Rs. 13,80,000/- as against Rs. 18,39,463/- made by him in the original assessment order. The AO has initiated penalty proceedings for both these additions, and ultimately levied a penalty of Rs. 5,20,000/- on the ground that the assessee has furnished inaccurate particulars of income.
7. Appeal to the ld. CIT(A) did not bring any relief to the assessee.
8. With the assistance of the ld. representatives, we have gone through the record carefully. Let us fist examine second issue. The stand of the assessee before the AO was that though certain companies have shown deduction of taxes in their books, and it is also discernible from the verification of TDS detail generated from computer software, but actually the assessee has not received this amount nor it was meant for it. In other words, the assessee has pleaded that right to receive has also not accrued. The ld. CIT(A) in the quantum proceedings was satisfied with this plea of the assessee to some extent and directed the AO to seek confirmation from the payers, and only thereafter compute the income. The AO has partly sought confirmation and reduced the addition. When this plea was raised before the ld. CIT(A) in the penalty proceedings, the ld. CIT(A) has observed that the CIT(A) in the quantum proceeding has no power to set aside the assessment order. The AO has given effect to these directions, which he could give within the time limit available to him. In our opinion, firstly, the AO should not have made addition in the original proceedings without verification of facts. Once the assessee has raised a specific plea that neither it has received nor it has a right to receive, in spite of that, the AO has assumed that since third party has shown deduction of tax, therefore, it is to be presumed that the assessee has received this receipt. This fact has to be viewed in the context wherein the assessee has been offering an income of more than Rs. 42 crores. There cannot be any occasion for the assessee to furnish or fudge with the details of such a small amounts. It is not appreciable at the end of the AO to make addition blindly. Now, in the second round, when the penalty was imposed, and the CIT(A) has given one more opportunity to first establish whether this addition deserves to be made in the hands of the assessee or not. He absolved himself under the garb of limitation from carrying out his responsibility, which otherwise, an obligation upon him to assess the correct income. Instead of discharging his function, in a fair and judicious manner, he visited the assessee with penalty also. Quasi judicial authorities are being respected, not on account of their powers to legalize the injustice on technical ground, but for their capabilities of removing injustice, and are expected to do so. Therefore, as far as this disallowance, the assessee does not deserve to be visited with penalty. As far as first issue is concerned, the stand of the assessee from very beginning was that it has not recovered the dress material charges and stitching charges independently, rather, it has claimed a lump-sum amount on providing dress. The assessee has given complete figures of purchases, expenses recovered etc. These were expenses incurred in routine way of running the business. Where is question of furnishing inaccurate particulars of income ? It is only difference of opinion qua a particular item of expenditure. Apart from the above, our attention was brought to the show cause notice dated 3.10.2013. The AO has not specifically spell out the charge for initiating penalty proceedings against the assessee, i.e. for furnishing inaccurate particulars or concealing of income. On the basis of the show cause notice, penalty cannot be imposed upon the assessee. For buttressing our view, we are support by the decision of the Hon'ble jurisdictional High Court in the case of New Sorathiya Engg. Co. v. CIT, 282 ITR 642. In view of the above, we allow the appeal of the assessee and delete the penalty.
9. In the result, appeal of the assessee is allowed.
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