Krishna Kumar Aggarwal, New Delhi v. DCIT, New Delhi

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH D DELHI BEFORE SHRI I.P. BANSAL AND SHRI K.G. BANSAL ITA NO. 5177(DEL)/2010 ASSESSMENT YEAR: 2003-04 SHRI KRISHNA KUMAR AGGARWAL DEPUTY COMMISSIONER OF A-37/2 MAYAPURI INDL. AREA VS. INCOME-TAX CIRCLE 27(1) PHASE-I NEW DELHI. NEW DELHI-110064. PAN-AAEPA1542K (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI ASHOK KHANDELWA L C.A. RESPONDENT BY : SHRI K. RAVI RAMA CHANDRAN DR ORDER PER K.G. BANSAL : AM THE ONLY GROUND TAKEN IN THE APPEAL BY THE ASSE SSEE IS THAT THE LD. CIT(APPEALS) ERRED IN CONFIRMING THE ACTION OF THE AO IN IMPOSING PENALTY OF RS. 3 97 555/- U/S 271(1)(C) OF THE INCOME-TAX ACT 1961 IN RESPECT OF THE AMOUNT ADDED IN ASSESSMENT AS E STIMATED SALE CONSIDERATION OF SCRAP OR THE WASTAGE. 2. THE ASSESSEE HAD FILED HIS RETURN ON 17.10.20 03 DECLARING TOTAL INCOME OF RS. 54 16 946/-. THE ASSESSMENT WAS COMPLETED ON 28.2.2006 ITA NO. 5177(DEL)/2010 2 AT TOTAL INCOME OF RS. 75 06 050/-. IN THIS A SSESSMENT AN ADDITION OF RS. 3 97 555/- WAS ALSO MADE IN RESPECT OF ES TIMATED SALE OF WASTAGE OR SCRAP. IT WAS MENTIONED THAT THE ASSESSEE IS ENGAGED IN MANUFACTURE AND EXPORT OF READYMADE GARMENTS. HE HAD NOT S HOWN ANY RECEIPT ON ACCOUNT OF SALE OF WASTAGE GENERATED IN THE PROC ESS OF MANUFACTURE. IT WAS SUBMITTED THAT HE DOES NOT HAVE ANY SALEABLE WASTAGE AS THE REJECTED CLOTH IS RETURNED TO THE VENDORS AND NEGLIGIBLE W ASTAGE IS USED INTERNALLY FOR CLEANING DUSTING ETC. THE AO FOUND THAT IN T HE IMMEDIATELY PRECEDING YEAR ADDITION WAS MADE BY ESTIMATING THE SALE PROCEEDS AT 0.2% OF THE TURNOVER. THE ACTUAL AMOUNT IN THAT YEAR WAS RS . 3 50 000/-. SIMILAR ESTIMATE WAS MADE IN THIS YEAR AND AN ADDITION O F RS. 3 97 555/- WAS MADE. PENALTY PROCEEDINGS WERE ALSO INITIATED U/S 271(1)(C) OF THE ACT. THE PROCEEDINGS WERE DISPOSED OFF ON 5.10.2007. PENALTY OF RS. 4 09 626/- WAS LEVIED IN RESPECT OF ADDITIONS O N FOUR COUNTS INCLUDING SALE OF SCRAP. IT HAS BEEN MENTIONED THAT THE ASSESSEE DOES NOT MAINTAIN STOCK REGISTER MANUFACTURING RECORD AND RECORD FOR THE YIELD AND WASTAGE. THEREFORE PROVISIONS OF SECTION 145 A RE APPLICABLE AS THE BOOKS CANNOT BE RELIED UPON. THE ADDITIONS WERE M ADE ON ESTIMATED BASIS BUT THE ESTIMATION WAS BASED ON SOUND FOOTIN G. THE ADDITION HAS ALSO BEEN CONFIRMED BY THE CIT(APPEALS). IT IS FURTH ER MENTIONED THAT THE ITA NO. 5177(DEL)/2010 3 GENERATION OF SCRAP HAS NOT BEEN DENIED BY THE ASSESSEE. WHEN THE SCRAP IS GENERATED THERE MUST BE SALE OF IT WHICH H AS NOT BEEN ENTERED IN THE BOOKS OF ACCOUNT. THE MATTER WAS AGITATED IN APP EAL. THE LD. CIT(APPEALS) CONFIRMED THE PENALTY IN RESPECT OF SCRAP SALES. HIS SIGNIFICANT FINDING IN THIS MATTER IS CONTAINED IN PARAGRAPH 4.4 WHICH IS REPRODUCED BELOW:- 4.4 DEFINITELY THE ASSESSEE WAS AWARE T HAT THE SCRAP HAD BEEN GENERATED IN THE MANUFACTURING PROCESS BUT HE HAD NOT SHOWN ITS VALUE IN THE BOOKS OF ACCOUNTS. T HUS THERE WAS AN ATTEMPT ON THE PART OF THE ASSESSEE TO DE CLARE LESSER INCOME. IN THE CASE OF K.C. BUILDERS (SUPRA) A LSO HONBLE SUPREME COURT OBSERVED THAT WHEN THERE IS POSIT IVE EVIDENCE PENALTY COULD BE LEVIED. IN THAT C ASE THE ASSESSEE HAD CLAIMED INADMISSIBLE EXPENSES AND THUS SUPPRESSED HIS INCOME. THE HONBLE COURT HAS HELD THAT THE LEVY OF PENALTYIS IMMINENT IN A CASE INVOLVING CLEAR CONCEALMENT DISCOVERED BY THE REVENUE AND ADMITTED BY THE ASSESSEE. HERE THE ADDITION ON ACCOUNT OF SCR AP HAS BEEN ACCEPTED BY THE APPELLANT AS HE HAS NOT PREFER RED APPEAL ON THIS SCORE AGAINST THE HONBLE ITATS ORDER. IT IS NOT A CASE OF UNINTENTIONAL AND INADVERTANT OMISSION RATHER IT IS A CASE OF SUPRESSING INCOME BY NOT DISCLOSING THE RECEIPTS/VALUE OF SCRAP BECAUSE THE APPELLANT STARTED SHOWING INCOME ON ACCOUNT OF SCRAP FROM A.Y. 2005-06 ONWARD. THUS NOT DISCLOSURE OF INCOME ON THIS SCORE IN THE RELEVANT YER WHEN FACTS AND CIRCUMSTANCES REMAINED SIMILAR ESTABLISHES THE CONCEALMENT OF INCOME AND FURNISHING OF INACCURATE PARTICULARS OF INCOME. THE EXPLANATION APPENDED TO THE SECTION 271(1)(C) INDICATES ELEMENT OF STRICT LIABILITY ITA NO. 5177(DEL)/2010 4 ON THE ASSESSEE FOR CONCEALMENT OR FOR GIVING INACCURATE PARTICULARS. THE NON-DISCLOSURE OF INCOME ON ACCOUNT OF SCRAP WAS IN THE KNOWLEDGE OF THE ASSESSEE AT THE TIME OF DISCOVERY OF THIS FACT. IT IS FOR THE ASSESSEE TO PROVE THAT THERE HAD BEEN NO CONCEALMENT OF INCOME (B.A. BALASUBRAMANIAM & BROS. & CO.VS. CIT 236 ITR 977 (SC). EXPLANATION ADDED TO SECTION 271(1)(C) IN THEIR ENTIRETY ALSO INDICATE ELEMENT OF STRICT LIABILITY ON THE ASS ESSEE FOR CONCEALMENT OR FOR FURNISHING INACCURATE PARTICUL ARS OF INCOME WHILE FILING RETURNS [UNION OF INDIA VS. DHARMENDR A TEXTILE PROCESSORS 295 ITR 244 (SC)] 3. BEFORE US THE LD. COUNSEL FAIRLY POINTED OUT THAT THE ADDITION HAS BEEN UPHELD BY THE TRIBUNAL. THE FINDINGS OF THE TRIBUNAL ARE CONTAINED IN PARAGRAPH NO. 4.1 WHICH IS REPRODUCED BELOW:- 4.1 WE NOW TAKE UP THE DISPUTE IN RELATION TO D ISALLOWANCE OF VARIOUS EXPENSES. THE FIRST DISPUTE IS REGARDI NG ESTIMATED ADDITION OF RS. 3 97 555/- ON ACCOUNT OF SALE OF SCRAP @ 0.2% OF THE TURNOVER. THIS ASPECT WE HAVE ALRE ADY DEALT WITH WHILE DEALING WITH THE APPEAL FOR THE YEA R 2002-03. THIS YEAR THE FACTS ARE IDENTICAL AND GP RA TE HAS DECLINED TO 15.22% COMPARED TO 16.82% IN THE IMMEDIATE PRECEDING YEAR. THE POSITION OF ACCOUNTING IS ALSO THE SAME. THE ESTIMATED DISALLOWANCE @ 0.2% IN VIEW OF OUR DECI SION TAKEN VIDE PARA 3.1.2 OF THIS ORDER IS UPHELD. 3.1 ON PERUSAL OF THE AFORESAID PARAGRAPH IT WILL BE SEEN THAT THE TRIBUNAL HAS RELIED ON ITS DECISION FOR ASSESSME NT YEAR 2002-03 THE APPEAL IN RESPECT OF WHICH WAS DISPOSED OFF ALONG WITH THE APPEAL FOR ITA NO. 5177(DEL)/2010 5 ASSESSMENT YEAR 2003-04. PARAGRAPH NO. 3.1.2 DEALS WITH THE ISSUE IN THAT YEAR AS UNDER:- 3.1.2 WE HAVE PERUSED THE RECORDS AND CONSI DERED THE MATTER CAREFULLY. THERE IS NO DISPUTE THAT THE GP RATE HAD FALLEN TO 16.85% AS COMPARED TO 18.41% IN THE IMMEDIATE PRECEDING YEAR. THERE IS ALSO NO DISPUTE THAT THE ASSESSEE IS NOT MAINTAINING STOCK RECORDS AND DETAILED DAY-TO -DAY MANUFACTURING RECORDS. THE EXPLANATION REGARDIN G FALL IN GP RATE GIVEN BY THE ASSESSEE IS ONLY GENERAL I .E. BECAUSE OF RICE IN TURNOVER WITHOUT PRODUCING ANY MATERIAL THAT PROFIT MARGIN ON SALES HAD DECREASED DURING THE YEAR . THOUGH THERE IS NO EVIDENCE REGARDING SALE OF SCRAP T HE SMALL ADDITION OF 0.2% ON ACCOUNT OF GP RATE IS JUSTI FIED IN OUR VIEW CONSIDERING THE FALL IN GP RATE AND IN THE ABSENCE OF DETAILS OF DAY-TO-DAY ACCOUNT OF STOCK AND MANUFA CTURING RECORDS. THE ESTIMATED ADDITION MADE IS THEREF ORE UPHELD. 3.2 OUR ATTENTION HAS BEEN DRAWN TOWARDS THE FI NDINGS OF THE AO AND THE LD. CIT(APPEALS) WHICH HAVE ALREADY BEEN S UMMARIZED BY US. IT IS ALSO SUBMITTED THAT ALTHOUGH THE ADDITION WAS M ADE ON SIMILAR GROUNDS IN ASSESSMENT YEAR 2002-03 THE PENALTY WAS NO T INITIATED. IN THIS CONNECTION REFERENCE WAS MADE TO PAGE NOS. 5 3 TO 61 OF THE ASSESSMENT ORDER IN THAT YEAR. THE CASE OF THE LD. COUNSEL IS THAT THERE IS NO EVIDENCE ON RECORD REGARDING SALE OF SCRAP. THEREFORE THE ESTIMATED ADDITION HAS BEEN MADE AND CONFIRMED ON THE BASIS OF APPRECIA TION OF OVERALL FACTS AND CIRCUMSTANCES OF THE CASE. IN SUCH A CASE PENALTY CANNOT BE LEVIED. ITA NO. 5177(DEL)/2010 6 3.3 IN REPLY THE LD. DR DREW OUR ATTENTION TO PARAGRAPH NO. 4.10 OF THE IMPUGNED ORDER IN WHICH IT IS MENTIONED THAT THE EXPLANATION OFFERED BY THE ASSESSEE IN THE PENALTY PROCEEDINGS IS ROU TINE AND CASUAL. THIS CANNOT BE CONSIDERED AS A BONA FIDE EXPLANAT ION. ALTHOUGH DIRECT EVIDENCE TO PROVE THE INTENT MAY NOT BE AVAILA BLE YET IT MUST BE PROVED AS A NECESSARY COROLLARY FROM THE FACTS AND CIRCUMSTANCES ESTABLISHED ON RECORD THAT THE ASSESSEE HAD CONCEALED INCOM E AND FURNISHED INACCURATE PARTICULARS OF INCOME. IN THIS CASE THE ASSESSEE HAS NOT SHOWN THE INCOME EITHER BY WAY OF SALE OF SCRA P OR ITS STOCK WHICH IS PATENTLY INCORRECT AND COMPLETELY IN DISREGARD OF THE PROVISION OF THE ACT. THUS INACCURATE PARTICULARS OF INCOME HAVE BEE N FURNISHED IN TERMS OF EXPLANATION-1 TO SECTION 271(1)(C) OF THE ACT. IT IS HIS CASE THAT THE PENALTY LEVIED AND SUSTAINED BY THE LOWER AUT HORITIES REQUIRES TO BE CONFIRMED ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE. 4. WE HAVE CONSIDERED THE FACTS OF THE CASE A ND SUBMISSIONS MADE BEFORE US. THE FACTS ARE THAT THE ASSESSEE IS MANUFACTURING READY- MADE GARMENTS FOR THE PURPOSE OF EXPORT. HE H AS NOT SHOWN SALE OF SCRAP OR WASTAGE. HE HAS ALSO NOT SHOWN THE INVENTORY OF WASTE ITA NO. 5177(DEL)/2010 7 MATERIAL IN THE BOOKS. THE AO FOUND THAT THE G ROSS PROFIT RATIO OF THE ASSESSEE HAS BEEN DECLINING FROM YEAR TO YEAR. THE ASSESSEE HAD ALSO NOT BEEN MAINTAINING MANUFACTURING RECORD. HE CAME TO THE CONCLUSION THAT THE PROCESS OF MANUFACTURE WILL INVOLVE WAST AGE. IN THIS CONTEXT HE FOUND THE EXPLANATION OF THE ASSESSEE THAT THE W ASTE MATERIAL IS USED FOR CLEANING ETC. TO BE INCORRECT. THEREFORE HE E STIMATED THE SALE VALUE OF THE SCRAP AT 0.2% OF THE TURNOVER. THIS AMOU NT WAS ADDED TO THE TOTAL INCOME. THE ADDITION HAS BEEN CONFIRMED BY THE T RIBUNAL AS MENTIONED EARLIER. 4.1 THE EXPLANATION OF THE ASSESSEE BEFORE THE L OWER AUTHORITIES HAS BEEN THAT THERE IS NO EVIDENCE OF SALE OF SCR AP. ADDITION HAS ALSO BEEN MADE ON ESTIMATED BASIS. THEREFORE PENALTY C ANNOT BE LEVIED. 4.2 IN THE CASE OF CIT VS. SOOD HARVESTER (2007 ) 304 ITR 279 THE HONBLE PUNJAB & HARYANA HIGH COURT MENTIONED THAT THE TRIBUNAL RECORDED CATEGORICAL FINDINGS OF FACT THAT TH E ASSESSEE HAD DISCLOSED COMPLETE FACTS BEFORE THE AO IN THE RETURN OF INCOME AS WELL AS DURING THE COURSE OF ASSESSMENT PROCEEDINGS. T HEREFORE WE ARE OF THE VIEW THAT THE TRIBUNAL HAS FOLLOWED CORRECT APPROACH THAT THIS IS A CASE ITA NO. 5177(DEL)/2010 8 OF DIFFERENCE OF OPINION AND NOT CONCEALMENT OF INCOME. IT MAY BE MENTIONED THAT THE AO HAD NOT INITIATED PENALT Y PROCEEDINGS ON SIMILAR GROUND IN THE IMMEDIATELY PRECEDING ASSESSMENT Y EAR 1982-83. FURTHER IN THE CASE OF CIT VS. M.M. RICE MILLS (2000) 253 ITR 17 THE HONBLE PUNJAB & HARYANA HIGH COURT MENTIONED TH AT NO SALE OR EXCESS STOCK OF KHUDI PHAK WAS DETECTED. THE ADDITION WAS MADE BY APPLYING THE PROVISO TO SECTION 145(1). THIS IS NOT ENOUGH FOR LEVY OF PENALTY U/S 271(1)(C) OF THE ACT BECAUSE THE ADDITION HAD B EEN MADE ON ESTIMATED BASIS UNDER PROVISO TO SECTION 145(1). 4.3 ON THE OTHER HAND THE LD. DR RELIED ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. ZOOM COM MUNICATION P. LTD. (2010) 327 ITR 510. IN THIS CASE THE ASSESSE E HAD INTER-ALIA CLAIMED DEDUCTION OF INCOME-TAX. THE EXPLANATION OF TH E ASSESSEE WAS THAT THE ERROR WAS COMMITTED THROUGH OVERSIGHT. THE HO NBLE COURT MENTIONED THAT THE DEDUCTION IS EX-FACIE INADMISSIBLE. NO REASON OR CIRCUMSTANCE HAS BEEN SHOWN ABOUT THE INADVERTENCE. IT HAS ALSO NOT BEEN SHOWN AS TO WHO COMMITTED THE INADVERTENCE. IN SUCH CIRC UMSTANCES THE PENALTY WAS CONFIRMED. FURTHER IN THE CASE OF CIT V S. ESCORTS LTD. (2010) 328 ITR 44 (DEL) THE ASSESSEE HAD CLAIMED DEDUCTION U/S 35D. THE ITA NO. 5177(DEL)/2010 9 HONBLE COURT MENTIONED THAT THE DEDUCTION IS NOT ADMISSIBLE TO A FINANCE COMPANY AND THEREFORE THE CLAIM AMOUNTED TO EX-FACIE BOGUS CLAIM. THE CLAIM WAS MADE ON THE BASIS OF DEC LARATION IN THE PROSPECTUS. THE HONBLE COURT MENTIONED THAT IT IS NOT ACCE PTABLE HOW EXPERTS IN TAX LAWS COULD GIVE SUCH A OPINION AGAINST TH E PLAIN LANGUAGE OF SECTION 35D. THEREFORE IT WAS HELD THAT A F ALSE CLAIM WAS MADE AND THE PENALTY WAS CONFIRMED. THE LD. D.R ALSO CITED THE CASE STATED TO BE REPORTED AT 321 ITR 254. HOWEVER WE FIND THA T THIS CASE DOES NOT DEAL WITH PENALTY BUT DEALS WITH THE ADDITION MAD E ON THE BASIS OF DOCUMENTS FOUND IN THE COURSE OF SEARCH SHOWING UNEXPLAINED INVESTMENT. 4.4 WE MAY EXAMINE THE FACTS OF THE CASE IN TH E LIGHT OF DECIDED CASES. HONBLE SUPREME COURT HELD IN THE CASE OF UNION OF INDIA VS. DHARMENDRA TEXTILE PROCESSORS (2008) 306 ITR 27 7 THAT PENALTY IS A CIVIL LIABILITY AND ITS LEVY HAS TO BE CONSIDERE D IN TERMS OF STATUTORY LANGUAGE OF SECTION 271(1)(C) AND EXPLANATION T HEREUNDER. THEREFORE THE ISSUE OF MENS REA IS NOT TO BE CONSIDERED WHIL E DECIDING THE LEVY OF PENALTY. IN THE CASE OF SOOD HARVESTER (SUPRA) THE TRIBUNAL HAD RECORDED CATEGORICAL FINDING THAT THE ASSESSEE DISCLOSED COMPLETE FACTS ITA NO. 5177(DEL)/2010 10 BEFORE THE AO IN THE RETURN OF INCOME AS WELL AS IN THE COURSE OF ASSESSMENT PROCEEDINGS. WE ARE UNABLE TO DO SO FOR THE SIMPLE REASON THAT THE QUANTITATIVE DETAILS ARE NOT ON REC ORD AND THEREFORE IT CANNOT BE SAID THAT NO WASTAGE WAS GENERATED IN THE PROCESS OF MANUFACTURE. HOWEVER THE OTHER FACT THAT PENALTY WAS NOT INITIATED IN THE IMMEDIATELY PRECEDING YEAR ON THE SAME GROUND IS SIMILAR T O THE FACTS OF THIS CASE. IN THE CASE OF M.M. RICE MILLS (SUPRA) THE PEN ALTY WAS DELETED BECAUSE BOOKS OF ACCOUNT WERE REJECTED AND PROFITS WER E ESTIMATED BY RESORTING TO PROVISO TO SECTION 145(1). HOWEVER UNACCOUN TED SALE OR UNACCOUNTED STOCK OF KHUDI PHAK WAS NOT DETECTED. THE HONBL E COURT CAME TO THE CONCLUSION THAT PENALTY CANNOT BE LEVIED BECAUSE THE FACTS DID NOT AUTOMATICALLY LEAD TO THE CONCLUSION THAT THERE WAS FAILURE TO RETURN THE CORRECT INCOME BY MEANS OF FRAUD OR GROSS WILLFU L NEGLECT . THE FACTS OF THIS CASE ARE SIMILAR TO THE FACTS OF THE CAS E ON HAND IN WHICH THERE IS NO EVIDENCE OF SALE OF SCRAP OR STOCK OF SCRAP. THE FACTS OF THE CASE OF ZOOM COMMUNICATION P. LTD. (SUPRA) ARE DISTINGUIS HABLE AS THAT WAS A CASE OF MAKING PRIMA FACIE BOGUS CLAIM. SUCH W AS ALSO THE CASE WITH ESCORTS FINANCE LTD. THEREFORE THE RATIO OF TH ESE CASES IS NOT APPLICABLE TO THE FACTS OF OUR CASE. IN THESE CIRCUMSTANCES RELYING ON THE DECISION ITA NO. 5177(DEL)/2010 11 OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF M.M. RICE MILLS (SUPRA) IT IS HELD THAT LEVY OF PENALTY WAS NO T JUSTIFIED. 5. IN THE RESULT THE APPEAL IS ALLOWED. THIS ORDER WAS PRONOUNCED IN THE OPEN COURT ON 25 FEBRUARY 2011. SD/- SD/- (I.P. BANSAL) (K.G.BANSAL) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE OF ORDER: 25TH FEBRUARY 2011. SP SATIA COPY OF THE ORDER FORWARDED TO:- SHRI KRISHAN KUMAR AGGARWAL NEW DELHI. DCIT 27(1) NEW DELHI. CIT(A) CIT THE DR ITAT NEW DELHI. ASSISTANT REGISTRAR.