Income Tax Appellate Tribunal - Jaipur
Choudharyh & Brothers, Jaipur vs Acit, Jaipur on 25 November, 2016
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IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR
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BEFORE: SHRI KUL BHARAT, JM & SHRI VIKRAM SINGH YADAV, AM
vk;dj vihy la-@ ITA No.928/JP/12
fu/kZkj.k o"kZ@Assessment Year : 2007-08
M/s Choudhary Brothers, C/o cuke The Addl. CIT, Range-7, Jaipur
M/s Ravi & Dev & Dev, CAS, C-68 Vs.
Lal Kothi, Jaipur
LFkk;h ys[kk la-@thvkbZvkj la-@PAN No. AAEPC 0190 M
vihykFkhZ@Appellant izR;FkhZ@Respondent
fu/kZkfjrh dh vksj ls@ Assessee by : Shri P.C. Parwal (CA)
jktLo dh vksj ls@ Revenue by :Shri O.P. Bateja (Addl.CIT)
lquokbZ dh rkjh[k@ Date of Hearing : 26.09.2016
?kks"k.kk dh rkjh[k@ Date of Pronouncement : 25/11/2016.
vkns'k@ ORDER
PER SHRI VIKRAM SINGH YADAV, A.M.
This is an appeal filed by the assessee against the order of Ld. CIT(A)-III, Jaipur dated 06.10.2012 wherein the assessee has taken following ground of appeal:
"The ld. CIT(A) erred in confirming the penalty of Rs.29,05,775/- levied u/s 271(1)(c) of the IT Act,1961 by the Assessing Officer on the basis of adhoc disallowance of expenses."
2. The brief facts of the case are that the assessee derives income from civil contract work. During the year, it carried out construction work of road, bridges etc. for PWD Rajasthan & various other government departments. Against returned income of Rs. 1,07,75,656, assessment was completed at an income of Rs. 3,12,45,610/. The AO also initiated penalty proceedings u/s 271(1)(c) for concealment of income and furnishing inaccurate particulars of income. The ld CIT(A) confirmed all the addition/disallowances. Against the order of CIT(A), assessee filed an appeal before the ITAT. The ITAT vide its ITA No.928/JP/12 M/s Choudhary Bros. Jaipur vs. Addl. CIT, Range-7, Jaipur order dt. 31.05.2011 in ITA No. 1177/JP/2010 deleted the additions made by AO u/s 68. However, in respect of disallowance out of various expenses, the ITAT partially confirmed the additions and at Para 8 of its order held as under :-
"It is seen that N.P. rate shown by assessee during the year is 10.07% against 10.82% in immediately preceding year. Therefore, we are of the view that instead of disallowing various expenses under the individual head, it will be better if a reasonable net profit rate is applied. Keeping in mind the past history of the case and defects noted by the AO, we are of the view that if a N.P. rate of 11.5% is applied, then it will meet the ends of justice. Accordingly, the AO is directed to recompute the profit by applying N.P. rate of 11.5% against N.P. rate of 10.07% shown by the assessee. For the sake of clarification, the ld. counsel of the assessee has stated that instead of disallowing expenses head-wise, a reasonable N.P. rate should be applied. This contention of the assessee is reasonable. Accordingly, we direct the AO to apply N.P. rate of 11.5% mentioned above. This ground of the assessee is allowed in part."
2.1 In penalty proceedings, the assessee submitted that penalty u/s 271(1)(c) cannot be levied in case of estimation of profit. The AO, however, held that the assessee could not substantiate its claim of expenditure in assessment proceedings and till now also it has not produced any supporting documentary evidence in support of its claim at any stage of consideration i.e. before the Ld. CIT(A) and Hon'ble ITAT. Further, the assessee has again not provided any documentary evidence during the penalty proceedings to prove the genuineness of its claim of expenditure. Moreover, the N.P. rate determined by Hon'ble ITAT is not estimation but the same has been determined only on the basis of specific disallowances made by the AO. These disallowances were made in view of non-verifiable expenses and non- compliance/partial compliance by the assessee. The bills and the vouchers were not produced at all. Non-verifiability of expenses claimed leads to both inaccuracy of the particulars of income and concealment of true income. Accordingly, the AO imposed penalty of Rs.29,05,775/- u/s 271(1)(c) on the amount of Rs.86,32,725/- on account of concealment of particulars of income.
The Ld. CIT(A) confirmed the levy of penalty by holding that in the assessment order dt. 30.12.2009, the AO has noted specific defects in the accounts of the appellant. In view of the said defects, AO made specific disallowances of various expenses resulting into total addition of Rs.1,39,94,870/-. These disallowances were confirmed by the ld. CIT(A) for the 2 ITA No.928/JP/12 M/s Choudhary Bros. Jaipur vs. Addl. CIT, Range-7, Jaipur reason that the assessee has not been able to substantiate the expenses with supporting bills/vouchers. Hon'ble ITAT upheld the rejection of books of accounts u/s 145(3) as admitted by the appellant. However, to simplify the matter, Hon'ble Tribunal upheld the addition by applying higher N.P. rate of 11.5%. These facts clearly shows that the appellant has furnished inaccurate particulars of income for which penalty is leviable u/s 271(1)(c) read with Explanation 1 of the Act. Appellant has failed to substantiate his particulars of income. The Ld. AR's argument that penalty cannot be levied in case of estimated income is misconceived. Relying on certain case laws, he upheld the imposition of penalty u/s 271(1)(c). He further held that the reports of the statutory auditor and the conduct of the appellant during the assessment proceedings by not producing the bills/vouchers and other details required by the AO also establish the means rea. Similar defects in account books of the appellant were also found in earlier years. Thus, penalty of Rs.29,05,775/- levied by AO u/s 271(1)(c) was upheld.
2.2 The ld. AR has submitted that at the outset, it may be noted that the tax auditor has qualified the audit report by specifying that in most of the cases vouchers have not been prepared and do not have proper supporting. The AO after referring to these qualifications made by the auditor and after considering the unverifiability of expenses under the head wages, repair & maintenance, diesel & petrol, freight, job work and hire charges made adhoc disallowance of 10% out of these expenses i.e. Rs. 80,80,238/- and also made disallowance of Rs. 59,14,632/- on account of outstanding wages, totaling to Rs.1,39,94,87/-. The Ld. CIT(A) confirmed the action of AO as per his finding at Page 6 Para 2.3 of the order dt. 05.08.2010 (PB 10). The fact that assessee has submitted the tax audit report containing the qualification, itself shows that there was no intention on part of the assessee to conceal any fact or income or to furnish inaccurate particulars of income. Therefore, when assessee himself has placed all material fact on record, there cannot be a levy of penalty.
It was further submitted that the manner of maintenance of books of accounts was same as in the year under consideration. In past, income is assessed by the AO by applying N.P. Rate. The assessee submitted the position of N.P. rate before depreciation, interest and remuneration to partners and interest to third parties as well as the N.P. after depreciation, interest and remuneration to partners and interest to third parties as under:-
3 ITA No.928/JP/12M/s Choudhary Bros. Jaipur vs. Addl. CIT, Range-7, Jaipur A.Y. Turnover Net profit before N.P. Net profit after N.P. depreciation, interest Rate depreciation, interest Rate & remuneration to & remuneration to partners & interest to partners & interest to third parties third parties 07-08 16,75,20,136 1,68,67,512/- 10.07% 1,07,77,678/- 6.43% 06-07 4,62,66,360 50,07,165/- 10.82% 9,03,391/- 1.95% The Hon'ble ITAT vide Para 8 of its order dt. 31.05.2011 (PB 26) after considering the order of lower authorities and the contention of the assessee held that instead of disallowing expenses head-wise, a reasonable N.P. rate should be applied. Keeping in mind the past history of the case and defects noted by AO, the AO is directed to re-compute the profit by applying N.P. rate of 11.5% against N.P. rate of 10.07% shown by the assessee. Thus, the rate so applied is subject to the claim of depreciation, interest and remuneration to partners and interest to third parties. However, the AO while giving the appeal effect has applied N.P. rate of 11.5% on the gross receipts without giving deduction of depreciation, interest and remuneration to partners and interest to third parties and thereby worked out the addition at Rs.86,32,725/-. From the above facts, it can be noted that the quantum of addition on which penalty is levied by the AO is incorrectly calculated. The Hon'ble ITAT has applied N.P. rate of 11.5% against the N.P. rate of 10.07% as evident from its order. The N.P. rate of 10.07% is before depreciation, interest and remuneration to partners and interest to third parties. On this basis, the quantum of addition would work out at Rs.23,99,326/-.
The fact that the N.P. rate of 11.5% applied by Hon'ble ITAT is subject to depreciation, interest and remuneration to partners and interest to third parties is also evident from the order of Hon'ble ITAT in ITA No. 897/JP/11 for A.Y. 08-09 where in Para 2.10 (PB 43-45) it was held that in A.Y. 07-08 also, the Tribunal taking into consideration the N.P rate of 10.07% directed to apply N.P. rate of 11.5%. In the year under consideration also, the Ld. CIT(A) has directed to apply the N.P. rate of 11.5% subject to depreciation, interest and remuneration to the partners on the basis of the order of the Tribunal of the immediately preceding year and accordingly the order of CIT(A) is confirmed. Thus, it is clear that N.P. rate of 11.5% applied by Hon'ble ITAT is subject to depreciation, interest and remuneration to partners and interest to third parties whereas the AO while calculating the addition has not considered the 4 ITA No.928/JP/12 M/s Choudhary Bros. Jaipur vs. Addl. CIT, Range-7, Jaipur allowance of depreciation, interest and remuneration to partners and interest to third parties. Therefore, the correct addition after the Hon'ble ITAT is Rs.23,99,326/- as against Rs.86,32,725/- computed by the AO and therefore the penalty imposed by AO with reference to the amount of Rs.86,32,725/- is incorrect.
It was further submitted that so far as levy of penalty on the addition confirmed after the order of ITAT by application of N.P. rate is concerned, it may be noted that the AO made adhoc disallowance out of certain expenses for the reason that the same are not fully vouched for want of supporting vouchers of expenses. Nowhere in the assessment order, the AO has alleged that the expenses claimed are not genuine or inflated. There is no specific expenditure which is disallowed by the AO. Hon'ble ITAT has also not approved disallowance of the expenses as made by the AO. Thus, when the penalty proceedings is initiated by the AO with reference to the disallowance of expenses, which do not remain after the order of ITAT, no penalty can be levied with reference to the addition sustained by Hon'ble ITAT by application of N.P. rate. The Ld. CIT(A) has upheld the levy of penalty only for the reason that Hon'ble Tribunal upheld the addition by applying higher N.P. rate of 11.5% to simplify the matter. For such reason, without pointing out any specific instance of inflation of expenses or claim of bogus or non-genuine expenses, penalty cannot be levied. The cases relied by CIT(A) are therefore distinguishable on facts as in those cases either there was a finding that the expenses claimed are bogus or the assessee admitted of the same. However, in the present case, there is no allegation of inflation in expenses or claim of bogus expenses. The N.P. rate declared by the assessee during the year on an increased turnover even after claim of depreciation, interest and remuneration to partners is better as compared to earlier years as per the details given at PB
16. Therefore, only because certain addition remains to the income returned by the assessee by application of higher N.P. rate would not ipso-facto lead to a conclusion that assessee has concealed the income or furnished inaccurate particulars of income. Reliance in this connection is placed on the following cases:-
• CIT vs. Mahendra Singh Khedla (2012) 71 DTR 189 (Raj) • Shiv Lal Tak Vs. CIT (2001) 251 ITR 353 (Raj.) 5 ITA No.928/JP/12 M/s Choudhary Bros. Jaipur vs. Addl. CIT, Range-7, Jaipur • Jugendra Singh & Co. Vs. DCIT (2013) 37 CCH 189 (Agr.) (Trib.) • Parasmal Parekh Vs. ACIT 58 ITD 0034 (Jpr.) (Trib.) • Sahyog Sahkari Shram Samvida Samiti Ltd. Vs. ACIT (2007) 111 TTJ 0540 (Luck.) • Naresh Chand Agarwal Vs. CIT (2013) 357 ITR 514 (All.) (HC) • Harigopal Singh Vs. CIT (2002) 258 ITR 85 (P&H) • CIT Vs. Vijay Kumar Jain 38 DTR 345 (Chattisgarh) • CIT Vs. Suresh Kumar Bansal 254 ITR 130 (Punj. & Har.) 2.3 The ld DR is heard who has vehemently argued the matter and relied upon the order of the lower authorities.
2.4 We have heard the rival contentions and perused the material available on record. Firstly, regarding the contention of the ld AR regarding the quantum of additions sustained by the ITAT in quantum proceedings and consequent levy of penalty levied by the AO, it was submitted that the ITAT has confirmed the trading additions by application of N.P rate of 11.5% as against 10.07% disclosed by the assessee in its return of income. The N.P rate so confirmed by the ITAT was before depreciation, interest, remuneration to partners and interest to third parties as N. P rate of 10.07% disclosed by the assessee was before depreciation, interest, remuneration to partners and interest to third parties. It was thus submitted that additions so sustained by the ITAT in quantum proceedings comes to Rs 23,99,326 as against Rs 86,32,725 computed by the AO giving the appeal effect and the quantum of additions which can thus form the basis of levy of penalty should be Rs 23,99,326 only. We have gone through the order of the Coordinate Bench in ITA No. 1177/JP/2010 dated 31.05.2011 and the Coordinate Bench in its order has given a finding that "the AO is directed to recompute the profit by applying N.P rate of 11.5% against N.P rate of 10.07% shown by the assessee." The contentions of the ld AR thus prima facie seems correct as the addition sustained by the ITAT shall form the basis for levy of penalty. Where the additions have been deleted, there would not be any basis to levy penalty as the machinery provisions would fail. The AO is directed to verify N. P rate of 10.07% disclosed by the assessee and whether the same was before depreciation, interest, remuneration to partners and interest to third parties, and where the same is found to be correct, allow the necessary relief to the assessee.
2.5 Now coming to the additions sustained by the Coordinate Bench in the quantum proceedings and consequent levy of penalty, it is the contention of 6 ITA No.928/JP/12 M/s Choudhary Bros. Jaipur vs. Addl. CIT, Range-7, Jaipur the ld AR that the addition has been sustained on purely an estimate basis and the same should not form the basis for levy of penalty. It is noted that the AO has disallowed Rs. 80,80,238/- being 10% of various expenses and also made disallowance of Rs. 59,14,632/- on account of outstanding wages at the year end, totalling to Rs.1,39,94,87/-. The Coordinate Bench has held that in instead of disallowing various expenses under the individual head, it will be better if a reasonable net profit rate is applied and keeping in mind, the past history of the case and defects noted by AO, N.P rate of 11.5% was directed to be applied. In the penalty proceedings, the AO has mentioned that in view of non-verifiability of expenses claimed, it leads to both inaccuracy of the particulars of income and concealment of the true income. The ld CIT(A) has held that the conduct of the appellant during the assessment proceedings by not producing the bills/vouchers and other details required by the AO also establish his means-rea and he accordingly confirmed the levy of penalty.
2.6 In the present case, the income of the assessee was assessed after rejection of books of accounts and 10% of certain expenses have been disallowed on estimate basis. What is relevant is finding of fact or bringing on record any evidence supporting the estimate. If there is none, it is only a matter of one's person estimate against the other. In the instant case, there is no positive evidence as to why only 10% of the expenses have been disallowed. The AO has stated that since these expenses are not verifiable, he disallows 10% of these expenses and also made the basis for levy of penalty.
This rather shows that the AO has not disputed the very incurrence or genuineness of the expenses at the first place. The non-verifiability of the expenses can be the basis for disallowance of expenses but the same cannot form the basis for levy of penalty without bringing on record any concrete evidence of furnishing inaccurate particulars of income or concealment of income. Further, the estimation done by the AO have been partially confirmed by ITAT by taking a macro view in terms of N. P rate instead of individual expenses and is again an estimation and nothing more. The Hon'ble Rajasthan High Court in case of CIT vs. Mahendra Singh Khedla (supra) has held that the additions have been sustained by the Tribunal only on estimation and a fact or allegation based on estimation cannot be said to be correct only, it can be incorrect also. Therefore, penalty was wrongly levied by the AO. Further, in case of CIT vs Krishi Tyre Retreading and Rubber Industries 360 ITR 580 (Raj), the Hon'ble Rajasthan High Court has held that "where the addition had been sustained purely on estimate basis and no positive fact or finding had been found, on such guess work or estimation, no penalty could be leviable."
7 ITA No.928/JP/12M/s Choudhary Bros. Jaipur vs. Addl. CIT, Range-7, Jaipur 2.7 In light of above discussions, taking into account the entirety of facts and circumstances of the case and respectfully following the decisions of the Hon'ble jurisdictional High Court in above referred cases, the penalty levied is hereby deleted.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 25/11/2016.
Sd/- Sd/-
(KUL BHARAT) (VIKRAM SINGH YADAV)
U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member
Jaipur
Dated:- 25/ 11/2016
Pillai
vkns'k dh izfrfyfi vxzfs "kr@Copy of the order forwarded to:
1. vihykFkhZ@The Appellant- M/s Choudhary Brothers, Jaipur
2. izR;FkhZ@ The Respondent- The Addl. Cit, Range-7, Jaipur
3. vk;dj vk;qDr@ CIT -III, Jaipur
4. vk;dj vk;qDr¼vihy½@The CIT(A)-III, Jaipur
5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur
6. xkMZ QkbZy@ Guard File (ITA No.928 /JP/2012) vkns'kkuqlkj@ By order, lgk;d iathdkj@ Assistant. Registrar.8 ITA No.928/JP/12
M/s Choudhary Bros. Jaipur vs. Addl. CIT, Range-7, Jaipur 9