Income Tax Appellate Tribunal - Delhi
Krishna Kumar Aggarwal, New Delhi vs Assessee on 25 February, 2011
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 Khandelwal, 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 assessee 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 estimated sale consideration of scrap or the wastage.
2. The assessee had filed his return on 17.10.2003 declaring total income of Rs. 54,16,946/-. The assessment was completed on 28.2.2006 2 ITA No. 5177(Del)/2010 at total income of Rs. 75,06,050/-. In this assessment, an addition of Rs. 3,97,555/- was also made in respect of estimated sale of wastage or scrap. It was mentioned that the assessee is engaged in manufacture and export of readymade garments. He had not shown any receipt on account of sale of wastage generated in the process of manufacture. It was submitted that he does not have any saleable wastage as the rejected cloth is returned to the vendors and negligible wastage is used internally for cleaning, dusting etc. The AO found that in the 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 of 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 on 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 are applicable as the books cannot be relied upon. The additions were made on estimated basis but the estimation was based on sound footing. The addition has also been confirmed by the CIT(Appeals). It is further mentioned that the 3 ITA No. 5177(Del)/2010 generation of scrap has not been denied by the assessee. When the scrap is generated, there must be sale of it, which has not been entered in the books of account. The matter was agitated in appeal. 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 that the scrap had been generated in the manufacturing process but he had not shown its value in the books of accounts. Thus, there was an attempt on the part of the assessee to declare lesser income. In the case of K.C. Builders (supra) also Hon'ble Supreme Court observed that when there is positive evidence, penalty could be levied. In that case, the assessee had claimed inadmissible expenses and thus suppressed his income. The Hon'ble 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 scrap has been accepted by the appellant as he has not preferred appeal on this score against the Hon'ble ITAT's 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 4 ITA No. 5177(Del)/2010 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 assessee for concealment or for furnishing inaccurate particulars of income while filing returns [Union of India vs. Dharmendra 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 disallowance of various expenses. The first dispute is regarding estimated addition of Rs. 3,97,555/- on account of sale of scrap @ 0.2% of the turnover. This aspect we have already dealt with while dealing with the appeal for the year 2002-03. This year, the facts are identical and GP rate 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 decision 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 assessment year 2002-03, the appeal in respect of which was disposed off along with the appeal for 5 ITA No. 5177(Del)/2010 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 considered 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 regarding 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, the small addition of 0.2% on account of GP rate is justified in our view considering the fall in GP rate and in the absence of details of day-to-day account of stock and manufacturing records. The estimated addition made is, therefore, upheld."
3.2 Our attention has been drawn towards the findings of the AO and the ld. CIT(Appeals), which have already been summarized by us. It is also submitted that although the addition was made on similar grounds in assessment year 2002-03, the penalty was not initiated. In this connection, reference was made to page nos. 53 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 appreciation of overall facts and circumstances of the case. In such a case, penalty cannot be levied. 6 ITA No. 5177(Del)/2010 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 routine and casual. This cannot be considered as a bona fide explanation. Although direct evidence to prove the intent may not be available, yet it must be proved as a necessary corollary from the facts and circumstances established on record that the assessee had concealed income and furnished inaccurate particulars of income. In this case, the assessee has not shown the income either by way of sale of scrap or its stock, which is patently incorrect and completely in disregard of the provision of the Act. Thus, inaccurate particulars of income have been 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 authorities requires to be confirmed on the facts and in the circumstances of the case.
4. We have considered the facts of the case and submissions made before us. The facts are that the assessee is manufacturing ready- made garments for the purpose of export. He has not shown sale of scrap or wastage. He has also not shown the inventory of waste 7 ITA No. 5177(Del)/2010 material in the books. The AO found that the gross 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 wastage. In this context, he found the explanation of the assessee that the waste material is used for cleaning etc. to be incorrect. Therefore, he estimated the sale value of the scrap at 0.2% of the turnover. This amount was added to the total income. The addition has been confirmed by the Tribunal as mentioned earlier.
4.1 The explanation of the assessee before the lower authorities has been that there is no evidence of sale of scrap. Addition has also been made on estimated basis. Therefore, penalty cannot be levied. 4.2 In the case of CIT Vs. Sood Harvester, (2007) 304 ITR 279, the Hon'ble Punjab & Haryana High Court mentioned that the Tribunal recorded categorical findings of fact that the assessee had disclosed complete facts before the AO in the return of income as well as during the course of assessment proceedings. Therefore, we are of the view that the Tribunal has followed correct approach that this is a case 8 ITA No. 5177(Del)/2010 of difference of opinion and not concealment of income. It may be mentioned that the AO had not initiated penalty proceedings on similar ground in the immediately preceding assessment year 1982-83. Further, in the case of CIT Vs. M.M. Rice Mills, (2000) 253 ITR 17, the Hon'ble Punjab & Haryana High Court mentioned that 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 been made on estimated basis under proviso to section 145(1).
4.3 On the other hand, the ld. DR relied on the decision of Hon'ble Delhi High Court in the case of CIT Vs. Zoom Communication P. Ltd., (2010) 327 ITR 510. In this case, the assessee had inter-alia claimed deduction of income-tax. The explanation of the assessee was that the error was committed through oversight. The Hon'ble 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 circumstances, the penalty was confirmed. Further, in the case of CIT Vs. Escorts Ltd., (2010) 328 ITR 44 (Del), the assessee had claimed deduction u/s 35D. The 9 ITA No. 5177(Del)/2010 Hon'ble 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 declaration in the prospectus. The Hon'ble Court mentioned that it is not acceptable how experts in tax laws could give such a opinion against the plain language of section 35D. Therefore, it was held that a false 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 that this case does not deal with penalty but deals with the addition made 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 the light of decided cases. Hon'ble Supreme Court held in the case of Union of India Vs. Dharmendra Textile Processors, (2008) 306 ITR 277, that penalty is a civil liability and its levy has to be considered in terms of statutory language of section 271(1)(c) and Explanation thereunder. Therefore, the issue of mens rea is not to be considered while deciding the levy of penalty. In the case of Sood Harvester (supra), the Tribunal had recorded categorical finding that the assessee disclosed complete facts 10 ITA No. 5177(Del)/2010 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 record 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 to the facts of this case. In the case of M.M. Rice Mills (supra), the penalty was deleted because books of account were rejected and profits were estimated by resorting to proviso to section 145(1). However, unaccounted sale or unaccounted stock of Khudi Phak was not detected. The Hon'ble 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 willful neglect . The facts of this case are similar to the facts of the case 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 distinguishable as that was a case of making prima facie bogus claim. Such was also the case with Escorts Finance Ltd. Therefore, the ratio of these cases is not applicable to the facts of our case. In these circumstances, relying on the decision 11 ITA No. 5177(Del)/2010 of Hon'ble Punjab & Haryana High Court in the case of M.M. Rice Mills (supra), it is held that levy of penalty was not 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.