No penalty if addition done to the returned income due to non availability of address of creditors: Ahnmedabad ITAT

Kishor A. Sewani Vs ITO (ITAT Ahmedabad)

ITA No. 836/Ahd/2016

In above case, assessee has shown sundry creditors of Rs. 8,20,652 as on 31-3-2011. However, Assessee failed to furnish the present current address of the parties to the Assessing Officer during the course of assessment proceedings.

Assessing Officer treated the same as bogus & made addition to the total income of the Assessee.

More importantly, Assessee during the course of assessment proceedings has accepted the addition made by the assessing officer to avoid the litigation, buy peace & arrive at the amicable solution with the department.

Therefore, CIT-A held that it has to be treated that the assessee has furnished inaccurate particulars of income or concealed the particulars of income.  Accordinly, AO order was endorsed by CIT-A.

Issue arose before tribunal was whether the penalty needs to be sustained in the hands of the assessee in the given facts and circumstances?

Tribunal observed that It is an undisputed fact that assessment and penalty proceedings are independent and different from each other. If there is any difference between the incomes declared by the assessee or income assessed during the proceedings cannot result in the concealment of income/furnishing inaccurate particulars of income.

The assessee has duly disclosed the sundry creditors in its books of accounts, which were not verified during the assessment proceedings for want of present address.

But that does not mean that the assessee has concealed the particulars of income or furnished inaccurate particulars of income. The impugned sundry creditors are arising from the purchases which have not been disturbed by the lower authorities.

It implies that the lower authorities have accepted the purchases but corresponding creditors have been added to the total income of the assessee for want of the address. In our considered view the addition on account of sundry creditors arising out of purchases cannot be added without disturbing the corresponding purchases.

None of lower authorities have been brought on record that there was a deliberate act on the parts of the assessee suggesting that the assessee has claimed bogus purchases either by concealing the income or furnishing inaccurate particulars of income. In view of above we reverse the order of the authorities below.

The ground of appeal of the assessee is allowed and the AO order was nullified as a result.

ORDER IS AS UNDER:

The captioned appeal has been filed at the instance of the assessee against the appellate order of the Commissioner (Appeals)-1, Vadodara (Commissioner (Appeals) in short) vide Appeal No. CAB-1/258/2015-16, dt. 12-1-2016 arising in the penalty order passed under section 271(1)(c) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) dated 24-9-2014 relevant to assessment year (assessment year) 2011-12.

2. The assessee has raised the following grounds of appeal :–

“1. That on facts and in law the learned Commissioner (Appeals) has grievously erred in confirming the levy of penalty under section 271(1)(c) of the Act of Rs. 2,73,567.

2. That on facts, in law, and on evidence on record, it ought to have been held that there is neither concealment of income nor furnishing of inaccurate particulars of income within the meaning of section 271(1)(c) of the Act.
3. The appellant craves leave to add, alter, amend any ground of appeal.”
4. The assessee in all the grounds of appeal has challenged the imposition of a penalty for Rs. 2,73,567 under section 271(1)(c) of the Act.
5. The briefly stated facts are that the assessee is an individual and engaged in the business of coal as coal merchant under the name and style of M/s. Kishor Aishiran Sewani. The assessee in its balance sheet as on 31-3-2011 has shown certain outstanding sundry creditors for purchases amounting to Rs. 820,652 only. But the assessee during the assessment proceedings failed to furnish complete present addresses of such parties/creditors representing the outstanding amount of Rs. 820,652 only. However, it was explained that the coal was purchased from local persons who are doing the business of coal making from jungle wood and for that purpose, Gram Panchayat authorized them. These persons were doing business on a small scale and therefore not keeping/maintaining books of accounts. Vouchers and weight slip support all the purchases from such parties. To check the quality of the goods, the assessee used to make payment after making sales of the goods purchased from them. Therefore, the credit balance at the end of the year was reflected in the balance sheet. However, the assessee in its letter dated 3-9-2014 offered the amount outstanding in respect of such creditors for Rs. 820,652 to the tax. It was explained that the amount was offered to tax to avoid the litigation with the department and for the peace of mind. As such there was no concealed income or inaccurate particulars of income were furnished.

However, the assessing officer during the assessment proceedings observed certain facts as detailed under :–

(i) The assessee failed to furnish the present address of the supplier/creditors which were outstanding for a long time as on 31-3-2011. There was also no name of the sundry creditors in the letter issued by the Gram Panchayat.

(ii) The suppliers of coal to the assessee are laborers, and therefore they would expect instant payment from the assessee.

(iii) The quality of the coal can be judged at the time of purchase only and not at the time of subsequent sale. There was no justification to make the payment after the sale of coal by the assessee to the suppliers.

In view of above, the assessing officer disallowed a sum of Rs. 820,652 on account of sundry bogus creditors and added to the total income of the assessee. The assessing officer during the assessment proceedings initiated the penalty proceedings under section 271(1)(c) of the Act for concealment of income.

The assessing officer during the assessment proceedings issued notice under section 274 read with section 271(1)(c) of the Act vide dated 18-3-2014 for levying the penalty. The assessee in compliance to it submitted that he agreed to the addition of sundry creditors for Rs. 820,542 to avoid the litigation with the department and buy the peace of mind. As such, no allegation can be framed against the assessee either for concealment of the income or furnishing inaccurate particulars of income.

However, the assessing officer disregarded the contention of the assessee by observing that the assessee failed to prove the genuineness of the sundry creditors outstanding as on its balance sheet on 31-3-2011. Therefore, the same was offered to tax. As per explanation 1 to section 271(c) of the Act, if there is a variation between the return of income and assessed income, then it shall be deemed that the assessee has furnished the inaccurate particulars of income. Accordingly, the assessing officer levied a minimum penalty of Rs. 2,73,567 being 100% of the amount of tax sought to be evaded.

5. Aggrieved, assessee preferred an appeal to learned Commissioner (Appeals). Assessee before the learned Commissioner (Appeals) submitted that the addition was agreed to avoid the litigation and buy the peace of mind. Therefore, it cannot be alleged that the assessee has concealed the particulars of income and furnished inaccurate particulars of income. However, all the vouchers and weight slip were duly issued in support of purchases claimed by the assessee for Rs. 820,652. The purchases from the local persons were duly authorized in certificate of Gram Panchayat. However, learned Commissioner (Appeals) disregarded the contention of the assessee and confirmed the order of assessing officer by observing as under :–

“4.3. I have considered the appellant’s submissions and the assessing officer’s observations. After the decision of the Hon’ble Supreme Court of India in the case of MAK Data (P) Ltd., (2013) 358 ITR 593 (SC) the appellant’s contentions that since that addition was made on agreed basis hence no penalty should be imposed is not acceptable. The other explanation of the appellant is that he’s procuring such’ materials from small farmers living in villages and these persons are not asking for payment immediately. Such claim has not been substantiated by any evidence. It is against human probability that small farmers will not ask for the payment immediately but will keep it pending for years together. Moreover the correct addresses of such persons were also not submitted by the appellant. Hence such explanation is also not bona fide. Thus it is held that the appellant has failed to substantiate the explanation filed by him regarding the additions made in the assessment order. Since he failed to substantiate these purchases, hence he agreed for the addition also. Hence it is held that the assessing officer has rightly levied penalty under section 271(1)(c) in this case.”

Being aggrieved by order of learned Commissioner (Appeals) assessee is in appeal before us.

The learned Authorised Representative before us filed a paper book which is running from pages from 1 to 36 and submitted that the GP ratio in the year under consideration has improved in comparison to the last year as evident from the order of assessing officer. The relevant extract of the assessing officer’s order is reproduced below :–

“2. The assessee is engaged in the trading of coal and shown turnover of Rs. 158,40,775 and gross profit of Rs. 13,82,545 @8.72%. In immediately preceeding year, assessee has shown turnover of Rs. 212,76,812 and Gross Profit of Rs. 16,10,240 @ 7.56%.”

The learned Authorised Representative before us further submitted that if the purchases are held as bogus, then the corresponding sales should also be treated as bogus and accordingly, no addition on account of bogus purchases can be called for. The case of the Revenue is not that assessee has suppressed the sales of coal. Thus the creditors arising out of the purchases cannot be treated as bogus merely on the basis that the assessee agreed to it. Moreover, the GP ratio during the year has also improved which strengthens the genuineness of purchases and so the creditors.

The sundry creditors shown outstanding as on 31-3-2011 were paid in the subsequent year. The learned Authorised Representative in support of assessee’s claim drew our attention on the submission made before the assessing officer that the outstanding creditors as on 31-3-2011 have been paid in the next year. The submission of the assessee before the assessing officer is placed on Page 22 of the Paper Book which is reproduced as under :–

“I have enclosed along with letter dated 11-5-2014 statement showing details of purchases payments made in assessment year 2011-12 and balance outstanding out of purchase during the year as on 31-3-2011 and payment made in assessment year 2012-13 to these parties. You will find that mostly payment is made in next year i.e. in assessment year 2012-13 to the parties as shown in statement and small amount in case of some parties remaining which is paid in further next year.”

The learned Authorised Representative also drew our attention on the chart depicting the payment made to the various sundry creditors in the subsequent year which is placed on page 9 of the Paper Book.

The Weigh Bridge Slip supports all the purchases claimed by the assessee. The learned Authorised Representative in support of assessee’s claim has drawn out attention on Page 10 and 11 of the paper book, where the copies of the weighbridge slip were placed on a sample basis.

The learned Authorised Representative also submitted that the sundry outstanding creditors are arising from the purchases made by the assessee and the liability on account of purchases has not ceased to exist in the books of accounts. Therefore, no disallowance of sundry outstanding creditors could have been made during the assessment proceedings. The learned Authorised Representative in support of his claim relied on the order of Hon’ble Supreme Court in the case of CIT v. Reliance Petroproducts (P) Ltd. 322 ITR 158. The relevant extract of the judgment is reproduced below :–

“The word ‘particulars’ must mean the details supplied in the return, which are not accurate, not exact or correct, not according to truth or erroneous. In the instant case, there was no finding that any details supplied by the assessee in its return were found to be incorrect or erroneous or false. Such not being the case, there would be no question of inviting the penalty under section 271(1)(c). A mere making of the claim, which is not sustainable in law by itself will not amount to furnishing of inaccurate particulars regarding the income of the assessee. Such claim made in the return cannot amount to the inaccurate particulars. (Para 9)

The revenue contended that since the assessee had claimed excessive deductions knowing that they were incorrect, it amounted to concealment of income. It was argued that the falsehood in accounts can take either of the two forms: (i) an item of receipt may be suppressed fraudulently; (ii) an item of expenditure may be falsely (or in an exaggerated amount) claimed, and both types attempt to reduce the taxable income and, therefore, both types amount to concealment of particulars of one’s income as well as furnishing of inaccurate particulars of income. Such contention could not be accepted as the assessee had furnished all the details of its expenditure as well as income in its return, which details, in themselves, were not found to be inaccurate nor could be viewed as the concealment of income on its part. It was up to the authorities to accept its claim in the return or not. Merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the revenue, that, by itself, would not attract the penalty under section 271(1)(c). If the contention of the revenue was accepted, then in case of every return where the claim made was not accepted by the assessing officer for any reason, the assessee would invite penalty under section 271(1)(c). That is clearly not the intendment of the Legislature. (Para 10)”

On the other hand, the learned Departmental Representative submitted that internal vouchers/self-made vouchers claimed the purchases. There was no bill produced by the assessee from the parties except weigh slip.

There was no justification furnished by the assessee for holding the payment of the sundry outstanding creditors. The learned Departmental Representative also claimed that all the payments were made to the sundry creditors in cash. Therefore, the same cannot be verified for the external documentary evidence. The learned Departmental Representative in support of his statement relied on the judgment of Hon’ble Supreme Court of India in the case of MAK Data (P) Ltd. v. CIT (2013) 358 ITR 593 (SC).

The learned Departmental Representative vehemently supported the order of authorities below.

6. We have heard the rival contentions and perused the materials available on record. In the present case, the assessee has shown sundry creditors of Rs. 8,20,652 as on 31-3-2011. The assessee failed to furnish the present current address of the parties to the assessing officer during the assessment proceedings. Therefore, the same was treated by the assessing officer as bogus. Accordingly, the addition was made to the total income of the assessee.

However, the Assessee during the assessment proceedings claimed to have accepted the addition made by the assessing officer to avoid the litigation, arrive at the amicable solution with the department and buy the peace of mind. Therefore, it cannot be held as the assessee has furnished inaccurate particulars of income or concealed the particulars of income. However, the view taken by the assessing officer was subsequently confirmed by the learned Commissioner (Appeals).

Now the issue before us arises for adjudication so as together whether the penalty needs to be sustained in the hands of the assessee in the given facts and circumstances. It is an undisputed fact that assessment and penalty proceedings are independent and different from each other. If there is any difference between the incomes declared by the assessee or income assessed during the proceedings cannot result in the concealment of income/furnishing inaccurate particulars of income.

The assessee has duly disclosed the sundry creditors in its books of accounts, which were not verified during the assessment proceedings for want of present address. But that does not mean that the assessee has concealed the particulars of income or furnished inaccurate particulars of income. The impugned sundry creditors are arising from the purchases which have not been disturbed by the lower authorities. It implies that the lower authorities have accepted the purchases but corresponding creditors have been added to the total income of the assessee for want of the address. In our considered view the addition on account of sundry creditors arising out of purchases cannot be added without disturbing the corresponding purchases.

For example, the assessee has shown purchases from Shree Amaratbhai Mnabhai during the year under consideration for Rs. 90,865.00 and claimed to have made the payment for Rs. 30000.00 during the year leaving the outstanding balance of Rs. 60,865.00 as on 31-3-2011. However, the assessing officer made the addition of an outstanding amount of Rs. 60,865.00, meaning thereby the purchases worth Rs. 30,000.00 from Shree Amaratbhai Mnabhai were accepted. It implies that the genuineness of the party namely Shree Amaratbhai Mnabhai for the purchases to the extent of Rs. 30,000.00 was accepted. Thus the addition has been made by the lower authorities on account of sundry outstanding creditors without questioning the corresponding purchases. Hence we are of the view the addition in the quantum assessment has been wrongly made and so as the penalty.

We also note that the facts in the case of MAK data were different from the present case. The addition in case of MAK Data was agreed in connection with the share capital transaction whereas in the facts the issue relates to the sundry creditors arising out of the purchases which were debited in the profit & loss account as revenue expenses. Thus we are reluctant to rely on the case of MAK Data as discussed above.

None of lower authorities have been brought on record that there was a deliberate act on the parts of the assessee suggesting that the assessee has claimed bogus purchases either by concealing the income or furnishing inaccurate particulars of income. In view of above we reverse the order of the authorities below. The ground of appeal of the assessee is allowed.

7. In the result, the appeal of the assessee is allowed.