Naresh Chand Agarwal vs Commissioner of Income Tax

Satish Chandra, J.—The present appeal has been filed by the assessee-appellant u/s 260A of the income tax Act 1961, against the judgment and order dated September 28, 2007, passed by the income tax Appellate Tribunal, Lucknow, in I.T.A. No. 507/Luc/07. On March 26, 2008, a co-ordinate Bench of this court has admitted the appeal on substantial questions of law (i) and (iii), which are reproduced as under:

(i) Whether, on a true and correct interpretation of the section 275 of the Act, the Tribunal was legally correct in holding that the penalty order dated September 28, 2006, had been passed within the limitation period as prescribed thereunder, and in upholding the validity thereof?

(iii) Whether, on a true and correct interpretation of the provisions of section 271(1)(c), the Tribunal was legally correct in holding that the assessee''s case fell within the said penal provisions and in upholding the levy of penalty thereunder?

The brief facts of the case are that during the assessment year under consideration, the assessee-appellant was engaged in the business of civil contract in his proprietary set up under the name and style "M/s. Naresh Chandra and Engineers". The original return was filed on October 31, 1992, declaring therein income amounting to Rs. 81,340. After the notice, on March 24, 1995, the assessment was completed u/s 143(3) of the income tax Act, on a total income Rs. 9,77,190 by rejecting the books of account u/s 145 of the income tax Act. Aggrieved with the order, the assessee-appellant filed the first appeal, where a partial relief of Rs. 94,426 was allowed to the appellant. Thus, the net income was worked out to Rs. 8,82,760. In second appeal, the Tribunal has set aside the order and remanded the matter back to the Assessing Officer.

In pursuance to the direction, the Assessing Officer passed an order u/s 143(3), where the interest on the FDR was calculated as Rs. 2,24,344 for a separate source of income and addition was also made by computing the net profit rate at 8 percent. u/s 44AD of the Act, on the contract business for an amount of Rs. 5,78,076. Thus, the total addition was made for Rs. 8,01,420, which was upheld by the appellate authorities.

At the Same time, the Assessing Officer has levied the penalty of Rs. 4,00,000 u/s 271(1)(c) of the income tax Act, which was also upheld by the appellate authorities. Being aggrieved, the appellant-assessee has filed the present appeal.

With this background, Sri K.R. Rastogi, holding brief of Sri S.K. Garg, learned counsel for the appellant, submits that the audit report, profit and loss account; and balance-sheet were filed, but the Assessing Officer has rejected the books of account and made the addition on estimate basis being inspired from section 44AD, where the net profit rate was estimated at 8 percent. from contract business. The Assessing Officer in his penalty order dated September 28, 2006, imposed the penalty of Rs. 4,00,000 (four lakhs) on two counts, i.e. firstly, additions were made in the income of assessee after rejection of book results and the net profit rate was fixed at 8 percent. on the total turnover. Secondly, interest on FDRs of Rs. 2,23,344 was treated as a "income from other sources". He further submits that no penalty for concealment can be imposed in respect of the addition made after rejection of the books of account; and on the basis of application of net profit rate. He also submits that the interest income which was treated as "income from other sources" does not mean that the assessee has concealed the income or filed inaccurate particulars thereof. If there can be two opinions about the claim of the assessee, the explanation offered by the assessee cannot be regarded to be false. No material or evidence was brought on record or pointed out which may prove that the Revenue had discharged the burden for proving that explanation of the assessee was incorrect or has ever furnished the inaccurate particulars of his income. So, the present case is not a case of concealment of the income. Hence, no penalty can be imposed for the concealment u/s 271(1)(c).

On the other hand, Sri D.D. Chopra, learned counsel for the Department, relied on the order passed by the lower authorities. He submits that earlier, the Assessing Officer, vide order dated March 24, 1995, has treated the amount of interest On FDRs as income of the assessee separately. While applying net profit rate the Assessing Officer has refused the netting of interest claimed by the assessee. He further submits that in the second round, the Assessing Officer, vide order dated March 28, 2006, observed that the FDRs were not purchased out of the capital of the assessee and, therefore, the netting of the interest accrued on FDRs is not allowable. So, the Assessing Officer has rightly treated the interest accrued on FDRs amounting to Rs. 2,23,344 as "income from other sources". He also submits that the books of account were rejected u/s 145 of the Act and on the net profit rate was computed at 8 percent. prescribed in the statute. Lastly, he justified the levy of the penalty of Rs. 4,00,000 u/s 271(1)(c).

Heard both the parties and gone through the material available on record.

In the instant case, the penalty was imposed in the second round by the Assessing Officer after making the addition by rejecting the books of account. In the case of Sri T. Ashok Pai Vs. Commissioner of Income Tax, Bangalore, , the hon''ble apex court observed that (headnote):

If an explanation given by the assessee with regard to the mistake committed by him has been treated to be bona fide and it is found as a fact that he had acted on the basis of wrong legal advice, the question of his failure to discharge his burden in terms of the Explanation to section 271(1)(c) of the income tax Act, 1961, would not arise.

The word ''inaccurate'' in the context of levying penalty u/s 271(1)(c) signifies a deliberate omission on the part of the assessee. Such deliberate act must be either for the purpose of concealment of income or furnishing of inaccurate particulars.

The Assessing Officer is required to arrive at a finding that the explanation offered by the assessee, in the event he offers one, was false. He must be found to have failed to prove that such explanation was not only not bona fide but all the fact relating to the same which are material to the income were not disclosed by him. Thus apart from his explanation being not bona fide, it should be found as a fact that he has not disclosed'' all the facts which were material for the computation of his income.

The order imposing penalty is quasi-criminal in nature and the burden lies on the Department to establish that the assessee has concealed his income. Since the burden of proof in penalty proceedings varies from that in the assessment proceeding a finding in an assessment proceeding that a particular receipt is income cannot automatically be adopted, though a finding in the assessment proceeding constitutes good evidence in the penalty proceedings. In the penalty proceedings the authorities must consider the matter afresh as the question has to be considered from a different angle.

It is now a well-settled principle of law that the more the law is stringent, more strict a construction thereof would be necessary. Even when the burden is required to be discharged by an assessee, it would not be as heavy as that on the prosecution.

Further, in the case of Commissioner of Income Tax, Ahmedabad Vs. Reliance Petroproducts Pvt. Ltd., , hon''ble apex court observed that (headnote):

A glance at the provisions of section 271(1)(c) of the income tax Act, 1961, suggests that in order to be covered by it, there has to be concealment of the particulars of the income of the assessee. Secondly, the assessee must have furnished inaccurate particulars of his income. The meaning of the word ''particulars'' used in section 271(1)(c) would embrace the details of the claim made. Where no information given in the return is found to be incorrect or inaccurate, the assessee cannot be held guilty of furnishing inaccurate particulars. In order to expose the assessee to penalty, unless the case is strictly covered by the provision, the penalty provision cannot be invoked. By no stretch of imagination can making an incorrect claim tantamount to furnishing inaccurate particulars. There can be no dispute that everything would depend upon the return filed by the assessee, because that is the only document where the assessee can furnish the particulars of his income. When such particulars are found to be inaccurate, the liability would arise. To attract penalty, the details supplied in the return must not be accurate, not exact or correct, not according to the truth or erroneous.

Where there is no finding that any details supplied by the assessee in its return are found to be incorrect or erroneous or false there is no question of inviting the penalty u/s 271(1)(c). A mere making of a claim, which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such a claim made in the return cannot amount to furnishing inaccurate particulars.

In the instant case, nothing was concealed by the assessee. It was the Assessing Officer who has rejected the books of account in the second round and applied the 8 percent. net profit rate prescribed u/s 44AD. In the instant case, the turnover is more than 40 lakhs, so section 44AD is not applicable, none the less the Assessing Officer was inspired with the provision of section 44AD and made the addition by estimating the net profit rate at 8 percent. Rejection of the books of account allowed the Assessing Officer to make the addition on estimate basis. When the addition is made on estimate basis, no penalty u/s 271(1)(c) of the income tax Act, can be imposed as per the ratio laid down in the case of Commissioner of Income Tax Vs. Arjun Prasad Ajit Kumar, , where it was observed that:

Appeal (High Court)--Substantial question of law--Penalty u/s 271(1)(c)--Commissioner of income tax (Appeals) deleted penalty u/s 271(1)(c) on the ground that there being nothing on record that assessee''s explanation lacked bona fides, penalty u/s 271(1)(c) could not be imposed on the basis of estimating sales and making addition by applying net profit rate--Same was rightly sustained by Tribunal and no substantial question of law arises.

Moreover, it may be mentioned that no finding of deliberate concealment of income was brought in the instant case as the assessee has never suppressed the interest income from FDRs. Interest income from FDRs was duly shown. It was for the Assessing Officer to treat this income as business income or income from other sources. But the fact remains that there is no concealment on the part of assessee. So, no penalty for concealment is leviable as per the ratio laid down in the case of CIT v. Attar Singh and Bros. [2008] 11 MTC 35 (All).

By considering the totality and circumstances of the case, we set aside the impugned orders and cancel the levy of the penalty of Rs. 4,00,000 (four lakhs). The assessee will get the relief accordingly. The answer for both the substantial questions of law is in favour of the assessee and against the Revenue. In the result, appeal is allowed. No costs.