The mere non-filing of an appeal against the additions made by the AO and voluntary surrender of any amount to buy peace of mind alone cannot constitute sufficient grounds for the imposition of a concealment penalty, as held by DelHC in CIT v Harsh Talwar — In favour of: The assessee; ITA No 1579 of 2010.
CIT v Harsh Talwar
High Court of Delhi
ITA No. 1579 of 2010
A.K. Sikri and M.L. Mehta, JJ
Decided on: 23 May 2011
Counsel appeared:
Prem Lata Bansal and Deepak Anand for the appellant
Rakesh Gupta, Ashwani Taneja, Poonam Ahuja and Johnson Bara for the respondent
Judgment
A.K. Sikri, J
1. This appeal was admitted on the substantial question of law whether the ITAT was correct in law in deleting the penalty imposed by the Assessing Officer under section 271(1)(c) of the Income-tax Act. The aforesaid issue has arisen for consideration in the following factual backdrop.
For the assessment year 2004-05, the assessee herein who is a partner of M/s. Gallaria June 1st.
During the assessment proceedings, the assessee was confronted with some stocks comprising of
various carpets and durris lying at the premises. It may be noted that a search was carried out at the
premises of the assessee on 16-1-2004 and at the same time, stock registers were verified which
showed opening stock of 3290 of various carpets and durris. However, the stock registers for the
financial year 2003-04 revealed opening stock of 5417 number of carpets and durris. The assessee
surrendered an amount of Rs.1.25 crores as an unexplained investment. Taking gross profit of 16 per
cent thereon which comes to Rs.28,68,390, that amount was added as an additional income for this
assessment year. At the same time, while passing the assessment orders, the Assessing Officer chose to initiate the penalty proceedings as well under section 271(1)(c) of the Act. Show cause notice was issued and after eliciting reply thereupon and hearing the assessee, penalty of Rs.41.25 lakhs was imposed upon the assessee. The penalty order passed by the Assessing Officer gives an impression that in the reply submitted by the assessee in the initiation of penalty proceedings, the assessee had merely challenged the said proceedings only on the ground that the mandatory satisfaction which is to be recorded by the Assessing Officer before proceedings under section 271(1)(c) of the Act was not recorded and in the absence of this mandatory requirement, the penalty proceedings were void ab initio. The Assessing Officer has dealt with this contention and after repelling the same, he imposed the penalty on the ground that the assessee had himself agreed to surrender the income of Rs.1.25 crores for tax and this was sufficient justification for imposition of penalty. The assessee challenged this penalty order passed by the Assessing Officer by preferring appeal before the CIT(A). It was asserted by the assessee that the assessee had given due explanation to the Assessing Officer during the penalty proceedings along with plethora of evidence. The surrender was made by the assessee just to buy peace and otherwise the difference in the figures of carpets was due to the fact that these carpets were taken on approval basis. The evidence produced by the assessee was in the form of bills and vouchers, copies of accounts of suppliers/manufacturers duly acknowledging the delivery of carpets to the assessee on approval basis, the details of income-tax assessment of the parties along with original bills in respect of carpets as and when the same were purchased along with the PAN details of the suppliers/manufacturers. The grievance of the assessee before the CIT(A) was that the
explanation furnished by the assessee along with the aforesaid documentary evidence was not even
adverted to and dealt with by the Assessing Officer while passing the penalty order. It was impressed upon by the assessee before the appellate authority that penalty proceedings were all together different and independent of the quantum proceedings and it was the right of the assessee to show that there was no concealment or deliberate misstatement of the part of the assessee which warranted any penalty to be imposed by him. The CIT(A) found, and rightly so, that the Assessing Officer had not dealt with the defence put forth by the assessee as noted above and merely on the basis that the assessee had surrendered the income during the quantum proceedings, the Assessing Officer jumped to the conclusion that there was concealment on the part of the assessee and rushed to impose the penalty. Thereafter the CIT(A) went into the documents which were submitted by the assessee and on that basis recorded the finding that the assessee had been able to show that there was no deliberate concealment of income on the part of the assessee and therefore the imposition of penalty was not justified. The detailed order passed by the CIT(A) further indicates that the CIT(A) focused his attention to the issue that mere surrender of the assessee would not amount to concealment of the income and this aspect had to be gone into afresh and independently in the penalty proceedings.
Various judgments in support of this position are taken note by the CIT(A) in his order. The CIT(A)
further specifically dealt with this aspect of the so called concealment and recorded the following
findings:-
"The above submissions of the appellant have been found to be not without merit. It is seen
that the appellant had filed copies of accounts confirmed by the suppliers/manufacturers with
regard to transactions on approval basis. In addition the details of income-tax assessment of
the said suppliers/manufacturers including PAN had also been filed. After going through the
penalty order it is seen that the Assessing Officer has not discussed any of these evidences or
proven them to be false. Nor has the Assessing Officer made out a case that some vital facts
were concealed by the appellant and that the Assessing Officer had detected the same. In any
case, the Assessing Officer apparently made the addition on the ground that the appellant
voluntarily came forward and surrendered the said amount. So far as assessment proceedings
are concerned, the Assessing Officer has rightly made the addition when the appellant has
voluntarily made a disclosure. However, for the purpose of levy of penalty under section
271(1)(c) it was obligatory on the part of the Assessing Officer to prove that the appellant had
in fact concealed the particulars of his income. In the penalty order no cogent reason has
apparently been given for holding that the appellant had concealed the particulars of his
income or that the explanation of the appellant was false and incorrect. Merely because
receipts and deliveries of carpets were made subject to approvals, the reasons of which have
been explained in details by the appellant, it cannot be said that the Assessing Officer was
justified in holding that they must necessarily by bogus or in genuine. The second factor
which may have influenced the mind of the Assessing Officer while imposing the penalty can
be that the explanation rendered any have been an afterthought. However, it has been stated
that there are enough evidences to show that services were in fact provided by each of them.
The Assessing Officer's observation that such instant arrangements represent diversion of
income does not appear to be based on any proper reasoning or basis. It appears to be a mere
suspicion on the part of the Assessing Officer. Ultimately the issue boils down to the fact that
the Assessing Officer has not elaborated on any cogent reason for being not satisfied with the
explanations furnished by the appellant with regard to the necessity or justification or
receiving and making deliveries on approvals. It is seen that the appellant offered this
explanation in respect of the state of affairs along with all available evidences to substantiate
his explanation. On the other hand the Assessing Officer has not discussed any cogent
argument for rejecting the appellant's explanation nor has he brought any thing on record to
show that the appellant's explanation is false or that the appellant has concealed his income.
The Assessing Officer has not made out a case that the appellant has claimed any fictitious
expenses on the basis of any incriminating evidences. The appellant has relied on certain case
laws also wherein it is held that penal provisions cannot be attracted where deliberate and
conscious concealment or furnishing of inaccurate particulars on the part of the assessee is not
established. Certain other case laws have also been cited to content that mere non-filing an
appeal against additions made by the Assessing Officer and voluntarily surrendering any
amount to buy peace of mind cannot alone constitute sufficient grounds for imposition of
concealment penalty.
Considering the facts and circumstances of the case in its entirety, it is held that merely
because the appellant agreed to surrender the income does not five the Assessing Officer the
jurisdiction to come to the conclusion that there was deliberate concealment on his part. The
surrendered amount may be taken into consideration while computing the income of the
person surrendering the income, but it is not sufficient grounds to prove concealment of
income on the part of the appellant for the purpose of levy of penalty under section 271(1)(c)
of the Act. In the light of the evidences and explanation submitted by the appellant, it is held
that there is no positive finding of the Assessing Officer at any stage in the penalty
proceedings that the explanation of the appellant was false and incorrect. In the present case
there is nothing to show that the explanation given by the appellant was found to be false.
This is a case where the explanation of the appellant was rejected without establishing it to be
false and penalty was levied."
2. It is clear from the above that the CIT(A) also commented upon the wrong approach adopted by the Assessing Officer and further that the Assessing Officer had not made out a case that the assessee had claimed any fictitious expenses on the basis of any incriminating evidences. It was now the turn of the revenue to feel aggrieved by the aforesaid order of the CIT(A) in deleting the penalty which prompted the revenue to challenge the said order by preferring appeal before the ITAT. However, the attempt of the revenue in seeking to get the order of the CIT(A) has failed, inasmuch as, vide impugned order dated 16-10-2009 the Tribunal dismissed the appeal of the revenue and upheld the order of the CIT(A). The position is summarized as under by the ITAT in the impugned order:-
"We have considered the rival submissions. We have also perused the material on records. A
perusal of the assessment order clearly shows that the assessee had made surrender and the
surrender has been accepted by the Assessing Officer without doing any further verification.
Further in the course of penalty proceedings the assessee has given detailed explanation. The
assessee has brought evidences on record to substantiate the case of the assessee that the
surrender itself was not called for and that the carpets were taken on approval basis. These
evidences as furnished by the assessee, as also the explanation as given by the assessee has
nowhere been disputed by the Assessing Officer In fact the Assessing Officer has levied the
penalty without even making any comment to the explanation given by the assessee much less
even without whispering about the falsity of the explanation. The Assessing Officer has gone
on the presumption that the assessee himself agreed to the surrender on his own sweet will
and consequently, penalty is leviable. This is not reason justifiable enough for the levy of
penalty. The assessee might surrender an amount for taxation for various reasons best known
to the assessee. The surrender of an amount to taxation in the course of assessment
proceedings, no doubt is a good finding for initiation of penalty proceeding but is not strong
enough for the levy of penalty especially when in the course of penalty proceedings the
assessee is able to place evidences and explanation and where he is fully entitled to challenge
the surrender and prove the surrender itself was not called for. If such explanation is given by
the assessee along with the corroborating proof for the same and if such explanation is not
dislodged by the Assessing Officer then penalty cannot be levied on the assessee. It is noticed
from the order of ld. CIT(A) that the CIT(A) has considered the fact that the assessee has
produced the bills and vouchers as also the confirmation and copies of accounts of
suppliers/manufacturers duly acknowledging the delivery of carpets of the assessee on
approval basis as also the details of income-tax assessment of the parties along with original
bills in respect of the carpets as and when the same were purchased along with PAN details of
the suppliers/manufacturers and these evidences have not been rebutted by the Assessing
Officer. Consequently, the ld. CIT(A) has rightly deleted the penalty. In these circumstances,
we find no error in the order of ld. CIT(A) in deleting the penalty levied under section
271(1)(c) of the Act. This view also finds support from the decision of Coordinate Bench of
this Tribunal in the case of partnership firm M/s. Galleria June 1st referred to supra wherein
the assessee is a partner. In these circumstances, the appeal of the revenue is dismissed."
3. Apart from what is recorded by the CIT(A), another additional aspect which the Tribunal has
pointed out is that even in the case of the partnership firm of M/s. Gallaria June 1st, wherein the
assessee is a partner, similar penalty under identical circumstances imposed by the revenue had been deleted by the ITAT. We may further add that the said order in respect of the partnership firm has been accepted by the revenue and no appeal preferred thereagainst.
4. For all these reasons, we answer the question of law in favour of the assessee and against the
revenue. As a consequence this appeal is dismissed.
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