2005 (3) TMI 385 - AT - Income Tax

Levy Of Penalty u/s 271(1)(c) - concealment or furnishing of inaccurate particulars of income - Sale of copper wire added u/s 41(2) - trading addition made on account of excess wastage - HELD THAT - It is not in dispute that the said copper wire was installed about 15 to 20 years before i.e. the years 1955 to 1965. The assessee had given reasons that the old wire could not be retrieved because of heavy cost involved in the recovery of the same and the reason that the removal thereof might cause damage to the building and flooring. This was a plausible explanation. Even during the visit of the AO to the factory no such copper wire was found in the store. The assessee had shown sale of old copper wire at Rs. 16, 000 and the same was duly reflected in the miscellaneous income under the head sale of discarded stores and machinery . There is no evidence available with the Department which could show that the assessee had in fact sold such copper wire at higher amount than what was reflected in the books of account. Therefore in any case the addition has been made because the explanation has not been found satisfactory. But such explanation could not be considered as false or mala fide. Moreover addition has been made on estimate basis only by assuming the quantity of wire quantity of irrecoverable wire or the quantity realised by the assessee. There is no definite information with the AO that actually old wire sold was more than worth Rs. 16, 000. Similar is the position with regard to wastage shown in the worsted division. There is no denying the fact that the assessee had maintained complete quantitative details indicating the consumption and yield of the same. It is also a fact that the wastage shown in the woollen division was much less as compared to worsted division in comparison to earlier assessment years. If the assessee had intention of manipulating trading results it could have easily done in the woollen division also. Further addition was made purely on estimate basis as discussed in the preceding paragraphs and the addition has been made on the ground that the explanation of the assessee is not found to be satisfactory. But this does not automatically lead to the conclusion that the assessee had concealed the income with a view of evade tax or conduct of the assessee was mala fide. Thus here also penalty u/s 271(1)(c) could not be levied merely because the explanation has been found unsatisfactory. In the present case also the additions have been made and sustained purely by rejecting the explanation of the assessee. There is no material or evidence on record that the explanation furnished by the assessee was either false or dishonest. In fact in the earlier assessment years much higher percentage of wastage shown in the worsted division was accepted by the Department. There is also no material or evidence to show that assessee had made sales outside the books of account. Not even a single defect has been pointed out by the AO in the books of account. Therefore mere fact that additions have been made and sustained would not justify levy of penalty u/s 271(1)(c). Thus we do not find any justification to interfere with the order of the CIT(A). The same is upheld and all the grounds of appeal of the Revenue are rejected. In the result the appeal filed by the Revenue is dismissed.

Summary

Issues Involved:
1. Justification of cancelling the penalty imposed under Section 271(1)(c) of the IT Act, 1961.
2. Validity of the additions made by the AO regarding the sale of copper wire and excessive wastage.
3. Whether the explanation provided by the assessee was bona fide and whether the penalty under Section 271(1)(c) was justified.

Detailed Analysis:

1. Justification of Cancelling the Penalty Imposed under Section 271(1)(c):
The appeal was filed by the Revenue against the order of CIT(A), Jammu, which cancelled the penalty of Rs. 20,54,059 imposed by the AO under Section 271(1)(c) of the IT Act, 1961. The CIT(A) observed that the AO had not specifically pointed out the applicability of Section 145 and that the complete production record had been maintained without any defect or discrepancy found by the AO. The Tribunal reversed the order of the CIT(A) and restored that of the AO, noting that the higher wastage accepted in earlier years could not justify not making an addition for the assessment year under consideration.

2. Validity of the Additions Made by the AO Regarding the Sale of Copper Wire and Excessive Wastage:
The AO made two additions: Rs. 2,25,150 for the sale of copper wire under Section 41(2) and Rs. 34,28,414 for trading addition due to excess wastage. The AO observed that the assessee did not account for the sale of copper wire in the P&L account and estimated the value of the scrap. Regarding wastage, the AO noticed a higher percentage of wastage compared to the previous year and made an addition based on the market rate. The CIT(A) deleted both additions, noting that the AO had not pointed out any defects in the accounts and that the Department had accepted higher wastage percentages in earlier years. The Tribunal, however, upheld the AO's additions, stating that the assessee failed to satisfactorily explain the increase in wastage.

3. Whether the Explanation Provided by the Assessee was Bona Fide and Whether the Penalty under Section 271(1)(c) was Justified:
The assessee argued that the mere fact that additions were made and sustained in appeal did not justify the imposition of penalty under Section 271(1)(c). The CIT(A) accepted the contention, stating that both additions were confirmed due to the rejection of the assessee's explanation and were based on probability. The Tribunal's findings indicated that the rejection of the explanation did not render it false. The CIT(A) concluded that the explanation provided by the assessee was bona fide and that no material evidence indicated that the explanation was false. The Departmental Representative argued that the additions were upheld by the Tribunal and that the assessee failed to substantiate its explanation, justifying the penalty. However, the Tribunal noted that the additions were based on assumptions and estimates, and the assessee maintained complete books of account without any specific instances of suppression of sales or purchases.

Conclusion:
The Tribunal concluded that the penalty under Section 271(1)(c) was not justified as the additions were made on an estimate basis and the explanation provided by the assessee was plausible. The Tribunal upheld the CIT(A)'s order cancelling the penalty, noting that there was no material evidence of concealment or furnishing inaccurate particulars by the assessee. The appeal filed by the Revenue was dismissed.