TMI Blog2010 (11) TMI 1071X X X X Extracts X X X X X X X X Extracts X X X X ..... are that in this case a survey u/s. 133A of the Income-tax Act, 1961[hereinafter referred to as the 'Act'] was conducted in the premises of the assessee on 20- 10-2000,when excess stock of garments was found and consequently, partner of the firm Shri Harishbhai U. Mamnani while admitting the existence of excess stock, offered a sum of ₹ 11,17,752/- for taxation. Later, the assessee stated that out of the said sum, ₹ 7,75,050/- related to the assessee, the remaining to two other firms M/s Harish Garment and M/s Udharam Ashumal, controlled by the family of partners and being operated in the same premises. Subsequently, return declaring income of only ₹ 1,84,350/- filed on 31-07-2001 by the assessee, dealing in garments and dress material, was taken up for scrutiny. During the course of assessment proceedings, the Assessing Officer[AO in short] noticed that the assessee had obtained a secured loan of ₹ 14,70,939/- from Anand Mercantile Co.op. Bank Ltd. (AMCBL) against hypothecation of stocks. As per statement of stock position as on 30/6/2000 submitted to the bank, stock was valued at ₹ 26,21,865/-. Even though the assessee included excess stock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the balance sheet as on 31-3-01 enclosed with the return showed secured loans amounting to ₹ 14,70,939/- on account of hypothecation of stocks with the Anand Mercantile Co-Op Bank Ltd. (AMCBL), the closing stock of goods hypothecated as per the books amounted to only ₹ 8,00,683/- after excluding the stock of ₹ 7,75,505/-declared as a result of survey . The AO further noticed that copy of the stock statements submitted to the bank revealed that the stock declared to the bank was much higher than the stock shown in the books of account. The highest stock disclosed to the bank as on 30.6.2000 amounted to ₹ 26,21,865/-.Since the assessee did not maintain day today stock register during the year, the AO worked out stock as on 30-6-2000 as per books after adopting the G.P. @ 26.2% declared by the assessee. As the stock as per the books worked out to only ₹ 8,00,683/- as against stock of ₹ 26,21,865/- declared to the bank, the AO concluded that the assessee understated of the stock in the books as on 30-6-2000 and the actual stock was much higher as disclosed to the bank. Accordingly, the assessee was asked to reply as to why unexplained investment in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.1,49,116 Rs.9,24,573 Less: cost of goods sold Rs.2,77,812 Opening stock 1-6-2000 Rs.6,46,761 Add. Purchase of June, 2000 Rs. 58,819 Rs.7,05,570 Less: cost of goods sold Rs.1,85,824 Opening stock 1-7-2000 Rs.5,19,746 (or say Closing stock as on 30-6-2000) As against the book stock of ₹ 5,19,746/- the assessee disclosed stock of ₹ 26,21,865/- to the bank as on 30-6-2000. However, while working out the excess stock, the stock disclosed during the course of survey was ₹ 7,75,505/- has to be taken into account. Thus, the excess stock disclosed to bank was worked out as under. Stocks disclosed to the Bank as on 30-6-2000 Less. Rs.26,21,865 Book stock as on 30-6-2000 Rs.519746 Add. excess st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explanation as to its nature and source, of an investment u/s 69 of the Act. Rather, if that were to be a criteria, the only thing to be seen would be the adequacy of the GP rate, and further, even the addition as finally sustained by him would enhance the total gross profit to ₹ 14.35 lakhs, which works to be a fabulous figure of 57.6% on the reported sales of ₹ 24.90 lakhs during the year. In fact, as the GP as deducted from the bank statement (27% approximately) matches with that being shown by the assessee (upto the pre-survey period), it, rather, only implies that the assessee was engaging in sales (trading activity) outside of its books of account. The issue, therefore, that arises for consideration is whether, in the facts of the present case, i.e., where the assessee was admittedly carrying stock in excess of that reflected in its books of accounts in respect of its business, can it be said to have made any investment outside its books of account, considering that the excess stock as at the date of survey (20.10.2000) stands surrendered for tax, and if so, its quantum. In other words, the resolution of the issue boils down to drawing an inference as to the qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o go back on their own statement given to the banks as to the stock held or hypothecated by them. And that, a heavy burden lies on the assessee to prove that the books of account alone gives a correct picture and its own statement given to the Bank was motivated. In the facts of the case, however, we find that, courtesy the survey operations, the burden of the assessee in proving that its books did not reflect the true picture and the statements submitted to the bank are, in fact, inflated, is amply discharged. And, therefore, it would be incorrect, as well as inconsistent with the facts on record to ignore the same, the income to be taxed being the real one. However, it is also a matter of fact that the stock of the assessee, or any business entity for that matter, cannot be held at constant levels throughout the year. As such, the assessee's plea that its entire excess stock stands discovered and surrendered at the time of survey cannot be accepted. The very fact that its stock varies from month to month, and which would only be in response to the business needs, would exhibit this. Rather, we observe that stock held by it generally is to be tune of ₹ 25 to ₹ 26 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me to him and which did not contain the stock statement dtd.20.10.2000. (c) That the stock of the two sister concerns of the assessee also lies in its business premises as these sister concerns also operate from the same, and as they were not enjoying any credit facilities, the assessee also declares the stock belonging to them to its bank. This claim of the assessee appears plausible as it is a fact borne out by the record that the stock discovered at-the time of survey i.e., ₹ 17.64 lakhs included stock of ₹ 3.42 lakhs belonging to its two sister concerns, and which was, therefore, reduced therefrom for surrender purposes. However, we also find that the Assessing Officer has, not accepting the assessee's contention in this respect on the ground that it would be indeed surprising that the assessee submits stock belonging to its sister concerns to its bank, not made any investigation in the matter. The reality of a business practice, whether right or wrong, has to be adjudged on the basis of evidence, or, in its absence, on the basis of preponderance of probabilities, so that the Assessing Officer's ground of rejection thereof, to our mind, is legally in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. 9. In view of the foregoing, we uphold the addition made by the Assessing Officer to the extent of ₹ 26,21,865 subject to reduction made to the extent of stock of its two sister concerns as at 30.6.2000, in terms of our observations in this respect at para 8(c) above. The addition of ₹ 775505 on the basis of stock found on survey would be simultaneously deleted; the addition being sustained on the basis of peak value of stock. 10. Grounds No.2 and 3 are general in nature and do not call for any specific adjudication. C.O.No.99/Ahd/2005 4.1 As regards GP addition, the ITAT upheld the findings of the AO in the following terms: 11. The first ground of the assessee in the cross objection relates to the confirmation of addition on account of Gross Profit made by the Assessing Officer at ₹ 1,49,888. 12. Addition in this case was made by the Assessing Officer after observing the sharp decline in the GP rate in the post- survey period in comparison to the preceding periods as under: Period Gross Profit Rate From 1.4. 1998 to 31.3.1999 25.66% From 1.4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ake Palace Hotels and Motels Pvt. Ltd. (81 TTJ 657). The learned Departmental Representative, on the other hand, relied upon the orders of the Assessing Officer and CIT(A). 16 We have heard both the parties as also perused through the judgment cited. The expenditure for travel by rail or road, as well as on boarding and lodging expenses, is not one for which evidence would be difficult or impracticable to obtain in the normal course as was the case for the expenses, being Misc. expenses, under reference in the decision cited. Nevertheless, it is highly unlikely that the assessee would not have incurred this expenditure, which is nominal by all counts, for the purpose stated. As such, we are of the opinion that though unevidenced, it would not be appropriate to uphold the disallowance of the said expenditure in the facts of the present case. The orders of the authorities below on this point, therefore, stand reversed. 17 The third and the final ground in the Cross objection is against confirmation of disallowance of staff welfare expenses for ₹ 9,500. This amount has been disallowed, in the absence of any evidence being furnished before the Assessing Officer as well th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.1,49,888/- 2. Unexplained Investment in stock Rs.9,84,367/- 3. Disallowance of advertisement expenses ₹ 2,336/- 4 With regard to addition on account of gross profit of ₹ 1,49,888/-, the Assessing Officer noted that there was a fall in G.P. by 4.31% compared to the immediately preceding year. For the post survey period, the appellant had disclosed G.P. of 11.63% against 26.2% declared for the pre-survey period. The issue was discussed at length by the Assessing Officer. The C.I.T. (Appeals), in his order dated 20.10.2004 as well as the ITAT in its order No.677/Ahd/2005 dated 20.5.2005 agreed that the G.P. declared by the appellant does not stand the test of scrutiny. In fact, there does not appear to be any reasonable ground for there being such a large variation in the pre-survey and post survey rate of G.P. declared. The Learned CIT(Appeals) held that the appellant has made an attempt to explain the decline in shortfall in GP but the same is not acceptable in the absence of any documentary evidence. There is no evidence that sales affected during the post ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income tax Act. 5.1 However, the Hon. I.T.A.T. differed from the order of the learned C.I.T.(Appeals) and held that the assessee has failed to discharge its onus to explain the difference between the stock declared with the bank and that reflected in its books of accounts. After going into details of the stock declared by the appellant with the bank and that found during the survey proceedings as well as the stock reflected in the books of accounts, the ITAT reversed the order of the CIT(Appeals) upholding the addition made by the Assessing Officer subject to the reduction of stocks declared by the sister concerns and also the amount surrendered during the time of survey. 5.3 In view of the fact that the highest fact finding authority has gone into detail with regard to the books of accounts and has squarely held that the peak difference in stock declared by the appellant deserves to be brought to tax reflects that the appellant had clearly not declared its true and correct income. Penalty u/s. 271(l)(c) Is clearly attracted on this issue and is therefore, confirmed. 6. The addition on account of advertisement expenses has been accepted by the appellant. Since the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the survey and on the basis of stock statements submitted to the bank, have been made by the AO after rejection of book results . On appeal, the ld. CIT(A) sustained the addition on account of low GP while deleting the addition on account of excess stock. There is nothing in the order dated 20.12.2004 of the ld.CIT(A) or order dated 20.5.2005 of the ITAT, suggesting that the assessee disputed the rejection of book results . The ITAT also upheld the addition towards low GP of only 11.63% declared by the assessee during the post survey period with the observations that the assessee did not substantiate his explanation either before the lower authorities or even before the ITAT in quantum appeal. The ITAT rather found the explanation of the assessee inconsistent while observing that all the figures were derived from assessee's own books of account. As is apparent from the facts of the case, the assessee failed to substantiate its explanation regarding low GP of only 11.63% in the post survey period during the course of assessment proceedings while no attempt at all was made in the penalty proceedings to justify through any explanation except stating that penalty could not be im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deemed to represent the income in respect of which particulars have been concealed. 8.1 As is evident from the aforesaid cl. (c) of s. 271(1) of the Act, the words used are 'has concealed the particulars of his income' or furnished 'inaccurate particulars of such income'. Thus, both in case of concealment and inaccuracy, the phrase 'particulars of income' has been used. The legislature has not used the words 'concealed his income'. From this it would be apparent that penal provision would operate when there is a failure to disclose fully or truly all the particulars. The words 'particulars of income' refer to the facts which lead to the correct computation of income in accordance with the provisions of the Act. So when any fact material to the determination of an item as income or material to the correct computation is not filed or that which is filed is not accurate, then the assessee would be liable to penalty under s. 271(1)(c) of the Act. The expression 'has concealed the particulars of income' and 'has furnished inaccurate particulars of income' have not been defined either in section 271 or elsewhere in the Act. Howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total income figure to that extent they reflect, it would amount to concealment to that extent. In the same way where specific and definite particulars of income are detected as inaccurate, then such figure will also make the total income inaccurate in particulars to the extent it does not include such income. Whether it be a case of only concealment or of only inaccuracy or both, the particulars of income so vitiated would be specific and definite and be known in the assessment proceedings by the ITO, who on being satisfied about each concealment or inaccuracy of particulars of income would be in a position to initiate the penalty proceedings on one or both of the grounds of default as may have been specifically and directly detected. The opportunity of hearing given by the notice under section 271(1)(c), obviously is against such concealment and inaccuracy as is detected in the assessment proceedings . 8.2 We may point out that in the aforecited decision , the AAC by his order dated 2-2-1974,interalia, deleted other additions including the amount of ₹ 37,535 which related to understatement of closing stock while in further appeal before the Tribunal in the quantum p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on before the AO during the penalty proceedings in respect of addition towards undisclosed investment in stock while in respect of addition on account low GP in the post survey period, the assessee failed to substantiate its own explanation at all levels nor could establish bonafide of its explanation and nor even placed all the relevant facts before the AO in support of the said explanation. In these circumstances, it does not lie in the mouth of the assessee that it was not concealing its income by furnishing inaccurate particulars thereof, as concluded by the AO and the ld. CIT(A). In the course of penalty proceedings , the assessee did not bring any material before the Assessing Officer to rebut the inferences drawn by the Assessing Officer in the course of assessment proceedings. In terms of provisions of sec. 271(1)(c) of the Act read with explanation 1 thereto and the judicial pronouncements in the case of B.A. Balasubramaniam Bros. Co. v. CIT [1999] 157 CTR 556(SC), CIT v. B.A. Balasubramaniam Bros. [1984] 40 CTR (Mad.)/[1985] 152 ITR 529 (Mad.) , CIT v. Mussadilal Ram Bharose [1987] 60 CTR (SC) 34/[ 1987] 165 ITR 14 (SC); TC 50 R. 474; CIT v. K.R. Sadayappan [1990] 86 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me was assessed on estimate basis - CIT v. B.A. Balasubramaniam Bros. [1984] 40 CTR (Mad.)/[1985] 152 ITR 529 (Mad.) affirmed; CIT v. Mussadilal Ram Bharose [1987] 60 CTR (SC) 34/[ 1987] 165 ITR 14 (SC); TC 50 R. 474; CIT v. K.R. Sadayappan [1990] 86 CTR (SC) 120; [1990] 185 ITR 49 (SC); TC 50 R. 795 and Addl. CIT v. Jeevan Lal Sah [1994] 117 CTR (SC) 130; [1994] 205 ITR 244 (SC); TC 50 R. 973 followed. Conclusion Difference between the income assessed and the income returned being more than 20 per cent, the Explanation to section 271 (1)(c) became applicable and the ITO was justified in imposing penalty because the assessee had not been able to discharge the onus which was on it under the said Explanation, notwithstanding the fact that income was assessed on estimate basis. 8.3 Hon'ble Supreme court in the case of K.P.Madhusudanan vs. CIT,251 ITR 99(SC) held that We find it difficult to accept as correct the two judgments aforemeiitioned. The Explanation to section 271(1)(c) is a part of section 271. When the Income-tax Officer or the Appellate Assistant Commissioner issues to an assessee a notice under section 271, he makes the assessee aware that the provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deemed to be the concealed income, and therefore, the penalty provisions are attracted. The decision relied upon by the Tribunal relates to the assessment years prior to April 1, 1976, when the present Explanation was not in the statute book, and, therefore, they are not applicable in the present case. We are therefore, of the considered opinion that the Tribunal has completely misdirected itself in cancelling the penalty. 8.6 Therefore, in view of the facts and circumstances and in the light of above noted authoritative pronouncements, when the assessee failed to discharge the onus laid down upon him in terms of explanation 1 to section 271(1)(c) of the Act, we have no option but to uphold the findings of the ld. CIT(A), in confirming levy of penalty on the aforesaid two additions. Even otherwise it is a settled law that in economic offences, the statutory liability to pay either duty or tax is nothing but a strict liability where the question of proving beyond the shadow of doubt one's existence of bona fide belief that such duty or interest is not taxable does not arise. It goes without saying that any violation of the law or rules relating to economic offences, either ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to the bank. A very heavy onus was placed on the assessee to explain the difference between the assessed income and returned income and the assessee did not discharge the said onus. . Since the assessee failed to establish the bonafide of their claim, therefore, in terms of explanation 1 to section 271(1)(c) of the Act, the onus is not discharged by the assessees, despite sufficient opportunity allowed by the lower authorities. Thus, levy of penalty is justified.[CIT Vs. Altron Electronics India Ltd.,301 ITR 66(Kar)]. In view of the foregoing, if the income had to be assessed under section 145 of the Act, then the presumption would be that the income was not properly returned, as held by Hon'ble jurisdictional High Court in CIT vs. Chandra Vilas Hotel,291 ITR 202(Guj) and levy of penalty has to be upheld. 8.8 In the case of CIT v. Prathi Hardware Stores [1993] 203 ITR 641 (Ori.), Hon'ble Orissa High Court have laid down the following proposition of law: i). explanation to section 271(1)(c) is the rule of evidence. ii) . the initial burden of rebuttal is on the assessee because the basic facts are within the special knowledge of the assessee. Section 106 of the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessed on estimate rejecting the explanation of the assessee. Even on estimated additions, levy of penalty has been upheld.[CIT Vs. Warast Hussain,171 ITR 405(Patna), Commissioner Of Income-Tax, Tamil Nadu I, Madras. vs E. V. Rajan,151 ITR189(Mad), Commissioner Of Income-Tax.vs Hoshiarpur Express Transport Co. Limited.,162 ITR 393(Punjab Haryana), Commissioner Of Income-Tax.vs Fazilka Dabwali Transport Co. Pvt. Limited,178 ITR 656, (Punjab Haryana),Addl. CIT vs. Chndrakantha another,205 ITR 607(MP) ,AM Shah Co. vs. CIT,238 ITR 415(Guj),CIT Vs. Krishnaswamy Sons,219 ITR 157(Mad.),Addl. CIT Vs. Lakshmi Industries Cold Storage Co. Ltd.,146 ITR 492(All) and CIT Vs. Swarup Cold Storage general Mills,136 ITR 435 (All.)]. No doubt the AO/CIT(A) are required to make an honest and fair estimate of the income even in a best judgment assessment and should not act totally arbitrarily, but there is necessarily some amount of guess work involved in a best judgment assessment, and it is the assessee himself who is to blame as he did not submit proper accounts and details.[ Kachwala Gems Vs JCIT, 288 ITR 10 (2007)(SC) ]. 9. Now adverting to three decisions relied upon by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upra), since the assessee did not produce any evidence and books of account including the balance sheet, net profit was estimated @ 10 per cent on the receipts from all sources as against 6.36 per cent shown by the assessee . In similar cases, AO accepted net profit even lower than 6.36 per cent declared by the assessee. Since it was not the case of the Revenue that the assessee concealed particulars of his income or the particulars of income furnished by him were found to be inaccurate by the AO, penalty under s. 271(l)(c) was held to be rightly cancelled. However, in the case before us admittedly the assessee owned up excess stock found during the course of survey. Inter alia, due to excess stock shown to the bank in their statements, the additions were made towards unexplained investment in excess stock apart from steep fall in GP in the post survey period. Moreover, the assessee did not discharge onus laid down him in terms of explanation 1 to sec. 271(1)(c) of the Act. In these circumstances, reliance on the aforesaid decision is totally misplaced. 10. In the light of the discussion made above, especially when the assessee miserably failed to discharge the onus laid down hi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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