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TMI Blog2010 (10) TMI 1197X X X X Extracts X X X X X X X X Extracts X X X X ..... 00/- made by AO u/s 41(1) of the Act. (5) This issue is about addition of ₹ 80,000/- made under section 69C. 3. The facts of the case are that the assessee is running a proprietary concern of civil contractorship under the name of 'Quality Construction'. It is carrying out construction activities with various public limited listed companies. During the course of assessment proceedings the AO noted that in the audit report auditors have mentioned that assessee is not maintaining any quantitative details regarding stock. This fact was also accepted by the ld. AR during the course of assessment proceedings. The AO then issued a show cause notice to the assessee asking why the books be not rejected. It was pointed out that books of account cannot be rejected merely on the ground that assessee is not maintaining quantitative stock register. The AO did not agree and held that assessee's stock details are not available because of non-maintenance of quantitative details. In absence of quantitative details, the books of accounts cannot be relied upon and, therefore, section 145 can be invoked. 4. The ld. CIT(A) held that in absence of quantitative details tally of the purchases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduce the income of the assessee in absence of quantitative stock register and verification of closing stock. Our view is also supported by the decision in Ramchandra Ramniklal vs. CIT (1961) 42 ITR 780 (Pat). We accordingly uphold the finding of authorities below in rejecting the books. This ground of assessee is accordingly rejected. 6. Ground No.1, 2 & 3 are about rejection of books and estimation of net profit. The AO found that assessee has shown a net profit of 1.13% on a gross receipt of ₹ 4,63,01,650/-. Since in a case gross receipts are less than ₹ 40 lacs a net profit rate of 8% is applied under section 44AB. Considering this fact the AO applied net profit of 5% and enhanced the income by 3.87% resulting in addition of ₹ 17,91,873/-. The ld. CIT(A) confirmed the addition holding that application of net profit rate of 5% is reasonable. 7. We have heard the parties and carefully perused the material on record. In our considered view the authorities have not brought out any definite material for applying net profit rate 5% except estimating the net profit at that rate. Before us also the ld. AR did not bring any material to show that he has valued the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordingly assessee derives benefit from such remission or cessation. In the present case there is no overt act on behalf of the creditor or the assessee so as to infer that there is a remission by the creditor or cessation of liability by agreement or by operation of law. It is only a change of head from trading liability to unsecured loan. The genuineness of the trading liabilities have not been doubted either in the year when they were debited in the profit and loss account or in the current year. Therefore, it cannot become income of the assessee or the assessee cannot be said to have derived any benefit out of this conversion of trading liability into unsecured loan. Our view is supported by following judgments:- "(i) Chief CIT Vs. Kesaria Tea Co. Ltd. 254 ITR 434 (SC) The question is whether the circumstances contemplated by section 41(1) exist so as to enable the Revenue to take back what has been allowed earlier as business expenditure and to include such amount in the income of the relevant assessment year, i.e. 198586. fn order to apply section 41(1) in the context of the facts obtaining in the present case, the following points are to be kept in view : (1) In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee obtains, whether in cash or in any other manner, any amount in respect of such trading liability by way of remission or cessation of such liability. In that case, either the amount obtained by the assessee or the value of the benefit accruing to the assessee can be deemed to be the profits and gains of business or profession and can be brought to tax as income of the previous year in which such amount or benefit is obtained. Held,_ that it was an admitted position that there had been no allowance or deduction in any of the preceding years and, hence, there was no question of applying the provision as such. Section 28 of the Act deals with profits and gains of business or profession and clause (iv) thereof says that the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession shall be chargeable as income under the head "Profits and gains of business or profession". In the facts of the present case, it could not be said that the assessee-company was carrying on business of obtaining loans and that the remission of such loans by the creditors of the company was a benefit arising from such business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and taxed it under section 41(1) of the Income-tax Act, 1961. On appeal the assessee contended that there was no finding that there was deduction of allowance made in the assessment of the assessee for any year and hence the provisions of section 41(1) had no application. Held -that section 41(1) creates a legal fiction and hence has to be strictly complied with if any addition to the income is sought to be made by the Revenue. Unless an allowance or deduction had been made in an earlier year in respect of loss, expenditure or trading liability there can be no addition under section 41(1). There was no finding of the Tribunal that any deduction or allowance was made in the assessment of the assessee in an earlier year. Therefore, the order of the Tribunal was set aside and the matter was remitted to the Tribunal for fresh consideration in accordance with law. (vii) Smartalk (P) Ltd. vs. ITO ACIT vs. Smartalk (P) Ltd. (2009) 313 ITR (A.T.) 96 (ITAT-Mum) Held,_ that the amount credited to the capital reserve account could not be taxed either under section 28(iv) or section 41(1) of the Act as waiver of loan was neither covered under section 28(iv) or section 41(1) of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion is more then no addition on account of household expenditure should be made. Accordingly, this ground of assessee is disposed of. The appeal filed by the assessee is partly allowed. ITA No.3372/Ahd/2008 Asst. Year 2005-06 (Assessee's appeal) 12. In this year the assessee has raised following issues - one is about estimation of net profit rate of 5%, second is about rejection of books, third is about claim of expenses of ₹ 4,86,503/- which has been disallowed by the AO. 13. The issue regarding rejection of books has been considered by us while disposing of the appeal of assessee for Asst. Year 2004-05. Since the facts and circumstances of the case are same to those of Asst. Year 2004-05 we uphold the rejection of the books for the reasons mentioned therein. The relevant ground of assessee is accordingly rejected. 14. Regarding applicability of net profit rate, we observe that while disposing of the appeal of assessee for Asst. Year 2004-05 we have held net profit of 3.5% should be applied on the civil construction work carried out by the assessee. Considering the similarity of facts in this Asst. Year as fairly conceded by the ld. AR we direct the AO to apply 3.5% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of net profit addition and addition in respect of household withdrawals. 20. We have considered the rival submissions and carefully perused the material on record. 21. The addition of ₹ 39,30,000/- made by the AO u/s 41(1) did not survive as we have held while disposing of quantum appeal for Asst. Year 2004-05. When addition does not survive, the question of levy of penalty does not arise. There are in fact several judgments according to which penalty is not leviable if addition is deleted. Hon. Punjab & Haryana High Court in CIT vs. Prakash Industries Ltd. (2010) 322 ITR 622 (P & H) held that basis for levy of penalty is returned income. If additions are deleted in quantum proceedings penalty could not be imposed. The Hon. High Court has held as under :- "A search showed that the assessee had received amount of ₹ 3.5 crores from the bank account of S. Faridabad. It was observed that the firm was a bogus firm and the claim of the assessee that the amount was received towards consideration for sale of material, was not accepted. Hence, addition was made to the declared income. Further additions were made by holding that lease rent shown to have been paid by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly committed an error in levying the penalty. In K.C. Builders vs. ACIT (2004) 265 ITR 562 (SC) it was held by the Hon. Apex Court that where additions are made in the assessment order on the basis of which penalty for concealment is levied, are deleted, there remains no basis at all for levying penalty for concealment. No penalty would survive if addition did not survive. In CIT vs. Arthanariswamy Chettiar (S.S.K.G.) (1982) 136 ITR 145 (Mad) Hon. Madras High Court held that penalty can be imposed with reference to the concealment done in the original return filed under section 139. In the case of Sulemanji Ganibhai vs. CIT (1980) 121 ITR 0373 (M.P.) it was held that an assessee incurs penalty under section 271(1)(c) if he files inaccurate particulars of his income in the return or conceals the particulars of income therein. There can be no concealment until there is a duty to disclose. The duty to disclose particulars of income arises at the time when assessee furnishes return of income under section 139 and if in filing his return he conceals the particulars of income or furnishes inaccurate particulars he incurs penalty under section 271(1)(c). In the case of Patna Guinea House ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osure of income resulting from disallowance made under section 40A(2)(b) . The disclosure of the particulars of the transaction in its books of account as done by the assessee was sufficient in law. The assessee had furnished correct details. The genuineness as well as the incurring of the expenditure was not disputed by the Assessing Officer. The disallowance under section 40A(2)(b) could not be considered as concealment of income or furnishing of inaccurate particulars. The levy of penalty was not warranted. Harigopal Singh vs. CIT (2002) 258 ITR 85 (P & H) CIT vs. Sangrur Vanaspati Mills Ltd. (2008) 303 ITR 53 (P & H) SLP dismissed in 308 ITR 8(St) 26. We notice that ld. CIT(A) has not given any finding that assessee has concealed any particulars of income or furnished inaccurate particulars of income. He mainly relied on the additions made by the AO. The explanation furnished by the assessee is as under :- "(1) The assessee has made full and true disclosure of all the material facts and has filed accurate particulars of income showing true income. (2) The assessee has not furnished any inaccurate particulars of income. (3) The assessee has not concealed any ..... X X X X Extracts X X X X X X X X Extracts X X X X
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