Vildirect: IncomeTax-caselaws-2011-VIL-722-ITAT-AHM

2011-VIL-722-ITAT-AHM

Income Tax Appellate Tribunal AHMEDABAD

ITA No. 3281/Ahd/2009

Date: 05.08.2011

M/s CHOKSHI HIRALAL MAGANLAL

DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-12, AHMEDABAD

For the Assessee : Shri S N Divatia, AR
For the Revenue : Shri Samir Tekriwal,DR

BENCH

SHRI T K SHARMA, JUDICIAL MEMBER And SHRI A N PAHUJA, ACCOUNTANT MEMBER

JUDGMENT

A N Pahuja:

This appeal filed on 10.12.2009 by the assessee against an order dated 14-10-2009 of the ld. CIT(Appeals)-XX, Ahmedabad, for the Assessment Year 2004-05, raises the following grounds:-

1.1 The order passed u/s 250 by the CIT(A)-X, Abad on 14.10.2009 upholding the penalty levied of Rs. 5,75,000/- u/s 271(1)(c) for AY 2004-05 by the DCIT, Cir. 12, Abad is wholly illegal, unlawful and against the principles of natural justice.

1.2 The Ld. CIT(A) has grievously erred in not considering fully and properly the submissions made as well as evidence produced before him, especially the audited annual accounts and tax audit report wherein the income disclosed during survey was specifically stated.

2.1 The Ld. CIT(A) has erred in law and/or on facts in upholding that the appellant had concealed income by not showing the value of excess stock, though in fact it was specifically credited in the P&LA/c., copy of which was filed before him.

2.2 That in the facts and circumstances of the case as well as in law, the Ld. CIT(A) has erred in upholding the penalty levied by AO by observing that the appellant had concealed the value of excess stock found during the survey.

2.3 The Ld. CIT(A) has erred in relying upon the decision of Fakir Mohd. Haji Hasan (supra), though it was distinguishable both on facts and in law.

3.1 The Ld. CIT(A) has failed to appreciate that it was a matter of dispute and difference of opinion as to whether the income disclosed during the course of survey was assessable under any of the heads of income or was it a headless income. Similarly, the disallowance of partners remuneration on such income was a consequential one.

It is therefore prayed that the penalty of Rs. 5,75,000 may please be cancelled.

2 Facts, in brief, as per relevant orders are that return declaring income of Rs. 27,98,970/- filed on 30-10-2004 by assessee, a jeweller, after being processed u/s 143(1) of the Income-tax Act, 1961 [hereinafter referred to as the “Act”] was selected for scrutiny with the service of a notice u/s 143(2) of the Act. In this case, a survey u/s 133A the Act was conducted in the business premises of the assessee on 20-01-2004, when excess stock of gold ornaments and silver ornaments to the extent of Rs. 35,70,518/- was found as detailed hereunder:-

Gold Ornaments: Unaccounted stock: 5404.060 x 565 =30,53,293 Silver Ornaments: Unaccounted stock: 95782.510 x 54 = 5,17,225

2.1 Shri Kamlesh Maganlal Soni, working partner of the firm, who was present during the survey agreed in his statement to surrender the excess stock and to pay the tax thereon. During the course of assessment proceedings, relying upon the findings of the ITAT in their order dated 28-02-2005 in ITA No.2623/Ahd/2004 in the case of Krishnamegh Yarn Industries, Ahmedabad for AY 2001-02 and the decision of the Hon’ble Jurisdictional High Court in the case of Fakir Mohmed Haji Hasan vs. CIT [2002] 120 Taxman 11,17, the Assessing Officer [‘AO’ for short] brought the aforesaid amount of Rs. 35,70,518/- to tax as deemed income u/s 69B of the Act and denied deduction of higher remuneration to partners in relation to the aforesaid amount in terms of provisions of section 40(b) of the Act.

Besides, an amount of Rs. 1,05,000/- received from the following persons was added u/s 68 of the Act:

1. Padmaben Bharatkumar Thakkar

2. Radheshyam Panchal

3. Shardaben Vasudevbhai

4. Niruben Radheshyam Soni

5. Yamnaji Punjaji Soni

6. Tulsiji Yamnaji Soni

7. Gopalji Lalji Soni

2.2 In view of aforesaid additions, penalty proceedings u/s 271(1)(c) of the Act were initiated for furnishing inaccurate particulars of income.

3. On appeal, the learned CIT(A) upheld the findings of the AO on the aforesaid two additions. Consequently, after appeal effect, the income was determined at Rs. 43,55,340/- comprising deemed income u/s 69B of Rs. 35,70,518/- and business income of Rs. 7,84,822/-. After the receipt of order of learned CIT(A), in response to a show cause notice issued by the AO before levy of penalty u/s 271(1)(c) of the Act, the assessee submitted a written reply. After considering the reply of the assessee, the AO relying upon the decisions mentioned in para-9 of the penalty order, imposed a penalty of Rs. 5,75,000/- @ 100% of the tax sought to be evaded on the income of Rs. 15,56,370/-[43,55,340-27,98,970].

4. On appeal, the learned CIT(A) upheld the levy of penalty in the following terms:-

“2.3 I have considered the facts of the case, assessment order, first quantum appeal order and the submission filed along with case laws relied upon by the Id. Counsel of the appellant and the Assessing Officer. In this case, the excess stock of Rs. 35,70,518/- detected by the survey party which was admitted by the appellant and who also agreed to declare in its return of income and to pay tax thereon. But when the appellant filed the return for the year under consideration, he had declared net profit of Rs. 18,14,587/- inspite of the fact that the disclosure of Rs. 35,70,518/- was credited to the trading and profit and loss account. Though the appellant had admitted and declared the unrecorded stock of Rs. 35,70,518/- during survey and promised to show in the return of income, the same has not been shown independently by the appellant knowingly to evade the tax. This is nothing but clear and glaring concealment of income on the part of the appellant. Before me also, the appellant has not been able to clarify the position as to how and on which date, the amount of Rs. 35,70,518/-, excess stock has been entered in the books. The Id. Counsel of the appellant was specifically requested to clarify the same. In such facts and circumstances, none of the judicial pronouncements relied upon by the Id. Counsel are applicable to the present facts of the case and are not helpful to the appellant.

Thus, it is established that the appellant has concealed his income and has knowingly filed the inaccurate particulars in the return of income. The Hon'ble Gujarat High Court in the case of A.M. Shah & Co. vs. CIT 238 ITR 415 has held that any concealment or inaccuracy in the particulars of income in the return occurring at any stage upto and inclusive of the ultimate stage of working out of total income would attract the penalty provisions of section 271(1)(c). Words 'inaccurate particulars' would cover falsity in final figures as also the consistent elements certain items not shown in the closing stock, profit, therefore, suppressed to that extent income not shown by this process obviously was concealment of particulars of income and hence, the penalty imposed on this very basis is justified. Thus, this decision is squarely applicable to the present facts of the case. Hence, in view of above facts and circumstances of the case and respectfully relying on the decision of Hon'ble Gujarat High Court cited supra, I hold that the appellant has intentionally concealed its income by not showing the value of excess stock and thus, showing inaccurate particulars of its income while filing the return of income. The penalty, therefore, levied is justified and is hereby confirmed.”

5. The assessee is now in appeal before us against the aforesaid findings of the learned CIT(A). The learned AR on behalf of the assessee while inviting our attention to the decision dated 21-012011 in the quantum appeal in ITA no.486/Ahd/2008 for the year under consideration, contended that their claim for deduction of remuneration to partners in terms of provisions of section 40(b) having been accepted by the Tribunal, penalty on that score cannot be imposed. As regards the amount of Rs. 1,05,000/- added u/s 68 of the Act, the learned AR pointed out that the matter has been restored to the file of the AO for fresh decision in accordance with law. In these circumstances, the learned AR argued that no penalty could be imposed. He added that the AO did not specifically initiate penalty proceedings u/s 271(1)(c) of the Act in relation to amount added u/s 68 of the Act in the assessment order nor discussed the issue in the penalty order. Even there is no discussion in the impugned order in respect of levy of penalty u/s 271(1)(c) of the Act in relation to the addition u/s 68 of the Act, the ld. AR pointed out . The learned DR, on the other hand, relied upon the findings of the learned CIT(A).

6. We have heard both the parties and gone through the facts of the case. Indisputably, the penalty in this case has been imposed on an amount of Rs. 15,56,370/-/-[43,55,340-27,98,970] comprising disallowance of remuneration to partners on account of treatment of the amount of Rs. 35,75,518/- disclosed on account of excess stock u/s 69B of the Act and the amount of Rs. 1,05,000/- added u/s 68 of the Act. In quantum appeal, the Tribunal vide their order dated 2101-2011 in ITA No.486/Ahd/2008 concluded on these two additions as under:-

“8 We have considered the rival submissions and perused the material on record. In our considered view the issue in the present case is squarely covered by the decision of this Tribunal in the case of M/s Fashion World (supra). In this case the Tribunal has observed as under:

“11. But this does not mean that loss computed under any of the five heads mentioned in section 14 - (i) 'salary', (ii) 'income from house property', (iii) 'profits and gains from business or profession', (iv). 'capital gains' and (v) 'income from other sources' - cannot at all be adjusted, against, unexplained investment or expenditure. What is necessary as per Hon. Gujarat High Court is that source of acquisition of asset or expenditure should, be clearly identifiable. In the case before Hon. Gujarat High Court the source of gold confiscated was not identifiable and hence adjustment was not permitted.

12. Thus the important aspect that emerges from the entire discussion is that for invoking deeming provisions under sections 69, 69A, 69B & 69C there should be clearly identifiable asset or expenditure. In. the present, case we find, that entire physical stock of'Rs. 25,14.306/- was part of the same business. Both kind of stock i.e. what is recorded in the books and what was found over and above the stock, recorded in the books, were held and dealt uniformly by the assessee. There was no physical distinction between the accounted stock or unaccounted stock. No such physical distinction was found by the Revenue either. The assessee has repeatedly claimed that unaccounted business income is invested in stock and there is no amount separately taxable under section 69. The department has ignored this claim of the assessee and sought to tax the difference between bookstock and physical-stock as unaccounted investment under section 69 without considering the claim of the assessee that first 'the business receipt has to be considered and then investment should be treated as coming out of such unaccounted income. The difference in stock so worked out by the authorities below had no independent identity of its own and it is part and parcel of entire lot of stock. The difference between declared stock in the books and what is physically found would only be a mathematical expression in terms of value and not a separate independent identifiable asset. Therefore, it cannot be said that, there is an undisclosed asset existed independently. Once this is so then what is not declared to the department is receipt from business and not any investment as it cannot be co-related with any specific asset.

13. Thus in a. case where source of investment/expenditure is clearly identifiable and alleged undisclosed asset has no independent existence of its own or there is no separate physical identity of such investment / expenditure then first 'what is to be taxed is the undisclosed business receipt invested in unidentifiable unaccounted asset and only on failure it should be considered to be taxed under section 69 on the premises that such excess investment is not recorded in the books of account and its nature and source is not identifiable. Once such excess investment is taxed as undeclared business receipt then taxing it further as deemed, income under section 69 would not be necessary. Therefore, the first attempt of the assessing authority should be to find out link of undeclared investment/expenditure with, the known head, give opportunity to the assessee to establish nexus and. if it is satisfactorily established then first such investment, should be considered, as undeclared receipt under that particular head. It is only where no nexus is established with any head 'then it should' be considered as deemed income under section 69, 69A, 69B & 69C as the case may be. It is because when assessee fails to explain satisfactorily the source of such investment then it should be taxed under section 69, 69A, 69B & 69C as the case may be. It should not 'be done at the first instance without giving opportunity' to the assessee to establish nexus. Therefore, there is no conflict with the decision of Hon. Gujarat High Court in the case of Fakir Mohmed Haji Hasan (supra) where investment, in an' asset or expenditure is not identifiable and no nexus was established then with any head of income and thus was not available for set off against any loss under any other head. Therefore, we hold that where asset in which undeclared investment is sought to be taxed is not clearly identifiable or does not have independent identity but is integral, and inseparable (mixed) part of declared asset, falling under a particular head, then the difference should be treated as undeclared business income explaining the investment.

14. To conclude, sum of Rs. 8.10,011/- being difference in stock is represented by undeclared business income. It does not have a separate physical identity. It is to be only taxed under the head 'business'. Other assets have separate physical identity being furniture and fixtures, air conditioners etc. They cannot have a direct nexus with business and therefore investment therein has to be considered under section 69 only.

15. In view of the above, AO is directed to consider the sum of Rs. 8,10,011/-as undisclosed business income assessable under the head 'business' and other two sums under section-69. The business income including application of section 40(b) has to be considered accordingly. For calculation of income in view of our above observations, we restore the matter to the file of AO."

So far as the decision of Hon. Gujarat High Court in DCIT vs. Radhe Developers India Ltd. & Anr. (supra) referred to by the Id. AR is concerned, it relates to claim of deduction for expenses against unexplained investment. It has not laid down the law that unexplained investment in an asset found during the course of search/survey cannot be taxed under section 69A, 69B & 69C. If the arguments of the Id. AR is accepted that any unexplained income of the nature as described in section 69, 69A, 69B & 69C and sought to be taxed has to be necessarily brought under any one head as enumerated in section 14 then the opening words of that section "Save as otherwise provided by this Act.......... " will become otios and meaningless. No words of the Statute can be read as meaningless, irrelevant or otiose. Therefore, this interpretation sought to be advanced by the Id. AR is not acceptable. Hon. Gujarat High Court in Fakir Mohmed Haji Has an (supra) has only said that if assessee is found to be owner of an asset which is not disclosed and in which unaccounted investment has been made then such unexplained investment has to be taxed as deemed income and any other expenditure which relates to business cannot be allowed as deduction against such deemed income as the two heads are different, one is business for adjusting expenditure and the other is for deemed .income as covered u/s 69, 69A, 69B & 69C. It is also not correct to say if any income is not brought to any of the heads as mentioned in section 14 then such income would be headless and, therefore, would go beyond computation machinery and hence will become untaxable. The provisions of deemed income mentioned in the several provisions of the Act take care of such income which may directly not fall in any of the heads, mentioned in section. 14.

9. Since in the present case excess stock found during the survey is not separately and clearly identifiable but is part of mixed lots of stock found at the premises which included declared stock as per books and also the excess stock as computed by the survey officers, the provisions of section 69B cannot be made applicable as primary condition for invoking the provisions of section 69A, 69B is that the asset should be separately identifiable and it should have independent physical existence of its own. Since excess stock is a result of suppression of profit from business other the years and has not been kept identifiable separately but i.e. the part of overall physical stock found, the investment in the excess stock 'has to be treated as business income as per detailed reasons given in the case of Fashion World (supra). Once excess stock is treated as business income then assessee is entitled for higher remuneration to the partners as per section 40(b). As a result, this ground -of assessee is allowed.

………………………………………………………………………………………

12. We have heard the parties and carefully perused the material on record. Firstly, it was not clarified whether advances were given by the assessee to various parties or assessee has borrowed money from such parties. If it is first situation then they cannot be added as cash credit under section 68. They can at best be considered under section 69 or section 69C. However, the assessee has raised the ground as cash credit. Thus there is apparently confusion as the correct fact which has not been clarified before us by either of the parties. It was only submitted by the Id. AR that assessee has furnished evidence from all those persons who had changed their addresses and, therefore, letters could not be served on them. In any case the correct and factual position has not been brought on record by any party and. therefore, we restore the matter to the file of AO for correctly examining the issue and taking a fresh decision as per law after providing a reasonable opportunity of being heard to the assessee. This ground is allowed but for statistical purposes.”

6.1 As is apparent from the aforesaid findings, the Tribunal have accepted the claim of the assessee that excess stock has to be treated as business income, entitled to deduction of a higher amount of remuneration to partners in terms of provisions of section 40(b) of the Act. As regards the amount added u/s 68, the matter has been restored to the file of the AO for fresh decision in accordance with law. Hon’ble Supreme Court in the case of K.C.Builders Vs. ACIT,265 ITR 562(SC) held that ordinarily, penalty cannot stand if the assessment itself is set aside. Where an order of assessment or reassessment on the basis of which penalty has been levied on the assessee, has itself been finally set aside or cancelled by the Tribunal or otherwise, the penalty cannot stand by itself and the same is liable to be cancelled. Hon’ble Delhi High Court in the case of CIT Vs. R.Dalmia,(1992)107 Taxation 107, held that no penalty survives after deletion of additions, forming the basis for the levy of penalty. Similar view was taken in Addl. Commissioner of Incometax v. Badri Kashi Prasad (1993] 200 ITR 206 (All) and Prabhat Oil Traders v. Income-tax Officer (No. 3) (1996) 218 ITR (A.T.) 39 (ITAT, Ahmedabad), City Dry Fish Company v. Commissioner of Income-tax (1999) 238 ITR 63 (A.P.) , CIT vs. Mohd. Bux Sokat Ali (2004) 265 ITR 326 (Raj)and ACIT vs. VIP Industries (2009) 122 TTJ 289 (Mum).

7. Since the very basis upon which the penalty has been imposed on the amount relating to excess stock added u/s 69B of the Act and consequently, denial of deduction of Rs. 19,50,131/- on account of remuneration to partners in terms of provisions of section 40(b) of the Act, does not exist in view of the aforesaid order dated 21-12011 of the ITAT in quantum appeal in ITA no. 486/Ahd/2008, we are of the opinion that penalty levied in relation to the said amount has to be cancelled. As regards penalty levied in relation to amount of Rs. 1,05,000/- added u/s 68 of the Act, since matter is restored to the file of the AO, penalty does not survive at this stage. However, the AO is free to initiate the penalty proceedings in accordance with law while completing the assessment in pursuance to the aforesaid directions of the ITAT in quantum appeal. With these observations, ground nos. 1.1 to 3.1 in the appeal are disposed of.

8. In the result, appeal is allowed.

Order pronounced in the court today on 5 -08-2011

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