D. Nitin & Co.,, Surat vs Department Of Income Tax

The Deputy Commissioner M/s. D. Nitin & CO., Plot No. of Income-tax, Circle-9, 78, Patel Nagar Society, Near Surat-395001 Vs M.M. Silk Mills, Ashwinkumar (Appellant) Road, Surat-395006 PAN: AACFD0042R (Respondent)

Revenue by: Shri B.L. Yadav, Sr. D.R. Assessee by: Shri R.N. Vepari, A.R.

Date of heari ng : 14-05-2015 Date of pronouncement : 22-05-2015

आदे श/ORDER

PER : RAJPAL YADAV, JUDICIAL MEMBER:-

The revenue is in appeal before us against the order of Ld. CIT(A)-V dated 13th June, 2011 passed for assessment year 2006-07.

I.T.A No. 2643/Ahd/2011 A.Y. 2006-07 Page No 2 DCIT vs. M/s. D. Nitin & Co.

2. The solitary grievance of the revenue is that Ld. CIT(A) has erred in deleting the penalty of Rs. 14,61,959/- which was imposed by the Assessing Officer u/s. 271(1)(c) for furnishing inaccurate particulars of income.

3. The brief facts of the case are that assessee has filed its return of income on 30th December, 2006 declaring total income at Rs. 3,99,48,424/-. The case of the assessee was selected for scrutiny assessment and a notice u/s. 143(2) was issued and served upon the assesse. On scrutiny of the accounts, it revealed to the Assessing Officer that GP shown by the assessee during the year is at 9.04/- whereas GP shown in the preceding year was at 8.37/-. Though GP in this year is better but the yield of polished diamond shown by the assesee is lower than the earlier year. The yield of polished diamonds shown by the assessee in this year is at 30.90% whereas in the preceding year, it was 33.20%. The Assessing Officer has rejected the books of the assessee, and proceeded to determine the income on an estimate basis. The Assessing Officer has estimated the yield at 31.91% as against 30.92% shown by the assessee. He made an addition of Rs. 3,65,88,431/- to the income of the assessee. On appeal, Ld. CIT(A) has confirmed the addition.

4. On further appeal, Tribunal has confirmed the estimation of income but directed the Assessing Officer to recompute the addition taking the yield at 31.01%. Thus, the addition of Rs. 93,43,319 stands confirmed as against addition of Rs. 3,65,88,431/- made by the Assessing Officer. The Tribunal has upheld the yield at 31.01% on the basis of average yield of last three years. The assesse has shown yield of 29.02%, 30.64%, I.T.A No. 2643/Ahd/2011 A.Y. 2006-07 Page No 3 DCIT vs. M/s. D. Nitin & Co.

33.20% in A.Y. 2003-04, 2004-05 and 2004-05 respectively. The Ld. Assessing Officer has initiated the penalty proceedings u/s. 271(1)(c) on the ground that since assessee failed to maintain proper books of accounts, out of which true income can be deduced, therefore, it is construed that asesssee has furnished inaccurate particulars of income. The Ld. Assessing Officer in order to bring home his pint of view made reference to various defects in the books of accounts of the assesse in para 4 of the penalty order. The assessee in response to the show cause notice has contended that assessing officer could not find factual inaccuracy in its particulars in the books of account. The stand of the Assessing Officer in the assessment proceedings was that certain more details under different heads ought to have been made namely; according to the Assessing Officer, it was not possible to ascertain which rough diamond was finally converted into polished diamonds, which quality and size was ultimately achieved out of a particular rough diamonds. Similarly, the assesse could not produce primary records in connection with various processes involved in the manufacturing of diamonds like assortment, rejection, boiling, sawing ghat etc. He was of the opinion, that on the basis of these details, yield cannot be worked out. Accordingly, Assessing Officer has imposed a penalty of Rs. 14,61,959/-.

5. On appeal, Ld. First Appellate Authority re-appreciated the facts and circumstances. It reproduced their detailed written submission of the assesse from pages 2 to o11 of the impugned order. Ld. CIT(A) has recorded following finding.

"6. I have carefully considered the penalty order as well as the submissions of the appellant. I have also gone through the various documentary evidences furnished by the AR and also the assessment order and appellate order. A combined reading of the assessment order and the penalty order show that the addition was I.T.A No. 2643/Ahd/2011 A.Y. 2006-07 Page No 4 DCIT vs. M/s. D. Nitin & Co.

made by the Assessing Officer on the rejection of claim of the assessee regarding low yield as compared to other similar cases. The hon' ITAT (Ahmedabad) estimated the yield based on the average yield of the assessee for the last three years. Hence only the basis of estimation has changed. The A.O. has not pointed out any specific defect in the books of the assessee. In my opinion, no penalty u/s. 271(1)(c) can be levied in case of an addition which is based on estimation. Hence, the penalty of Rs. 14,61,959/- levied by the AO is hereby deleted and the ground of appeal is allowed.

6. With the assistance of Ld. Representatives, we have gone through the record carefully. Section 271(1)(c) of the Act has a direct bearing on the controversy and, therefore, it is salutary upon us to take note of the relevant provisions of section 271(1)(c) along with Explanation 1 which read as under:

"271. Failure to furnish returns, comply with notices, concealment of income, etc. (1) The Assessing Officer or the Commissioner (Appeals) or the CIT in the of course of any proceedings under this Act, is satisfied that any person

(a) and (b)** ** **

(c) has concealed the particulars of his income or furnished inaccurate particulars of such income.

He may direct that such person shall pay by way of penalty.

(i)and (Income-tax Officer,)** ** **

(iii) in the cases referred to in Clause (c) or Clause (d), in addition to tax, if any, payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or fringe benefit the furnishing of inaccurate particulars of such income or fringe benefits:

I.T.A No. 2643/Ahd/2011 A.Y. 2006-07 Page No 5 DCIT vs. M/s. D. Nitin & Co.

Explanation 1- Where in respect of any facts material to the computation of the total income of any person under this Act, (A) Such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the CIT to be false, or (B) such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then, the amount added or disallowed in computing the total income or such person as a result thereof shall, for the purposes of Clause (c) of this sub-

section, be deemed to represent the income in respect of which particulars have been concealed."

7. A bare perusal of this section would reveal that for visiting any assessee with the penalty, the Assessing Officer or the Learned CIT(Appeals) during the course of any proceedings before them should be satisfied, that the assessee has; (i) concealed his income or furnished inaccurate particulars of income. As far as the quantification of the penalty is concerned, the penalty imposed under this section can range in between 100% to 300% of the tax sought to be evaded by the assessee, as a result of such concealment of income or furnishing inaccurate particulars. The other most important features of this section is deeming provisions regarding concealment of income. The section not only covered the situation in which the assessee has concealed the income or furnished inaccurate particulars, in certain situation, even without there being anything to indicate so, statutory deeming fiction for concealment of income comes into play. This deeming fiction, by way of Explanation I to I.T.A No. 2643/Ahd/2011 A.Y. 2006-07 Page No 6 DCIT vs. M/s. D. Nitin & Co.

section 271(1)(c) postulates two situations; (a) first whether in respect of any facts material to the computation of the total income under the provisions of the Act, the assessee fails to offer an explanation or the explanation offered by the assessee is found to be false by the Assessing Officer or Learned CIT( Appeal); and, (b) where in respect of any fact, material to the computation of total income under the provisions of the Act, the assessee is not able to substantiate the explanation and the assessee fails, to prove that such explanation is bona fide and that the assessee had disclosed all the facts relating to the same and material to the computation of the total income. Under first situation, the deeming fiction would come to play if the assessee failed to give any explanation with respect to any fact material to the computation of total income or by action of the Assessing Officer or the Learned CIT(Appeals) by giving a categorical finding to the effect that explanation given by the assessee is false. In the second situation, the deeming fiction would come to play by the failure of the assessee to substantiate his explanation in respect of any fact material to the computation of total income and in addition to this the assessee is not able to prove that such explanation was given bona fide and all the facts relating to the same and material to the computation of the total income have been disclosed by the assessee. These two situations provided in Explanation 1 appended to section 27 1(1)(c) makes it clear that that when this deeming fiction comes into play in the above two situations then the related addition or disallowance in computing the total income of the assessee for the purpose of section 271(1)(c) would be deemed to be representing the income in respect of which inaccurate particulars have been furnished.

I.T.A No. 2643/Ahd/2011 A.Y. 2006-07 Page No 7 DCIT vs. M/s. D. Nitin & Co.

8. At this stage, we deem it pertinent to take note of the explanation of assessee recorded by the CIT(A) in para 5 of the impugned order explaining the yield. It reads as under:

"(3) Before proceeding with the aforementioned aspect, it would be necessary to understand what exactly is yield. A rough diamond taken out of mine becomes polished diamond after it undergoes several processes ad it is cut from several sides to bring out shapely diamond. Now, this cutting results in reduction of the weight of the diamond and what eventually emerges is called yield. Rough diamonds are obtained from mines. They are not homogenous. For each piece of rough diamond, the extent of cutting would vary on account of several factors viz. shape of the rough diamond, the talent of the artisans and more importantly inclusions therein. Many a times, the rough diamonds have inclusion of other materials. That has to be taken out before polished diamonds take place.

Depending upon how deep inclusion is, the cutting proportion varies. There is another factor. Diamond being an item of fashion, the fancy of the people changes and while at some point of time the round shape has more value or sometimes the prince or the fancy cutting fetches more value. At the time of beginning of polishing itself, artisans take a decision as to the manner of cutting to bring out the shape which would fetch maximum value. Therefore, even cutting diamond to a great extent may bring out diamond with less weight (carat) and less yield but more value. These considerations weigh in determining what would be the yield. Therefore, the percentage of yield would not remain the same not only between various diamond manufacturers but also even in case of the same manufacture between different lots and even different pieces of diamonds. Yield cannot be constant."

9. On due consideration of the facts and circumstances, we are of the view that Assessing Officer has visited the assesse with penalty u/s. 271(1)(c) for the reason that it failed to produce certain primary records exhibiting how much rough diamonds were finally converted into polished diamonds, and how one can establish the quality and size. Therefore, it amounts to furnishing of inaccurate particulars of income. On the other hand, the stand of the assessee is that it has been maintaining the books I.T.A No. 2643/Ahd/2011 A.Y. 2006-07 Page No 8 DCIT vs. M/s. D. Nitin & Co.

of accounts as per the accounting standard notified by the income tax authorities u/s. 145(2) of the Income Tax Act. Assessing Officer has not pointed out any factual error in the details maintained by it. He might have felt handicapness from those details to deduce the result according to his understanding. But the accounts are audited accounts duly complying all the requirements, the addition is an estimated addition on the basis of estimated yield, therefore, there is an inherent difference of opinion between the result shown by the assessee vis-a-vis ultimately determined. In such situation, assesse cannot be held liable for furnishing inaccurate particulars. In our opinion, if the basic details were not maintained by the assessee and its action put the Assessing Officer against the wall leaving no choice except to reject the book result and estimate the income, then, probably this argument may not be available with the assessee that income has been determined on an estimate basis, therefore, no penalty is imposable on it. But in the present case, the Assessing Officer has not brought on record the facts with this angle. It has not been established that even basic records and the books of accounts were not maintained according to the notified standard of accounting. The Assessing Officer did not point out factual inaccuracy in the details submitted by the assessee. Therefore, in our onion, Ld. First Appellate Authority has rightly deleted the penalty. No interference is called in the order of Ld. CIT(A). In the result, the appeal of the revenue is dismissed.

Order pronounced in the open court on 22-05-2015

Sd/- Sd/-

(G.D. AGRAWAL) (RAJPAL YADAV) VICE PRESIDENT JUDICIAL MEMBER Ahmedabad : Dated 22/05/2015 ak I.T.A No. 2643/Ahd/2011 A.Y. 2006-07 Page No 9 DCIT vs. M/s. D. Nitin & Co.

आदेश क त ल प अ े षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file.

By order/आदेश से,

उप/सहायक पंजीकार आयकर अपील य अ धकरण, अहमदाबाद