M/S K.N.Plastics,, Hyderabad vs Department Of Income Tax

This is Revenue's appeal against the order of the Commissioner of Income Tax (Appeals)-III, Hyderabad dated 13-02-2013, cancelling the penalty imposed u/s. 271(1)(c) of the Income Tax Act [Act].

2. Briefly stated the facts are that assessee-firm is engaged in the business of manufacture of plastic jars. During assessment proceedings, assessee was not able to produce certain bills and documents as well as reconciliation of various bank statements and confirmations for various outstanding credits. Additions were made on account of estimations and non-production of details. Even though no satisfaction was recorded while initiating penalty, notice u/s. 271(1)(c) was issued. In the order u/s. 271(1)(c), Assessing Officer (AO) has given an opportunity to assessee. Assessee explained that the firm is not in the business and due to inability in furnishing the necessary evidence in the course of I.T.A. No. 626/Hyd/2013 :- 2 -: M/s. K.N. Plastics

assessment, they have admitted various additions on which there was no appeal. It was further submitted that most of the credits do not pertain to the year and simply because additions were made and accepted it does not lead to concealment of penalty. It was further submitted that just to buy peace, having failed to reconcile the balances has accepted for addition but it does not mean that assessee has concealed income or furnished inaccurate particulars. It was further submitted that the balances appearing in the books are as per information available in the books. Assessee could not get confirmation of the balances and was not in a position to reconcile as to how the difference arose. It was further contended that there being no finding that the amounts that were added relate to transactions of this year and actually be assessed in this year, mere addition of income can't lead to levy of penalty.

3. Without countering the arguments of assessee, AO vide para 2 had come to a conclusion that with regard to additions cited above in Nos. 3 & 4, assessee has concealed income due to which penalty is leviable on assessee. He quantified the amount added on two additions at Rs. 20,42,578/-. However, in the last para 4, the concealed income was determined at Rs. 24,89,789/- ( total of all additions) and an amount of Rs. 19,69,107/- was held to be penalty leviable at 300% of the tax sought to be evaded.

4. Before the Ld.CIT(A), it was contended that AO was not correct in levying the penalty as the additions u/s. 68 of the Act were made on balances outstanding under the head 'Sundry Creditors' and further, additions were made as assessee could not furnish the proper reconciliations during the assessment proceedings. These cannot lead to levy of penalty. It was further contended that citation given by assessee that of Bhuramal Manikchand Vs. CIT [138 ITR] is not correct citation as I.T.A. No. 626/Hyd/2013 :- 3 -: M/s. K.N. Plastics

there is no such case. It was submitted that on verification it is found that there was a reported decision in 121 ITR 840 and another reported in 130 ITR 129, wherein the penalty was cancelled. It was contended that AO simply stated a citation, did not apply his mind while considering the levy of penalty. It was further contended that addition u/s. 68 was made in assessee's case on un-reconciled balance of bank account and for not furnishing of confirmations of Sundry Creditors. Assessee relied on the decision of the Supreme Court in the case of Pricewaterhouse wherein their Lordships has cancelled the penalty u/s. 271(1)(c) holding that for inadvertence, penalty cannot be levied. Assessee further submitted that the balances brought to tax were arising in earlier years and they cannot be considered as income of this year and just to buy the peace, assessee having failed to reconcile the balance /obtain confirmations has accepted for addition. Penalty cannot be levied under facts.

5. Ld.CIT(A) considered the submissions and deleted penalty stating as under:

"4. I have seen carefully the facts and evidences and have also gone through the assessment order and the details of additions made in that order. I find that just because certain amounts could not be properly reconciled, the assessing officer made the additions. Being small amounts, the appellant had agreed for such additions during the course of assessment proceedings so as to buy peace. Further, the assessing officer has added all the balances under the head sundry creditors etc. He has not even bothered to find out as to which amounts were introduced during the year and absolutely no details have been obtained to verify the credits and other details. Even in the penalty order the only reason provided is that the onus to prove the genuineness was on the appellant. There is no reason or enquiry made and penalty has been imposed on the basis of estimations and unverified credits without even ascertaining as to which credits pertains to the current year. In my opinion no penalty is impossible on such additions and in such a cryptic manner".

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6. Ld. DR vehemently contended that CIT(A) was not correct in deleting the penalty. It was submitted that assessee has surrendered only on enquiry and AO was prevented in establishing the concealments as assessee has consented in the course of assessment itself. There is no need to establish concealment on the part of assessee when the assessee himself admitted the incomes during the course of assessment after AO started enquiry about various purchases and entries in the Books of Accounts. The Ld. DR relied on the following case law:

i. Kamal Chand Jain Vs. ITO [277 ITR 429] (Delhi ); ii. CIT Vs. Jagabandhu Prasanna Kumar Ruplal Sen Poddar [133 ITR 156];

iii. B.A. Balasubramaniam and Bros. Co., Vs. CIT [236 ITR 977] (SC); iv. Rajkumar Chaurasia Vs. CIT [288 ITR 329] (Allahabad); and v. CIT Vs. Mangha Ram Om Prakash [276 ITR 362] (P&H)

7. Ld. AR, however, relied on the orders of the CIT(A) to submit that assessee's explanation which was bonafide has not been proved to be false and Ld.CIT(A) having examined the contentions held that penalty is not leviable. He further relied on the judgment of the Hon'ble Supreme Court in the case of Reliance Petro Products [322 ITR 158] (SC).

8. I have considered the rival contentions and perused the facts on record. As far as the assessment proceedings are concerned, AO has simply disallowed the amounts i.e., 4 items in the assessment order and the reasons given for that were that assessee could not furnish the relevant purchase vouchers (an amount of Rs. 3,21,972/-; Expenses Rs. 43,646/-). In addition to the above, AO notes that verification of balances in bank account revealed that difference of Rs. 81,593/- and in the absence of reconciliation between the details furnished and the I.T.A. No. 626/Hyd/2013 :- 5 -: M/s. K.N. Plastics

bank statement, the difference of Rs. 81,593/- was added. Last item was with reference to confirmations from creditors shown in the balance sheet in respect of 'Unsecured Loans' and 'Sundry Creditors'. Out of many items, confirmations could not be produced in respect of 4 items. As seen from the assessment order, nowhere AO has come to a conclusion that assessee has concealed income or furnished inaccurate particulars. This is not a case of furnishing inaccurate particulars as assessee has made claims which are disallowed.

9. The issue is whether mere disallowance of expenditure/ claims and additions made on the basis of un-reconciled amounts or un- confirmed creditors can lead to penalty for concealment of income. I am of the opinion that facts do not indicate that there is any concealment. Assessee has explained during the assessment proceedings as well as during the penalty proceedings that it was not in the business at the time of assessment and was not in a position to furnish the bills/vouchers for two items i.e., purchases and expenses disallowed. With reference to bank reconciliation, the details were furnished but AO found that there are differences in the account. How the differences were quantified is not verifiable from the order but amount of Rs. 81,593/- was quantified which assessee has not disputed.

10. With reference to the addition of creditors of 4 items, the 2 items of SSV Chit Funds are carried over balances. How they can be brought to tax income in this year was not explained and assessee's contentions on that are correct. The balance of the amounts pertain to M/s Futura Polysters Ltd., and HP Exports. These were new entries during the year, but these seems to be arising from the purchases/job works. Without any disallowance of purchase to the same extent, the outstanding balance at the end of the year cannot be considered as income and I.T.A. No. 626/Hyd/2013 :- 6 -: M/s. K.N. Plastics

certainly cannot be considered for levy of penalty. There is no evidence on record to indicate that there is cessation of liability so as to tax u/s. 41(1) of the Act. There seems to be no exercise in the part of the AO to establish that these amounts are indeed concealed incomes of assessee. Just because the assessee could not confirm the year ending balances, the addition of outstanding balance alone cannot be considered as concealed income of assessee for levy of penalty. Whatever may be the reason assessee accepted the above additions. One reason to accept could be the loss being carried forward which could be set of, as assessee went out of business. The mere disallowance of amounts in my opinion cannot lead to levy of penalty.

11. Ld. DR relied on various case law. In the case of Kamal Chand Jain Vs. ITO [277 ITR 429] (Delhi), Hon'ble Delhi High Court has upheld the levy of penalty on the reason that after insertion of Explanation-I to Section 271(1)(c), it is obligatory on the part of assessee to substantially support his explanation and if no proper explanation from assessee was offered except surrendering certain amount for taxation to by peace and avoid further litigation, penalty is justified. This decision is not applicable to the facts of the case as assessee has a bonafide explanation that it went out of the business and was not in a position to reconcile the amounts.

12. In the case of Rajkumar Chaurasia Vs. CIT [288 ITR 329] (Allahabad), the provisions of Section 271(1)(c) were interpreted after insertion of Explanation-I. There was a presumption of concealment where returned income was less than 80% of the assessed income in those assessment years of 1975-76 and 1976-77. When there was no valid explanation from assessee under Explanation-I, which was also found to be false, the imposition of penalty was held valid. However, the I.T.A. No. 626/Hyd/2013 :- 7 -: M/s. K.N. Plastics

provisions were amended subsequently and there is no presumption of concealment as was then existing. Moreover, assessee has given a bonafide explanation under Explanation-I which was not proved false. Accordingly, this judgment also does not apply.

13. In the case of CIT Vs. Mangha Ram Om Prakash [276 ITR 362] again the facts indicate that there is no explanation regarding cash credits and the legal presumption that there was concealment where the total income returned by assessee was less than 80% of the assessed income, he shall be deemed to have concealed the particulars of his income. Since, assessee did not offer any explanation, penalty was levied which was upheld. However, in the present case as already stated above, there is no presumption of concealment as the provisions were amended subsequently and moreover, assessee's explanation was not proved false.

14. In the case of CIT Vs. Jagabandhu Prasanna Kumar Ruplal Sen Poddar [133 ITR 156], in fact the penalty was cancelled, wherein the Hon'ble High Court has held that items which accounted for difference were for expenses claimed as deduction and estimated income in Pakistan which was subject to rectification. This case law infact support assessee's case that penalty cannot be levied in case of disallowance of expenditure.

15. The Hon'ble Supreme Court in the case of B.A. Balasubramaniam and Bros. Co., Vs. CIT [236 ITR 977] (SC), in fact was considering the presumption of concealment where the returned income was less than 80% of income assessed. It was held that Explanation to Section 271(1)(c) became applicable and Income Tax Officer was justified in imposing penalty because, assessee had not been able to discharge the I.T.A. No. 626/Hyd/2013 :- 8 -: M/s. K.N. Plastics

onus which was on it under the Explanation1 to Section 271(1)(c). This case law also is in fact supporting assessee's case wherein, there is no presumption of concealment as the law was amended and further assessee's bonafide explanation was not proved to be bogus. As already stated above, there were some disallowances of the claims made in the P&L A/c and addition on the basis of non-furnishing reconciliations or non-furnishing of confirmations. As seen from the balance sheet, there are many more credits which the AO has accepted as assessee was in a position to furnish the confirmation letters. Just because he could not confirm the two of the credits occurred during the year and two of the credits carried over from earlier year, it cannot be held that assessee's case come under concealment of Income.

16. In view of this, I uphold the order of CIT(A) cancelling the penalty and dismiss the Revenue's grounds.

17. In the result, appeal is dismissed.

Order pronounced in the open court on 26th June, 2015.

Sd/-

(B. RAMAKOTAIAH) ACCOUNTANT MEMBER

Hyderabad, Dated 26th June, 2015

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Copy to :

1. The Dy. Commissioner of Income Tax, Circle-8(1), 8th Floor, C-Block, I.T. Towers, Hyderabad.

2. M/s. K.N. Plastics, H.No. 8-4-101/4, Keshavgiri, Hyderabad.

3. CIT(Appeals)-III, Hyderabad.

4. CIT-II, Hyderabad.

5. D.R. ITAT, Hyderabad.

6. Guard File.