* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 1st April, 2014
% Date of Decision: 15th April, 2014
+ ITA 244/2013
COMMISSIONER OF INCOME TAX DELH-II ..... Appellant
Through: Mr. Sanjeev Sabharwal, Sr.
Standing Counsel with Sh. Ruchir
Bhatia, Jr. Standing Counsel
versus
KALINDI RAIL NIRMAN ENGG. LTD. ..... Respondent
Through: Sh. R.K. Sharma, Advocate.
CORAM:
MR. JUSTICE S. RAVINDRA BHAT
MR. JUSTICE R.V. EASWAR
R.V. EASWAR, J.
1. This appeal filed by the revenue under Section 260A of the Income
Tax Act, 1961 (hereinafter referred as the "Act") is directed against the
order passed by the Income Tax Appellate Tribunal ("Tribunal", for
short) on 29.03.2012 in ITA No.322/Del/2008 confirming the order of the
Commissioner of Income Tax (Appeals) dated 26.10.2007 by which he
cancelled the penalty of Rs.24,00,977/- imposed on the assessee under
Section 271(1)(c) of the Act for concealment of income.
ITA No.244/2013 Page 1 of 12
2. The assessee, a contractor undertaking projects of Indian Railways
on turn key basis, filed its return of income for the assessment year 1995-
96 on 29.11.1995 declaring a total income of Rs.88,91,700/-. On the
basis of the materials gathered by the income tax authorities in the course
of a search carried out in the assessee's premises on 14.03.1995 as well as
in the premises of the directors and trusted persons, the assessing officer
referred the matter to a special audit in terms of Section 142(2A) of the
Act. The special audit report, inter alia, reported that there were large
number of transactions for which no supporting vouchers were available,
that several discrepancies in cash and journal vouchers and changes in the
dates of the vouchers were noticed, that there were discrepancies in the
adjustments of cash books with cash vouchers, that there were payments
made to the Railway staff which were not allowable as deduction under
the Act, that several payments were made without obtaining any signature
of the recipients, that the assessee did not maintain any stock register and
did not disclose any work-in-progress in the balance sheet, that several
items of capital expenditure were passed off as revenue expenditure and
so on and so forth. In response to the queries raised by the assessing
officer on the basis of special audit report the assessee could not give any
proper explanation and wherever an explanation was sought to be given,
it was found to be evasive. The assessee was also allowed inspection of
ITA No.244/2013 Page 2 of 12
the seized documents and was supplied photocopies of the seized records.
Despite such opportunity, no convincing reason was given by the
assessee to the query of the assessing officer as to why the results
declared by the books of accounts could not be rejected and the profit
from the contracts be not estimated at a rate exceeding 11% of the gross
receipts. Not convinced by the assessee's explanation to the show-cause
notice, which was only that the accounts maintained by the assessee were
based on accounting policies consistently adhered to, the assessing officer
proceeded to estimate the net profit of the assessee at 11% of the gross
receipts from the contracts amounting to Rs.20,30,74,024/-, which came
to Rs.2,23,38,143/-. The assessing officer also found that some income
from business activities was not included in the aforesaid receipts and the
profit from such activity was taken at Rs.13,34,308/-. The total business
income was thus taken at Rs.2,36,72,451/- before allowing depreciation.
Demands were accordingly raised.
3. It would appear that the assessee carried the matter in appeal to the
Tribunal which by order dated 05.09.2002 passed in ITA No.28/JP/2000,
reduced the income by adopting the profit rate of 8% on the gross receipts
subject to allowance of depreciation and interest. The separate addition
of Rs.13,34,308/- was deleted.
ITA No.244/2013 Page 3 of 12
4. Penalty proceedings were initiated by the assessing officer for
concealment of income and after rejecting the assessee's explanation, a
minimum penalty of Rs.24,00,977/- was imposed for concealment of
income under Section 271(1)(c) of the Act. The assessing officer held,
overruling the assessee's explanation that merely because the profits were
estimated, it does not follow that the assessee was not guilty of any fraud
or gross or wilful neglect on his part to return the correct income, as
provided in the Explanation below Section 271(1)(c) of the Act, as it
stood at the material period.
5. The penalty order was taken in appeal to the CIT (Appeals) who
cancelled the same on the ground that the assessing officer has not stated
the basis of this estimate nor did he give an opportunity to the assessee to
rebut the proposal to estimate the profits at 11% of the gross receipts. He
held that the assessee made a counter proposal which was a conditional
offer as to the taxability of the profits and even if it is assumed that there
was an agreement on the part of the assessee for being taxed at the rate of
11% of the gross receipts, it does not follow automatically that the
assessee concealed its income. The revenue's appeal to the Tribunal
having been dismissed, it is in further appeal before this Court.
ITA No.244/2013 Page 4 of 12
6. In our opinion the following questions of law arise for
consideration: -
(i) Whether on the facts and in the circumstances of the
case the Tribunal was right in law in upholding the order
of the CIT (Appeals) cancelling the penalty imposed on the
assessee for concealment of income under Section
271(1)(c) of the Act?
(ii) Whether the view of the Tribunal that the assessee's
acceptance of the profit rate of 11% was only a conditional
proposal and made with a view to buy peace and avoid
disputes, is a reasonable view or is it perverse?
7. We have considered the rival contentions. While the revenue
assails the order of the Tribunal on the ground that after the judgment of
the Supreme Court in the case of MAK Ltd. Data P. Ltd. vs. CIT, (2013)
358 ITR 593 there is no question of the assessee offering income "to buy
peace" and that in any case the seized material and the special audit
report disclose several discrepancies to cover which a higher estimate of
the profits was resorted to, the learned counsel for the assessee
vehemently contended that the Tribunal committed no error in upholding
the order passed by the CIT (Appeals) cancelling the penalty. He would
contend that it was a mere case of different estimates of income being
adopted by different authorities which itself would show that there is no
merit in the charge of concealment of income. He further contended that
the revenue is wrong in saying that a higher rate of profit was adopted to
ITA No.244/2013 Page 5 of 12
cover the discrepancies pointed out in the special audit report, since there
was nothing preventing the assessing officer from making separate
additions if those discrepancies were not explained by the assessee as
alleged by him. He filed a copy of the order of the Tribunal dated
05.09.2002 passed in the quantum proceedings to support his contentions.
He also emphasised that the assessee had agreed to be assessed on 11% of
the gross receipts only on the condition that no inference of concealment
of income would be drawn from such concession and in such
circumstances, where the offer was conditional and to buy peace, there
can be no levy of penalty for alleged concealment of income.
8. The learned counsel for the assessee would have been right if it
was a simple case of one estimate against another. However, where
incriminating materials are gathered in the course of search conducted by
the tax authorities and the special audit report, which is based on those
materials, reports a number of discrepancies and irregularities in the
maintenance of books of accounts, the case ceases to be a simple case of
estimate of income and it is open to the assessing officer to conclude that
the assessee concealed its income, provided the alleged discrepancies and
irregularities are not properly explained. In such a case it is open to the
assessing officer even to make a flat rate assessment, pitching the
ITA No.244/2013 Page 6 of 12
percentage at high figure to cover up the discrepancies noticed in the
special audit report and revealed by the seized material, instead of making
separate additions. This is what has happened in the present case. The
search took place on 14.03.1995, towards the close of the relevant
counting period. Despite the search, in the return filed on 29.11.1995, the
assessee chose to declare its income at an estimated 3% of the contract
receipts of Rs.20,30,74,024/-; no attempt was made in the course of the
assessment proceedings to justify the said estimate. The assessing
officer, armed with the seized material and the special audit report, did
comply with the rules of natural justice and called upon the assessee to
justify the income returned and explain the discrepancies and
irregularities noticed by the special auditor. When the assessee was
unable to do so, the assessing officer had no option but to make an
estimate of the profits by adopting a percentage sufficient in his opinion
to cover the discrepancies revealed by the special auditor and the seized
material. In doing this, he committed no error; he also committed no
error of law in concluding that there was gross or wilful neglect on the
part of the assessee in failing to return the correct income. The burden to
show the contrary was, according to the assessing officer, on the assessee
which the assessee failed to discharge.
ITA No.244/2013 Page 7 of 12
9. The learned counsel for the assessee is not right in his contention
that whenever an assessment is made by applying a flat rate of profit to
the declared turnover or receipts, which is higher than the rate adopted by
the assessee in the return of income, there can be no inference that the
assessee concealed his profits. There is no such absolute proposition and
this has been brought out by the Madras High Court in Bashu Sahib vs.
CIT, (1977) 108 ITR 736. There the assessee who was a bus operator
filed a return in which he estimated the income at Rs.8,000/- per bus
which was on the basis of the income determined by the Tribunal in his
own case for an earlier assessment year. In the course of the assessment
proceedings he denied having maintained books of accounts and also did
not produce the trip sheets, invoices and correspondence with the regional
transport authorities. The assessing officer, therefore, enhanced the
income from each bus to Rs.19,245/-. Such estimated assessments were
made for two assessment years and in the later assessment year the
income was estimated at Rs.22,000/- per bus. Penalty proceedings were
initiated for concealment of income. The Madras High Court held that
the assessee did not produce the relevant evidence despite being called
upon and there was a finding by the Tribunal that the assessee chose to
withhold the books of accounts. The assessee knew that the method
adopted by him did not disclose the real income. Though he was in a
ITA No.244/2013 Page 8 of 12
position to know his real income, he deliberately estimated it at a lower
amount. The High Court, therefore, held that the penalty proceedings
were justified. Dealing with the argument that in cases of estimate of
profits there can be no concealment, and rejecting the same, the High
Court observed as under: -
"We are also unable to agree with the argument that in all
cases where the taxing authorities estimated the income at
a higher figure than what was estimated by an assessee, no
penalty was leviable. Where the estimate of the assessee
amounts to deliberate under-estimate, an inference of
concealment of income could certainly be drawn. The
facts in the present case clearly show that the assessee had
deliberately under-estimated his income in the two years
under appeal."
10. A Division Bench of this Court was seized with the question in
Qammar-ud-din & Sons vs. CIT, (1981) 129 ITR 703, Ranganathan, J.
(as he then was) held as follows: -
"The obligation of filing of a return is a solemn and
important one and should not be undertaken in a
lighthearted and careless manner. It may be that, in some
circumstances, an assessee may have to estimate its
income, but if so, such estimate should have some basis
therefor. An assessee cannot escape its responsibility or
escape penal action merely by filing a return showing an
estimated income but without there being any real basis
for that income."
(underlining ours)
ITA No.244/2013 Page 9 of 12
11. In that case the penalty was ultimately cancelled by this Court on
the ground that there was no fraud or gross or wilful neglect on the part of
the assessee and that the Tribunal's finding to the contrary was vitiated by
failure to consider certain material facts.
12. We are bound by ratio of the decision of this Court. The number of
discrepancies and irregularities listed by the special auditor in his report
which are reproduced in the assessment order bear testimony to the fact
that the books of accounts maintained by the assessee were wholly
unreliable. If they were so, there can be no sanctity attached to the figure
of gross contract receipts of Rs.20,30,74,024/- on which the assessee
estimated 3% as its income. It is true that the assessing officer did not
enhance the figure of gross receipts but that is not because he gave a
clean chit to the books of accounts allegedly maintained by the assessee;
he could not have given a clean chit in the face of the defects,
discrepancies and irregularities reported by the special auditor. In order
to take care of those discrepancies he resorted to a much higher estimate
of the profits by adopting 11% on the gross contract receipts. He gave
due opportunity to the assessee to explain the discrepancies and also to
show why the profit rate of 11% cannot be adopted but these
opportunities were not availed of by the assessee. He also has recorded in
ITA No.244/2013 Page 10 of 12
the assessment order that the assessee was permitted to inspect the seized
documents and was given photocopies of the desired documents (para 7).
This is not denied by the assessee. In these circumstances, the mere fact
that the estimate was reduced by the Tribunal to 8% would in no way take
away the guilt of the assessee or explain its failure to prove that the
failure to return the correct income did not arise from any fraud or any
gross or wilful neglect on its part. It appears to us that the assessee was
taking a chance sitting on the fence - despite the fact that there was a
search towards the close of the relevant accounting year in the course of
which incriminating documents were found. It appears to us that the
intention of the assessee was to take a risk and disclose a lesser income
than what it actually earned and rely upon the minor variations in the rate
of profits adopted by the taxing authorities and the Tribunal as a defence
in the penalty proceedings. The plea accepted by the Tribunal that the
assessee agreed to be assessed at 11% of the gross receipts only "to buy
peace" and "avoid litigation" cannot be accepted by us in view of the
judgment of the Supreme Court in MAK Data P. Ltd. (supra). The
Tribunal in our view was in error in upholding the order of the CIT
(Appeals) cancelling the penalty. We accordingly answer the substantial
questions of law framed by us against the assessee and in favour of the
revenue.
ITA No.244/2013 Page 11 of 12
13. The appeal of the revenue is allowed with no order as to costs.
(R.V. EASWAR)
JUDGE
(S. RAVINDRA BHAT)
JUDGE
APRIL 15, 2014
hs
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