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Commissioner Of Income Tax Delh-Ii Vs. Kalindi Rail Nirman Engg. Ltd.
April, 18th 2014

                                            Reserved on: 1st April, 2014
%                                     Date of Decision: 15th April, 2014

+      ITA 244/2013

                   Through: Mr. Sanjeev Sabharwal, Sr.
                            Standing Counsel with Sh. Ruchir
                            Bhatia, Jr. Standing Counsel


       KALINDI RAIL NIRMAN ENGG. LTD.           ..... Respondent
                     Through: Sh. R.K. Sharma, Advocate.



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

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)

                                               (S. RAVINDRA BHAT)
APRIL 15, 2014

ITA No.244/2013                                           Page 12 of 12
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