AO has to be satisfied about concealment of income - Tribunal's findings not relevant - satisfaction is AO's not Tribunal's - This jurisdictional defect going to root of issue cannot be cured subsequently : ITAT
The assessee is a company engaged in the execution of projects. While completing the assessment under section 143(3) of the Act, the Assessing Officer disallowed the commission
payment of Rs.31,75,000 claimed by the assessee as a deduction on the ground that the assessee could give only a general explanation justifying the payment, but could not adduce any correspondence or other evidence to show that the commission was paid for the purpose
of the business. The assessee's explanation that the commission payment had been allowed in the past was not accepted by the Assessing Officer to be sufficient ground for allowing the same in the year under consideration. In respect of the payment of commission to a company by name Four Season marketing Pvt Ltd., amounting to Rs 18,75,000, the Assessing Officer also observed that the nature of the services was described in the assessee's own letterhead which cannot be accepted as evidence.
The assessee took the matter in appeal to the CIT (Appeals) who deleted the disallowance of the commission of Rs.3,00,000 paid to M/s Copost Engineering, but sustained the disallowance of the commission of Rs. 18,75,000 paid to Four Season Marketing Pvt. Ltd. and Rs. 10,00,000 paid to Arvind Refractories Pvt. Ltd. The assessee filed a further appeal to the Tribunal. The Tribunal confirmed the disallowance of the commission aggregating to Rs.28,75,000.
After the order of the Tribunal, the Assessing Officer issued show cause notice asking the assessee to explain why penalty for concealment of income cannot be imposed. The assessee submitted its written reply stating that an appeal against the order of the Tribunal has been filed before the Delhi High Court and it was also explained that the commission expenses were actually incurred by the assessee but the departmental authorities took the view that it was
not allowable under section 37(1) of the Act, that the disallowance was based on a difference of opinion regarding the allowability of the claim and that at no point of time had the assessee concealed any income or withheld or furnished any inaccurate particulars of its income.
The Assessing Officer rejected the assessee's explanation. He strongly relied on the order of the Tribunal. According to the Assessing Officer, the assessee had filed a fabricated document to justify the commission payment claimed as a deduction. He concluded that there was enough material or circumstances leading to the reasonable conclusion that the assessee furnished inaccurate particulars of the so-called commission payment and that there was
conscious concealment on the part of the assessee. He accordingly imposed a penalty of Rs 10,06,250.
On appeal, the CIT (Appeals) took the view that there is a difference between assessment proceedings and penalty proceedings and that the mere disallowance of an expenditure, confirmed in appeal proceedings does not automatically lead to the conclusion that the assessee concealed its income and that in order to bring the case under Explanation 1, it has to be seen whether the assessee offered any explanation and if so, whether it was false. Before the CIT (Appeals) the assessee had questioned the levy of penalty also on the basic ground that the Assessing Officer has not recorded any satisfaction to the effect that the assessee had concealed its income or furnished inaccurate particulars thereof and therefore the levy of penalty without recording the requisite satisfaction was invalid. The CIT (Appeals) held that the Assessing Officer had not recorded any satisfaction in the assessment order that the assessee has concealed its income or furnished inaccurate particulars thereof. On this basic ground also, the penalty was cancelled.
The Tribunal observed,
1. the CIT (Appeals) was right in canceling the penalty on the ground of non-recording of the requisite satisfaction.
2. A perusal of para 3 of the assessment order shows that the entire commission payment was disallowed for lack of evidence regarding the nature of services rendered by the agents.
3. There is no remark or observation made therein by the Assessing Officer that the commission payment is false or inflated.
4. There is also no finding to the effect that the monies paid as commission have found their way back to the assessee. There is not even a suggestion to that effect.
5. The disallowance proceeded merely on the basis that the assessee could not prove the nature of services rendered by the agents. Thus, no satisfaction was recorded to the effect that the assessee concealed its income or furnished inaccurate particulars thereof by
claiming a false or inflated deduction on account of commission.
6. There was no suggestion in the assessment order that the agreement with Four Seasons Marketing was fabricated.
7. The finding that the agreement was fabricated was given by the Tribunal in its order passed in the appeal filed by the assessee against the disallowance, but that is no reason to hold that the Assessing Officer had recorded his satisfaction in the assessment order.
8. The requirement of law is that it is the Assessing Officer who has to be satisfied in the course of any proceedings under the I.T. Act that the assessee has concealed its income or furnished inaccurate particulars of the income.
9. The satisfaction is thus of the Assessing Officer and not that of the Tribunal.
10. The Tribunal could impose penalty under section 28(1)(c) of the 1922 Act if it was satisfied in the course of any proceeding before it that the assessee had concealed his income or furnished inaccurate particulars thereof, but under the 1961 Act this power has been taken away. It is only the Assessing Officer and the first appellate authority who have the power.
11. Therefore even in a case where the assessment has been confirmed by the Tribunal it is the satisfaction of the Assessing Officer that the assessee has concealed his income or furnished inaccurate particulars thereof that is relevant or material.
12. This is the jurisdictional defect going to the root of the matter which cannot be cured subsequently.
13. It has been held that the remark in the assessment order that penalty proceedings under section 271(1)(c) have been initiated separately does not amount to proper recording of the requisite satisfaction.
14. Going by all these parameters, we are satisfied that the Assessing Officer has not recorded any satisfaction and on this ground the penalty proceedings have been rightly invalidated by the CIT (Appeals)
Therefore his order canceling the penalty is therefore upheld and the appeal filed by the department is dismissed.
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