Ahmedabad ITAT deletes Addition of Profits from Suppressed of Sales belonging to Firm of director of Company

Fact and Issue of the case

Appeal 1:

The facts relating to the case, as emanate from the orders of the authorities below, is that the assessee is engaged in the business of catering and hospitality/house keeping service etc. For the impugned assessment year return of income was filed by the assessee declaring Nil income. Thereafter reassessment proceedings, under Section 147 of the Act , were initiated on the assessee on the basis of information received from the Office of the Commissioner, Central Excise, Customs and Service Tax, Baroda-1 that the assessee had provided services and received an amount of Rs.5,10,61,886/- during the year. The assessee denied having received any such amount and asserted that no business had been carried out in the impugned year, since it was the first year of coming into existence. The Assessing Officer, however, was not convinced with the explanation of the assessee and accordingly he held that the sum reflected undisclosed sales of the assessee. Applying an N.P. rate of 25% thereon, he calculated the income earned from the same at Rs.1,38,07,344/- and added the same to the income of the assessee. The Assessing Officer also made addition of Rs.30,29,240/- on account of unpaid Service Tax liability. Accordingly the total income of the assessee was assessed at Rs.1,68,36,584/- as against Nil returned by the assessee.

Appeal 2:

In other appeal of the assessee in ITA No.526/Ahd/2015, pertaining to Y 2010-11 against the order of the Ld. CIT(A) confirming levy of penalty u/s 271(1)(c) of the Act. In the facts and circumstances of the case the Learned CIT has erred in

a) The assessee company collects government tax from the public and pays to the account of the government. Such duties and taxes are collected from the parties and are shown in a separate account. This is not an actual income of the assessee, but it only acts as a mediator for collection of the taxes. The assessee during the year under consideration did not have sound financial conditions and hence failed to pay the taxes to the government account till the due date of such payment. This same fact was disclosed in the tax audit report of the assessee also. It is not an actual income of the assessee, it still paid income tax on that quantum of taxes as it had not paid the taxes to the government account before due date. It is a sort of penalty that was charged on a notional income of the assessee. Also, the assessee disclosed the unpaid government dues in its tax audit report.

(b) Thus, the assessee pays income tax on an amount which is not an actual income, it is a type of penalty charged to the assessee. Also, the assessee did not have any malafide intention of concealing the income since it had disclosed the unpaid liabilities in its tax audit report. To attract the provisions of Section 271(1)(c), the assessee should have malafide intentions or criminal intent or mens rea, which is not true in the case of the assessee since it had disclosed in the tax audit report. Thus, this case does not attract penalty u/s 271(1)(c) of the Act.

Observation of the Tribunal

Appeal 1:

The Tribunal has gone through the order of the Ld. CIT(A) and do not find any infirmity in the same. The acceptance of the explanation of the assessee that the turnover did not belong to it but to the proprietary concern of the Director of the assessee Company Shri Keshav Alwa, going by the same name as the assessee Company, we find is based on appreciation of several evidences which were there before the Ld. CIT(A). There were evidences before the Ld.CIT(A) demonstrating that the assessee company came into existence only in the later part of the year and could have commenced its activities of providing services only from the subsequent year onwards when it was registered with the Central Excise and Customs, Baroda, thus ruling out the possibility of any activity being carried out in the impugned year by the assessee company. The aforesaid facts were established by the Memorandum of Association and Article of Association of the assessee Company showing the date of formation of the Company as 19.12.2005 i.e. during later part of the impugned year and the Service Tax registration of the assessee company, from the Central Excise and Customs, Baroda, being found to be obtained in the subsequent year i.e. 15.05.2006.

There were evidences with the Ld.CIT(A) establishing existence of the proprietorship Concern of the director of the assessee company, Sh.Keshav Alwa, going by the same name as the assessee company , by way of several notices issued in its name by the Central Excise and Customs and Service Tax Department in 2006 and 2007 for non filing of annual yearly returns and for shortfall of service tax. Further the Ld. CIT(A) noted that the notice issued in the name of the assessee company by the Central Excise and Customs and Service Tax Department dt.20/11/2009, which was the basis of reopening the case and making the impugned additions was also issued to Mr. Keshav Alwa, director of the assessee company and proprietor of the concern going by the same name as the assessee. He also noted from the same that the amount of service tax stated to be paid therein by the assessee company, was actually paid in the proprietorship concern. Copies of Form No.36, reflecting the said payment in the proprietorship concern, were filed before and perused by the Ld.CIT(A).

Also the proprietor, Sh Keshav Alwa, had confirmed on oath to the Ld.CIT(A) the fact that the turnover of Rs.5.55 crores, mentioned in the notice issued to the assessee company, pertained to his concern and stood reflected in the books also. On the basis of the aforestated facts, the Ld. CIT(A) concluded that there was no suppression of sale on the part of the assessee Company and that it actually related to the proprietorship concern and accordingly directed that the issue of addition on account of suppressed sales alongwith that of unpaid service tax liability be examined in the case of the proprietorship concern. None of the findings of fact by the Ld. CIT(A) have been controverted by the Ld. Departmental Representative before us. In view of the same, we see no reason to interfere in the order of the Ld. CIT(A) deleting the addition made of profits from suppressed of sales ,amounting to Rs.1,38,07,344/- and that on account of unpaid service tax liability u/s 43B of the Act of Rs.30,29,240/-. Grounds raised by the Revenue are therefore dismissed.

Appeal 2:

The tribunal has gone through the orders of the authorities below and have heard the Ld. DR who has supported the order of the Ld.CIT(A). It is a fact on record the both the unpaid liabilities had been reflected in the respective columns of the tax audit report. In fact the AO had picked them up from the tax audit report itself for making addition in quantum proceedings, which fact finds mention in the assessment order. Further on going through the assessment order ,which is reproduced at para 4.1 of the CIT(A)’s order in the impugned penalty proceedings ,we find that the assessee had stated that the outstanding demand related to a contested liability the appeal against which was pending at higher level. The assessee had stated that the liability had been fixed on the assessee by the Service tax department holding that it was not entitled to 50% abatement on tea and snacks, which the assessee was contesting in appeal. The assessee clearly had a bonafide explanation for not adding the unpaid tax liabilities to its income since it was contesting the very levy of the same before the concerned department. It may be a fit case of making addition of the unpaid liabilities to the income of the assessee. But as far as the levy of penalty is concerned the explanation for not adding back the unpaid liabilities to its income cannot be outrightly rejected as not being bonafide.

What emerges therefore is that all particulars relating to income were disclosed by the assessee, as is evident, in the tax audit report itself reflecting the impugned unpaid tax liabilities. Further Explanation 1 to section 271(1)(c) of the Act deems concealment of income when ,with respect to a fact material to the computation of income, the explanation of the assessee is either false or not bonafide and unsubstantiated. In the present case, we find, the explanation of the assessee for not adding back the unpaid liabilities to its income as bonafide, since they were stated to be contested with the concerned departments. 20. Considering the above facts and circumstances we are of the view therefore that the assessee cannot be said to have concealed/furnished any particulars of income so as to attract the levy of penalty u/s 271(1)(c) of the Act. 21. In view of the same, we delete the penalty so levied amounting to Rs.32,82,000/-. In the result, appeal of the assessee is allowed.