The order of the Bench was delivered by
G. C. GUPTA (Vice-President).-These two appeals of the assessee for the assessment year 2001-02 and the assessment year 2004-05 are directed against the orders of the Commissioner of Income-tax (Appeals)-II, Surat. Both these appeals are being disposed of with this consolidated order.
I. T. A. No. 1104/Ahd/2008 : assessment year 2001-02
The only issue in this appeal of the assessee is regarding validity of penalty levied under section 271 (1) (c) of the Income-tax Act, 1961:
Learned counsel for the assessee submitted that the penalty under section 271(1)(c) of the Act was imposed on the assessee on two counts, i.e., on account of estimate of gross profit rate, and other regarding payment to M/s. Swami Chemicals ("SC" for short). He submitted that the gross profit rate has been applied by way of estimate and therefore no penalty under section 271(1)(c) of the Act was imposable on the assessee. Regarding the other issues of payment to "SC", learned counsel submitted that there was no mens rea and the Tribunal in the first round of appeal has set aside the issue to the file of the Commissioner of Income-tax (Appeals) to find out whether any addition on this count was called for. The Commissioner of Income-tax (Appeals) again made the addition and further appeal of the assessee before the Tribunal was dismissed by the Tribunal vide its order dated November 16, 2011. He submitted that the addition has been made merely on presumption as the Tribunal has found that the transaction with "SC" was not real transaction but was merely a paper transaction. The learned Departmental representative has opposed the submissions of learned counsel for the assessee. He submitted that it is a survey case and the assessee has surrendered Rs. 40 lakhs at the time of survey. He submitted that in order to neutralise the effect of survey and surrender of Rs. 40 lakhs, the assessee has reduced its gross profit rate and therefore it is a fit case for imposition of penalty under section 271(1)(c) of the Act. He submitted that on the second issue pertaining to "SC", the penalty was imposable since the partner of the assessee-firm has admitted that the transactions with "SC" was merely a paper transaction. He relied on the orders of the Assessing Officer and the Commissioner of Incometax (Appeals).
4 We have considered rival submissions carefully. We find that the penalty under section 271 (1) (c) of the Act has been imposed on two issues and the first issue is regarding estimation of income by applying flat rate of gross profit in this case. Certain defects were found in the account books of the assessee and therefore the same was rejected and flat rate of gross profit was applied by the Department. We find that it is well settled that no penalty under section 271(1)(c) of the Act could be imposed merely on the ground that there were defects in the account books of the assessee and the account books were rejected and the flat rate of the gross profit is applied to arrive at the gross profits of the assessee. Merely because in the case of the assessee a survey action was undertaken, it does not follow that the penalty under section 271(1)(c) was imposable on the estimated trading profit of the assessee. Accordingly, we find no justification for imposition of penalty under section 271(1)(c) of the Act on this issue, which is cancelled.
5 Regarding other issue of transaction with "SC", we find that the addition was made on the basis of presumption which could not be made basis for imposition of penalty under section 271(1)(c) of the Act. The Tribunal vide its order dated August 30, 2005 in the first round of quantum appeal of the assessee has set aside the issue to the file of the Commissioner of Income-tax (Appeals) with the observation that the Commissioner of Income-tax (Appeals) has not properly appreciated the issue and has observed that if the assessee has not retained 3 per cent. on account of sales tax and the sales tax has been deposited by the assessee, then no addition is warranted and if any part of 3 per cent. remained with the assessee to that extent, is certainly the income of the assessee. The Commissioner of Income-tax (Appeals) has repeated the addition and the Tribunal in the second round of the quantum appeal of the assessee vide its order dated November 16, 2011 has confirmed the addition sustained by the Commissioner of Income-tax (Appeals). We find that the facts of the case may justify the confirmation of the addition made on this count by the Revenue authorities, but are not sufficient for sustaining the penalty imposed under section 271(1)(c) of the Act. We find that no evidence or material was brought on record by the Department to suggest that the assessee has retained 3 per cent. or part thereof on account of sales tax with it. The assessee has filed an explanation, which could not be termed as not bona fide. In the absence of any corroborative evidence to prove the charge that any part of 3 per cent. being sales tax on the transaction remained with assessee, we are unable to sustain the penalty imposed under section 271(1)(c) of the Act on the assessee, which is cancelled. Accordingly, this appeal of the assessee is allowed.
I. T. A. No. 629/Ahd/2009 : assessment year 2004-05
There is a delay of 475 days in filing the present appeal by the assessee before the Tribunal. The assessee has filed condonation petition along with affidavit of Shri K.L. Bhakta, managing partner with medical certificate and also affidavit of Shri M. S. Sarvaiya, clerk of the assessee-firm explaining the circumstances resulting in delay in filing the appeal before the Tribunal.
We have heard the parties on this issue. In the facts of the case and particularly in view of fact that the managing partner, Shri K.L. Bhakta was 82 years of age with illness, we condone the delay in filing the present appeal before the Tribunal.
Ground No. l(i) of the assessee's appeal reads as under:
"l(i) The learned Commissioner of Income-tax (Appeals) has erred in law as well as on the facts while confirming the addition of Rs. 8,09,100 on account of alleged unexplained cash credits under section 68 of the Act by the Assessing Officer."
Learned counsel for the assessee submitted that the evidence filed before the Commissioner of Income-tax (Appeals) including the affidavits was not admitted by the Commissioner of Income-tax (Appeals) as additional evidence, although the reasons for non-filing of the same before the Assessing Officer were explained by the assessee. The learned Departmental representative has relied on the orders of the Assessing Officer and the Commissioner of Income-tax (Appeals).
We have considered rival submissions. We find that there was sufficient reason for the assessee for its filing the necessary evidences before the Commissioner of Income-tax (Appeals). In the facts of the case, we consider that it shall be in the interest of justice to set aside the issue of addition of Rs. 8,09,100 under section 68 to the file of the Assessing Officer with direction to decide the same afresh in accordance with law after allowing reasonable opportunity of being heard to the assessee. We direct accordingly.
Ground No. l(ii) of the assessee's appeal reads as under:
"l(ii) The learned Commissioner of Income-tax (Appeals) has erred in law as well as on the facts while confirming the disallowance of Rs. 3,75,823 on account of alleged excessive or unreasonable payments of job work charges under section 40A(2)(b) of the Act."
12 Learned counsel for the assessee submitted that the job work charges are comparable with the job work charges of the immediately preceding assessment year. In the immediately preceding assessment year no addition on this account is made by the Assessing Officer. He submitted that the payments for job work were reasonable and therefore the addition has been wrongly made by the Department. The learned Departmental representative relied on the orders of the Assessing Officer and the Commissioner of Income-tax (Appeals). He submitted that the onus was on the assessee to prove that the payments made to the sister concerns was not excessive or unreasonable.
13 We have considered rival submissions. We find that the assessee could not lead any evidence to show that the payment for job work were not excessive or unreasonable. The assessee has not given any comparable figures of job work rate prevailing in the market with regard to other parties in similar line of the trade for the relevant period. The assessee has given job work only to M/s. Krishna Organics and Mis. Iyoti Industries and both these firms are admittedly the sister-concerns of the assessee. The comparison of job work rate with the earlier year is not relevant. What is more relevant is the prevailing market rate of similar service rendered by the parties to the unrelated business firm. In the facts of the case, we hold that the pre-dominance of probabilities is against the assessee and accordingly the disallowance of Rs. 3,75,823 made by the Assessing Officer under section 40A(2)(b) of the Act is confirmed and ground No. 1(ii) is dismissed.
14 Ground No. l(iii) of the assessee's appeal reads as under:
“l(iii) The learned Commissioner of Income-tax (Appeals) has erred in law as well as on the facts while confirming the ad hoc disallowance of dalali/commission expenses. To the extent of Rs. 1,81,587. addition of Rs. 8,09,100 on account of alleged unexplained cash credits under section 68 of the Act by the Assessing Officer."
15 Learned counsel for the assessee submitted that the commission expenses were paid through account payee cheques and the assessee has filed confirmation from the payees with their permanent account number. The learned Departmental representative relied on the orders of the Assessing Officer and the Commissioner of Income-tax (Appeals).
16 We have considered rival submissions. In the facts of the case, no case of disallowance of commission expenditure could be made out by the Assessing Officer. The assessee has proved the identity of payee and payee-parties have confirmed the payment made to them by account payee cheque and have given their permanent account number in confirmation thereof. The business purpose of commission payments have not been disputed by the Department. In these facts, we hold that no case for disallowance could be made out by the Department and accordingly, the addition is deleted and ground No. 1(iii) of the assessee's appeal is allowed.
Ground No. 1(iv) of the assessee's appeal reads as under:
"l(iv) The learned Commissioner of Income-tax (Appeals) has erred in law as well as on the facts while confirming the ad hoc disallowance of ,trade discount expenses. To the extent of Rs. 1,50,000."
Learned counsel for the assessee submitted that the assessee had made trade discount which was duly evidenced by the bills and account books of the assessee. All the parties are trading parties. The learned Departmental representative relied on the orders of the Assessing Officer and the Commissioner of Income-tax (Appeals).
We have considered rival submissions. We find that the Department could not dispute that the discount was allowed to the trading parties of the assessee in the normal course of the business: The payee parties have confirmed the fact of trade discounts. Business purpose of the trade discount could not be controverted by the Revenue. We are unable to sustain the reasoning of the Commissioner of Income-tax (Appeals) that there should have a clear method in terms of percentages, and evidence of negotiation of the rates between the assessee and the parties should be there. We find that the assessee has paid the trade discount for business purpose to its constituents and no case for disallowance thereof could be made out by the Department and accordingly the disallowance is deleted and Ground No. 1(iv) of the assessee's appeal is allowed.
Ground No. 1(v), (vi) and (vii) are reproduced hereunder:
“ (v) The learned Commissioner of Income-tax (Appeals) has erred in law as well as on the facts while confirming the disallowance of Rs. 8,700 on account of late deposit of provident fund.
(vi) The learned Commissioner of Income-tax (Appeals) has erred in law as well as on the facts while confirming the ad hoc disallowance of telephone expenses. To the extent of Rs. 15,746.
(vii) The learned Commissioner of Income-tax (Appeals) has erred in law as well as on the facts while confirming ad hoc disallowance of vehicle expenses and depreciation thereon to the extent of Rs. 852 and Rs. 5,177."
These grounds are not pressed by learned counsel for the assessee, which are accordingly dismissed.
22 Ground No. 1(viii) of the assessee's appeal reads as under:
"1(viii) The learned Commissioner of Income-tax (Appeals) has erred in law as well as on the facts while confirming the addition of Rs. 1,26,581 under section 14A of the Act."
23 Before us, learned counsel for the assessee fairly admitted that no such ground was taken before the Commissioner of Income-tax (Appeals). In these facts of the case, we hold that since the assessee has not raised this issue as an additional ground before us and this was not raised in any of the grounds of the appeal before the Commissioner of Income-tax (Appeals), this ground of the appeal needs no adjudication and the same is dismissed in limine.
24 In the result, I. T. A. No. 1104/Ahd/2008 is allowed while the I. T. A. No. 629/Ahd/2009 is partly allowed.
25 The order pronounced in the open court on the date mentioned hereinabove.