Penalty u/s 271(1)(c) - Difference of Opinion
1. The method of accounting consistently followed by the assessee firm does not call for penalty u/s 271(1)(c) of the Act as no particulars of income are concealed nor there is any furnishing of in-accurate particulars of income before the Revenue
2. There is a difference of opinion between the assessee firm and A.O. and the claim of the assessee firm was not accepted by the A.O. Mere non-acceptance of the bona-fide claim of the tax-payer by the Revenue does not call for imposition of penalty within the ambit of provisions of Section 271(1)(c) of the Act
1. The assessee firm is in an indenting business of steel products on behalf of the foreign suppliers for the supplies made by the foreign principals directly to Indian Buyers like L & T, BHEL, Essar Steel etc. for their power projects
2. The assessee firm gets commission income from the foreign principal’s
3. The return of income was filed by the assessee firm with the Revenue declaring total income of Rs. 70,46,095/- on 13th October, 2006 and assessment u/s 143(3) of the Income Tax Act, 1961 was completed by the AO on 26th December, 2008 u/s. 143(3) of the Act assessing the income at Rs. 2,32,43,125/-
4. During the course of assessment proceedings u/s 143(3) read with Section 143(2) of the Act, the A.O. observed from the Balance Sheet that the assessee firm is showing advance from suppliers of Rs. 1.62 crores.
5. These advances were commission payments for indenting services provided by the assessee firm to the foreign clients
6. On perusal of the agency agreements signed with the foreign clients , it was observed by the AO that the commission will become due and payable after the clients receives the full sale price for the products sold by it to the customers in the territory
7. As the commission payments were already received by the assessee firm, it was concluded by the A.O. that the assessee firm has completed its assignments as per agency agreements and the income has already accrued to the assessee firm
8. To prove that the commission payment received by the assessee firm from foreign principals is no longer a liability but already accrued to the assessee firm as income, the A.O. critically examined the agreement with foreign principal namely Ascometal France and proved that the commission income has already accrued to the assessee firm
9. The Advance received from the suppliers of Rs. 1,61,97,030/- was treated by the A.O. as business income of the assessee firm and added to the total income of the assessee firm vide assessment order dated 26.12.2008 passed u/s 143(3) of the Act keeping in view the concept of accrual of income and as the income has accrued to the assessee firm the same was brought to tax as per Section 5 of the Act
10. Consequently, the penalty proceedings were initiated u/s 271(1)(c) of the Act against the assessee firm for concealment of income by the assessee firm
11. In the quantum proceedings, the CIT(A) upheld the advance commission income receipt of Rs.1,61,97,030/- as accrued income for the impugned assessment year under the Act as the assessee firm is following mercantile system of accounting vide orders dated 01-02-2010.The assessee firm did not filed any appeal with the Tribunal against the orders dated 01-02-2010 of the CIT(A) with respect to quantum additions and the same attained finality
12. The assessee firm in the penalty proceedings initiated u/s 271(1)(c) of the Act submitted that the assessee firm has not concealed any income with deliberate intention to deprive the revenue of its legitimate taxes
13. The AO relied upon the judgment of the Hon’ble Supreme Court in the case of UOI v. Dharmendra Textile Processors, 306 ITR 277 (SC) and held that assessee firm has deliberately failed to disclose the correct and true particulars of its income and thereby tried to postpone the taxability of the correct income
14. The AO thereby held that the assessee firm has filed inaccurate particulars of income and hence concealed the income. The penalty of Rs. 54,51,920/- was levied by the AO on the assessee firm u/s 271(1)(c) of the Act read with explanation 1 , vide penalty orders dated 28-03-2011
15. Aggrieved by the penalty orders dated 28-03-2011 passed u/s. 271(1)(c) of the Act, the assessee firm filed first appeal with the CIT(A)
16. The CIT(A) observed that the A.O. had totally relied upon the findings given in the assessment order in quantum proceedings while passing the penalty order u/s. 271(1)(c) of the Act and has not brought on record any material to justify that there were concealment of income or furnishing of inaccurate particulars of income by the assessee
17. The Quantum addition does not automatically lead to the concealment of income making it exigible to penalty u/s 271(1)(c) of the Act
18. The additions have been made due to difference in opinion and perception on the same issue
19. CIT(A) held that penalty cannot be levied on mere rejection of an explanation furnished by the assessee firm
20. The mere fact that the assessee firm has not filed appeal with the Tribunal against the orders of the CIT(A) in quantum proceedings will not render the provisions of section 271(1)(c) of the Act applicable to the case
21. Against the order of CIT(A) Revenue moved to the Tribunal and Honb. ITAT decided the issue in favour of the Assessee and dismissed the Appeal
The method of accounting consistently followed by the assessee firm has not found favour with the Revenue which in our considered view keeping in view the factual matrix as set out above does not call for penalty u/s 271(1)(c) of the Act as no particulars of income are concealed nor there is any furnishing of in-accurate particulars of income before the Revenue. The assessee firm has in an open and transparent manner disclosed all information connected with the earning of the said commission income. No penalty has been levied by the revenue for the assessment year 2005-06 and 2007-08 while the same method of accounting was consistently followed by the assessee firm. In fact for the assessment year 2007-08, the penalty proceedings were initiated by the Revenue on the similar ground but was later dropped by the AO vide orders dated 15-03-2012 which are placed in paper book page 1.
In our considered view, no penalty is leviable in the instant case keeping in view peculiar facts and circumstances of the case as set out above, as there is no deliberate attempt or positive act on the part of the assessee firm to conceal income or furnish in-accurate particulars of income. The bona-fide claim was made by the assessee firm based on the terms and condition of the agency agreement and the method of accounting was consistently followed based on the bona-fide belief that the commission income will become due to the assessee firm and right to receive will be vested in favour of the assessee firm only when the foreign principals have got their payments from Indian Buyers for products supplied by the foreign principals to the Indian Buyers and any deductions by the Indian Buyers in the payments due to the foreign principals will lead simultaneously deduction in the commission income of the assessee firm as per terms of agency agreement, But the said explanation did not found favour with the Revenue as in their view , the commission has already accrued to the assessee in terms of provisions of the Act and the same is exigible to tax . Thus, the assessee came out with an bona-fide explanation for substantiating the claim made by it in the return of income filed with the Revenue which was not accepted by the Revenue but it did not made the assessee firm liable for penalty u/s 271(1)(c) of the Act.
There is a difference of opinion between the assessee firm and A.O. and the claim of the assessee firm was not accepted by the A.O. Mere non-acceptance of the bona-fide claim of the tax-payer by the Revenue does not call for imposition of penalty within the ambit of provisions of Section 271(1)(c) of the Act , more-so the assessee firm came forward with a bona-fide explanation to substantiate its claim and hence the case of the assessee is not hit by explanation 1 to Section 271(1)(c) of the Act. We have observed that the CIT(A) has passed a well reasoned and detailed order and we do not find any infirmity in the orders of the CIT(A). Hence, in our considered view penalty of Rs. 54,51,920/- levied by the A.O. is not sustainable in law.
Cases Referred to