THE issue before the Bench is - Whether when serious
irregularities are pointed out in Special Audit Report and the fact that the
assessee was also given opportunities to inspect records seized during Search
but it did not avail it, penalty is inescapable consequence in such a case. And
the verdict goes in favour of Revenue.
The assessee, a contractor,
undertaking projects of Indian Railways on turnkey basis, filed its return of
income declaring a total income of Rs. 88,91,700/-. On the basis of the
materials gathered in the course of a search carried out in the assessee's
premises 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 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. 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 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.
On appeal, the Tribunal 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. 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 did 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. On appeal, the CIT(A) cancelled the penalty order on the ground that the
assessing officer had 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 was
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 did not follow automatically that
the assessee concealed its income.
On appeal, the HC held
that,
++
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 Data P. Ltd. vs. CIT 2013-TIOL-58-SC-IT 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 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 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;
++
the 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 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;
++
the 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. 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 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 rejected the
same;
++ we
are bound by ratio of the decision. 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 the assessment order that
the assessee was permitted to inspect the seized documents and was given
photocopies of the desired documents. 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. 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 revenue.
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