2013 (10) TMI 870 - AT - Income Tax

Penalty cancelled for estimated commission disallowance under Income-tax Act

The Tribunal canceled the penalty imposed by the Assessing Officer under Section 271(1)(c) of the Income-tax Act, 1961, as the disallowance of commission ... Penalty u/s 271(1)(c) of the Income Tax Act for disallowance of entire commission payments made in the quantum proceedings by the Assessing Officer – Held that:- Disallowance out of commission payments sustained by the Tribunal is merely by estimation of the excess amount of expenditure which the assessee might have been claimed by the assessee, and further, since such disallowance has been made on the basis of the material furnished by the assessee itself and already available on record, this is not a fit case for imposition of the penalty under S.271(1)(c) of the Act - Further, unless the claim of the assessee was proved to be bogus or that any amount was received back by the assessee, the disallowance of the expenditure by itself, cannot be a reason for levy of penalty. The addition is only on account of difference in estimation of expenditure liable for disallowance made by the Assessing Officer and the Tribunal, and the claim of the assessee itself was not found to be bogus. The Assessing Officer could not prove that there was willful or gross negligence on the part of the assessee, resulting thereby either in concealment of income or furnishing inaccurate particulars of income. As per Allahabad High Court in the case of CIT V/s. K.L. Mangal Sain[1974 (5) TMI 6 - ALLAHABAD High Court], when the Assessing Officer is not able to prove that the assessee was guilty of fraud or gross or willful negligence, penalty cannot be sustained - Considering totality of facts and circumstances of the case on hand, this is not a fit case for levy of penalty – Decided in favor of Assessee. Issues Involved:1. Disallowance of commission payments.2. Levy of penalty under Section 271(1)(c) of the Income-tax Act, 1961.3. Estimation of expenditure and its impact on penalty.4. Full disclosure and substantiation of commission payments by the assessee.5. Procedural aspects of penalty imposition.Detailed Analysis:1. Disallowance of Commission Payments:The assessee, a company, filed its return of income for the assessment year 2005-06, which was revised later. The Assessing Officer disallowed commission payments aggregating to Rs.2,97,24,985, leading to a higher assessed income. On appeal, the CIT(A) confirmed the disallowance based on previous appellate orders. The Tribunal later provided partial relief by sustaining only 15% of the disallowance and directed a recomputation of the income.2. Levy of Penalty under Section 271(1)(c):The Assessing Officer initiated penalty proceedings under Section 271(1)(c) for concealment of income or furnishing inaccurate particulars. The assessee contended that it had fully disclosed all material facts and provided necessary details, arguing that the disallowance was merely on an estimation basis and did not warrant a penalty. The Assessing Officer, however, imposed a penalty of Rs.1,08,77,115, concluding that the assessee failed to substantiate the genuineness of the commission payments.3. Estimation of Expenditure and Its Impact on Penalty:The CIT(A) upheld the penalty but limited it to the disallowance sustained by the Tribunal (15%). The assessee argued that the disallowance was based on estimation and that such estimated additions should not lead to a penalty. The Tribunal noted that the disallowance was indeed an estimation of excessive payment and that the addition was not conclusive evidence of concealment or furnishing inaccurate particulars.4. Full Disclosure and Substantiation of Commission Payments by the Assessee:The assessee provided detailed explanations, affidavits, and vouchers to substantiate the commission payments, which were a common trade practice in the transport business. The Tribunal acknowledged that the assessee had made a full disclosure and that the disallowance was due to the non-verifiable nature of the expenditure, not due to any concealment or inaccurate particulars.5. Procedural Aspects of Penalty Imposition:The Tribunal emphasized that penalty proceedings under Section 271(1)(c) are penal in nature and require independent examination of whether there was concealment of income or furnishing inaccurate particulars. The Tribunal found that the lower authorities did not independently examine the matter and relied solely on findings from the quantum proceedings. Consequently, the penalty could not be sustained merely based on estimated disallowances.Conclusion:The Tribunal concluded that the disallowance was based on estimation and did not prove concealment or furnishing inaccurate particulars. Hence, it was not a fit case for penalty under Section 271(1)(c). The Tribunal canceled the entire penalty imposed by the Assessing Officer, allowing the assessee's appeal and dismissing the Revenue's appeal. The order was pronounced on 27.09.2013.