2003 (10) TMI 269 - AT - Income Tax

Revenue's Appeal Dismissed, Penalty Cancelled under IT Act Section 271(1)(c)

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to cancel the penalty under Section 271(1)(c) of the IT Act due to the AO's ... - Issues Involved:1. Legality of the penalty imposed under Section 271(1)(c) of the IT Act.2. Validity of the addition on account of unexplained investment in stock.3. Validity of the disallowance of commission paid to directors and the manager.Detailed Analysis:1. Legality of the Penalty Imposed under Section 271(1)(c) of the IT Act:The Revenue challenged the CIT(A)'s decision to cancel the penalty of Rs. 3,40,832 imposed by the AO under Section 271(1)(c). The penalty was linked to two main items: an addition of Rs. 2,55,273 for unexplained investment in stock and a disallowance of Rs. 1,99,171 for commission paid to directors and the manager. Both additions were confirmed by the Tribunal in the quantum proceedings.The CIT(A) had erroneously observed that the books of accounts had not been rejected, whereas the AO had applied Section 145(2) and rejected the books. The Tribunal noted that the CIT(A)'s reasoning was flawed as the AO had indeed rejected the books of accounts.The Tribunal emphasized that the penalty under Section 271(1)(c) required the AO to record satisfaction during the assessment proceedings. The Tribunal found no such satisfaction recorded by the AO in the assessment order, leading to the conclusion that the penalty could not be sustained. This was in line with the judgment of the Hon'ble Delhi High Court in CIT vs. Ram Commercial Enterprises Ltd., which stated that the assessing authority must form and record its satisfaction before initiating penalty proceedings.2. Validity of the Addition on Account of Unexplained Investment in Stock:During a survey under Section 133A, a shortage of stock amounting to Rs. 1,09,492 was initially noticed. However, the AO later found an excess stock of Rs. 2,55,273. The assessee explained that certain goods received before the survey were included in the inventory but not entered in the purchase register. The AO allowed partial credit but found the explanation regarding silver ornaments purchased from M/s MK Gems to be false, leading to the addition under Section 69.The CIT(A) and the Tribunal confirmed the addition, noting that the assessee failed to maintain quantitative stock records and could not satisfactorily explain the excess stock. The Tribunal observed that the method adopted by the AO to prepare the trading account as of the survey date was correct and justified the addition.3. Validity of the Disallowance of Commission Paid to Directors and the Manager:The AO disallowed the commission paid to directors and the manager, amounting to Rs. 1,99,171, as the assessee failed to provide evidence of additional services rendered by these individuals. The AO noted discrepancies in the documents provided, such as telephone numbers on a purported agreement that did not exist at the time of its supposed execution.The CIT(A) and the Tribunal upheld the disallowance, stating that the mere passing of a resolution did not justify the payment of commission without evidence of services rendered. The Tribunal found the claim to be for non-business consideration and supported the disallowance based on factual findings.Conclusion:The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to cancel the penalty on the legal ground of non-recording of satisfaction by the AO. The Tribunal confirmed the additions and disallowances made by the AO and upheld by the CIT(A) in the quantum proceedings. The decision emphasized the necessity for the AO to record satisfaction for penalty proceedings under Section 271(1)(c) and found the assessee's explanations and evidence inadequate to overturn the additions and disallowances.