2024 (5) TMI 98 - AT - Income Tax

ITAT deletes penalty under section 271(1)(c) for bogus purchases supported by self-made vouchers following Supreme Court precedent

ITAT Chennai ruled in favor of the assessee, deleting penalty under section 271(1)(c). The assessee's purchases were supported by self-made vouchers, ... Penalty u/s. 271(1)(c) - bogus purchases or inflated purchases not supported by proper vouchers treated the same as concealed income - HELD THAT:- In the present case before us, the assessee is unable to prove a claim because the vouchers of purchases were self-made vouchers and this fact has been recorded by AO, As noted that once these purchases are supported by self-made vouchers and the same are treated as bogus as held by the AO, how the same is concealment of particulars of income leading to concealment of income, the decision of Hon’ble Supreme Court in the case of Suresh Chandra Mittal [2001 (6) TMI 63 - SC ORDER] squarely applies to the facts of the case. Hence, respectfully following the decision of Hon’ble Supreme Court in the case of Suresh Chandra Mittal, supra, we delete the penalty and allow the appeal of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether penalty under section 271(1)(c) for concealment of particulars of income can be sustained where the assessee disclosed additional income in a return filed in response to a notice under section 148 consequent to a survey under section 133A, the undisputed underlying purchases being supported by self-made (bogus) vouchers and not recorded in stock registers. 2. Whether the 'amount of tax on income sought to be evaded' under Explanation 4 to section 271(1)(c) can be computed and applied where the assessee's admitted additional income was returned in response to a reopened assessment (notice under section 148) rather than in the original return, and whether such disclosure can be treated as voluntary for penalty purposes. ISSUE-WISE DETAILED ANALYSIS Issue 1: Sustainment of penalty under section 271(1)(c) where additional income was disclosed after survey and supported underlying transactions are shown to be by self-made vouchers. Legal framework: Section 271(1)(c) penalises concealment of particulars of income or furnishing inaccurate particulars. Explanation 4 to section 271(1)(c) relates to the 'amount of tax on income sought to be evaded' and prescribes the basis for computing penalty where assessed income differs from returned income. Precedent Treatment: The Tribunal applied the principle from the Supreme Court decision in Suresh Chandra Mittal, where a disclosure made in a revised return after initiation of search/notice was held to be capable of being bonafide and the penalty was cancelled. The appellate authority (CIT(A)) had placed reliance on other authorities to treat disclosure made in response to a section 148 notice as non-voluntary and liable to penalty, but the Tribunal distinguished the matter on facts and followed the Supreme Court precedent. Interpretation and reasoning: The Tribunal noted the factual matrix: (a) original return filed showed no disclosure of inflated/bogus purchases; (b) survey under section 133A revealed bought-note purchases supported by self-made vouchers and not entered in stock registers; (c) on confrontation, a partner gave a sworn statement and the assessee filed a return in response to section 148 disclosing a quantified sum (20% of such purchases) as additional income. The Tribunal emphasised that the underlying purchases were found to be bogus (self-made vouchers) and that the disclosure was made consequent to survey. Relying on the Supreme Court principle that a post-notice declaration made to 'buy peace' or to avoid protracted litigation can constitute a bonafide explanation, the Tribunal held that in these circumstances the declaration could not be equated to culpable concealment warranting penalty. Ratio vs. Obiter: Ratio - Where undisputed factual findings establish that purchases were bogus and the taxpayer, after a survey, voluntarily disclosed additional income in a return filed in response to a reopening notice, such disclosure may amount to a bonafide explanation and negate culpable concealment under section 271(1)(c), thereby disentitling levy of penalty. Obiter - Observations on the particular manner in which stock entries were omitted and on ancillary factual inferences drawn from the partner's statement. Conclusions: Penalty under section 271(1)(c) cannot be sustained on these facts; the Tribunal deleted the penalty for the relevant assessment year. The Tribunal extended the same conclusion to the subsequent year on identical facts. Issue 2: Applicability of Explanation 4 for computing penalty where assessed income equals income returned in response to section 148 and whether that prevents a finding of bonafide disclosure. Legal framework: Explanation 4 to section 271(1)(c) prescribes a method for computing the amount of tax 'sought to be evaded' where there is a difference between assessed income and returned income; it is ordinarily invoked to quantify penalty where concealment is established. Precedent Treatment: The CIT(A) relied on provisions of Explanation 4 and on authorities construing it to compute penalty even where income was returned in response to section 148; however, the Tribunal expressly followed the Supreme Court authority (Suresh Chandra Mittal) which recognised that a post-notice disclosure may be bonafide and may exculpate the taxpayer from penalty despite later assessment adjustments. Interpretation and reasoning: The Tribunal observed that Explanation 4 addresses computation of the 'amount of tax sought to be evaded' but does not, by itself, convert every post-reopening disclosure into concealment. The critical question is voluntariness and culpability. Where the factual matrix demonstrates that the taxpayer's disclosure arose from a survey revealing bogus vouchers and the taxpayer offered an explanation (including a quantified admission) that can be considered bonafide in the circumstances, invoking Explanation 4 to compute penalty is impermissible because the foundational element - concealment of particulars of income - is not established. The Tribunal rejected the CIT(A)'s view that acceptance of returned income in the reassessment precludes treatment as voluntary disclosure; it held that the timing and circumstances (survey, confrontation, sworn statement) and the Supreme Court precedent permit cancellation of penalty notwithstanding the use of Explanation 4 by the AO/CIT(A). Ratio vs. Obiter: Ratio - Explanation 4 cannot be mechanically applied to sustain penalty where the essential element of culpable concealment is negatived by a bonafide post-survey disclosure; the existence of an assessed figure equal to returned income in reassessment does not, per se, preclude treatment of the disclosure as bonafide. Obiter - Comments on procedural timing of reassessment and implications for other fact patterns where concealment is otherwise proved. Conclusions: Explanation 4's computation does not salvage the penalty where the disclosure is held to be bonafide in light of the survey, the nature of supporting vouchers (self-made/bogus), and controlling precedent. Therefore, the penalty computed under Explanation 4 was deleted by the Tribunal. Cross-Reference The conclusions on both issues are interlinked: the Tribunal's acceptance of the post-survey disclosure as bonafide (Issue 1) is the operative basis for rejecting the AO/CIT(A)'s reliance on Explanation 4 to compute and sustain penalty (Issue 2); consequently, penalty was deleted for both contested years on identical facts.