TaxTMI 
TaxTMI 
2025 (7) TMI 1936
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....enalty levied on adhoc disallowance of salaries and wages amounting to Rs. 14,22,444/- & adhoc disallowance of administrative expenses amounting to Rs. 2,17,162/- made u/s 37(1) of the act on estimated basis. 2. On the facts and circumstances of the case and in law, the learned CIT (A) has erred in confirming the penalty leviedon suo-moto disallowance of interest of Rs. 33,94,396/- & Excess depreciation of Rs. 38,02,913/- in the return of income filed u/s 153A. 3. Before us, the Ld. Counsel for the assessee filed an additional ground on 04.06.2025, which is reproduced as under: 1) The Learned CIT(A) has erred in confirming the action of the Learned Assessing officer in levying penalty on the addition made in the assessment order, without appreciating the fact that these addition itself are not sustainable in the order passed u/s. 143(3) r.w.s 153A of the Income Tax Act, 1961. 3.1 We have heard both the parties on the issue of admissibility of the additional ground. We find that the issue-in-dispute raised being of purely legal in nature and goes to the root of the matter and not requiring investigation of the fresh facts, therefore, same was admitted for adj....
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.... assessee had made suo-motu made disallowance of the above expenses in the return of income filed in response to notice u/s 153A of the Act and therefore, while determining total income under the assessment under section 153A of the Act, the AO did not make any separate additions, but issued the penalty proceedings u/s 271(1)(c) of the Act for furnishing inaccurate particulars of the income in relation to said suo-motu disallowance also. 4.4 As no appeal was preferred by the assessee before the Ld. CIT(A) against the addition/disallowance made by the AO, the Assessing Officer issued show cause notice on 03.11.20222 as why the penalty u/s 271(1)(c) of the Act might not be levied for furnishing inaccurate particulars of the income. 4.5 With regard to the disallowance of "salary and wages expenses " amounting to Rs. 14,22,444/- and disallowance of "administrative expenses" amounting to Rs. 2, 17,162/- made u/s 37(1) of the Act, the assessee submitted that same was made on estimate basis and therefore do not satisfy the criteria laid down u/s 271(1)(c) of the Act. Regarding the disallowance of interest of Rs. 33,94,396/- and excess depreciation of Rs. 38,02,913/-, it was submitte....
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....that the disallowance of cash expenses towards salaries & wages have been calculated at 4% whereas the disallowance of administrative expenses has been calculated at 10%. Have these disallowances been purely made on estimate basis then the common percentage rate of disallowance would have been made by the AO on the two separate cash expenses instead of different disallowance rate. (iii) The assessee has disallowed interest expense of Rs. 33,94,396/- & excess depreciation of Rs. 38,02,913/- in ITR filed u/s 153A of the Act and had there been no search action, the assessee would not have offered this additional income for taxation. (iv) Further, during the course of search/post search proceedings as well as during the assessment proceedings, it was found that, the assessee had used said shell entities for rotation of funds/circuitous transactions in order to and creation of fictitious asset. On perusal of the ledger account extracted from the Tally data, it was found during search action that the assessee company had made payments to certain entities which are found to be shell entities. The conduct & affairs of these shell entities had established that these shell ....
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....ee to declare its true income in the return of income filed by it from year to year and if the assessee had concealed true particulars of income than the assessee is liable for penalty proceedings u/s 271 read with s. 274 of the Act." (ix) Further the Delhi High Court in the case of CIT Vs Zoom Communication Put. Ltd. vide ITA No. 07/2010 dated 24.05.2010 has held that :- "The Court cannot overlook the fact that only a small percentage of the Income Tax Returns are picked up for scrutiny. If the assessee makes a claim which is not only incorrect in law but is also wholly without any basis and the explanation furnished by him for making such a claim is not found to be bonafide, it would be difficult to say that he would still not be liable to penalty under Section 271(1)(c) of the Act. ITA No. 7/2010 Page 14 of 18 If we take the view that a claim which is wholly untenable in law and has absolutely no foundation on which it could be made, the assessee would not be liable to imposition of penalty, even if he was not acting bonafide while making a claim of this nature, that would give a license to unscrupulous assessee to make wholly untenable and unsustainable claims....
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....e unsustainable by the appellate authorities. Accordingly, the additional ground raised by the assessee is dismissed. 6. As far as regular ground No. 1 of the appeal in relation to the penalty levied in respect of salary and wages and administrative expenses is concerned, the assessee has challenged mainly on the ground that penalty levied is on the estimate basis. It is undisputed fact that the Assessing Officer has levied the penalty @ 4% out of the salary and wages expenses claimed to have incurred in cash mode. Similarly, disallowance out of administrative expenses has been made @ 10% out of expenses claimed to have been incurred in the cash mode. As far as levy of the penalty in respect of addition made on the estimate basis, the Ld. Counsel relied on the decision of the Tribunal in the case of Dr. Kaushal Goes v. Asst. CIT (2015) 45 CCH 0363 (Delhi-Trib.) wherein the Tribunal following the decision of the Co-ordinate Bench in the case of Smt. Surinder Kaur 31 SOT 23 (Lucknow) deleted the penalty observing as under: "9. Now, the sole question arises for determination in this case is, "as to whether penalty order passed by ACIT is without any jurisdiction, having be....
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....ces of the case. So, when the foundation of addition on unaccounted income of Rs.4,95,000/-, though not challenged by the assessee, is not sustainable in the eyes of law, the question of imposing penalty qua the said amount, does not arise. 13. In view of what has been discussed, we are of the considered view that the impugned order passed by Ld. CIT(A) confirming the penalty @ 300%, the amount of Rs. 4,95,000/- is not sustainable in the eyes of law, hence, hereby set aside and the appeal of the assessee is allowed." 6.1 In the instant case before us, the basis of making disallowance of 'salary and wages' and 'administrative expenses' has been mentioned by the AO in assessment order in para 10.2 to 10.5 of the assessment order. Relevant part of show cause notice reproduced in assessment order is extracted as under: "10.2. The assessee, through its various submissions, represented that 90% - 95% of the salary/ wages are related to the payments made to guards, which are all below the taxable limit. The assessee provided the copy of Salary register for the respective years containing the names of employees, branch details, employee code, month for ....
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....s and hence, a question arises as to how the assessee managed to make salary payments through cash in such locations. 10.4. The assessee has further submitted that the guards employed by the assessee are required to give certain amount to the assessee company as security deposits and such security deposits are recovered from them through the salary to be paid to such employees. Hence, the security deposits collectible from the guards are adjusted from the salary payable to them. Accordingly, the assessee has passed consolidated journal entries in the books by debiting Salary a/c and crediting Security Deposit a/ c. However, the assessee has neither given the employee wise details of security deposits and the months for which the salary has been adjusted nor produced any supporting documents in relation to the same. Thus, the assessee has not substantiated the salary expenses adjusted through security deposits with proper details and supporting documents. 10.5. It is also seen that the other entities of the assessee group i.e. M/s. Trig Security & Detective Services, M/s. Trig Integrated Facility Management, M/s. Trig Facility Services and M/s. Trig Detective Priva....
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.... is a lag of 3-4 months between receipt of income and expenses incurred such as salaries and wages, which constitutes 80-90% of total expenses. Salary wages has to be paid regularly on monthly basis while income is received after a gap of 3-4 months. Most of the time we have to avail working capital overdraft facility to pay the salary & wages etc. Some time bank dose not allow overdraft and last moment guards salary cheque get bounced. Against bouncing of cheques we have to pay cash to guards so they can perform duties without hurdle. 4. The administrative expenses exclusively and wholly incurred for business purpose only. As we are in service industries and we have branches in all over India, we have to pay cash to various officers reimbursement of expenses like business promotion, printing & Stationery, Courier charges, fuels etc on day to day basis for smooth running of business. We have already submitted documentary proof for the same. Considering the specific circumstances under which the expenses are incurred in cash, we request you not to do any disallowance towards cash expenses incurred in cash as these are reasonable & exclusively incurred for the busin....
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....e Ld. CIT(A) upheld the penalty observing as under: "8.3 I have gone through the submissions filed by the appellant and the relevant records. It is an established fact and various decisions of the Hon'ble Apex court and other courts have held that suo-moto disclosure in the return after search action does not absolve the appellant of the penalty provisions. 8.4 The appellant has relied upon the decision of Hon'ble Chandigarh Tribunal in the case of DCIT Central Circle-1, Chandigarh v Kulwant Singh wherein it was held that penalty should not be levied on suo-moto income offered in the return u/s 153A. As per the appellant case of the Apex court decision in Mak Data P Ltd has been discussed and differentiated. 8.5 It is however noted that facts in that case were different. The relevant paras of the order are reproduced as under: "Applying the similar proposition, even when the Assessing officer is precluded from making any addition in the absence of any incriminating material found during the search action in the assessment proceedings carried out u/s 153A of the Act in which the original assessment proceedings stood completed and not abate....
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....e tangible assets/ documents must have been found which would reflect concealed income of the assessee and which have become basis for making addition of concealed income. It is an admitted position that there has not been any seizure of tangible assets/ documents in the search which could be said to be belonging to the assessee. Therefore, it cannot be said that assessee has been found to be the owner of tangible assets and that such tangible assets have been acquired by her by utilizing her undisclosed income earned before the date of search, and also there is no claim by the assessee that she has acquired any such asset out of income not disclosed before the Department. 21. We, therefore, uphold the order of learned CIT(A) in cancelling the penalty which had been levied by the Assessing Officer on the basis of an apparently invalid assessment order and by invoking the provisions of Explanation 5 which, on the face of it, are not applicable, as no tangible asset belonging to assessee has been seized." 7.2 We have heard rival submissions of the parties and perused the relevant material on record. The Assessing Officer has invoked Explanation 5A below the section 271(1)....
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.... be found to be a owner of tangible asset acquired out of the undisclosed income. In the instant case before us is also the issue in dispute is whether the assessee is found to be owner of the tangible assets and whether such tangible assets have been acquired by the assessee using the relevant undisclosed income before the date of the search. The assessee in the return of income filed in response to notice under section 153A of the Act made variation in total income as compared to the original return of income filed. But detail of variation has not been mentioned by the AO in impugned assessment order. The AO has simply stated that the assessee has withdrawn the expenses on interest and depreciation which were claimed to have been incurred through shell entities, but nowhere brought on record as how said withdrawal of expenses in the return filed u/s 153A was as a consequence to search action. Under the Explanation 5A, the Assessing Officer has to establish that the suo-motu disallowance made by the assessee for any money, bullion, jewellery or other valuable article or thing or income was based on the books of account or the documents found during the course of search and unless ....
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.... been adjudicated by the Ld. CIT(A) through a combined order taking assessment year 2018-19 as lead. Accordingly, we also take up the assessment year 2018-19 as a lead year. The grounds raised by the assessee are reproduced as under: 1. On the facts and circumstances of the case and in law, the learned CIT (A) has erred in confirming the penalty levied on adhoc disallowance of salaries and wages amounting to Rs.10,85,164/- & adhoc disallowance of administrative expenses amounting to Rs. 1,35,137/- made u/s 37(1) of the act on estimated basis. 2. On the facts and circumstances of the case and in law, the learned CIT (A) has erred in confirming the penalty leviedon suo-moto disallowance of interest of Rs. 44,65,742/- & Excess depreciation of Rs.97,75,277/- in the return of income filed u/s 153A. 9.1 While completing the assessment u/s 153A of the Act, the Assessing Officer made addition on three items, firstly, disallowance on estimate basis in respect of cash expense incurred on salary, wages and administrative expenses, secondly, disallowance u/s 40A(ia) for non-deduction of tax at source amounting to Rs.19,050/-, thirdly, disallowance of interest expenses and ....
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....d reliance on various judicial pronouncements in support of its claim. However, the facts of the instant case are different. It is unbelievable that assessee company which is engaged in providing uniformed guarding services to corporate / government/ multinational all over India for many years is unaware both about the industry norms as well as the provisions of income tax with respect to TDS deductions. (iv) The assessee has disallowed interest expense of Rs.44,65,742/- & excess depreciation of Rs.97,75,277/- in ITR filed u/s 153A of the Act.and had there been no search action, the assessee would not have offered this additional income for taxation, (v) Further, during the course of search/post search proceedings as well as during the assessment proceedings, it was found that, the assessee had used said shell entities for rotation of funds/circuitous transactions in order to and creation of fictitious asset. On perusal of the ledger account extracted from the Tally data, it was found during search action that the assessee company had made payments to certain entities which are found to be shell entities. The conduct & affairs of these shell entities had establish....
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.... 1. the amount of income in respect of which the assessee offers an explanation and the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, is satisfied that the explanation is bona fide and the assessee has disclosed all the material facts to substantiate the explanation offered; 2. the amount of under-reported income determined on the basis of an estimate, if the accounts are correct and complete to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or the Commissioner or the Principal Commissioner, as the case may be, but the method employed is such that the income cannot properly be deduced therefrom; 3. the amount of under-reported income determined on the basis of an estimate, if the assessee has, on his own, estimated a lower amount of addition or disallowance on the same issue, has included such amount in the computation of his income and has disclosed all the facts material to the addition or disallowance; 4. the amount of under-reported income represented by any addition made in conformity with the arm's length price determined by the Transfer Pr....
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....e action of appellant is clearly deliberate suppression and under reporting of income. Based on above discussion levy of penalty is upheld on this ground. Accordingly, this ground of appeal is dismissed." 9.3 Regarding the penalty in respect of interest of Rs.44,65,742/- and excess depreciation of Rs.97,75,277/-, The Ld. CIT(A) relied on the decision of the Hon'ble Supreme Court in the case of Mak Data Pvt. Ltd. v. CIT (supra) and upheld the penalty levied for under reporting of the income observing as under: "9.2 Before me, the appellant has submitted that the additional income was offered in the return of income out of abundant precaution and to avoid litigation. It has further been submitted that no penalty may be levied as the declaration of additional income has been done suo-moto. As noted by the AO, during search/post search proceedings and assessment proceedings, it was found that the appellant had used shell entities for rotation of funds/ circuitous transactions in order to and creation of fictitious asset. On perusal of the ledger account extracted from the Tally data found during search action, it was found that appellant company had made payments to var....
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....come was not disclosed in original return, it was a clear case of concealment of income attracting penalty under section 271(1)(c); in such a case it was unnecessary to invoke Explanation 5 to section 271(1)(c) 9.8 Hon'ble Calcutta High Court in CIT Vs Prasanna Dugar [2015] 59 taxmann.com 99 (Calcutta), while deciding matter related to section 271(1)(c) Expl 5A held that even where subsequent to search, assessee voluntarily disclosed a sum and offered said sum to tax, since said amount was not disclosed in original return, penalty levied under section 271(1)(c) was justified. Hon'ble Supreme Court has upheld the decision of Hon'ble High Court in the above case. 9.9 Although the above judgements are in the context of 271(1)(c), the same are applicable in case of penalty u/s 270 A as the both the penalty provisions are analogous. The AO had clearly initiated the penalty u/s 270A for 'under reporting of income' and the final penalty order was also passed for 'under reporting of income and as such the conditions of Section 270A of the Act were fulfilled. Thus respectfully following the judgments of various courts the penalty levied by ....
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....ned on the basis of an estimate, if the assessee has, on his own, estimated a lower amount of addition or disallowance on the same issue, has included such amount in the computation of his income and has disclosed all the facts material to the addition or disallowance; (d) the amount of under-reported income represented by any addition made in conformity with the arm's length price determined by the Transfer Pricing Officer, where the assessee had maintained information and documents as prescribed under section 92D, declared the international transaction under Chapter X, and, disclosed all the material facts relating to the transaction; and (e) the amount of undisclosed income referred to in section 271AAB. 10.2 The Ld. Counsel for the assessee referred to the clause (a) of sub-section 6 and submitted that assessee has duly offered explanation in respect of interest and excess depreciation and suo-motu offered income in the return of income filed in response to section 153A of the Act therefore, according to the assessee, the explanation of the assessee is bonafide and the assessee has disclosed all the material fact to substantiate the explanation offered,....
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....Act. Accordingly, the penalty levied by the Assessing Officer for under reporting of the income u/s 270A of the Act is hereby deleted. 10.4 The Ld. CIT(A) in assessment years 2018-19 and 2019-2020 has followed his finding in assessment year 2017-18. Being identical facts and circumstances, following our finding in AY 2017- 18, the penalty levied by the Assessing Officer u/s 270A of the Act in assessment years 2017-18 and 2019-2020 is also hereby cancelled and relevant grounds are accordingly allowed. 11. Now, we take up the appeal of the assessee for assessment year 2020-21. The grounds raised by the assessee are reproduced as under: 1. On the facts and circumstances of the case and in law, the learned CIT (A) has erred in confirming the initiation of penalty wherein the Assessing Officer has not specified the provision of Section 271AAB of the Income tax Act under which the penalty is levied. 2. On the facts and circumstances of the case and in law, the learned CIT (A) has erred in confirming the penalty levied on adhoc disallowance of salaries and wages amounting to Rs.76,70,900/- &adhoc disallowance of administrative expenses amounting to Rs. 3,89,240/- m....
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....s of quantifying the penalty, the Assessing officer has to examine the satisfaction of ancillary conditions as specified under clause (a), clause (b) or clause (c) to sub-section (1) to Section 271AAB. Merely because the quantum of penalty varies from 10% to 30% subject to compliances with the ancillary conditions, it cannot be said that where the AO has initiated the penalty under section 271AAB, there is any ambiguity in the charge or there is any lack of application of mind on part of the Assessing officer." 11.2 We have heard rival submissions of the parties and perused the relevant materials on record. The contention of the assessee is that penalty u/s 271AAB is levied @ 10%, 20% and 30% depending on the demonstrations of specified conditions applicable over the facts of the case. The Ld. Counsel for the assessee was of the view that the Assessing Officer was required to specify relevant rate under which penalty was leviable and due to non-specification of the same, relying on the decision of Hon'ble Karnataka High Court in the case of Manjunath Cotton & Ginning Factory(supra), though which is on the section 271(1)(c) of the Act, but being pari-materia, is applicable ov....
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....re not filed. Thus, due to lack to data and any clarification from appellant's end, the AO computed income on the total receipts on estimate basis as no relevant data or substantive records were produced by the appellant before him. The appellant has not gone into further appeal against the quantum order of the AO. The appellant has not provided any details even before me except filing a note on the matter. 8.5 The AO in his order has observed that appellant had incurred expenses under the heads 'salary & wages' & 'administrative expenses' in cash mode. The AO has also noted that complete documentary evidences and explanations with regard to such cash expenses was not provided by the appellant. Accordingly, the AO disallowed expenses to the extent which was not verifiable. During the penalty proceedings before the AO, the appellant submitted that it had not gone into appeal against the quantum order and that penalty cannot be levied on addition made on estimate basis. 8.6 Before me, the only contention of the appellant in his submissions, on this ground, is that penalty cannot be levied on additions made on estimate basis. 8.7 Consider....
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....previous balance sheet filed and the re- written one filed recently. These variations existed even in cases where the earlier financials filed had been audited. Thus, it was observed that the books of accounts, financials of various entities as well as the subsequent return of income filed, were not reliable and serious doubts existed regarding the correctness of the books of accounts of the appellant group. No details were submitted before the AO to explain the discrepancies. Again, during the course of special audit in the group case complete details were not filed. Thus, due to lack to data and any clarification from appellant's end, the AO computed income on the total receipts on estimate basis as no relevant data or substantive records were produced by the appellant before him. The AO finally noted that during the search proceedings, post search proceedings and during assessment proceedings assessee could not explain the cash transactions and other deficiencies. Since the details furnished were incomplete and not verifiable addition was made. 6.4 In the context of section 271AAB of the Act, undisclosed income would be represented by money, bullion, jewellery or other va....
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....planation to section 271AAB defining the undisclosed income is reproduced as under: [Penalty where search has been initiated. ^13 271AAB. (1) .................... (a) .............. (b) ........... (c) ............ ^18 [(1A) ........................ (2) .............. (3) ............ Explanation .- For the purposes of this section,- (a) "specified date" means the due date of furnishing of return of income under sub-section (1) of section 139 or the date on which the period specified in the notice issued ^22[under section 148 or under section 153A, as the case may be,] for furnishing of return of income expires, as the case may be; (b) "specified previous year" means the previous year- (i) which has ended before the date of search, but the date of furnishing the return of income under sub-section (1) of section 139 for such year has not expired before the date of search and the assessee has not furnished the return of income for the previous year before the date of search; or (ii) in which search was conducted; (c) "undisclosed income" means- (i) an....
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....said expenses should be found to be false and secondly, said expenses should be found in the course of the search action. We find that both these conditions are not satisfied in the instant case. The Assessing Officer has nowhere held the said cash expenditure is either bogus or false but he made disallowance merely for the lack of verification of the vouchers of the expenses made in cash. The second condition is that the fact of expenses being false should emerge in search action. But nothing has been brought on record that non availability of vouchers was observed in search action, rather, it appears that fact has been recorded in assessment proceeding. Unless, the conditions specified for disallowance to be in the nature of the undisclosed income specified in section 271AAB are satisfied, no penalty could be levied in respect of disallowance merely for the reason that Assessing Officer has made addition in the assessment order. The ground No. 2 of the appeal of the assessee is accordingly allowed. 13. The ground No. 3 of the appeal of the assessee relates to levy of the penalty in respect of interest and depreciation expenses disallowed by the Assessing Officer. The relevant ....