The ITAT held it was premature to levy penalty at this stage as CIT(A)'s second round order is pending.

Case Name:

M/s. Kottakkal Wood Complex, Kottakkal, Malappuram vs. The Income Tax Officer, Ward-1, Tirur (ITAT Cochin)

Key Takeaways:

The Income Tax Appellate Tribunal (ITAT) remitted the penalty orders under Section 271(1)(c) of the Income Tax Act for the assessment years 2002-03 to 2008-09 to the Assessing Officer for fresh consideration.

The ITAT found it premature to levy penalties at this stage, as the quantum additions were still under appeal before the Commissioner of Income Tax (Appeals) [CIT(A)].

The ITAT directed the Assessing Officer to pass fresh penalty orders after the CIT(A) adjudicates the appeals on the quantum additions, considering the final outcome.

The ITAT dismissed the assessee’s stay petitions as infructuous, given the remittance of the penalty orders.

Issue:

The central legal issue in this case is whether the penalty imposed under Section 271(1)(c) of the Income Tax Act for concealment of income is justified for the assessment years 2002-03 to 2008-09.

Facts:

The High Court remitted the proceedings to the AO to pass fresh orders, taking into account the order dated 08.08.2007 passed by the Intelligence Officer, Squad No. II, Tirur, under the KVAT Act, which reduced the excess stock detected.

A search operation was conducted at the residential premises of Shri Adattil Mohammed, Managing Partner, and one of his group concerns, M/s. Classy the Antique Designed Furniture, on 12.09.2007.

Documents relating to the assessee were seized, and a survey under Section 133A was conducted at the assessee’s premises.

The Assessing Officer (AO) noticed that unbranded items were sold at double the rate code marked on the tags attached to such furniture.

Statements recorded from sales personnel and Shri Jabir, son of Shri Adattil Mohammed, revealed that Shri Jabir fixed the prices and discounts were given on the sale amount.

The AO made additions to the income on account of suppressed sales/understated sales for the assessment years 2002-03 to 2008-09 and undisclosed stock for the assessment year 2007-08.

The assessments were completed under Section 143(3) read with Section 153C on 09.12.2009.

The AO initiated the penalty proceedings under section 271(1)(c) as a result of assessment order dated 09.12.2009.

The assessee filed appeals against the assessment orders dated 9.12.2009, which were ultimately remitted to the AO by the High Court of Kerala to pass fresh orders after considering the KVAT Order dated 08.08.2007.

The AO passed a consequential order on 02.01.2017, modifying the total income for the relevant assessment years.

The consequential order dated 02.01.2017 is subjudice before the Commissioner of Income Tax (Appeals), Kozhikode.

In the penalty proceedings under section 271(1)(c), the AO held that the assessee did not furnish a reasonable explanation for the failure to disclose the income or the furnishing of inaccurate particulars in the return and imposed penalty u/s, 271(1)(c) for all the years.

The CIT(A) confirmed the AO’s action in imposing penalty under Section 271(1)(c) for all the assessment years, agreeing with the findings of the CIT(A) in the quantum addition appeals and the High Court’s affirmation of the assessments as legal. However, the CIT(A) directed the AO to rework the amount of penalty based on the modified total income as per the AO’s order dated 02.01.2017, giving effect to the High Court’s order.

Assesee appealed against CIT(A) order confirming AO's action in penalty.

Arguments:

The assessee argued that the penalty proceedings were premature, as the quantum additions were still under appeal before the CIT(A).

The Revenue contended that the statements and other evidence supported the concealment of income.

Judgment:

The ITAT remitted the appeals to the AO for passing fresh penalty orders after the adjudication of the appeals by the CIT(A) in the second round and considering the final outcome of the same, as it was premature to levy penalty at this stage.

FAQs:

Q1: What was the issue in this case?

A1: The central issue was the imposition of penalties under Section 271(1)(c) of the Income Tax Act for concealment of income, based on the Assessing Officer’s additions on account of suppressed sales and undisclosed stock.

Q2: What were the key facts?

A2: The case arose from a search operation and survey conducted on the assessee’s premises, where statements from employees revealed a modus operandi of understating sales prices. The Assessing Officer made additions for suppressed sales and undisclosed stock, which were upheld by the appellate authorities, subject to quantification adjustments based on a Kerala High Court order.

Q3: What were the arguments?

A3: The assessee argued that the penalty proceedings were premature, as the quantum additions were still under appeal before the CIT(A). The Revenue contended that the statements and other evidence supported the concealment of income.

Q4: What legal precedents were cited?

A4: The Kerala High Court’s judgment in ITA Nos. 27, 28, 29, 35, 36, 42 & 53 of 2013 dated 04.07.2016 was a key precedent, where the court remitted the matter to the Assessing Officer for quantification adjustments based on the KVAT order.

Q5: What was the judgment?

A5: The ITAT remitted the penalty orders to the Assessing Officer for fresh consideration after the CIT(A) adjudicates the appeals on the quantum additions, considering the final outcome. The stay petitions were dismissed as infructuous.

These seven appeals filed by the assessee are directed against the consolidated order of the CIT(A) dated 30/09/2019 arising out of the penalty order u/s. 271(1)(c) of the I.T. Act for the assessment years 2002-03 to 2008-09. The assessee has also filed Stay Petitions in all these assessment years in S.P. Nos. 68 to 74/Coch/2019 seeking stay of recovery of outstanding penalty levied in these cases.

2. The assessee has raised common grounds of appeal:

1. The impugned order to the extent objected to hereunder is absolutely illegal, arbitrary and unauthorized.

2. Penalty proceeding was initiated as a result of the Assessment Order dated 09.12.2009. Statutory appeals were filed against the Assessment Order dated 09.12.2009 before the appellate authorities under the respective provisions. On appeal to the Hon'ble High Court of Kerala under Sec. 260A of the Act, the Hon'ble Court remitted the matters to the Assessing Officer to pass fresh orders after taking into consideration the KVAT Order dated 08.08.2007. The Assessing Officer passed a consequential order to give effect to the order of the High Court. The consequential order dated 02.01.2017 is subjudice before the Commissioner of Income Tax (Appeals), Kozhikode.

3. In view of that, it is respectfully prayed that this Hon'ble Tribunal be pleased to set aside the order of the First appellate authority. If order prayed for is not granted, the appellant would be put to irreparable loss and hardship, it is therefore, accordingly prayed.

3. The facts of the case are that a search operation was conducted in the residential premises of Shri Adattil Mohammed, Managing Partner and one of his group concerns, namely, M/s. Classy the Antique Designed Furniture on 12.09.2007 and documents relating to the Appellant were seized. Survey u/s. 133A was also conducted in the appellant's premises. Notice u/s. 153A r.w.s. 153C of the Income Tax Act was issued to the assessee on 2.12.2008 and the assessment was completed u/s. 143(3) r.w.s. 153C on 09.12.2009 making addition on account of suppressed sales/understated sales as under. (For asst. year 2007-08, the AO made addition on account of undisclosed stock also).

3.1 During the course of survey action u/s. 133A, the Assessing Officer noticed that the unbranded items were sold at double the rate code marked on the tags attached to such furniture. Statements recorded from sales personnel revealed that it was Shri Jabir, son of Shri Adattil Mohammed attending to business on the premises of M/s. Classy the Antique Designed Furniture situated at Kottakkal who fixed the prices. This was concurrently affirmed in the statements recorded from Shri Jabir on the same date at the premises where he was attending to business. It was also stated that discounts @ 25% for mahagony/redwood and @ 15% for teak/veeti would be given on such amount arrived from the price tags.

3.2 The assessing officer arrived at the figures of suppressed sales after giving deduction for branded sales/sales to sister concerns from sales disclosed in the P&L A/c. Average discount @ 20% was also given thereon. The entire figure of suppressed sale was added to the income on the grounds that the assessee had not tampered with the total number of unbranded items sold and there was no case for disturbing the expenses already disclosed.

3.3 The assessee during the penalty proceedings submitted that they had disclosed all particulars of their income and all the records and documents in support of the return of income were submitted before the Deputy Commissioner in the course of assessment and the Deputy Commissioner was satisfied as to the bonafides of the documents and no allegations were made in the books of accounts or in the stock held. The Deputy Commissioner made addition in the assessments not on the basis of concealment of income but on the basis of opinion formed that there is understatement of sales by showing the sale value at a lesser price than the sale value realised from the customer.

3.4 However, the arguments of the assessee were rejected by the AO in penalty procedings stating that nowhere it has been recorded that the assessing authority was satisfied with the bonafides of the books of accounts and documents produced. Similarly, nowhere it was recorded that no allegations were raised in the books of accounts. The addition on account of suppressed sales was made by the assessing authority after analysing the modus operandi of the assessee, namely the facts and the manner in which Shri Jabir son of the Managing partner, who was then aged 22 years, fixed the price of the unbranded items sold in the assessee's premises. In the cause of natural justice, the AO has given a deduction on account of sales recorded of branded items while arriving at the figure of suppressed sales. The statements of Shri Jabir and the salesman with reference to the price tags of unbranded items reveal the modus operandi. Therefore the Assessing Officer rejected the argument of the assessee that assessee's claim that the Deputy Commissioner formed opinion that there is under statement of sales without any evidence is incorrect. According to the Assessing Officer, records revealed that Shri Jabir is the son of the Managing partner, who was attending to affairs of a sister concern M/s. Classy the Antique Designed Furniture, wherein he is a partner and is situated in the same locality at Kottakkal.

3.5 The Assessing Officer also mentioned that the appellate authority confirmed the addition made by the AO on account of suppressed sales by holding that the book results reveal erratic trend of turnover and gross profit disclosed by the appellant which shows wide variation from 5.9% to 29.95% which was totally unreasonable in the line of business. The conclusions have been reinforced by the fact ihat Commercial Tax Department made detection of unaccounted stock in the assesses's premises on 17.08.2006 and the assessee had admitted to the possession of this excess stock to the said department and it has been treated as unaccounted investment in the business by the AO for the asst. year 2007-08 and confirmed in appeal. The AO held that the assessee did not furnish a reasonable explanation for the failure to disclose the income or the furnishing of inaccurate particulars in the return. Thereafter, penalty u/s, 271(1)(c) was imposed for all these years as under.

4. On appeal, the CIT(A) observed that the main issue is penalty imposed by the AO on account of addition made for suppressed sales and undisclosed stock in all these years. The assessment orders passed by the AO on these issues were confirmed by the Appellate Authority against which the assessee filed appeals before the Tribunal. The CIT(A) observed that the appeals filed by the assessee were dismissed by the Tribunal and the assessee filed further appeals in the High Court. The High Court of Kerala while dealing with the matter pronounced its judgment in ITA Nos. 27, 28, 29, 35, 36, 42 & 53 of 2013 on 4th July, 2016 wherein the Court took note of the contention raised by the assessee namely that the entire assessments were based on the statement of Shri V.A. Ahammed, a salesman of the assessee, recorded u/s. 133A of the Act and that in the absence of any corroborative evidence, the assessments were illegal. The Court also took note of the argument of Revenue that statement u/s. 133A of the Act has its evidentiary value so long as assessee has not proved that the contents of the statement were incorrect, the assessment made relying on the statement cannot be interfered with. The High Court also noted the fact that penalties were imposed u/s. 67 of the KVAT Act on the allegations of suppression of stock. The High Court pronounced its judgment as under:

“4. We heard the learned counsel for the appellant and the learned Senior Standing Counsel for the Revenue.

5. The contention raised by the learned counsel for the appellant is mainly that the entire assessments are based on the statement of Sri. V.A. Ahammed, a Salesman of the appellant, recorded under Section 133A of the Act, and that in the absence of any corroborative evidence, the assessments are illegal. In support of this contention, the learned counsel has placed reliance on the judgments of this Court and the Madras High Court in Paul Mathews and Sons v. Commissioner of Income Tax (263 ITR 101) and Commissioner of Income Tax v. S. Khader Khan Son (2008)_ 300 ITR 157 (Mad) respectively and the judgment of the Apex Court in Commissioner of Income Tax v. S. Khader Khan Son (2013) 352 ITR 480 (SC) where the judgment of the Madras High Court was confirmed. On the other hand, the learned senior Counsel appearing for the Revenue contended that the statement under Section 133A has its evidentiary value, and according to him, so long as the assesses has not proved that the contents of the statement are incorrect, the assessment made relying on the statement cannot be interfered with. The learned counsel also invited our attention to the assessment order, where in addition to the statement under Section 133A, reliance has been placed on the proceedings for imposition of penalty under Section 67 of the KVAT Act on the allegation of suppression of stock. He also invited our attention to the assessment order where reliance has been placed on letter dated 18.09.2007 issued by Sri. V. Ahammed, a salesman of the appellant. Therefore, according to him, the principle laid down in the judgments of this Court and Madras High Court cannot be applied to the facts of this case. In fact, the learned counsel invited our attention to the judgment of the Bombay High Court in Dr. Dinesh Jain v. ITO (Bom) (2014) 364 ITR 210 where the Bombay High Court has distinguished the judgment in S. Khader Khan Son (supra).

6. We have considered the submissions made. It is a fact that the statement under Section 133A of Sri. V. Ahammed, the salesman of the appellant, was recorded during the survey conducted. It is also true that an assessment made entirely relying on such a statement cannot be sustained. Law in this behalf has been clarified by this Court in Paul Mathews and Sons v. Commissioner of Income Tax (263 ITR 101) wherein this Court has held thus:

"Section 133A(3)(iii) enables the authority to record the statement of any person which may be useful for, or relevant to, any proceeding under the Act. Section 133A, however, enables the income-tax authority only to record any statement of any person which may be useful, but does not authorize taking any sworn statement. On the other hand, we find that such a power to examine a person on oath is specifically conferred on the authorised officer only under Section 132(4) of the Income-tax Act in the course of any search or seizure. Thus, the Income-tax Act, whenever it thought fit and necessary to confer such power to examine a person on oath, the same has been expressly provided whereas section 133A does not empower any Income-tax Officer to examine any person on oath. Thus, in contradistinction to the power under Section 133A, Section 132(4) of the Income-tax Act enables the authorised officer to examine a person on oath and any statement made by such person during such examination can also be used in evidence under the Income-tax Act On the other hand, whatever statement is recorded under Section 133A of the Income-tax Act it is not given any evidentiary value obviously for the reason that the officer is not authorised to administer oath and to take any sworn statement which alone has evidentiary value as contemplated under law. Therefore, there is much force in the argument of learned counsel for the appellant that the statement elicited during the survey operation has not evidentiary value and the Income-tax Officer was well aware of this."

The judgment in Paul Mathews (supra) was relied on by the Madras High Court in S. Khader Khan Son . The judgment of the Madras High Courtt was confirmed by the Apex Court by dismissing the appeal filed by the Revenue.

7. However, insofar as this case is concerned, we find force in the submission of the learned Senior Counsel for the Revenue that the assessments made is not based only on the statement under Section 133A of the Act. On the other hand, the assessment order itself reveals that the Revenue has placed reliance on the proceedings initiated against the appellant for imposition of penalty under Section 67 of the KVAT Act based on an inspection held on 17.08.2006. It is seen that the Revenue relied on letter dated 18.09.2007 issued by V. Ahammed to the Assistant Director of Income Tax (Investigation) clarifying his statement under Section 133A of the Act. This shows that the maker of the statement himself has re-affirmed the statement and nothing has been produced by the assessee to show that the contents of the statement are incorrect. In such a situation, we cannot accept the contention now raised by the learned counsel for the assessee and hold the assessments to be illegal.

8. However, we find from the order of the Assessing Officer which now stand confirmed that the quantification of the volume of suppression allegedly made by the assessee is based on the quantity detected by the authorities under the KVAT Act in the inspection held on 17.08.2006. It is stated that the proceedings for levy of penalty under Section 67 of the KVAT Act were initiated on finding of excess stock of Rs.14,38,785, and that the suppression of sale was worked out at Rs.17,81,971 by adding gross profit to the excess stock. This is evident from the assessment order, wherein it has been stated thus:

"The contention of the assessee is not accepted. Assessee is a sister concern of Classy group which is a family concern of Adattil Mohammed. The modus operandi regarding the suppression of sale by understating the sale is common in all the firms as it is evident from the statement of Sri. Adattil Jabir and Sri. V. Ahammed as mentioned above. There was an inspection by the intelligence officer of Commercial Taxes of Tirur in the case of Kottakkal Wood Complex on 17.08.2006 and excess stock of 14,38,785/- was found and the Department of Commercial Taxes has issued a show cause notice bearing No. TRL-08/06-07 dated 16.10.2007 for imposing penalty u/s.67(6) of the KVAT Act. In response to the said show cause notice assessee vide letter dated 10.04.2007 replied that the stock difference existed only in the case of 12 items out of 31 items. This shows that the assessee is regularly suppressing the sale of goods while computing the understated sale, branded items, sales to Banks etc. are excluded. Further, the sharp fall in GP could not be satisfactorily explained from which it is clear that the assessee has suppressed the sales. Therefore, the suppression of sale worked out as above at Rs.17,81,971/- is added to the total income as undisclosed business income. Penalty proceedings u/s 271 (l)(c) is initiated for concealment of income,"

9. During the course of hearing, the learned for the appellant produced before us order No.TRL-08/06-07 dated 08,08.2007, whereby the penalty proceedings under Section 67 of the Act were compounded by the assessee on payment of Rs.28000/- as compounding fee. This order shows that the total suppression detected was only Rs.2,10,595/- This means that the penalty proceedings were initiated on the basis that there was excess stock of Rs.14,38,785. In the final order that was passed, the said amount is now reduced to Rs.2,10,595. Since the assessment under the Income Tax Act has been completed quantifying the suppression of sale based on the excess stock detected in the inspection conducted by the authorities under the KVAT Act on 17.08.2006, the reduction in the excess stock as seen in the final order passed in the proceedings under Section 67 of the KVAT Act, should have an impact on the assessment under the Income Tax Act also. Therefore, though we confirm the orders impugned before us, we are of the view that the assessee is entitled to get the benefit of the reduced excess stock as determined by the authorities of the KVAT Act in their order No.TRL-08/06-07 dated 08.08.2007. For that matter, we remit the proceedings to the Assessing Officer, who will issue revised orders taking into account the order dated 08.08.2007 passed by the Intelligence Officer, Squad No.II, Tirur. The appeals are accordingly disposed of remitting the matter to the Assessing Officer to pass fresh orders as directed above. This shall be done within a period of six months from the date of receipt of a copy of this judgment.”

4.1 In pursuance to the order of the hon'ble High Court, the AO has given effect to the order of the High Court and worked out the asst. year-wise income as under vide order dated 02.01.2017. Asst Year Date of Order Total inome Modified total income on giving effect to the orders of the Hon’ble High Court of Kerala Remarks

4.2 According to the CIT(A), the High Court had confirmed the action of the AO and the only relief given by the High Court was regarding quantification of total income to be reworked by the AO. The CIT(A) It is relevant to draw attention to specific observations of the hon'ble High Court that "this shows that the maker of the statement himself has re-affirmed the statement and nothing has been produced by the assessee to show that the contents of the statement are incorrect. In such situation, we cannot accept the contention now raised by the learned counsel for the assessee and hold the assessments to be illegal".

4.3 The CIT(A) drew support from the earlier observations made by the CIT(A) while deciding the appeals of the assessee for these assessment years under section 143(3) read with section 153C of the IT Act in his order dated 11th November 2010:

" I find that during the course of search action there was a clear admission by salesman of form Mr V. Ahammed that sale price was decided by Mr Jabir who was a partner in M/S Classy the Antique design furniture a sister concern of appellant firm. Mr Jabir who was the son of managing partner made a clear admission that invoice was prepared only for half of the amount for which an item was sold. The statement was duly corroborated by the code tag attached to the furniture which has been duly elaborated by Mr Jabir and has also been referred to in the body of assessment order. This modus operandi was also elaborated by the salesman Mr. V. Ahammed in the deposition given during the course of search action...”

In the deposition given on the day of search, Mr Ahmmed salesman of appellant firm clearly stated that the billing of furniture sold was done by Mr. Jabir and the computer for issuing the bill was used by Mr Jabir and their accountant. Involvement of Mr Jabir in the matter was therefore fully established irrespective of the fact that he himself was not a partner in the appellant firm but being a concern of the group he was handling the real affairs of the appellant firm. The claim of appellant that Mr Jabir was a boy of 22 years does not have much bearing on the issue because he was major and was actively handling the affairs of appellant group. Another claim of appellant that statement was not voluntary is also far from truth for the reason that the issue was cleared by Mr Jabir himself while answering the questions. Mr Jabir elaborated upon the modus operand/ of the appellant along with the reasoning that attempt was to reduce incidence of sales tax."

4.3 The CIT(A) also made a mention of erratic GP rate in various years ranging from 5.9% to 29.94%. He finally concluded that these facts form strong circumstantial evidences to establish that the assessee was not disclosing the business transactions in the books of accounts in a truthful manner and there was an apparent evidence that the assessee was indulging in suppression of turnover and profit therefrom in a regular manner and for all assessment years. The deposition of the salesman of assessee firm and Mr Jabir who was managing affairs of the firm in fact describe the modus operandi of the assessee as a regular practice and not for any specific period. According to the CIT(A), the same therefore has to have consequence for all assessment years and inspection by Intelligence Officer of commercial taxes and discovery of substantial stock discrepancy referred to in the assessment order further confirmed that assessee was not recording the business transactions in the books of accounts in a truthful manner.

4.4 The CIT(A) also agreed with the findings of the CIT(A) in quantum addition in these assessment years that the assessee is indulging in regular practice of suppression of sales in all these assessment years. The CIT(A) also agreed with the Assessing Officer that the assessee had failed to disclose its true income particulars. The High Court has affirmed the assessments to be legal and provided relief to the assessee only as regards quantification of addition.

4.5 In view of the decision of High Court and various appellate authorities confirming the quantum additions made by the AO in the assessment orders on the issue, the CIT(A) confirmed and upheld the action of the AO in imposing penalty u/s. 271(1)(c) of the Income Tax Act for these years. However, the CIT(A) directed the AO to rework the amount of penalty as per order of AO dated 02.01.2017 giving effect to the order of the High Court in ITA Nos. 27, 28, 29, 35, 36, 42 & 53 of 2013 dated 04.07.2016. Thus, the CIT(A) gave relief to the assessee to that extent. According to the CIT(A), there was no change in the total income reworked by the AO for the asst. years 2002-03 to 2006-07 and 2008-09. The income was slightly reduced for the asst. year 2007-08. Against this, the assessee is in appeal before us.

5. We have heard the rival contentions and perused the record. It is admitted fact that the assessee is in appeal before the CIT(A) in all these assessment years on the second round of quantum addition sustained by the Assessing Officer, consequent to the judgment of the Jurisdictional High Court in ITA Nos.27,28,29,35,36,42 & 53 of 2013 dated 4th July, 2016, which is pending for adjudication by the CIT(A) . Being so, it is appropriate to remit this issue in dispute to the file of the Assessing Officer for passing fresh penalty orders after the adjudication of the appeals by the CIT(A) in the second round and considering the final outcome of the same. At this stage, it is premature to levy penalty by the Assessing Officer in these assessment years. Accordingly, all the appeals are remitted to the file of the Assessing Officer for fresh consideration. Hence, the appeals of the assessee are partly allowed for statistical purposes.

6. Since we have remitted the appeals to the file of the Assessing Officer for fresh consideration, the stay petitions filed by the assessee have become infructuous and hence, are dismissed as same.

7. In the result, the appeals of the assessee are allowed and the Stay Petitions filed by the assessee are dismissed as infrutuous.

Order pronounced in the open court on 3rd March, 2020.

sd/- sd/-

(GEORGE GEORGE K.) (CHANDRA POOJARI)

JUDICIAL MEMBER ACCOUNTANT MEMBER

Place: Kochi Dated: 3rd March, 2020