1. The assessee firm has filed this appeal against the order of the CIT(A)-I, Bangalore, dt. 31st March, 2006. The grievance of the assessee is with regard to the order of the C1T(A) confirming the imposition of penalty of Rs. 96,41,811 that was levied by the AO with reference to the provisions of Section 271(1)(c) of the IT Act, 1961 (hereinafter referred to as the Act') and the assessee has also challenged the conclusion of the authorities for imposing special audit under Section 142(2A) of the Act on the plea that the accounts of the assessee are superficial and simple with no complexity involved.
Further, the assessee has also challenged that the AO had not arrived at any satisfaction for initiation of proceedings for penalty for concealment of income.
2. The learned Counsel for assessee, Shri G. Lakshminarasimhan, submitted that consequent to the assessment having been selected for scrutiny, the CIT vide his order dt. 20th March, 2003 directed that the accounts of the assessee be audited with reference to the provisions of Section 142(2A) of the Act and a report be submitted. The audit report found the following items:(1) Salary and wages debited to P & L a/c 7,92,785(2) Titan works :(a) Sales-tax deposit 10,34,000(b) Others 3,96,060(3) BWSSB deposit 11,99,124(4) Stock 22,03,810(5) Electricity charges (current & previous year) 24,25,591(6) Service charges 2,96,518(7) Stock valuation: Excess project cost debited over the years 15,21,786 -------------- Total 98,69,674 -------------- These were considered and added to the income and on that basis total income was determined at Rs. 99,04,910 and tax of Rs. 38,13,389 was determined. He submitted that in the year under review there were no projects on hand to the assessee, all the projects had concluded and the assessee had to necessarily square off the various accounts. These included deposit with BWSSB, sales-tax deposit claimed from M/s Titan Industries who refused to pay electricity charges and reworking of stock of unsold flats. Items of salaries and wages, security deposit, deposit with BWSSB and stock valuation are all coming from the earlier years and no part of it has any element of disallowable expenses but in the light of the project being accounted for on completed contract basis, some mistake in accounts had resulted in some of these items being remained not adjusted. The AO concluded that because these were charged to P&L a/c there was deliberate intention on the part of the assessee to show lower income. However, when it comes to imposing of penalty all that the AO states is that penalty proceedings have been initiated in a mechanical manner without pointing out what are those specific items with reference to which he intends or feels that resulted in concealment of income. He submitted that the assessee, finding that the project account contained certain mistakes did not hesitate to surrender the same before the authorities and this was so done with the good intention that the authorities would appreciate that it was a genuine mistake on the part of the assessee. However, the authorities proceeded to levy penalty. He drew our attention to the order of penalty as passed by the AO and submitted that it is dt. 25th March, 2004. He submitted that proposal to levy penalty with the approval of the CIT was dt. 29th March, 2004 and the CIT approved the imposition of penalty vide his order dt. 31st March, 2004. But the order is dt. 25th March, 2004 including the notice under Section 156 raising a demand on the assesses covering penalty proceedings which is also dt. 25th March, 2004.
3. The submission of the learned Counsel for assessee Shri Lakshminarasimhan was that penalty has been imposed on the assessee without the approval of the authorities and therefore, deserves to be quashed. He submitted that though the assessee did not raise the issue of special audit on the assessee in the assessment proceedings, in the penalty proceedings he was well within his rights to raise the issue.
Referring to the audit report he submitted that it was more or less a straight forward issue with no complications involved because in the financial year relevant to assessment year under appeal there were no projects on hand and all the projects got concluded in the financial year relevant to asst. yr. 1997-98. Further, there was no construction activity at all in the year. He submitted that in the facts, as they are, the AO, other than going by the order of assessment, has not stated what is the concealment or what is it that the assessee has furnished inaccurate particulars. He submitted that the items that the AO considered are deposits with BWSSB, sales-tax deposit, certain electricity charges and valuation of stock all coming from earlier years. These were apparently brought forward because additional cost could not be recovered from the various flats buyers. The AO claims that the assessee had inflated the expenses. This is because though the expenses were incurred, the assessee could not recover them from various flat buyers because the assessee had already agreed to certain price with the flat buyers and thus was held back from imposing further burden on the flat buyers. He drew our attention to the decision of the Supreme Court in the case of T. Ashok Pai v. CIT in support of his argument that various expenses that the assessee could not recover including the adjustments in the value of stock could under no circumstances be termed as inaccurate particulars furnished by the assessee. This was a case where the assessee, while squaring up the accounts, found it could not recover and hence wrote it off. Further, as stated earlier, there was no construction activity in the year and the construction activity had stopped more than three years back. He relied on the decision of Supreme Court in the case of Rqjesh Kumar and Ors. v. Dy. CIT , decision of Rajasthan High Court in the case of CIT v. Bajrang Textiles (2006) 205 CTR (Raj) 287 : (2007) 294 ITR 561 (Raj), Karnataka High Court decision in the case of Balqji Vegetable Products (P) Ltd. v. CIT , Bombay High Court decision in the case of Jain Trading Co. v. Union of India and Ors.
, Delhi High Court decision in the case of CIT v.Rajan & Co. , decision of Tribunal, Delhi Bench in the case of Everplus Securities & Finance Ltd. v. Dy. CIT (2006) 102 TTJ (Del) 120 : (2006) 101 ITD 151 (Del) and decision of Tribunal, Mumbai Bench in the case of Jain Trading Co. v. ITO (2007) 17 SOT 574 (Mumbai).
The learned Departmental Representative supported the orders. He relied on the decisions of Karnataka High Court in the case of Gayathri Textiles v. CIT and G. Manoharan v. Asstt. CITSahara India Financial Corporation Ltd, v. CIT 4. Rival contentions in regard to the above have been very carefully considered. The audit report shows that deposit with BWSSB was charged on the basis of project having been concluded. With regard to the amount shown as recoverable from M/s Titan Industries, the report was that the party had refused to pay the amount. Valuation of stock was only method of approximation and the salaries and wages were so debited to square off the cost as there was no further construction activity involved. Electricity charges also were the balance irrecoverable amount. When all these put together, which was perhaps the reason for the managing partner to agree for disallowance, only goes to show that the assessee having realized that its project account contained certain mistakes it was high time that the same were corrected. Therefore, on the facts and circumstances, we are of the view that penalty was uncalled for and we quash the same. Insofar as the legal issue raised by the assessee that the order of penalty is dt. 25th March, 2004 while the CIT granted approval on 31st March, 2004, even if we remand it back to the AO so that it is restored to the point where irregularity was committed by the AO, it would only result in an extra proceeding. The argument advanced by the learned Departmental Representative was that the draft was dt. 25th March, 2004 and the notice was also prepared on that date, but the same was issued to the assessee only on dt. 31st March, 2004 after obtaining approval of the CIT. For the reasons observed above, restoration to the point of irregularity will not lead to any adverse conclusion, considering the proximity and the argument of the learned Departmental Representative it is a possibility that the AO overlooked the date of order.