Unreported Decisions – May 2020

By Ajay R. Singh, Advocate

1. Penalty u/s 271G – Primary books /documents maintained – Non maintenance of segmental profitability of the AE and non–AE transactions- Practical difficulty in maintaining those details considering the nature of business carried on – Penalty deleted.

The assessee is a resident company, is engaged in the business of importing rough diamond, getting them cut & polished and thereafter exporting to various parties outside the Country including the Associated Enterprises (AEs) of the assessee situated abroad. In the transfer pricing study report, the assessee benchmarked the international transaction with the AEs relating to sale of polished diamond amounting to Rs. 27,65,09,328, adopting Transactional Net Margin Method (TNMM) as the most appropriate method with operating profit / sales as the profit level indicator (PLI). Since, the margin shown by the assessee @ 2.70% is within the tolerance range of the average margin of the comparables worked out @ 5.54%, the transaction with the AE was claimed to be at arm’s length. The TPO observed that the entity level margin of the assessee included its combined profit on the transactions with both the AE and the non–AE. Therefore, he called upon the assessee to furnish separate segmental result in respect of transactions with the AE and non–AE along with segmental profitability. The assessee vide letter dated 16th January 2014 expressed its inability to furnish the segmental profitability due to the volume and number of transactions which makes it difficult to provide such details. Thus, after considering the submissions of the assessee the TPO alleged that due to lack of information furnished by the assessee, it is difficult to benchmark the transaction properly. Therefore, ultimately he accepted the benchmarking done by the assessee by holding that the transactions with the AE are at arm’s length. However, alleging non–maintenance of specified documents, he initiated proceedings u/s. 271G of the Act and ultimately, imposed penalty of Rs. 55,30,187.

The Commissioner (Appeals) observed that it is extremely difficult for a diamond trader / manufacturer to identify conversion of a particular rough diamond into a polished diamond. Therefore, it is very difficult for the assessee to identify each rough diamond piece–wise and equally difficult to identify each cut and polished diamond vis–a–vis the original rough diamond from which it was cut and polished. He observed, though, the TPO called for the segment–wise Profit & Loss account in respect of exported as well as all the diamond, however, ultimately, he accepted the arm’s length price declared by the assessee. Therefore Commissioner (Appeals) deleted the penalty.

The ITAT observed that the material on record makes it clear that the assessee has maintained primary books of account / documents in respect of its business activity. The fact that the documents relating to transaction with the AE have also been maintained by the assessee is evident from the transfer pricing study report, wherein, the transaction with the AE has been benchmarked under TNMM. This shows that the assessee has maintained documents / books of account as required under the statute. It is also evident, in the course of proceedings before the TPO, the assessee has made substantial compliance by furnishing transfer pricing study report as well as many other documents. What the assessee has failed to furnish is, the segmental profitability of the AE and non–AE transactions. The inability to furnish the aforesaid details was also well explained by the assessee before the TPO and Commissioner (Appeals) by demonstrating the practical difficulty in maintaining those details considering the nature of business carried on. Notably, though, the TPO has alleged that non–furnishing of segmental profitability makes it difficult for him to correctly ascertain the arm’s length price, however, ultimately the TPO has accepted the transaction with the AE to be at arm’s length. If the TPO was not satisfied with the benchmarking of the assessee under TNMM, nothing prevented him from rejecting assessee benchmarking and determining the arm’s length price of the transaction with the AE independently by applying any one of the prescribed methods. The blame for failure on the part of the TPO to determine the arm’s length price cannot be fastened with the assessee. The ITAT relied on the following decision of the Hon’ble Gujarat High Court in case of D. Navinchandra Exports Pvt. Ltd. [ Tax Appeal no.788/2018, dated 9th July 2018 (Guj.)]; and Mumbai ITAT decision in case of DCIT v/s Ankit Gems Pvt. Ltd., [2019] 106 taxmann.com 243 (Mum.) wherein the deletion of penalty u/s 271G has been upheld. In the result, Revenue appeal was dismissed.

Dy. CIT Circle–5(4), Mumbai v/s. Decent Dia Jewels Pvt. Ltd. [IT(TP)A no.2608/Mum/2017 (AY : 2011–12) ; Dated : 13.03.2020 ; “K” BENCH]   

Decent Dia Jewels Pvt. Ltd.

2. Penalty 271(1)( c) Of the Act – Hawala purchase – estimated addition – Penalty Deleted :

The assessee an individual engaged in the business of “Trade of hardware and electrical items” . Assessment was completed on 23.02.2015 u/s. 143(3) r.w.s 147 of the Act determining the income at ₹ 8,05,340/-. While completing the reassessment the Assessing Officer treated the purchases of ₹ 5,22,838/- made from various dealers as non-genuine on the basis of the information received from Sales Tax Department, Mumbai that assessee has received accommodation entries from those parties without making any purchases but made purchases only in gray market. The AO treated such purchases from various parties as non-genuine as the assessee could not produce the parties and also could not establish the movement of goods. Further, the notices issued to the parties u/s. 133(6) of the Act were also returned unserved . Thus, the Assessing Officer estimated the profit element from the non-genuine purchases at 12.5% and brought to tax. Assessing Officer initiated the penalty proceedings and levied penalty u/s. 271(1)(c) of the Act stating that the assessee has furnished inaccurate particulars of income thereby concealed its true and correct income within the meaning of section 271(1)(c) of the Act. On appeal the Ld.CIT(A) deleted the penalty.

The Hon. ITAT observed that it is a settled position of law that penalty cannot be levied when an adhoc estimation is made. In this case an adhoc estimation was made by the Assessing Officer restricting the profit element in the purchases @12.5%. On identical situations the Coordinate Bench in the case of Shri Deepak Gogri v. Income Tax Officer [ITA.No. 1396/MUM/2017 dated 23.11.2017] held that no penalty is leviable. Similar view has been taken by the Hon’ble Delhi High Court in the case of CIT v. Aero Traders Pvt. Ltd., [322 ITR 316] wherein the Hon’ble High Court affirmed the order of the Tribunal in holding that estimated rate of profit applied on the turnover of the assessee does not amount to concealment or furnishing inaccurate particulars In the case on hand the Assessing Officer has only estimated the Gross Profit on the alleged non-genuine purchases without there being any conclusive proof of concealment of income or furnishing inaccurate particulars of such income. Thus, the Ld.CIT(A) rightly deleted the penalty u/s. 271(1)(c) of the Act levied by the Assessing Officer. In the result, appeal of the revenue was dismissed.

Income Tax Officer -2(1) v/s. Shri Jignesh Amrutlal Shah [ITA NO. 1267/MUM/2019 ; (A.Y: 2010-11) ; BENCH “SMC; dated :13.03.2020]

Shri Jignesh Amrutlal Shah

3. Penalty – notice without specifying the charge – non striking off of the inappropriate limb – Issue raised as additional ground – admitted – Notice held to be bad.

The assessee submitted that the initiation of penalty proceedings is bad in law as the Assessing Officer has not specified the limb on which the penalty was proposed to be levied. The assessee referring to the notice issued u/s. 274 r.w.s 271(1)(c) of the Act submitted that the Assessing Officer is not clear as to the charge for which the penalty is initiated i.e. either for concealment of income or for furnishing inaccurate particulars. The assessee submitted that the inappropriate limb in the notice was not strike off. The assessee referring to the Assessment Order submitted that the Assessing Officer stated that proceedings u/s. 271(1)(c) are initiated for furnishing inaccurate particulars and concealment of income. Referring to Penalty Order, the assessee submitted that Assessing Officer levied penalty for furnishing inaccurate particulars of income and for concealment of income. Therefore, it was submitted that the initiation of penalty proceedings itself is improper and not valid. The assessee submitted that there is a complete non-application of mind by the Assessing Officer in initiating the penalty proceedings and therefore, levy of penalty is illegal, void, bad in law, initiated by non application of mind and is without jurisdiction as the penalty notice issued by the Assessing Officer does not strike off the irrelevant portion thereon.

The assessee submitted that the additional ground was filed challenging the initiation of penalty proceedings as bad in law. The additional ground raised by the assessee challenging the initiation of penalty proceedings as bad in law for the reason that the Assessing Officer did not strike off irrelevant limbs of the penalty notice is purely a legal ground thus the same was admitted by the ITAT.

The ITAT observed that notice issued u/s. 274 r.w.s 271(1)(c) of the Act for initiation of penalty proceedings, that Assessing Officer did not strike off and specify the charge/limb for which he is proposing to initiate the penalty proceedings. In the assessment order Assessing Officer stated that proceedings u/s. 271(1)(c) are initiated for furnishing inaccurate particulars and concealment of income. However, in the penalty order passed it is stated that penalty is levied for furnishing inaccurate particulars of income and for concealment of income. The ITAT relying on the Coordinate Bench decision and the decisions rendered by Hon’ble Bombay High Court at Goa in the case of Pr.CIT v. Goa Coastal Resorts and Recreation Pvt. Ltd., in Tax Appeal No. 24 of 2019 dated 11.11.2019 ; Pr.CIT v. New Era Sova Mine in Tax Appeal No. 70 of 2018 dated 18.06.2019 And Pr.CIT v. Goa Dourado Promotions Pvt. Ltd., in Tax Appeal No. 18 of 2019 dated 26.11.2019 held that the notice was issued by the Assessing Officer U/s. 274 r.w.s 271(1)(c) of the Act is without specifying the charge for which the notice was issued as was non striking off of the inappropriate limb on account of non-application of mind and therefore the penalty proceedings initiated are bad in law. Thus, the Assessing Officer was directed to delete the penalty levied U/s. 271(1)(c) of the Act.

Shri Jagdish P. Purohit v/s. Income Tax Officer 18(1)(5)

[ITA NO.1322/MUM/2019 ; (A.Y: 2013-14); BENCH “SMC”, dt: 13.03.2020 ]  

Shri Jagdish P. Purohit