The imposition of penalty under Section 271(1)(c) requires the AO to base the decision on materials available on record at the time of initiating penalty proceedings.

S. RAVINDRA BHAT, MR. JUSTICE R.V. EASWAR, JJ.

1. The question of law urged in this case is as follows:

“1. Whether the disclosure/admission of Assessee of taxing the income @ 8% when faced with detailed enquiry is a voluntary surrender and not liable for penalty under section 271(1)(c) of the Act?”

2. The assessee carries on construction business. It filed its return for the Assessment Year 2004-05. In the course of enquiry, the Assessing Officer (AO) pointed out that the assessee had purchased different materials from small suppliers who had, in turn, bought them from big stockists. Those suppliers had insisted on cash payments and payments through bearer cheques. The assessee had issued large number of bearer cheques to such suppliers. The assessee was asked to explain as to why the cash payments made ought not to be disallowed under Section 40A(3). It was also asked to explain the substantial expenses claimed in the P&L account with the aid of vouchers and bills. The assessee explained that small suppliers who could deliver the building materials at the site of construction had insisted on early payments since they in turn had to make immediate payments to the stockists. Consequently, a large number of bearer cheques to such small suppliers had been issued. The assessee, therefore, requested as follows:

“...In these circumstances, the assessee would be grateful if the net profit of the company may be computed by application of a reasonable net profit rate on its contract receipts net of material supplied by the societies (employer). It is understood by the assessee that in the case of building contractors, the department normally applies a net profit rate of 8 percent on net receipts. Therefore, to buy peace of mind, to obviate unnecessary litigation and with a view to cooperate with the Department, the assessee offers that its income may be computed by applying a net profit rate of 8 percent provided penalty proceedings u/s 271(1)(c) of IT Act me not initiated.”

3. The AO accordingly accepted the assessee’s contention by applying the 8% net profit rate, in terms of Section 44AD of the Income Tax Act and holding that net profit @ 8% of gross receipts was acceptable. However, the AO initiated penalty proceedings.

4. The AO appears to have, after initiation of proceedings under Section 271(1)(C), sought for particulars and verification in regard to the genuineness of the parties to whom the payments were made on account of purchase of building materials. The Inspector’s report, as borne from the AO’s order showed that the premises of five of such suppliers had been visited and that the assessee’s claims were unsubstantiated as the concerns or their proprietors were not found. In these circumstances, the AO held as follows:

“The report of the Inspector clearly indicates that the parties to whom payments were made could not be found on the address furnished by the assessee during the assessment proceedings. The assessee, during the assessment proceedings was conscious about the fact that if enquiry had been made regarding genuineness of parties and transactions the concealment of income would have been detected therefore the assessee decided to offer additional income for taxation. In fact this was not an offer but admission/confession of income concealed/filing of inaccurate particulars as it has been established beyond doubt through enquiry that the payments on a/c of purchases had been made to non-existent parties to inflate purchase which has resulted into concealment of income.

In view of the detailed discussion made above and also considering the facts and circumstances of the case penalty u/s 271(1)(c) is imposed on the assessee.

The quantum of the penalty is computed as under:

Income in respect of which inaccurate particulars have been furnished/concealed - Rs.52,36,845/-

Tax sought to be evaded - Rs.18,32,895/-

Minimum penalty imposable @ 100% - Rs.18,32,895/-

Maximum penalty imposable @ 300% - Rs.54,98,685/-

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