ITO 12(3)(4), MUMBAI vs. MUEZ HEST INDIA P.LTD, MUMBAI

The revenue has raised the following effective ground of appeal against the impugned order passed by the Ld. CIT (A):-

Before us, the Ld. Departmental Representative (DR) relying on the findings of the Addl. Commissioner of Income Tax submitted that since the amount in question was paid by M/s Tara Health Foods Ltd. amounting to Rs. 7,00,00,000/-, as per the incriminating document recovered during search action, the Ld. CIT (A) has wrongly held that the Addl. CIT-Range-12(3) was not having any other tangible material to confirm the said transaction. Therefore, the impugned order is liable to be set-aside.

On the other hand, the Ld. counsel for the assessee relying on the order passed by the Ld. CIT(A) submitted that since the AO had wrongly levied the penalty despite the fact that Managing Director of Tata Health Food Ltd. has sworn an affidavit stating therein that no such transaction had taken place with the assessee, the Ld. CIT(A) has rightly allowed the appeal of the assessee and directed the AO to delete the penalty. Without prejudice, the Ld. counsel further submitted that even if it is assumed that Tata Health Food Ltd, had made payment of the amount in question, the payment was made towards advance for machinery and the provisions of section 269SS of the Act are applicable to transaction of loan or deposit or any specified sum and not to any business transactions. The Ld. counsel relying on the decision of the Hon’ble Supreme court, in the case of Common Cause (A Registered Society) vs. Union of India, 394 ITR 220 submitted that penalty u/s 271D read with section 269 SS cannot be levied on the basis of entries in loose paper recovered from a third party. Without prejudice the Ld. counsel submitted that the entries in question do not pertain to loan or deposit but pertain to Advance for Machinery. Under these circumstances, the Ld. CIT(A) has rightly allowed the appeal of the assessee and deleted the penalty. 6. We have heard the rival submissions and perused the material on record including the cases relied upon the authorities below and the Ld. counsel for the assessee. The only grievance of the revenue is that the Ld. CIT(A) has wrongly deleted the penalty in question. We notice that the Ld. CIT(A) has Assessment Year: 2010-2011 deleted the addition mainly on the ground that AO has made addition on the basis of rough noting recovered from the possession of Tara Health Foods Ltd. during search conducted by the department. The observations of the Ld. CIT(A) read as under: “I have gone through the order of the Addl. CIT Range- 12(3) levying penalty and the submissions made by the A/R of the appellant in this regard. It is noted that the penalty has been levied u/s 271D on the assessee on account of acceptance of cash loans in contravention of provisions of section 269SS. The A.O. had noted in the penalty order instances of acceptance of loans through modes other than by account payee cheque or draft. Accordingly it was observed that assessee had violated provisions of section 269SS and was liable for penalty u/s. 271D. During the course of appellate proceedings the A/R of the assessee has vehemently opposed the levy of penalty. It has been submitted that the learned Addl. CIT Range-12(3) was not having any other tangible material in his possession to confirm the said transactions but still he disregarded the submissions of the appellant and the statement of Tara Health Foods Ltd. that there proceedings based on the information received from Dy. Commissioner of Income Tax, Central Circle-I, Ludhiana. The learned officer also did not appreciate that the rough noting found was not a valid document to prove the existence of such transaction. In the present case the revenue does not have any material to prove that such transactions ever existed. Hence the action of the learned offer is bad in law in utter disregard of the legal provisions and hence it is prayed that the penalty levied be deleted and the penalty order be quashed. It is also submitted that without accepting, that if we proceed on an assumption that such transactions does exists between the said THFL and the appellant the learned officer has Assessment Year: 2010-2011 erred in misunderstanding the reported transactions of Advance for Machinery as Loan and held that the Appellant has violated the conditions of Sec 269SS and 269T of the I T Act, 1961 and initiated penalty proceedings u/s 271D/ The learned officer did not appreciate that the transaction reported by the DCIT Ludhiana was of an advance for Machinery, which is out of the purview of Sec 269SS and does not attract penalty u/s 271D. If the document found by the search Team in the premises of M/s Tara Health Foods Ltd. is believed to be true and correct the name on the account and the narrations mentioned in the Entry itself are self-speaking that the nature of transaction is of “Advance for Machinery”. Which means the transaction is in the nature of business transaction and not the transaction of Loan. It is submitted that whenever any document has been relied upon it should be considered as a whole and the assessing officer cannot read or select the portion advantageous to revenue and ignore the other part. The said principle has also been confirmed by the Hon’ble ITAT, Pune in the case of [Dhanvarsha Builders & Developers Pvt. Ltd. (102 ITD 375 (Pune). In the case of appellant it is apparent in the ledger name and in the narration of the entries that the amount is paid towards Advance for Machinery, which is outside the purview of Sec. 269SS and 269T. It is absolutely clear from the language of the section that the provisions of Sec. 269SS are applicable only in the case of transaction of Loans or Deposits and does not apply to any business transaction.”

The rival contentions of the parties give rise to the question that whether the entries in loose papers recovered from the possession of a third party, during search u/s 132 of the Act, is sufficient to concluded that the assessee has accepted loan or advance in cash within the meaning of section 269SS so as to impose penalty u/s 271D of the Act? Assessment Year: 2010-2011 The Ld. CIT(A) has deleted the penalty firstly on the ground that the AO had no tangible material to hold that the assessee has received any loan or deposit in cash from Tata Health Food Ltd in violation of section 269SS of the Act and secondly, on the ground that since the entries pertain to money paid towards ‘Advance for Machinery’, which is outside the ambit of loans or deposits within the meaning of section 269SS of the Act, there is no justification in imposing penalty u/s 271D of the Act.

As pointed out by the Ld. counsel for the assessee, the Hon’ble Supreme court has held in the case of Common Cause vs. Union of India (supra) that loose sheets of paper containing rough entries have no evidentiary value under Evidence Act. We notice that in the present case, except the presumption drawn by AO from the rough sheet containing the questioned entries, there is no other direct or circumstantial evidence to substantiate the conclusion of AO that the assessee has accepted loan or deposit in cash from Tata Health Food Ltd. within the meaning of section 269SS of the Act. We further notice that Sh. Balwant Singh, MD of Tata Health Food Ltd. has sworn an affidavit stating that the company Tata Health Food Ltd. had neither given any cash loan to the assessee company nor any amount was received by Tata Health Food Ltd. Sh. Balwant singh has further stated that only in the financial year 2008-09, the Tata Health Food Ltd had purchased Machinery from the assessee company. Under these circumstances, particularly in the light of the principles of law laid down by the Hon’ble Supreme Court referred above, we are of the considered view that AO has wrongly arrived at the conclusion that the assessee had obtained the amount in question in violation of section 269SS of the Act, on the basis of loose papers containing the questioned entries, without pointing out any corroboration. In any case, even if one is to go by this documents found by the search tem, the Ld. CIT (A) has rightly inferred that, the nature of transaction is not loan but a business advance for purchase of machinery. As per the settled principles of the law, penal provisions are required to be Assessment Year: 2010-2011 construed strictly. Hence, in our considered view, the material on record is not sufficient to sustain penalty imposed by the assessment officer u/s 271D read with section 269SS of the Act.

Hence, we agree with the findings of the Ld. CIT(A) that penalty u/s 271D cannot be levied only on the basis of entries made in loose papers found in possession of a third party, particularly in view of the fact that the question entries pertained to advance for purchase of machinery we do not find any infirmity in the findings of the Ld. CIT(A) to interfered with. We therefore, uphold the findings of the Ld. CIT(A) and dismiss the sole ground of appeal of the revenue. Vide the present appeal, the revenue has challenged the impugned order passed by the Ld. CIT(A) on the following effective:-