S.S. RAJ & CO.,MUMBAI vs. ITO WD 19(1)(4), MUMBAI

Briefly stated, the facts of the case are that the assessee-firm had advanced loans to three parties, who were related to its partners. During the course of assessment proceedings, the AO asked the assessee to explain why interest income was not shown during the year under consideration. The assessee submitted before the AO that due to litigation in respect of certain immovable property, the parties had become hostile and stopped making payments and therefore, the same was not offered to tax. The AO noted that the assessee had offered income from interest on accrual basis during the AY 2001-02 and AY 2002-03 and therefore, consistency should have been maintained by offering the interest income in the impugned assessment years. As the assessee had not offered the interest income during the impugned assessment years, the AO levied minimum penalty u/s 271(1)(c) of Rs.2,39,730/- (AY 2003-04), Rs.2,68,496/- (AY 2004-05), Rs.3,00,677/- (AY 2005-06) and Rs.3,09,810/- (AY 2006-07).

Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) observed that “the so called disputes cannot have any bearing on the transactions entered into by the assessee with the borrower parties and also on the interest income to be accrued on the loans given to the borrower parties. If such was the case, then the appellant could have written off the loans given to the said three parties in its books of account. However, it is seen that the S. Raj Co. 3 ITA Nos. 1570 to 1573/Mum/2016 appellant-firm has not written off the loans given to the said three parties from its books of accounts till this date.” The Ld. CIT(A) thus agreed with the reasons given by the AO and dismissed the appeal filed by the assessee.

Before us, the Ld. counsel of the assessee submits that the assessee-firm had advanced loans to three parties who were related to its partners. Till the AY 2002-03, the three said parties had been regularly paying the assessee the interest due on the loans and the assessee had been duly reflecting the receipt in its return of income. However, from the AY 2003-04 there was serious dispute relating to other matters between the assessee and the three borrowers and they stopped paying any interest to the assessee. They also stopped claiming deduction of the interest payable to the assessee in their return of income. On its part, as the assessee is not actually in receipt of interest, it had no alternative but to follow the action of the other parties. It also stopped showing any receipt of interest income which is the factual position. The Ld. counsel submits that the assessee cannot be held guilty of concealing an income which did not in reality result nor likely to result in any foreseeable future. It is stated by him that what happened in quantum assessment is a different matter but which should not influence the penalty proceedings. Reliance is placed by him on the decision in Anantharam Veerasinghaiah & Co. v. CIT (1980) 123 ITR 457 (SC).

Per contra, the Ld. DR relies on the order passed by the Ld. CIT(A). Also reliance is placed by him in the order of the ITAT ‘H’ Bench, Mumbai in assessee’s own case for the AYs 2003-04, 2004-05, 2005-06 and 2006-07 (ITA Nos. 7466, 7467, 7468 & 7471/Mum/2011). The Ld. DR submits that in the above order, the Tribunal has confirmed the addition made by the AO of interest amounting to Rs.6,68,233/- (AY 2003-04), Rs.7,48,222/- (AY 2004-05), Rs.8,38,234/- (AY 2005-06) and Rs.9,38,821/- (AY 2006-07). As the appeal of the assessee for the impugned assessment years in quantum assessment has been dismissed by the Tribunal, the Ld. DR submits that the penalty levied by the AO for the above assessment years be confirmed.

We have heard the rival submissions and perused the relevant materials on record. We find from the assessment order for the AY 2003-04 that the AO has estimated the interest income accrued against loan to three parties as under: Sr. Loan Opening Interest Closing TDS Net No. Parties Balance Accrued Balance Amount Closing Amount (Rs.) @ Amount (Rs.) Balance (Rs.) 12% (Rs.) after TDS S. Raj Co. 5 ITA Nos. 1570 to 1573/Mum/2016

Kirtika A. 1888528.0 226623 2115151 0 2115151 Wadhwani 8 2. Wadhwani 2522538 302704 2825242 0 2825242 Associates 3. Wadhwani 1157558 138906 1296464 0 1296464 Constructio n Total 668233 A perusal of the above shows that the AO has arrived at interest income of Rs.6,68,233/- by estimating @ 12% on the opening balance disclosed by the assessee. We find that neither there was any concealment of income nor the assessee filed any inaccurate particulars of such income. At best, it is ‘hypothetical income’. Similar is the calculation made by the AO in the other assessment years. In respect of the order of the ITAT in quantum assessment in assessee’s own case for the impugned assessment years we may refer to the judgment of the Hon’ble Supreme Court Anantharam Veerasinghaiah & Co. (supra), wherein it has been held that the findings recorded in the assessment order constitute good evidence in the penalty proceedings but those findings cannot be regarded as conclusive for the purposes of the penalty proceedings. Whether a penalty can be imposed in a given case, the entirety of the circumstances must be taken into account. All will depend on the circumstances of the case.