P. JAMES,MUMBAI vs. ASST CIT 12(1), MUMBAI

O R D E R Per G Manjunatha, AM : This appeal filed by the assessee is directed against the order of the CIT(A)-23, Mumbai dated 14-11-2014 and it pertains to AY 2010-11. The assessee has raised the following grounds of appeal:-

There is no -Finding in the Assessment Order / Penalty a. order that any details supplied by the assessee in its return are found to be incorrect or erroneous or false or inaccurate particulars have been furnished. The Penalty order has just reiterated the facts and justified b. the levy of tax on deemed Dividend.

We were under the bonafide belief that the advance c. treated as deemed dividend u/s 2(22 ) (e) is and was a loan taken in the normal course of business which has been repaid as and when funds are / were available. There was no column in the return of income filed for d. A.Y.2010-11 to show the share holding pattern in the Company as mentioned by CIT ( A ) 23 Mumbai as one of the reasons for justifying the penalty levied as in para 2.9 on page 6 of CIT ( A ) 23 Mumbai. Share holding pattern of Company was disclosed during the assessment proceedings before AU ACIT 12 ( 1 ) as reiterated in para 2.2 on page 62 of CIT ( A ) 23 Mumbai which has been reproduced ad verbatim from penalty order of ACIT 12 ( 1 ) Mumbai. Addition on a/c of deemed dividend was accepted to buy e. peace with the department and avoid litigation as reiterated in assessment order for A.Y.2009-10 para 6.2 on page 3 of which is reproduced ad verbatim Vide Order sheet noting dated 10.10.2011 the assesse has agreed to pay taxes on the above two additions. Based on findings of A.Y.2009-10 wherein deemed f. dividend was taxed for the first time asssessment was reopened U/S 148 for A.Y.2008-09 and A.Y.2010-11. Our belief that tax was not payable u/s 2 ( 22 ) ( e ) was g. accepted by the AO ACIT 12(1) Mumbai in A.Y.2008-09 and A.Y.2009-10 and penalty proposed to be levied U/S 271(1)(c) was not levied.

On similar facts / findings penalty is levied once again. h. 1. The Income department was itself aware and knowing this i. issue of taxability of deemed dividend based on asseessmnet order passed u/s 143(3) in A.Y.2009-10 was there earlier in A.Y.2008-09 and subsequently in A.Y.2010-11 from the submissions filed by us in A.Y.2009-10. j. Notice under Section 274 of the Act does not specifically j. state the grounds mentioned in Section 271(l)(c), i.e., whether it is for concealment of income or for furnishing of incorrect particulars of Only printed form where all the ground mentioned in Section k. 271 are mentioned has been sent. Ref CIT Vs Manjunatha Cotton & Ginning Factory ( Karnataka ) l. 359 ITR 565 2. The brief facts of the case are that the assessee had filed his return of income for the assessment year 2010-11 on 01-10-2010 declaring total income at Rs.1,02,38,142. Subsequently the case has been reopened u/s 147 on the basis of information gathered during the course of scrutiny proceedings for the assessment year 2008-09 that the assessee had taken loan from a company in which he was a beneficial shareholder with a share holding of more than 10% and such loan and advance from the company is taxable as deemed dividend u/s 2(22)(e) of the Act. Thereafter the assessment was completed u/s 143(3) r.w.s. 147 making addition for Rs.78,08,433 u/s 2(22)(e) of the Act, 1961. The AO initiated penalty proceedings u/s 271(1)(c) of the Act, for furnishing inaccurate particulars of income. During the course of penalty proceedings, the assessee was called upon to explain as to why penalty shall not be levied in respect of deemed dividend u/s 2(22)(e) for furnishing inaccurate particulars of income. In response to show cause notice, the assessee submitted that the assessment for the assessment year in question was reopened on the basis of scrutiny assessment proceedings for AY 2008-09 on the basis of financial statements of the assessee wherein he had disclosed necessary particulars of loans taken from the company where he was holding beneficial interest in shares. The assessee further submitted that addition on account of deemed dividend u/s 2(22)(e)| was made for the first time for AY 2010-11 and the findings of the AO is based on balance-sheet filed by the assessee which means that he had disclosed the fact of disclosing the same in the balance-sheet.

Therefore, there is no concealment of income or furnishing of inaccurate particulars of income which warrants levy of penalty u/s 271(1)(c) of the Act The AO, after considering the submissions of the assessee and also relying upon the decision of Hon’ble Rajasthan High Court in the case of CIT vs Hotel Hill Top (2009) 313 ITR 116 (Raj) observed that the assessee has failed to offer an explanation with regard to the non disclosure of deemed dividend towards loans borrowed from a company, in which he was a beneficial shareholder, in the return of income for the relevant assessment year. The assessee also failed to prove the explanation offered by him is bona fide. Therefore, he opined that the assessee has furnished inaccurate particulars of income in respect of deemed dividend assessable u/s 2(22)(e) which warrants levy of penalty u/s 271(1)(c) and accordingly levied penalty of Rs.24,12,806.

Therefore, penalty cannot be levied for furnishing inaccurate particulars of income in respect of an addition made by invoking deeming provisions of the Act. In this regard, he relied upon the decision of Hon’ble Supreme Court in the case of CIT vs Reliance Petroproducts P 322 ITR 158 (SC) and the decision of ITAT, Mumbai Bench in the case of Gitanjali Ghate vs DCIT ITA No.6560/Mum/2010. The CIT(A), after considering relevant submissions of the assessee and also relying upon the decision of Hon’ble Delhi High Court in the case of Zoom Communication Ltd 327 ITR 510 (Del) confirmed penalty levied by the AO u/s 271(1)(c). Relevant portion of the order of CIT(A) is extracted below:-

2.9 I have considered the above contention of the assessee. However, the same cannot be accepted for the reason that the assessee has not furnished either before the Assessing Officer or before me any material to show the basis for holding the bonafide belief that no addition u/s 2(22)(e) was required to be made in its case. It is not the case of the assessee that the income remained to be disclosed due to ignorance of law or due to the fact that there were different opinions on this issue. The basis for holding the bonafide belief that the provisions relating to deemed income was not applicable to its case has not been explained by the assessee. Hence, the assessee has not substantiated its contention that the income was not offered to tax because of any bonafide belief./ The Assessing Officer, in the penalty order, has clearly stated that the assessee has not been able to substantiate the explanation offered by him and has not shown that the explanation offered by him is bonafide and has also not shown that all the facts relating to the same and material to the computation of his total income have been disclosed by him and, therefore, the case of the assessee was covered by the provisions of section 271(1)(c). )The assessee has contended that the fact of taking the loan from the company was disclosed in the balance sheet. However, the assessee has not shown before me that the fact of the share holding pattern in the company was also disclosed in the return of income filed by it. Unless and until this was also shown, it cannot be held that all facts material to the computation of the total income of the assessee has been disclosed by it. In view of the aforesaid fact, the decision of the Hon'bI,e ITAT in the case of Gitanjali Ghate relied upon by the assessee is distinguishable. 2.10 From the above facts, it is clear that although the amount of deemed dividend of Rs.78,08,433/- was required to be declared by the assessee as its income, it did not disclose the same in the return of income filed by her. This fact was discovered only by the Assessing Officer who initiated the proceedings u/s 147 of the I.T. Act, 1961 and brought the same to tax. Otherwise, this income would have escaped taxation. Hence, in view of the decision in Reliance Petroproduct P.Ltd it is without doubt clear that the details supplied in the return were not accurate nor exactly correct, not according to the truth. In the of Zoom Communication Ltd. 327 ITR 510, the Hon'ble Delhi High Court has, after considering the decision of the Hon’ble Supreme Court in the case of Reliance Petroproducts Pvt. Ltd., held as follows:-

"The Court cannot overlook the fact that only a small percentage of the IT returns are picked up for scrutiny. If the assessee makes a claim which is not only incorrect in law but is also wholly without any basis and the explanation furnished by him for making such a claim is not found to be bonafide, it would be difficult to say that he would still not U/s.271(1)(c). If one takes the view that a claim which is wholly untenable in law and has absolutely no foundation on which it could be made, the assessee would not be liable to imposition of penalty, even if he was not acting benafide while making a claim of this nature, that would give a license to unscrupulous assessees to make wholly untenable and unsustainable claims without there being any basis for making them, in the hope that their return would not be picked up for scrutiny and they would be assessed on the basis of self assessment u/s. 143(1) and even if their case is selected for scrutiny, they can get away merely by payment the tax, which in any case, was payable by them. The consequence would be that the pet-sons who made claims of this nature, actuated by a malafide intention to evade tax otherwise payable by them would get away without paying the tax legally payable by them, if their, cases are not picked up for scrutiny. This would take away the deterrent effect, which these penalty provisions in the Act have."

2.11 In view of the aforesaid reasons, I am of the opinion that the case of the assessee is strictly covered by the provisions of section 271(1)(c). The action of the Assessing Officer of levying the penalty under the said section being as per law is upheld. The ground of appeal filed by the assessee is dismissed.

Aggrieved by the order of CIT(A), assessee is in appeal before us. 4. None appeared for the assessee. We have heard the Ld.DR, perused the material available on record and gone through the orders of authorities below.

The AO levied penalty u/s 271(1)(c) towards addition made on account of deemed dividend u/s 2(22)(e) of the Act. According to the AO, the assessee has failed to offer any explanation for not disclosing loans and advances received from a company in which he was a beneficial shareholder under the provisions

2(22)(e) of the Act. It is the contention of the assessee that penalty cannot be levied u/s 271(1)(c) towards addition made by invoking deeming provisions provided under the Act. The assessee further contended that the AO has made addition u/s 2(22)(e) for the first time in the impugned assessment year and such addition was made on the basis of information gathered during the course of assessment proceedings of AY 2008-09 from the financial statement filed by the assessee. The assessee has disclosed loan borrowed from the company, in his balance-sheet. The assessee further contended that deeming fiction provided under the provisions of section 2(22)(e) cannot be extended to the provisions of section 271(1)(c) to hold that the assessee has furnished inaccurate particulars of income, despite details of loan has been disclosed in the balance-sheet filed for the relevant assessment year.

No such addition has been made in the preceding financial years. The assessee claims that he was under a bonafide belief that deeming fiction provided u/s 2(22)(e) for the purpose of making addition towards loans and advances borrowed from a company in the hands of the director cannot be extended to penalty provisions provided u/s 271(1)(c) to hold that non disclosure of deeming dividends in the return of income would amount to furnishing of inaccurate particulars of income. We find force in the arguments of the assessee for the reason that deeming fiction provided u/s 2(22)(e) for making addition towards loans and advances from a closely held company in the hands of the directors cannot be considered as furnishing of inaccurate particulars of income; despite the assessee has disclosed borrowings from the company in its balance-sheet. We further observe that the AO has made addition for the first time in the financial year under consideration. Therefore, we are of the considered view that the explanation offered by the assessee that no penalty can be levied towards addition made by invoking deeming provisions for levying penalty appears to be bonafide. We further observe that whether the provisions of section 2(22)(e) is applicable or not to a particular loan and advance from a company in the hands of the director is a debatable issue and there is a possibility of two views. The AO has taken a view to bring it to tax loans and advances under the provisions of section 2(22)(e) of the Income-tax

Act, 1961. Such deeming fiction provided u/s 2(22)(e) cannot be considered as furnishing of inaccurate particulars of income. We further observe that the ITAT, Indore Bench in the case of Sadhna Bros vs ACIT (2011) 46 SOT 1 (Ind)(URO) held that penalty u/s 271(1)(c) in respect of loans received by the assessee from a company in which he was holding beneficial shareholding which was brought to tax by invoking deeming provisions of section 2(22)(e) cannot be a ground for imposing penalty. The relevant portion of the order is extracted below:-

For imposing a penaltv under section 271(1)(c) either there should be concealment of income or furnishing of inaccurate particulars of income. In the instant appeal, the assessee company had neither concealed its income nor furnished the inaccurate particulars of income. Insofar as the assessee had disclosed all the particulars 0/transactions with the sister concern in the audited accounts as well as in the return of income, therefore it was not a good case for imposing penalty under section 271(1)(c). In the instant case, complete details were disclosed in the balance- sheet and in the schedule annexed to tax audit report, meaning thereby that all material facts were disclosed to the department by the assessee and the additions had been made on legal interpretation of law. There is no dispute to the well settled proposition that finding in the assessment proceedings are not conclusive for determining the imposition of penalty. Thus, while imposing penalty, the entirety of circumstances must reasonably point to the conclusion that there is a concealment or furnishing of inaccurate particulars. It was apparent from the record that the assessee-companv was neither holding any shares nor it was a registered share holder of 'R' Ltd. who had given loan to the assessee-company.

The Assessing Officer had levied penalty with reference to the addition made on account of loans/advances received by the assessee company from 'R' Ltd., by bringing such loans and advances under the purview of section 2(22)(e). While levying the penalty, the deeming provisions can he applied to a limited extent and instant case was concerned with the imposition of penalty under section 271(1)(c), which was not sustainable insofar as the assessee-company was not a registered shareholder of 'R' Ltd. who had given loan/advance to the assessee-company. In view of the above, it was not a fit case for levy of penalty under section 271(I)(c) in respect o/loans received by the assessee company from 'R' Ltd. which was brought to tax net by invoking the deeming provisions of section 2(22)(e).”

by the co-ordinate bench, we are of the view that penalty cannot be levied u/s 271(1)(c) towards addition made for loans and advances by invoking deeming provisions of section 2(22)(e) of the Act. Therefore, we direct the AO to delete penalty levied u/s 271(1)(c) of the Act.