DCIT, CIR-22, KOLKATA, KOLKATA vs. SHRI DILIP CHAND KANKARIA, KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH (D), KOLKATA [Before Shri P.M. Jagtap, AM & Shri S.S. Viswanethra Ravi, JM] I.T.A. No. 650/Kol/2017 Assessment Year: 2012-13 DCIT CIR 22 Kolkata..............................…………………………......................................Appellant 54/1, Rafi Ahmed Kidwai Road, 4th Floor, Kolkata – 700 016 Shri Dilip Chand Kankaria...................…………………………………………….........Respondent 87, Lenin Sarani, Kolkata – 700 013 [PAN: AJXPK 5793 Q] Appearances by: Shri A. Bhattacharjee, Addl. CIT appearing on behalf of the Revenue. Shri Subash Agarwal, Advocate appearing on behalf of the Assessee Date of concluding the hearing : April 10, 2018 Date of pronouncing the order : April 13, 2018 ORDER PER P.M. JAGTAP, AM This appeal is preferred by the revenue against the order of Ld. CIT(Appeals) – 6, Kolkata dated 24.01.2017 whereby he cancelled the penalty of Rs. 45,02,635/- imposed by the A.O. under section 271(1)(c) of the Income Tax Act, 1961.

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disallowance of brokerage on loan and disallowance of 50% of interest respectively. Consequently penalty proceedings were also initiated by the A.O. under section 271(1)(c) and since the explanation offered by the assessee in response to the show cause notice issued during the course of the said proceedings was not found acceptable by the A.O., he proceeded to impose a penalty of Rs. 45,02,635/- under section 271(1)(c) being 100% of the tax sought to be evaded by the assessee in respect of two additions of Rs. 33,96,435/- and Rs. 1,16,91,865/- made to his total income.

“I have considered the facts of the case and the appellant’s submissions. The penalty was imposed in relation to two disallowances i.e. brokerage of Rs. 33,96,435/- and interest of Rs. 1,16,91,865/-. The A.O. disallowed brokerage of Rs. 33,96,435/- paid to one Shri Santi Kumar Surana on the ground that the services offered by him for mobilization of loans(for which the brokerage was paid) did not appear to be genuine and the brokerage was not incurred wholly and exclusively for the purpose of business. The AO arrived at this conclusion as old loans had been brought from years prior to A.Y. 2010-11 and brokerage had been claimed for the first time in A.Y. 2010-11. Similar addition had been made in A.Y. 2010-11 and A.Y. 2011-12 also. The Ld. CIT(A) XXXVI, Kolkata vide his order dated 08.01.2014 in appeal no. 86/2013-14 deleted the disallowance of brokerage holding that, in view of the evidence produced in the form of full details of brokerage charged and payments

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being made by cheque after deducting tax at source, ‘there was no basis for the A.O. to disbelieve the brokerage paid’. The A.O. has mentioned in the penalty order that this order of the Ld. CIT(A) has been contested by the department before the Hon’ble ITAT. Accordingly, the A.O. held, in view of the findings of the assessment order that inaccurate particulars of income were furnished by the appellant in relation to the claim of brokerage. In my order dated 20.01.2017 in appeal no 90/CIT(A)-6, Kol/2014-15 for the A.Y. 2011-12 in the appellant’s own case. I have deleted part of similar disallowance of brokerage paid to Shri Santi Kumar Surana after holding that the payment could not be held to be non-genuine merely on the ground of suspicion as under:

‘It is clear that the facts relating to payment of brokerage are similar to those in the A.Y. 2010-11 and this issue has already been decided in favour of the appellant in view of the evidence furnished in support of the genuineness of the brokerage. I agree with the Ld. CIT(A)-XXXVI, Kolkata on his findings in A.Y. 2010-11 as the appellant has furnished all necessary evidence in support of genuineness of the brokerage. The A.O. has disallowed the commission only on the basis of suspicion and as held by Hon’ble Supreme Court in the case of Dhakeshwari Cotton Mills Ltd. vs CIT(1954) 26 ITR 775 (SC), there must be something more than mere suspicion in support of an assessment and mere suspicion cannot take the place proof for the purpose of passing an order of assessment. The appellant has convincingly contended that he had no motive to minimise profit as he had incurred loss. Hence, the suspicion also is not well founded. Hence, respectfully following the order of the Ld. CIT(A) XXXVI, Kolkata for A.Y. 2010-11, it is held that payment of brokerage was genuine. However, I have held in para 5.2 above that borrowings worth Rs. 3,64,11,579/- had not been made for the purpose of business and upheld disallowance of interest of Rs. 54,61,737/- out of total claim of Rs. 1,40,86,839/-. Hence brokerage relatable to such borrowings also is not admissible as deduction, having been incurred not for the purpose of business. I consider it reasonable to disallow brokerage in the same proportion in which part of the interest has been disallowed. Hence, disallowance of brokerage of Rs. 10,49,713/- (i.e. Rs. 27.07.320/- X 54,61,737/1,40,86,389) is confirmed. The appellant gets a relief of Rs. 16,57,607/-.’

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Thus, in earlier years, the payment of brokerage to Shri Santi kumar Surana has been held to be genuine although part of the disallowance for A.Y. 2011-12 has been upheld as not having been incurred for the purpose of business as the relevant loans were not found lo have been borrowed for the purpose of business. The facts for the instant year are similar. All evidence in support of the claim that the brokerage was actually paid was furnished. The AO has not disputed the genuineness of payment of brokerage. It is also not the case of the AO that the brokerage has been paid back in cash by the broker to the appellant. The appellant has contended that on similar facts, the AO has himself not imposed any penalty in relation to a similar disallowance of brokerage for the A.Y. 2013-14 although notice for imposition of penalty u/s 271(1)(c) was issued. Be that as it may, on the facts of the case, there is no material on record to establish that the appellant had furnished inaccurate particulars of income in relation to the claim of brokerage. In the judgement of Hon’ble Karnataka High Court in the case of CIT v. Manjunatha Cotton and Ginning Factory, Bellary (2013) 218 Taxman 423 (Karnataka), the Hon'ble Court after analysing the provisions of section 271(1)(c) and various judicial decisions summarized, inter-alia, the following features of penalty leviable u/s 271(1)(c) of the Income Tax Act, 1961:

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Therefore, respectfully following the above judgement of the Hon’ble Karnataka High Court and the judgement in the case of CIT vs Reliance Petro Products Ltd. 322 ITR 158 (SC) relied upon by the appellant, it is held that appellant had not provided any inaccurate particulars of income in the return of income while claiming the brokerage. Merely because of an addition has been made to the income declared by the assessee on the basis of suspicion, penalty u/s 271(1)(c) cannot be imposed. The second disallowance of Rs. 1,16,91,855/- which has been considered fit for imposition of penalty by the A.O. is out of interest on borrowings claimed by the appellant. The A.O. disallowed 50% of the total interest of Rs. 2,33,89,373/- claimed by the appellant. It was held by the A.O. that the main business of the appellant had been discontinued long ago and it was not understandable as to why the appellant was incurring huge interest and brokerage for the loan taken neither for the purpose of business of film distribution nor for profit yielding assets. The A.O. also observed that this gave rise to a doubt in his mind as to whether the appellant was a businessman trying to make profit or to incur loss year after year by giving huge interest and brokerage. The A.O. was also unable to understand as to why lenders were giving loans to the appellant knowing fully well that possibility of repayment was nearly impossible. It was also inferred by the A.O. that the appellant was ‘using his income tax return along with accounts to accommodate interest income of other party’. Hence, ‘to meet both ends’, Rs. 1,16,91,865/- being 50% of the interest incurred by the appellant was disallowed. On the basis of these findings of the assessment order, in the penalty order, it has been held that inaccurate particulars of income were furnished by the appellant. In the aforesaid appellate order for A.Y. 2010-11, the CIT(A) XXXVI, Kolkata has deleted interest disallowance made on similar facts. In my order above referred order dated 20.01.2017 for the A.Y. 2011-12, I have deleted disallowance of Rs. 86,24,652/- out of total disallowance of interest of Rs. 1,40,86,389/- holding that the same was incurred on loans borrowed for the purpose of business. As stated above, the A.O. has not imposed any penalty for furnishing inaccurate particulars of income in relation to a similar disallowance of interest for A.Y. 2013-14. The findings of the A.O. for the instant assessment year have been discussed above. The primary

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reason given for making the disallowance was that the state of affairs evident from the appellant’s balance sheet created a doubt about the real purpose for which and the real person for whom the interest was being incurred although the appellant was continuously incurring losses. However, it is clear on the basis of the facts discussed in the assessment order that the main reason for the disallowance was the doubt in the mind of the A.O. as to how the interest could be considered to have been incurred for the purpose of business. As held in Dhakeshwari Cotton Mills Ltd. vs CIT (supra) by the Hon’ble Apex Court, suspicion cannot take place of proof even for the purpose of passing an order of assessment. The findings of the assessment order have been repeated in the penalty order. The level of proof required for imposing penalty for furnishing inaccurate particulars of income is even higher. Further, the disallowance is only an estimated disallowance, as an ad hoc 50% disallowance has been made out of the total interest claimed by the appellant. It is a settled position of law that penalty cannot be imposed for furnishing inaccurate particulars of income, when the disallowance / addition is estimated. Thus, there is no material on record to prove that the appellant had furnished inaccurate particulars of income while claiming of interest of Rs. 1,16,91,865/- being part of total interest of Rs. 2,33,89,373/- claimed by the appellant. The ultimate reason given by the A.O. for the disallowance is ‘to meet both ends’. The A.O. has not even been able to clearly conclude that the appellant had incurred interest on funds not borrowed for the purpose of business. Therefore, in view of the ratio of the case of Reliance Petro Products Ltd. (supra) relied upon by the appellant, it is held in relation to the disallowance of interest of interest of Rs. 1,16,91,865/- also that the appellant had not provided any inaccurate particulars of income in the return of income while claiming deduction on account of the interest. Hence, it is held that this is not a fit case for imposition of penalty and penalty of Rs. 45,02,635/- imposed by the A.O. is cancelled.”

Aggrieved by the order of the Ld. CIT(A), the revenue has preferred this appeal before the Tribunal.

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supported the said order of the Ld. CIT(A) cancelling the penalty imposed by the A.O. under section 271(1)(c) on the ground that the penalty notice issued by the A.O. initiating the penalty proceedings itself was bad in law being a defective one. He has invited our attention to the copy of the said notice placed at page no 1 of the Paper Book and pointed out that it did not specify which limb of 271(1)(c) of the Act, the penalty proceedings had been initiated i.e. whether for concealment of particulars of income or furnishing of inaccurate particulars of income. As rightly submitted by him, the irrelevant portion in the said notice was not struck off by the A.O. and it was thus not clear from the notice issued by the A.O. as to whether the penalty proceedings were initiated for concealing the particulars of income by the assessee or furnishing of inaccurate particulars of such income. In the case of CIT vs SSA’s Emerald Meadows (ITA No. 380 of 2015 dated 23rd November, 2015), a similar defective notice issued by the A.O. without specifying as to whether the penalty proceedings had been initiated for concealment of particulars of his income by the assessee or furnishing of inaccurate particulars of such income was held to be bad in law by the Tribunal cancelling the penalty and the said decision of the Tribunal was upheld by the Hon’ble Karnataka High Court by relying on its earlier decision rendered in the case of CIT vs Manjunatha Cotton & Ginning Factory 359 ITR 565. As submitted by the learned counsel for the assessee, the SLP filed by the assessee against the decision of the Hon’ble Karnataka High Court in the case of SSA’s Emerald Meadows has already been dismissed by the Hon’ble Supreme Court on 05.08.2016. We, therefore, hold that the notice issued by the A.O. in the present

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case initiating the penalty proceedings under section 271(1)(c) was bad in law being a defective one and the penalty imposed by him in pursuance of such improper and invalid initiation is liable to be cancelled. We accordingly uphold the impugned order of the Ld. CIT(A) cancelling the penalty under section 271(1)(c) although on a different ground.

Sd/- Sd/- (S.S. Viswanethra Ravi) (P.M. Jagtap) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 13/04/2018 Biswajit, Sr. PS Copy of order forwarded to: 1. Shri Dilip Chand Kankaria, 54/1, Rafi Ahmed Kidwai Road, 4th Floor, Kolkata – 700 016. 2. DCIT CIR 22, 87, Lenin Sarani, Kolkata – 700 013. 3. The CIT(A) 4. The CIT 5. DR True Copy, By order, Sr. P.S. / H.O.O. ITAT, Kolkata