P.SRINIVASAN,SALEM vs. ITO, SALEM

This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals), Salem (‘CIT(A)’ for short) dated 31.03.2017, dismissing the assessee’s appeal contesting the levy of penalty u/s. 271(1)(c) of the Income Tax Act, 1961 (‘the Act’ hereinafter) for the Assessment Year (AY) 2009-10 vide order dated 18.11.2015.

The only issue arising in the instant appeal is the maintainability in law, in the facts and circumstances of the case, of the penalty u/s. 271(1)(c) of the 2 (AY 2009-10) P.Srinivasan v. ITO Act, levied and sustained in the sum of �. 10,16,287/-, i.e., at one hundred per cent. of the tax sought to be evaded in terms of Explanation 4 to s. 271(1)(c) on the undisclosed income of �. 31,36,168/-.

We may begin by stating the back-ground facts of the case. The assessee individual is a Salem based retail and wholesale trader in sarees, buying them from Surat (Gujarat) and selling them at Salem (Tamil Nadu). During the course of the assessment proceedings, it was observed that an ATM cash withdrawal of �. 30,000/- from the assessee’s bank account with ICICI Bank was entered six times in the cash book (on different dates), i.e., increasing the cash balance (in his accounts) by �. 1,80,000/-, instead of by �. 30,000/- only, in-as-much as there were no corresponding withdrawals in the bank for the balance �. 1,50,000/-. The ld. Authorized Representative (AR), Shri T.S.Lakshmi Venkataraman, FCA, on being questioned in the matter, agreed to the additional sum being taxed as income. Further, the Assessing Officer (AO) found the cheques issued to third parties (i.e., ostensibly the creditors, the sellers of sarees) encashed at Surat. However, surprisingly, cash was entered in the cash book at Salem in respect of those cheques, and on the same day. How was it that the cheques issued in favour of third parties resulted in, instead of discharge of liability/s to that extent, even if per bearer cheque/s, an increase in the cash balance with the assessee? Again, why were the cheques encashed in Surat if the cash was required at Salem, where it was absorbed for the purposes of the assessee’s business? Further, how was the cash brought physically each time from Surat to Salem, separated by a long distance, and on the same day? The assessee’s repeated and specific questioning by the AO in the matter during hearing, i.e., with regard to the purpose of the cash withdrawals at Surat and, further, as to how and why was the cash brought, each time, to Salem, on the same day, which was highly impractical, did not elicit any answer. Removing 3 (AY 2009-10) P.Srinivasan v. ITO the cash withdrawn at Surat from the assessee’s cash book resulted in a negative cash balance, a physical impossibility, so that it could not be, and which was therefore inferred by the AO as having been entered (in the cash-book) as a device to cover the cash otherwise available with the assessee, i.e., source of which is not explained, and since used for meeting business expenses/for business purposes. The peak negative cash balance was worked out, including the ‘excess’ cash introduced against the cash withdrawal of �. 30,000/- on 29.04.2008, at �. 31,36,168/- (detailed at Ann. 1 to the assessment order). Further still, the AO, in the absence of any purpose of the cash withdrawals at Surat being explained, and which again could not be, presumed the same to be utilized for cash purchases at Surat, i.e., at �. 31.25 lacs, 10 per cent. of which, i.e., �. 3.1251 lacs, was considered as profit from undisclosed sales against such purchases. The assessee in first appeal found favour with the ld. CIT(A) as regards the addition on account of additional profit in-as-much as the inference of unaccounted purchases at Surat was, in the absence of any evidence toward the same, only a presumption. The addition qua the negative cash balance (�. 31.36 lacs) was confirmed by the Tribunal in second appeal (in ITA No.986/Mds/2014 dated 15.05.2015/copy on record). The penalty proceedings, initiated at the conclusion of the assessment proceedings, by issue of notice u/s. 274 dated 31.12.2011, were accordingly proceeded with, affording opportunity to the assessee to explain his case in the matter. The assessee replied by relying on the decisions in Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26 (SC) and Dilip N. Shroff v. Jt. CIT [2007] 291 ITR 513 (SC). The same were found as of little relevance. The matter was factual. Cheques were issued to third parties at Surat, which were encashed thereat, while cash in respect of those cheques was found entered in the assessee’s cash-book (at Salem). How could it be? Then, again, who were these parties to whom the cheques were being regularly issued? Recasting the assessee’s cash-book, removing this cash, 4 ITA No.1280/Mds/2017 (AY 2009-10) P.Srinivasan v. ITO resulted in a negative cash balance, a physical impossibility, so that the source of each – to that extent, was not known. No explanation had been furnished by the assessee toward the same. He, accordingly, finding the decisions cited as not applicable, levied penalty in respect of the addition of �. 31.36 lacs. The same stood confirmed in first appeal, and for the same reasons, i.e., an absence of explanation by the assessee qua the findings by the AO, since confirmed by the tribunal. Aggrieved, the assessee is in second appeal.

We have heard the parties, and perused the material on record. The law in the matter, i.e., qua penalty u/s. 271(1)(c) is trite; a plausible explanation saves penalty. An absence of explanation or a failure to substantiate the same would result in Explanation 1 to s. 271(1)(c), reproduced as under, being trigged, deeming the assessee to have concealed the particulars of income, i.e., qua the relevant income: ‘Failure to furnish returns, comply with notices, concealment of income, etc. 271. (1) If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person— (a) to (b)……. (c) has concealed the particulars of his income or furnished inaccurate particulars of such income, or he may direct that such person shall pay by way of penalty,— (i) to (iii)….. Explanation 1.—Where in respect of any facts material to the computation of the total income of any person under this Act,— (A) such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the Commissioner to be false, or (B) such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this Where the assessee is unable to furnish any explanation, duly supported, it cannot be said to be saved by either clause (A) or clause (B) of Explanation 1 to s. 271(1)(c), and toward which we may cite several decisions, settling the law, as follows: Union of India v. Dharmendra Textile Processors [2008] 306 ITR 277 (SC): Mak Data P. Ltd. vs. CIT [2013] 358 ITR 593 (SC); CIT v. Atul Mohan Bindal [2009] 317 ITR 1 (SC); K.P. Madhusudhanan vs. CIT [2001] 251 ITR 99 (SC); B.A. Balasubramaniam and Bros v. CIT (1999) 236 ITR 977 (SC); Addl. CIT vs. Jeevan Lal Shah [1994] 205 ITR 244 (SC); CIT vs. K. R. Sadayappan [1990] 185 ITR 49 (SC); CIT vs. Mussadilal Ram Bharose [1987] 165 ITR 14 (SC); and Sharma Alloys (India) Ltd. v. ITO [2013] 357 ITR 379 (Mad). Coming to the facts of the case, we find that neither in the assessment nor in the penalty proceedings did the assessee furnish any explanation whatsoever with regard to the encashment of the relevant cheques, i.e., as to how the cheques, issued to third parties at Surat, found its way as cash in his books of account, maintained at Salem, and, on cash occasion, on the same day. If the assessee required cash at Salem, for the purpose of meeting the expenditure of his business thereat, for which the same has been used, why were the cheques issued to third parties at Surat. That is, how did the cheques issued to third parties translate into cash with the assessee. The further question of it being available at Salem, and on the same day, for being utilized, is also perplexing. The same is clearly an artifice adopted for not disclosing the cheque payment to third parties, against perhaps unaccounted purchases there-from, so as to provide cash for his regular use at Salem. During hearing, the ld. AR would argue that the cash from unaccounted sales would meet the cash deficiency as reflected by the negative cash balance. Does that mean that the assessee admits 6 (AY 2009-10) P.Srinivasan v. ITO to unaccounted cash purchases from the cash withdrawn at Surat, as the AO had inferred, and which was assailed as presumptuous. Further, the cash generated from sales (at Salem) would again get deployed for cash purchases at Surat, without impacting the negative cash balance and, rather, would increase the (unaccounted) cash flow with the assessee on account of profit from the unaccounted business (i.e., purchase and sale). The cash generated cannot be used twice, both to fund purchases at Surat and, at the same time, business expenditure at Salem. The argument would thus be of no assistance to the assessee, who has been taxed only in respect of and, accordingly, levied penalty only qua the negative cash balance, i.e., for the unexplained source of cash. This is however subject to one caveat, i.e., the cash entered in the assessee’s books is deposited in bank, i.e., recycled, so that it is these funds that get effectually withdrawn at Surat. In other words, examining the assessee’s explanation of the cash sales (of the unaccounted purchased goods as being the source of funds introduced in the cash-book of the business), we find it as valid where and to the extent the same are deposited in the assessee’s bank account/s, so as to be available for purchase on withdrawal from the bank. This also obviates the need to ‘transfer’ cash from Surat – where it is withdrawn, to Salem. That is, as in fact advancing the assessee’s case. However, one needs to dwell further in the matter. For cash sales to happen, the cash withdrawn (at Surat) must necessarily be used for the purchase of goods (which are then sold out of books), so that it is not available for being entered in the assessee’s books upon withdrawal (i.e., on day one (D1)(say)), as done. However, the cash becomes available on the sale of goods, i.e., on day two (D2). As such, the cash withdrawn on day one becomes available to the assessee (through sales) with a time lag (D2 – D1). The cash required to support the expenditure or cash utilization – which could also be by way of bank deposit, can be estimated on the basis of the overall cash utilization (for the year), with the time period (time 7 (AY 2009-10) P.Srinivasan v. ITO lag) between purchase and sale being signified by the average inventory (of goods) vis-a-vis purchases. The relevant data is not readily available. However, given the smallness of the volume, we do not consider it proper to remit the matter for carrying out the said estimation exercise. The assessee has already admitted to an income corresponding to the excess cash withdrawal of �.1.5 lacs from ICICI Bank at the beginning of the year (refer para 3). No explanation stands furnished in its respect even in the penalty proceedings. This, coupled with another �. 30,000/-, similarly withdrawn from the IDBI Bank on 26.04.2008 (refer Annexure 1 to the assessment order), i.e., at a total of �. 1.80 lacs, which could provide the necessary basic fund (or unaccounted stock) of the assessee’s unaccounted business. Further, a concomitant would be the profit of the assessee’s said business, i.e., by way of unaccounted sales, estimated at �. 3.2 lacs (apprx.) in assessment. The assessee’s explanation, though completely unsubstantiated, and on which basis it found disfavour with the tribunal (in the quantum proceedings), however, explains the modus operandi employed by him. The same also explains the issue of cheques to third parties, being for the purchase of sarees (goods) from them at Surat. Being unaccounted, there is no question of the same being debited in the assessee’s books to their respective accounts. This also explains as to why the assessee could not lead any evidence in its respect, so that the explanation has to be considered bearing the same in mind. This also exposes another major flaw in the Revenue’s case. If the cheque/s proceeds were not available to the assessee, reflected to be by way of cash in the assessee’s books of account, how did the assessee benefit from the issue of cheques to these parties, parting with his resources in their favour, which could not be without purpose, i.e., could not reasonably be without consideration or quid pro quo. In our view, therefore, where the assessee has actually recycled the funds, depositing the cash in bank, the assessee has furnished a satisfactory explanation 8 (AY 2009-10) P.Srinivasan v. ITO for his inexplicable behavior. He, we consider, ought to have advanced the same even in the quantum proceedings, instead of assailing the addition on account of profit, a concomitant and, rather, the purpose of engaging in this exercise. We are, therefore, on the condition precedent of recycling of funds, and to the extent it is, being satisfied, direct the deletion of penalty u/s. 271(1)(c) qua the impugned income (�. 31.68 lacs), save for �. 5 lacs, being the unaccounted funds used for purchases as well as the profit on unaccounted sales. Though wholly un-substantiated, recycling of funds, i.e., by depositing cash in his bank account/s, only subject to which the assessee’s explanation becomes valid and admissible, shall at once prove the truth thereof, i.e., of the cash sales (of goods purchased out of books at Surat) as providing the source of funds introduced in business at Salem. We may further clarify that where the recycling of funds is less than �. 31.68 lacs, so that the balance negative cash is unexplained, warranting levy of penalty on the balance, the profit earned shall fill in the breach. The profit earned, estimated at �. 3 lacs for the year, worked out proportionately, shall supply the balance, i.e., telescoped against the said deficiency. As such, only the balance unexplained deficiency, if any, that survives the said telescoping, would warrant being subject to penalty, i.e., apart from the sum of �. 5 lacs estimated by us. Before parting with our order, we may though clarify that the penalty on the income sustained (�. 5 lacs), as estimated by us, arises out of and agrees with the assessee’s own explanation and conduct, as admitted income (�. 1.8 lacs) and the profit (�. 3.2 lacs) of its estimated undisclosed business on the basis of the profit rate of the disclosed business. Further, though arrived at in a different manner, i.e., consistent with assessee’s explanation, the same forms part of the undisclosed income (�. 31.36 lacs) assessed in quantum proceedings, and which also explains the telescoping afore-referred.

In the result, the assessee’s appeal is disposed of in the foregoing terms. Order pronounced on October 13, 2017 at Chennai.