MAHAVEER SARASWATHI,ARSIKERE vs. ITO, HASSAN

Per Shri Vijay Pal Rao, J.M. : These two appeals by the assessee are directed against two separate

orders of the CIT (Appeals), Mysuru arising from assessment order under

Section143(3) of the Income Tax Act, 1961 (in short 'the Act') and

penalty order passed under Section 271(1)(c) of the Act for the

Assessment Year 2010-11.

2 ITA Nos.801 & 802/Bang/2015 2. First we take up the quantum appeal of the assessee wherein the

assessee has raised the following grounds :

“ 1. The learned CIT (Appeals) erred in passing the order in the manner which he did. 2. The learned CIT (Appeals) erred in confirming the addition made of Rs.1 lakh towards cash credit and ought to have accepted the explanation offered by the appellant and accordingly liable to be deleted the said addition. 3. The learned CIT (Appeals) ought to have appreciated the submissions of the appellant towards the source for cash credit of Rs.2.5 lakhs and ought to have deleted the addition made by A.O. under Section 68 of the Act. 4. The learned CIT (Appeals) ought to have considered the submission of the appellant towards the genuineness of the loan borrowed from the villagers and the same was supported by confirmation letters. Thus, the addition of Rs.6,46,000 has to be deleted. 5. Without prejudice, the addition/disallowance is excessive, arbitrary and unreasonable and liable to be deleted into. 6. The learned CIT (Appeals) erred in confirming the interest under Section 234A and 234B of the Act. 7. For these and other grounds that may be urged at the time of hearing of the appeal the appellant prays that the appeal may be allowed.”

adjudication.

credit. During the course of appellate proceedings, the Assessing Officer

noted that the assessee has cash credit in the books of accounts as

3 ITA Nos.801 & 802/Bang/2015 withdrawal from Axis Bank of Rs.1 lakh. The Assessing Officer verified

the bank account of the assessee and found that there is no such entry of

Rs.1 lakh appearing in the Axis Bank account. When this fact was pointed

out to the assessee, the assessee submitted that in the cash book the

Accountant wrongly typed as Axis Bank whereas it is loan taken from

two persons namely Sri Yagati Naganna of Rs.50,000 and Sri Nerlige

Karinayak of Rs.50,000. The assessee has also explained that the above

amounts have been repaid to these two creditors on 21.7.2009 and

22.7.2009 respectively. The Assessing Officer did not accept this

explanation of the assessee and made an addition of Rs.1 lakh as

unexplained cash credit. On appeal, the assessee has reiterated the

contentions as raised before the Assessing Officer. The CIT (Appeals) was

not impressed with the explanation of the assessee and confirmed the

addition made by the Assessing Officer.

has submitted that the assessee has submitted the relevant details in the

assessment proceedings and also given the details of the repayment of

the said amount to these two creditors. The learned Authorised

Representative further submitted that the assessee has also filed the

4 ITA Nos.801 & 802/Bang/2015 confirmation which was not accepted by the authorities below and the

assessee is ready to produce the creditors for examination of the

Assessing Officer. The Assessing Officer has made addition because of

this mistake committed by the Accountant in the books showing this

amount as withdrawn from Axis Bank instead of loan taken from these

two creditors.

Assessing Officer has verified the account and found that the claim of

the assessee is factually incorrect and bogus, the assessee has come up

with a new explanation that this amount is taken from two parties which

is after though. He has relied upon the order of the authorities below.

material on record. Admittedly the assessee has shown Rs.1 lakh in the

cash book as withdrawal from the Axis Bank however, on verification the

Assessing Officer found that there is no such entry in the account. The

assessee then explained that this was a mistake committed by the

Accountant and the amount involved is loan taken from two persons

namely (1) Yagati Naganna & (2) Nerlige Karinayak. The assessee has

also explained that the said amount was repaid by the assessee on

5 ITA Nos.801 & 802/Bang/2015 21.7.2009 and 22.7.2009 respectively. The Assessing Officer did not

choose to verify the facts explained by the assessee and disallowed the

explanation at threshold. It is pertinent to note that when the assessee

has explained that this loan amount in question has been paid to these

creditors and also filed the confirmation of these two parties then in case

the Assessing Officer was not satisfied or doubting the veracity of the

confirmation as well as the claim then further enquiry / investigation

could have been conducted by the Assessing Officer. Instead of

conducting further enquiry, the Assessing Officer has out rightly rejected

the explanation as well as confirmation produced by the assessee.

Accordingly in view of the facts and circumstances of the case we find

that this issue requires a proper verification and examination. If need

arises the creditors may be examined by the Assessing Officer on being

production by the assessee.

unexplained cash credit.

persons as per cash book. The assessee filed certain documents certified

by Sri Mahaveer who was examined by the Assessing Officer. The

6 ITA Nos.801 & 802/Bang/2015 assessee produced the contract dt.2.4.2009 and 5.4.2009 under which

the amount of advance was claimed to have received against the

agricultural income. The Assessing Officer verified the date of issue of

stamp paper on which the contract dt.2.4.2009 and 5.4.2009 were

executed and also received clarification from Karnataka Stat Registration

and Stamp department and Multi Purpose Co-operative Society Ltd. who

is responsible for printing and distribution of stamp paper. It was

clarified that the same were issued in the market on 31.12.2010

onwards. When this fact was pointed out to the assessee, the assessee

explained that the original agreement was written on a plain paper and

later on the same was written on the stamp paper. The Assessing Officer

did not accept this explanation and held that the alleged agreement is

after thought as the assessee even did not produce the original

agreement. Accordingly, the Assessing Officer made the addition of this

amount as unexplained cash credit. On appeal, the assessee has

reiterated the contention and explanation as raised before the Assessing

Officer but could not succeed.

learned Departmental Representative and considered the relevant

7 ITA Nos.801 & 802/Bang/2015 material on record. The assessee claimed to have received an advance of

Rs.2,50,000 from various persons against the agricultural income. In

support of the claim the assessee produced two agreements dt.2.4.2009

and 5.4.2009. However the stamp paper used for these agreements

belong to the series of the stamp paper which were available only on

31.12.2010 onwards. Apart from these agreements the assessee has not

produced any other supporting documents except confirmation letters

from the creditors. It is manifest from the record that when the

Assessing Officer questioned the genuineness of the claim the assessee

attempted to manufacture the evidence in support of the claim by

producing pre-dated agreements on subsequently purchased stamp

papers. Therefore the evidence produced by the assessee is after

thought and created only after the Assessing Officer has questioned the

genuineness of the claim. In the absence of any contemporaneous

supporting evidence we do not find any error or illegality in the orders of

the authorities below for this issue.

borrowed fund from villagers.

8 ITA Nos.801 & 802/Bang/2015 12. The assessee has shown loan of Rs.19,000 each from 34 persons

amounting to Rs.6,46,000. The Assessing Officer question the strange

situation when 34 persons lent money to the assessee in a span of four

days of an identical amount of Rs.19,000 each. The assessee filed

confirmation letters from the creditors but all stereo typed letters dated

between 21.7.2012 to 31.7.2012. The Assessing Officer further noted

that all the confirmations were written in the same hand writing and

gave name and vague addresses of the alleged creditors. The Assessing

Officer asked the assessee to produce the lenders. In response the

assessee shown her inability to produce the lenders on the ground that

they were busy in their agriculture work. Hence the Assessing Officer

made an addition of Rs.6,46,000 as unexplained cash credit. The

assessee challenged the action of the Assessing Officer before the CIT

(Appeals) but could not succeed.

learned Departmental Representative and considered the relevant

material on record. Except the alleged confirmations as produced before

the Assessing Officer, no other evidence has been produced by the

assessee. The Assessing Officer had enough reason to doubt the

9 ITA Nos.801 & 802/Bang/2015 genuineness of the transaction as it is apparent that the assessee shown

loan of Rs.19,000 each from 34 persons. This fact itself shows that it is all

well thought out claim of the assessee to escape the relevant provisions

of the Act. Further all loans are shown as interest free loans which is not

acceptable except in case of a close relatives nobody will advance loan

without interest. The burden of proving the onus is on the assessee to

produce the creditors specifically when the facts and circumstances

clearly raise the suspicion on the very genuineness of the claim.

Accordingly, we find that the assessee has failed to discharge his onus to

prove the genuineness of the claim. This ground of the assessee is

dismissed.

assessee has also shown agricultural income of Rs.3,20,995 which has

been accepted by the Assessing Officer therefore the addition sustained

by us on account of unexplained credit to the extent of the agricultural

income stand explained and therefore the assessee will get the benefit of

source of the cash credit to the extent of the amount of Rs.3,20,995.

10 ITA Nos.801 & 802/Bang/2015 16. In the penalty appeal (ITA No.802/Bang/2015), the assessee has

originally raised the following grounds :

“ 1. The learned CIT (Appeals) erred in confirming the penalty levied by the Assessing Officer. 2. On the facts and in the circumstances of the case, confirming the penalty under Section 271(1)(c) of the Act is opposed to law as there being no concealment or furnishing of inaccurate particulars to justify such penalty. 3. The learned CIT (Appeals) ought to have appreciated that the amount received from the parties were identifiable and confirmations were also produced and accordingly confirming the additions under Section 68 of the Act was unjustifiable much less the penalty confirmed under Section 271(1)(c) of the Act on alleged concealment was opposed to law and liable to be deleted. 4. The learned CIT (Appeals) ought to have appreciated that even if the explanation furnished was not acceptable, still there could be no conclusion as to the concealment or furnishing of inaccurate particulars to justify the confirming of the levy of penalty. 5. Without prejudice, the confirming of penalty by the CIT (Appeals) is excessive, arbitrary and unreasonable and liable to be deleted in toto. 6. For these and other grounds that may be urged at the time of hearing of the appeal the appellant prays that the appeal may be allowed.” 17. The assessee has also raised additional ground which reads as

under :

“ 1. The Assessing Officer having issued the notice under Section 274 read with section 271(1)(c) of the Act in a mechanical manner, the penalty order passed under Section 271(1)(c) of the Act is not sustainable in the eye of law.

11 ITA Nos.801 & 802/Bang/2015 2. The appellant begs to submit that the decision of the jurisdictional High Court in the case of CIT Vs. Manjunatha Cotton & Ginning Factory (2013) 359 ITR 565 (Karn) is squarely applicable and therefore the impugned order of the authorities below is required to be set aside.”

learned Departmental Representative and considered the relevant

material on admission of additional grounds. As it is clear from the issue

raised in the additional ground that it is pure legal in nature whereby the

assessee is challenging the validity of notice issued under Section 274

r.w.s. 271(1)( c ) of the Act and supported the same with the judgment

of Hon'ble jurisdictional High Court in the case of Manjunatha Cotton &

Ginning Factory reported in 359 ITR 565. Since the additional grounds

raised by the assessee does not require any fresh investigation of facts

therefore, in the facts and circumstances of the case and in view of the

judgment of Hon'ble Supreme Court in the case of NTPC Ltd. Vs. CIT 229

ITR 383, the additional ground raised by the assessee is admitted for

adjudication.

271(1)(c) of the Act and submitted that the Assessing Officer has not

specified the default on the part of the assessee whether it is

12 ITA Nos.801 & 802/Bang/2015 concealment of income or furnishing of inaccurate particulars of income.

Therefore the said show cause notice under Section 274 is defective and

illegal and consequently penalty is not sustainable. She has also relied

upon the subsequent decision of the Hon'ble jurisdictional High Court

dt.25.1.2016 in the case of Safina Hotels Pvt. Ltd. Vs. CIT, Bangalore III &

Another in ITA No.240/2010 wherein the Hon'ble High Court has

reiterated the principle as laid out in the case of CIT Vs. Manjunatha

Cotton & Ginning Factory (supra).

authorities below.

is noted that the Assessing Officer has initiated the penalty proceedings

by issuing a notice under Section 274 r.w.s. 271 dt. 3.12.2012. The

grounds of proposed penalty under Section 271(1)(c) of the Act has been

mentioned in the notice as under :

“Have concealed the particulars of your income or furnished inaccurate particulars of such income.”

which ground the penalty was proposed to be initiated by issuing the

13 ITA Nos.801 & 802/Bang/2015 said notice, the Hon'ble jurisdictional High Court in the case of CIT Vs.

Manjunatha Cotton & Ginning Factory (supra) has held that the notice

under Section 274 of the Act should specifically state the ground

mentioned in 271(1)(c) of the Act i.e. whether it is for concealment of

income or furnishing of inaccurate particulars of income. Sending

printed form where all the grounds mentioned in the section 271(1) are

mentioned would not satisfy the requirement of law. By considering the

said decision, the Hon'ble jurisdictional High Court in the subsequent

decision dt.25.1.2016 in the case of M/s. Safina Hotels Pvt. Ltd. Vs. CIT

& Another (supra) has held in paras 9 to 11 as under :

“ 9. The Judgment of Manjunath Cotton and Ginning's case (supra) is squarely applicable to the facts of the present case wherein, it is held that the levy of penalty is not automatic concomitant of the assessment and the standard proforma without speaking of the relevant clauses lead to an inference to non- application of mind. In the conclusion part at para.63 of the said judgment, in clauses n,p,q,r, it is held thus: "(n) The direction referred to in Explanation IB to Section 271 of the Act should be clear and without any ambiguity. (p) Notice under Section 274 of the Act should specifically state the grounds mentioned in Section271(1)(c), i.e., whether it is for concealment of income or for furnishing of incorrect particulars of income. (q) Sending printed form where all the ground mentioned in Section 271 are mentioned would not satisfy requirement of law. (r) The assessee should know the grounds which he has to meet specifically. Otherwise, principles of natural justice is offended. On the basis of such proceedings, no penalty could be imposed to the assessee."

14 ITA Nos.801 & 802/Bang/2015 10. As regards Section 271(1-B) of the Act, it clearly indicates that the assessment order should contain a direction for initiation of proceedings. Merely saying that the penalty proceedings have been initiated would not satisfy the requirement, a direction to initiate proceeding shall be clear and not be ambiguous. 11. In the light of the said judgment of the Co-ordinate Bench, we are of the considered view that the Assessing Officer has not applied his mind at the time of issuing notice under Section 274 R/W Section 271(1)(b) of the Act. This view is fortified by the order passed under Section 271(1)(c) of the Act. No direction is coming forth in the assessments order for levying penalty which is mandatory as per Section 271(1B) of the Act. Considering the relevant factors, appellate commissioner has rightly allowed the appeal of the assessee setting- aside the order passed by the Assessing Officer which has been reversed by the ITAT on the ground that the assessee deliberately evaded the payment of tax by declaring the capital expenditure as revenue expenditure in the 'financial expenses'. In our considered opinion, for the reasons stated above, the order passed by the ITAT is not sustainable. Accordingly, we set aside the order of the ITAT and restore the order passed by the CIT(A) answering the substantial questions of law in favour of the assessee and against the revenue.” Respectfully following the judgment of the Hon'ble jurisdictional High

Court on this issue, the penalty levied under Section 271(1)(c) on the

basis of defective notice under Section 274 is not sustainable and

accordingly the same is deleted.

partly allowed and ITA No.802/Bang/2015 is allowed.

Order pronounced in the open court on the 29th day of July, 2016.

Sd/- Sd/- (INTURI RAMA RAO) (VIJAY PAL RAO) Accountant Member Judicial Member *Reddy gp