KUDRAT PROPERTIES,MUMBAI vs. ITO 23(2)(4), MUMBAI

The facts relating to the case are discussed in brief. The assessee is a partnership firm and its principal source of income was rental income. The partnership firm was formed on 10-04-2008 and hence the year under consideration was the first year of operation. During the course of assessment proceedings, the AO noticed that the assessee has taken loan from various parties numbering 23 persons for an amount aggregating to Rs.2,09,23,000/-. The assessee furnished confirmation letters obtained from 20 parties. All the loans were claimed to be interest free. In order to verify the genuineness of the 2 M/s. Kudrat Properties loans, the assessing officer issued notices u/s 133(6) of the Act. Since the AO did not receive any response from the creditors, he deputed his inspector to make enquiries. The Inspector reported that the creditors have denied having given loan to the assessee. It was further noticed that all the creditors have filed their respective return of income through the auditor of the assessee firm named Shri Kamal Sangtani. Subsequently the AO carried our survey operation u/s 133A of the Act at the business premises of the assessee. A statement was taken from the auditor of the assessee firm, i.e., Shri Kamal Sangtani. In the statement so taken, Shri Kamal Sangtani agreed to offer the entire loan amount of Rs.2,09,23,000/- and also further capital contribution of Rs.28,95,755/- was also offered. Thus a sum of Rs.2,38,17,755/- in aggregate was offered as income of the assessee. During the course of assessment proceedings, the AO issued a show cause notice dated 7.12.2011 asking the assessee to explain as to why the addition of Rs.2,38,71,755/- should not be made to the returned income as admitted in the survey proceeding. Even though the assessee did not respond to the said letter, yet the AO completed the assessment by assessing the above said amount as income of the assessee. It is pertinent to note that the assessee also accepted the assessment order by not challenging the addition by filing appeal.

Thereafter, the AO initiated penalty proceedings u/s 271(1)(c) of the Act. In the penalty proceedings, the assessee’s authorised representative filed a letter dated 24.04.2012, wherein it was pleaded that the impugned amount of Rs.2,38,17,755/- was offered voluntarily as at that point of time, it was not possible for the assessee to produce the loan creditors. It was submitted that the assessee has furnished all the details relating to creditors. Accordingly it was submitted that the voluntary offer to surrender unsecured loans as income was made to purchase peace of mind and the same cannot be considered as 3 M/s. Kudrat Properties concealment of income. It was further submitted that there was no conscious concealment of income and accordingly the assessee prayed the AO to drop penalty proceedings. The AO was not convinced with the submissions of the assessee. He took the view that the assessee had no other option but to offer the cash credits as its income as the assessee could not justify the cash credits. Accordingly he held that the assessee has filed inaccurate particulars and concealed his income. Accordingly he levied penalty of Rs.79.80 lakhs u/s 271(1)(c) of the Act. In the appellate proceedings, the Ld CIT(A) confirmed the penalty levied by the AO by holding that the surrender of income merely to purchase peace would not exonerate the assessee from penal liability as held by Hon’ble Supreme Court in the case of MAK Data Pvt Ltd (Appeal No,9772 of 2013). Aggrieved by the order passed by Ld CIT(A), the assessee has filed this appeal before us.

The Ld A.R submitted that the year under consideration is the first year of operation and the impugned loans were obtained by the assessee during the initial period of the year. He submitted that the assessee has filed confirmation letters including the financial statements/return of income copies obtained from the Creditors during the course of assessment proceedings in order to discharge the burden of proof placed upon the assessee u/s 68 of the Act. During the course of survey proceedings, the authorized representative of the assessee has agreed to offer the sundry creditors balances as income. He has further offered one of the partners’ capital also as income of the assessee. The assessee has also accepted the same by not filing appeal. He submitted that the provisions of sec. 68 create a legal fiction to treat capital receipts as income of the assessee. He submitted that the impugned loans and partner’s capital has been brought into the books immediately after the inception of the partnership firm. He submitted that the assessee’s source of income is only rental income and it is 4 M/s. Kudrat Properties not the case of the AO that the assessee has suppressed any rental income. Accordingly he submitted that the assessee-firm could not have earned the income equivalent to impugned cash credits addition during the year under consideration. He further submitted that the assessee has furnished all the relevant details before the AO, but the authorized representative agreed to offer the same as the assessee could not produce the loan creditors at that point of time. Accordingly he submitted that the addition made u/s 68 of the Act cannot lead to the inference that the assessee has concealed income.

The Ld A.R further submitted that the provisions of sec. 271(1)(c) provide two limbs, viz., furnishing of inaccurate particulars of income and concealing particulars of income. Both the limbs have different connotations. He submitted that the AO did not strike off inappropriate limb in the penalty notice issued by him. He further submitted that the penalty order is silent about the approval, if any, obtained from the Joint Commissioner of Income tax, which is a mandatory condition prescribed under the Act. He submitted that the non-striking of inappropriate limb in the penalty notice would vitiate the penalty proceedings as held by Hon’ble Karnataka High Court in the case of CIT Vs. Manjunatha Cotton and Ginning Factory & Others (2013)(359 ITR 565) and CIT Vs. M/s SSA’s Emerald Meadows (ITA 380/Kar/2015)(Kar). He further submitted that the absence of approval from Joint Commissioner would also vitiate the penalty proceedings.

On the contrary, the Ld D.R submitted that the statement was taken from the authorized representative of the assessee, since the spouse of the authorized representative was also one of the partners of the assessee firm. Further he was holding Power of Attorney obtained from his wife. He submitted that the assessing officer has issued notices u/s 133(6) of the Act to the creditors, which remain un-responded. Further the Inspector of the Income tax

We have heard rival contentions and perused the record. We have noticed that the assessee firm was formed on 10-04-2008 and hence the year under consideration is the first year of operation for the assessee. We have noticed that the assessee’s income source is rental income and there is no allegation that the assessee has understated its rental income. The impugned addition has been made u/s 68 of the Act in respect of unsecured loans obtained from various parties and also capital introduced in one of the partners’ hand. There should not any dispute that the provisions of Section 68 introduce a legal fiction to assess capital credits as revenue income of the assessee, if the assessee fails to discharge the initial burden of proof placed upon its shoulders. In the instant case, the assessee has furnished confirmation letters obtained from 20 creditors and the same has been placed in the paper book filed by the assessee. A perusal of the same would show that the assessee has obtained copies of financial statements, bank accounts and return of income filed by them. We notice that the above said sundry creditors did not respond to the notices issued by the AO u/s 133(6) of the Act. Further, according to the report submitted by the Inspector of income tax, most of the creditors have denied the loan transaction. However, the facts remain that the copies of financial

Thus, the basis of the addition is the surrender made during the course of survey operation. However, the fact remains that the year under consideration is the first year of operation of the assessee. The assessee’s only source of income is the rental income. It is not the case of the assessing officer that the assessee has suppressed rental income and introduced the same as Cash Credits in the books of account. As submitted by the Ld A.R, the provisions of sec. 68 provides a legal fiction to assess the capital receipts as revenue income of the assessee, when the assessee fails to prove the initial burden of proof placed upon it. The provisions have been introduced to curb the practice of introducing the income in the form of Capital receipts. In the facts, we have noticed that the year under consideration is the first year of operation and further there is no allegation that the assessee has suppressed its rental income, being the lone source of income. Hence, in the instant case, the impugned cash credits have been assessed as income of the assessee due to legal fiction introduced in sec. 68 of the Act. Otherwise there is no scope for treating impugned loan credits/capital credits as income of the assessee. We have also noticed that the documents furnished by the creditors have not been proved to be false and hence there is merit in the submission of the assessee that it has offered the 7 M/s. Kudrat Properties cash credits/capital credits as its income, since it could not produce the creditors at that point of time.

The penalty u/s 271(1)(c) of the Act is levied for concealing the particulars of income or furnishing inaccurate particulars of income. We have earlier noticed that the assessing officer has levied penalty by observing that the assessee has furnished inaccurate particulars of income and concealed his income. It is well settled proposition that both the limbs prescribed in sec. 271(1)(c) viz., concealment of particulars of income and furnishing of inaccurate particulars of income connote different meanings. In the instant case, the observation made by the assessing officer would lead to two types of interpretations, i.e., either the AO has charged the assessee with both kinds of fault, without specifying how both charges fit into in the present case or he has charged the assessee for furnishing inaccurate particulars of income, which has lead to concealment of income. However, the fact remains that the addition has been made u/s 68 of the Act due to legal fiction and there is no allegation that the assessee has suppressed its rental income, being the only source of income of the assessee. Hence we are of the view that the assessee, in the facts and circumstances of the case, cannot be charged with the guilt of furnishing inaccurate particulars of income

The Ld D.R objected to the contention of the assessee with regard to the contention of first year of operation on the plea that the same has been raised for the first time before the Tribunal. However we notice that the Ld A.R has only brought to light the facts already available on record and hence we do not find any infirmity in it.

We have earlier noticed that the assessee’s only source of income is rental income and there is no charge that the assessee has suppressed its rental

We have noticed that the Ld CIT(A) has confirmed the penalty by following the decision rendered by Hon’ble Supreme Court in the case of MAK Data P Ltd (supra). The Hon’ble Supreme Court has laid down a principle that the voluntary surrender of income will not exonerate the assessee from the clutches of penalty provisions u/s 271(1)(c) of the Act. However, in the facts and circumstances of the case, we have come to the conclusion that the impugned addition has been made due to legal fiction prescribed u/s 68 of the Act and there is no scope that the assessee could have earned income to the extent assessed by the partnership firm. We have also noticed that the question of assessing such cash credits in the hands of partnership firm during the first year of operation has got divergent views. Hence the entire addition itself becomes debatable one. It is well settled proposition of law that the penalty u/s 271(1)(c) cannot be levied on debatable issues.

In view of the foregoing discussions, we are of the view that the impugned addition would not lead to levy of penalty u/s 271(1)(c) of the Act.

The Ld A.R also pointed out that the assessing officer did not strike out inapplicable portion in the notice issued to the assessee, i.e., he did not specify the charge under which the penalty proceedings were initiated. Accordingly he submitted that the penalty proceeding initiated by the AO is liable to be quashed on this legal issue alone. He further submitted that the penalty order did not specify that the approval of Joint Commissioner was obtained by the AO. We do not find it necessary to address these legal issues, since we have held that the penalty u/s 271(1)(c) of the Act is not levieble in the facts and circumstances of the case.

In view of the foregoing discussions, we set aside the order passed by Ld CIT(A) and direct the AO to delete the impugned penalty.

In the result, the appeal of the assessee is allowed. Order has been pronounced in the Court on 22.3.2017.