DILIPKUMAR PHOOLCHAND JAIN,THANE vs. ACIT CEN CIR 2, THANE

ORDER PER N.K. PRADHAN, A.M. This is an appeal filed by the assessee. The relevant assessment year is 2006-07. The appeal is directed against the order of the Commissioner(Appeals)-1 at Thane and arises out of the penalty order u/s 271(1)(c) of the Income Tax Act, 1961 (here-in-after ‘the Act’).

A search and seizure action was carried out by the department u/s 132 of the Act at the business and residential premises of the assessee on 05/01/2006. In the statement recorded during the course of search, the assessee had admitted that he was earning net profit @10% on the gross receipts. The gross receipts of the assessee from his proprietary business were Rs. 11,93,19,338/-. The net profit @10% on it works to Rs.1,19,31,933/-. The assessee had disclosed net profit of Rs. 1,13,73,561/-. The Assessing Officer(AO) made an addition on the difference of Rs.5,58,372/- to the assessee’s income.

3.1 The assessee had disclosed Long Term Capital Gains(LTCG) of Rs.52,92,328/- on transaction of purchase and sale of shares. In response to the query raised by the AO, the assessee could not produce during the assessment proceedings, the share certificates, STT challans, demat account. The AO recorded the statement of Shri Raj Masalia, Principal Officer of M/s DPS Shares & Securities Pvt. Ltd through whom the assessee had shown transactions of purchase and sale of shares. In his statement, Shri Masalia admitted that, in fact, no purchase or sale of shares of M/s Pranett Industries had been undertaken by him on behalf of the assessee and the bills/contract notes supplied by them to the assessee were only accommodation bills. The statement of Shri Masalia was confronted to the assessee by the AO on ITA No. 5954/Mum-2014 3 18/12/2007. The assessee was asked to explain why the amount of Rs.53,86,564/- shown as sale price of the shares shall not be treated as unexplained credit u/s 68 of the Act. Then, the assessee filed a revised return of income on 20/12/2007 increasing the business income by Rs. 17,95,551/-. Also, the cash-in-hand was reduced from Rs. 76,70,732/- to Rs. 41,70,732/-, thereby reducing it by Rs. 35,00,000/-. The AO, however, made an addition of Rs.53,86,564/- to the assessee’s income u/s 68 being unexplained cash credit. The AO imposed a penalty @ 150% of the tax sought to be evaded u/s 271(1)(c) of the Act and it comes to Rs. 30,01,597/-. The ld. CIT(A) directed the AO to reduce the quantum of penalty to Rs. 20,01,064/- being 100% of the tax sought to be evaded.

4.1 Against the penalty levied on the addition of Rs. 5,58,372/-, it is submitted that the assessee in the course of statement recorded u/s 132(4) of the Act on 25/01/2006 had stated that his income from business of construction of godowns was around 10%. This statement of the assessee was a general one indicating the approximate rate of net profit which would be earned by the assessee from the said business. The net profit finally declared by the assessee vide his return of income from the said business was 9.53% i.e. around 10% figure stated by the assessee in the 132(4) statement. The AO , however, did not accept the declared income and made addition of Rs. 5,58,372/- on account of difference in net profit. It is stated that the addition made by the AO is solely based on the statement of the assessee recorded u/s ITA No. 5954/Mum-2014 4 132(4) of the Act and no defect or deficiency has been pointed out by the AO in support of the addition. Therefore, it is submitted that penalty u/s 271(1)(c) would not be attracted on the addition made on such adhoc basis.

4.2 Against the levy of penalty on addition of Rs. 53,86,564/-, the ld. Counsel of the assessee submits that during the impugned assessment year the assessee had earned LTCG on the sale of equity shares of a listed company i.e. M/s Prranet Industries Ltd. It is also stated that due to diverse reason, the assessee could not produce the relevant details called for by the AO in the course of assessment proceedings. The assessee also harboured doubts about obtaining the relevant information from the broker who was not cooperating. To overcome this defect, the assessee voluntarily filed a revised return of income on 20/12/2007 wherein income of Rs. 17,95,551/- was additionally offered to tax and cash balance to the extent of Rs. 35,00,000/- was reduced. Thus the credit in the accounts on account of exempt LTCG was nullified through the revised return/revised accounts. It is submitted that the transaction of purchase and sale of shares be taken as genuine as the sale of shares had taken place in demat form. He brought to our notice p. 36 to 38 of the paper book filed by him. The AO in the original assessment proceedings had recorded the statement of the broker through whom the concerned shares were acquired. It is stated that the said broker appears to have denied that any shares were purchased through him. It is specifically stated that no reliance should be placed on the said statement of the broker unless a real and reasonable opportunity is granted to the assessee to meet the adverse evidence given by him.

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The ld. Counsel for the assessee further submits that the sum of Rs. 53,86,564/- credited in the books of accounts on account of sale of equity shares has been received by account payee cheque from the broker M/s DPS Shares and Securities Pvt. Ltd. for sale of shares on behalf of the assessee. The amount credited in the books of the assessee has been received from the above mentioned broker through banking channels. The AO does not dispute this fact. The sale of shares in demat form is also confirmed by the depository participant. In view of the above, it is submitted that penalty under section 271(1)(c) would not be attracted in such a case.

4.3 Reliance was placed by him on the decision in the case of Andaman Timber Industries vs. Commissioner of Central Excise [2015] 281 CTR 0241 (SC); R.W. Promotions (P) Ltd. vs. ACIT (2015) 61 taxmann.com 54 (Bom); CIT vs. Gem Granites (2014) 42 Taxman.com 493 (Mad).

6.1 Now we turn to the appeal filed against the levy of penalty u/s 271(1)(c) of the Act on addition of Rs. 53,86,564/- made u/s 68 as unexplained cash credit on account of consideration received on sale of equity shares.

Let us begin with the cases relied on by the ld. Counsel of the assessee. The first case is Andaman Timber Industries (supra). In this case the assessee had filed its declaration u/s 173C of the Central Excise Rules showing the price of the goods at which they were sold ex-factory and delivery basis. Statements of two buyers were recorded and show-cause notice was served on the assessee stating as to why the price at which goods were sold to these customers from the depots may not be the basis for determining the value for ITA No. 5954/Mum-2014 7 the purpose of excise duty. The assessee questioned the correctness of the statements of the aforesaid two witnesses and demanded right to cross- examine. Thereafter, the adjudicating authority passed the order confirming the demand in the show cause notice. The assessee filed appeal against the aforesaid order of the adjudicating authority. However, the said appeal was dismissed by the Customs, Excise and Service Tax Appellate Tribunal. The Hon’ble Supreme Court observed that the assessee had contested the truthfulness of the statements of these two witnesses and wanted to discredit their testimony for which purpose it wanted to avail the opportunity of cross- examination. Even when the assessee disputed the correctness of the statement and wanted to cross-examine, the adjudicating authority did not grant this opportunity to the assessee. The Hon’ble Court also observed that “in the impugned order passed by the adjudicating authority, he has specifically mentioned that such an opportunity was sought by the assessee. However, no such opportunity was granted and the aforesaid plea is not even dealt with by the adjudicating authority”. The Hon’ble Court held that “not allowing assessee to cross-examine witness by adjudicating authority though statements of those witnesses were made as basis of impugned order, amounted in serious flaw which makes impugned order nullity as it amounted to violation of principles of natural justice.”

In the above case, the assessee questioned the correctness of the statements of the aforesaid two witnesses and demanded right for cross- examination before the adjudicating authority. In the instant case, the assessee has not demanded right for cross-examination before the AO during the course of assessment made u/s 153A r.w.s 143(3) dt. 31/12/2007. Also ITA No. 5954/Mum-2014 8 the assessee has not filed appeal before the ITAT against the order of the ld. CIT(A)-1, Thane dated 31/07/2008 which arises out of the above order of the ACIT, Central Circle-2 ,Thane. Thus, the above order passed by the Ld. CIT(A)- 1, Thane has attained finality. In view of the above, the case of the present assessee is distinguishable from the above decision.

The second case is R.W. Promotions (P) Ltd.(supra). In this case, during the A.Y. 2007-08, the assessee had engaged services of “Inorbit” and “Nupur” to enable them to carry out promotional and advertisement activities. The amount of Rs.1.15 crores paid to them was treated as expenditure to arrive at its profit while filing its return of income. This was accepted by the AO u/s 143(1) of the Act. Thereafter, the AO issued a notice u/s 148 seeking to re- open the above assessment on the ground that the expenditure claim of Rs.1.15 crores was bogus as evidenced by the statement of representative of “Inorbit” “Nupur”. During the course of assessment proceedings, the assessee called upon the AO to make available to him the statement recorded of the representatives of “Inorbit” “Nupur” which were allegedly adverse to him. Thereafter, the assessee sought cross-examination of the deponents of the statements made on behalf of “Inorbit” “Nupur”. Inspite of the above request, the AO passed an assessment order disallowing the expenditure of Rs.1.15 crores. In appeal the CIT(A) and ITAT upheld the order of the lower authorities. In further appeal by the assessee, the Hon’ble High Court held:

“There has been a breach of principles of natural justice in as much as the Assessing Officer has in his order placed reliance upon the statements of representatives of Inorbit and Nupur to come to the conclusion that claim for expenditure made by the assessee is not genuine. Thus the assessee was ITA No. 5954/Mum-2014 9 entitled to cross examine them before any reliance could be placed upon them to the extent it is adverse to the assessee. This right to cross-examine is a part of the audi altrem partem principle and the same can be denied only on strong reason to be recorded and communicated. The impugned order holding that cross examination would have been directed if felt was necessary, is hardly a reason in support of coming to the conclusion that no cross examination was called for in the present facts. This reason itself makes the impugned order vulnerable. [Para 11]

Thus the assessee was not given an opportunity to cross examine the witnesses whose statement is relied upon by the revenue and the evidence led by the assessee has not been considered. Therefore this is clearly a breach of principles of natural justice. In view of the above, the order of the Tribunal is set aside and the issue is restored to the Assessing Officer for fresh disposal after following the principles of natural justice and in accordance with law.[Para 13]”

In the above case, during the course of assessment proceedings, the assessee called upon the AO to make available to him the statement recorded of the representatives of “Inorbit” “Nupur” which were allegedly adverse to him. Thereafter, the assessee sought cross-examination of the deponents of the statements made on behalf of “Inorbit” “Nupur”. Inspite of the above request, the AO passed an assessment order disallowing the expenditure of Rs.1.15 crores. In the instant case, in response to the query raised by the AO during the course of assessment proceeding, the assessee could not produce during the assessment proceedings, the share certificates, STT challans, demat account. The AO recorded the statement of Shri Raj Masalia, Principal Officer of M/s DPS Shares & Securities Pvt. Ltd through whom the assessee had shown transactions of purchase and sale of shares. In his statement, Shri

ITA No. 5954/Mum-2014 10 Masalia admitted that in fact no purchase or sale of shares of M/s Pranett Industries had been undertaken by him on behalf of the assessee and the bills/contract notes supplied by them to the assessee were only accommodation bills. The statement of Shri Masalia was confronted to the assessee by the AO on 18/12/2007. In the instant case, the assessee has not demanded right to cross-examination before the AO during the course of assessment u/s 153A r.w.s 143(3) dt. 31/12/2007. Also the assessee has not filed appeal before the ITAT against the order of the ld. CIT(A)-1, Thane dated 31/07/2008 which arises out of the above order of the ACIT, Central Circle-2 ,Thane. Thus, the above order passed by the ld. CIT(A)-1, Thane has attained finality. In view of the above, the case of the assessee is distinguishable from the above decision.

The third case relied on by the ld. Counsel of the assessee is Gem Granites (supra) . In this case, the assessment in respect of the assesse for the A.Y. 1996-97 was completed u/s 143(3) on 30/03/1999 on a total income of Rs.26,12,140/-. There was search conducted u/s 132 in which it was revealed that in a real estate dealings, there were ‘on money’ transactions and cash of Rs.27,00,000/- was seized. The assessee offered to admit the ‘on money’, but claimed that they will do so on completion of the projects under the ‘completed contract method’ and therefore, no income was offered by the assessee in the said year, namely, 1996-97. The assessee took a stand that the cash found at the time of search represented ‘on money’ and the notings and workings made in the slips of papers, were not of relevance, since such notings related to one purchaser. The AO found the explanation given by the assessee as not credible. Accordingly, the AO based on the evidence included

ITA No. 5954/Mum-2014 11 ‘on money’ component and completed the assessment. Penalty proceedings were also initiated u/s 271(1)(c) of the Act. The CIT(A) observed that the entries relating to ‘on money’ received from JB Exports are clearly recorded in the seized documents and there is no escape from inevitable and infallible conclusion that the assessee had received ‘on money’ of Rs.86,50,250/-. Taking note of the findings recorded by the Tribunal in its order in the quantum appeal, the ld. CIT(A) held that there is no reason for deviating from the view and there is no infirmity in the imposition of penalty u/s 271(1)(c) of the Act. On further appeal, the Tribunal held that the possibility of wrong entry could not be ruled out and allowed the assessee’s appeal The short question which was before the Hon’ble High Court was whether the order of penalty u/s 271(1)(c) of the Act passed by the AO and confirmed by the ld. CIT(A) was just and proper. The Hon’ble High Court held:

“Factually, the onus cast upon the assessee has been discharged by giving a cogent and reliable explanation and, if the department did not agree with the explanation, then the onus was on the department to prove that there was concealment of particulars of income or furnishing inaccurate particulars of income. In the instant case, such onus which shifted on the department has not been discharged. In the circumstances, there is no ground to interfere with the finding of the Tribunal on the aspect of the bona fides of the conduct of the assessee. [Para 12]

In the above case, the assessee offered to admit the ‘on money’, but claimed that they will do so on completion of the projects under the ‘completed contract method’ and therefore, no income was offered by the assessee in the said year, namely, 1996-97. The assessee took a stand that the cash found at the time of search represented ‘on money’ and the notings and ITA No. 5954/Mum-2014 12 workings made in the slips of papers, were not of relevance, since such notings related to one purchaser. In the instant case, the facts are different. The same has been summarised at para 6.4 infra. A perusal of it shows that the case of the present assessee is distinguishable from the above decision .

The assessee, in the instant case, has also filed a paper book wherein the written submission dated 08.05.2014 filed before ld. CIT(A) has been mentioned. Therein, the assessee has relied on some decisions. The copies of the said decisions were not filed before us. Inspite of it, we shall try to examine them. The first decision is M/s Karla Glue Factory vs. STT & Ors (1987) 167 ITR 498 (SC) . The assessee submits that where the statement of a person is recorded behind the back of the assessee but not tested by cross examination, such a statement cannot be allowed to be used to the prejudice of the assessee.

The second decision relied on by the assessee before the ld. CIT(A) is Mukesh R. Marolia vs. Addl. CIT, 6 SOT 247(Mum.)(2006). The assessee submits that the Tribunal in this case has upheld the contentions of the assessee with relation to purchase and sale of shares through off market transactions.

The third decision relied on by the assessee is CIT v. Anupam Kapoor (2008) 299 ITR 179(P&H). In this case, it has been held that there was no material before the AO which could have led to a conclusion that transaction was simplicitor a device to camouflage activities to defraud revenue.

The assessee then relied on the decision in the case of ITO vs. Smt. Bibi Rani Bansal, 44 SOT 500 (2011) (Agra) (TM), Acchyalal Shaw vs. ITO 121 TTJ

ITA No. 5954/Mum-2014 13 695 (Kol)(2009), ITO vs. Kusumlata 105 TTJ 265(Jodh)(2006), Km. Saumya Agrawal vs. ITO 174 Taxman 60(Agra)(TM)(2008), CIT vs. Smt. Rajnidevi A. Chowdhary, of 2008( Bom), CIT vs. Smt. Jamnadevi Agarwal & Ors. 328 ITR 656(Bom)(2010) and ITO, Ward 3(2), Thane vs. Paresh Gala, ITA No. 3634/M/07. The assessee submits that in the above cases, similar transaction of purchase and sale of shares are discussed.

The last decision relied on by the assessee before the ld. CIT(A) is CIT vs. Reliance Petroproducts(P) Ltd. 322 ITR 158(SC). In this case, the return of income for the A.Y. 2001-02 was filed by the assessee declaring loss of Rs. 26,54,554/- This assessment was finalized u/s 143(3) whereby the total income was determined at Rs. 2,22,688/-. In the assessment, addition in respect of interest expenditure was made. Simultaneously, penalty proceedings u/s 271(1)( c ) were also initiated on account of concealment of income/ furnishing of inaccurate particulars of income. The Hon’ble Supreme Court held that ‘ merely because assessee had claimed expenditure, which claim was not accepted or was not acceptable to revenue, that by itself would not attract penalty u/s 271(1)( c ).’

In the instant case, the facts are different. The same has been summarised at para 6.4 infra. A perusal of it shows that the instant case is distinguishable from the decisions relied on by the assessee before the ld CIT(A).

Let us remind ourselves that in Padmasundra Rao v. State of TN 255 ITR 147 (SC), it has been held by the Hon’ble Supreme Court that reliance should not be placed on a decision without discussing how the factual situation fits in ITA No. 5954/Mum-2014 14 with the factual situation of the decision on which reliance is placed. Also it was held therein that circumstantial flexibility, e.g. one additional or different fact, may make a world of difference between conclusions in two cases.

6.2 The ld AR submits that the penalty proceedings are different from the assessment proceedings. We find that in the scheme of the Act, the proceedings for imposition of penalty, though emanating from proceedings of assessment, are essentially independent and separate aspect of the proceedings which closely follow the assessment proceedings. Findings given in assessment proceedings are certainly relevant and have probative value, in the instant case as the ld. AR submits that due to diverse reason, the assessee could not produce the relevant details called for by the AO in the course of assessment proceedings.

6.3 Let us delineate the law relating to onus of proving the source of any money received by the assessee. It is well established by a set of decisions of the Hon’ble Supreme Court, namely Kale Khan Mohammad Hanif v. CIT(1963) 50 ITR 1(SC), Govindarajulu Mudaliar(A) v. CIT(1958) 34 ITR 807(SC), CIT v. Devi Prasad Vishwanath Prasad (1969) 72 ITR 194(SC), that the onus of proving the source of any money received by the assessee is upon him. In Sreelekha Banerjee v. CIT(1963) 49 ITR 112(SC), the Hon’ble Supreme Court has held that if there is an entry in the account books of the assessee which shows the receipt of a sum, it is necessary for the assessee to establish, if asked what the source of that money is and to prove that it does not bear the nature of income. In the instant case, the assessee could not produce before the AO, during the course of assessment proceedings, the share certificates, STT challans, demat account and thereby, failed to prove the onus cast upon

ITA No. 5954/Mum-2014 15 him. The ld. AR also submits that due to diverse reason, the assessee could not produce the relevant details called for by the AO in the course of assessment proceedings.

6.4 Let us go back to the facts. The assessee had disclosed LTCG of Rs.52,92,328/- on transaction of purchase and sale of shares. In response to the query raised by the AO, the assessee could not produce during the assessment proceedings, the share certificates, STT challans, Demat account. The AO recorded the statement of Shri Raj Masalia, Principal Officer of M/s DPS Shares & Securities Pvt. Ltd through whom the assessee had shown transactions of purchase and sale of shares. In his statement, Shri Masalia admitted that in fact no purchase or sale of shares of M/s Pranett Industries has been undertaken by him on behalf of the assessee and the bills/contract notes supplied by them to the assessee were only accommodation bills. The statement of Shri Masalia was confronted to the assessee by the AO on 18/12/2007. The assessee was asked to explain why the amount of Rs.53,86,564/- shown as sale price of the shares shall not be treated as unexplained credit u/s 68 of the Act. Then, the assessee filed a revised return of income on 20/12/2007 increasing the business income by Rs. 17,95,551/-. In the case of Vadilal Ichhachand v. CIT (1957) 32 ITR 569(Bom); Dayabhai Girdharbhai v. CIT(1957) 32 ITR 677 (Bom), it has been held by the Hon’ble Bombay High Court that the assessee cannot escape liability for penalty by filing revised return after queries from the authority concerned.

6.5 The Hon’ble Supreme Court in UoI vs. Dharmendra Textile Processors (2008) 306 ITR 277 (SC) has held that penalty u/s 271(1)(c) is a civil liability and the wilful concealment is not an essential ingredient for attracting civil

ITA No. 5954/Mum-2014 16 liability unlike the matter of prosecution u/s 276C. While considering an appeal against an order made u/s 271(1)(c), what is required to be examined is the record which the officer imposing penalty had before him and if that record can sustain the finding that there has been concealment, that would be sufficient to sustain penalty.

6.6 The present factual matrix is to be tested on the anvil of the above enunciation of law. In the light of the decisions referred here-in-above, the order of the ld. CIT(A) directing the AO to impose penalty u/s 271(1)(c) @ 100% on addition of Rs. 53,86,564/- made u/s 68 is confirmed.

Order pronounced in the open court on 26/10/2016.