ITO WD 1(3), THANE vs. AMAR DIAMOND TOOLS, MUMBAI

(A.Y. 2007-08) ITO vs. Amar Diamond Tools The primary facts of the case are simple and undisputed. The addition stands made on account of furnishing non-satisfactory explanation by the assessee-firm in respect of the cash credit appearing in its books (as to nature and source thereof), i.e., establishing the same, described as loans from family members of the the continuing partner, as genuine credit/s. The same, as is well-settled, requires proving the credit on the parameters of identity, creditworthiness and genuineness, each of which is to be independently established. The confirmations, vide statements on oath by the creditors, would prove only the identity of the creditor/s. The other two aspects of the transaction are completely unproved. To begin with, they admittedly do not have any capacity, admitting to having no source of income and, further, of having sourced the funds from the relatives from their native place. Why, two, Shri Pankaj P. Mahajan (nephew of Shri G. B. Mahajan) (being the son of his brother, Shri Panditrao Mahajan) and Shri Prashant G. Mahajan (son of G. B. Mahajan) were students of engineering at the relevant time, who completed their graduation only in May, 2007, filing their first return of income for A.Y. 2007-08 (copy not on record). Similarly, for the wives of the two brothers, i.e., Sangeeta P. Mahajan and Asha G. Mahajan, who also do not admittedly have any capacity or stated source of income. In fact, all of them did not even have a bank account, which was opened only subsequently on 09.1.2007, by all of them, and being with the same bank, as it appears, together. The fifth creditor, Shri Panditrao V. Mahajan, is also not an income-tax assessee, drawing salary at a mere Rs.10,000/- p.m., up from Rs.7,000/- p.m., at which he was employed by the assessee-firm only in the year 2003. The said income would surely be, if at all, barely sufficient to eke out a living. No doubt no savings are reflected in his saving bank account (with South Indian Bank), as is inferable from the fact of it having not been produced and, further, the impugned loan/s being taken as well as given in cash, again, stated as sourced from relatives. That is, the transaction is carried out in a manner to have no trail, with no specifics forthcoming, so as not to be borne out by any material/ evidence and/or subject to any verification or confirmation. Further on, though all (A.Y. 2007-08) ITO vs. Amar Diamond Tools of them (creditors) are stated to also have some agricultural income, the same is again wholly un-evidenced. There is no mention of land holding, or of what is the agricultural produce, much less its’ quantity or evidence qua sale thereof. There is also no iota of evidence toward proving financial capacity to any extent, with four of the five creditors being themselves dependents and the fifth, Shri Panditrao Mahajan, having nominal income, barely sufficient to meet the requirements of himself and his family. No wonder, no return of income is admittedly filed except for A.Y. 2007-08, the extent of which is also not mentioned. This clearly appears to be by design, with no returns following for the subsequent years as well. All this in fact becomes academic in view of the admission of the source of funds lent being borrowings from relatives from their native place, whose identity/s is conspicuous by its’ absence. It is these relatives who thus are the stated source of funds. Who are they, i.e., their names and addresses? What is their occupation; sources of income, etc., i.e., their financial capacity? Why would they lend to the named creditors, considering that they have no repayment capacity? Rather, considering that the amounts lent to the firm are toward enabling it to maintain its’ capital in view of the imminent capital withdrawal by the outgoing partner (and which perhaps also forms the reason for admitting the creditors as partners) and, therefore, no or little scope for its’ return, the advancing of loans from the so-called relatives – who remain unspecified, itself becomes highly suspect and quizzical. Why, the raising of loans by persons with no established means is itself fantastic. The entire story is incredulous and de hors any material, i.e., un-evidenced and un-substantiated. The same, therefore, though normally liable to be regarded as of some evidentiary value, is only in the realm of bald statement/s and, as it appears, tutored. As clarified by the Hon’ ble Apex Court in CIT vs. P. Mohankala [2007] 291 ITR 278 (SC), the expression “the assessee offers no explanation” in section 68 means where the assessee offers no proper, reasonable and acceptable explanation (at pg. 285). In fact, the entire transaction is, as apparent, calculated to introduce liquid capital in the firm for payment to the outgoing partner, whose (A.Y. 2007-08) ITO vs. Amar Diamond Tools share thus gets acquired by the outgoing partner, introducing his family members as partners in his stead. The stated depositors, with no financial means of their own, are only ostensible sources of finance, introducing cash together on an appointed day, as if they were waiting with cash in their hands to be deposited with the firm and, further, shifting the source thereof to non-specified identities. It is clearly a concerted action with a view and toward the distinct objective of maintaining the continuity of the business of the firm in wake of the departure of a person holding 50% interest therein. There is a complete lack of bona fides, and the genuineness of the transactions, highly suspect. Coming to the aspect of levy of penalty, we cannot help but note that the entire case is completely without substance, and the explanation, if we may call it so, bizarre, with no basis in reality. Could the same, one may ask, by any stretch of imagination, be said to be a explanation? Why, the law, which saves a plausible explanation from penalty, clearly requires one which is either not found as false or incorrect or, alternatively, is substantiated. Can a bald statement, howsoever baseless and fanciful, be regarded as an explanation, as emphasized in P. Mohankala (supra), much less true, the opposite of false. The same is, in any case, completely unsubstantiated. The instant case is a case of no explanation, attracting Explanation 1(A) to section 271(1)(c), and where regarded as so, being wholly unsubstantiated, is in any case covered by Explanation 1(B) thereto. As explained in CIT vs. Durga Prasad More [1971] 82 ITR 540 (SC), it is the truth of the recitals in the documents (or the truth of their contents) that is relevant and is to be established, or else it would leave the door wide open for tax evasion by merely executing self-serving documents, and that the Revenue authorities were fully entitled to look at the surrounding circumstances to find out the reality of the transaction and not put blinkers while looking at documents produced before them. In the present case, we have ‘statements’ instead of ‘documents’, so that the said decision is in ratio fully applicable in the facts and circumstances of the case. The Apex Court therein also emphasized the primacy of the test of human probabilities (A.Y. 2007-08) ITO vs. Amar Diamond Tools in appreciating and evaluating evidence – absent in the instant case (also refer ss. 103 and 114 of the Indian Evidence Act and Sumati Dayal vs. CIT [1995] 214 ITR 801 (SC)). In Chuharmal vs. CIT [1988] 72 ITR 250 (SC), the Hon’ble Apex Court, applying the test of human probabilities, upheld the levy of penalty u/s. 271(1)(c) of the Act on a failure to satisfactorily explain the possession of watches by the assessee. Sections 68 and 69/69A are para materia in-as-much as the assessee is the beneficiary in case of section 68. The reliance by the assessee on the decision in CIT vs. Upendra V. Mithani (Income Tax Appeal(L) No. 1860 of 2009 dated 05.8.2009), holding penalty as not exigible where the facts and circumstances are equally consistent with the hypothesis that the amount does not represent concealed income as with the hypothesis that it does, is clearly misplaced. The ld. CIT(A) has incorrectly shifted the burden of proof and furnishing a reasonable explanation, substantiating the same, on the Revenue. When the assessee’s case falls either under part (A) or (B) of Explanation 1 to section 271(1)(c), he is deemed to have concealed particulars of income. There is, further, in the admitted and undisputed facts and circumstances, no case for application of the decision in Reliance Petroproducts (P) Ltd. (supra), which stands wrongly applied by the ld.CIT(A). What the said decision states is that where a claim is found as not correct or valid in law, the same cannot by itself lead to the levy of penalty. It is trite law that penalty proceedings are separate and distinct proceedings, and is to be levied on its’ own merits. Case law in the matter is legion, and toward which we may advert to the following decisions, viz. Mak Data (P.) Ltd. vs. CIT [2013] 358 ITR 593 (SC); Union of India v. Dharmendra Textile Processors [2008] 306 ITR 277 (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); and CIT vs. Nathulal Agarwala & Sons [1985] 153 ITR 292 (Pat)(FB).

(A.Y. 2007-08) ITO vs. Amar Diamond Tools 5. In view of the foregoing, we have no hesitation in, vacating the findings of the ld. CIT(A), uphold the levy of penalty in the instant case. We decide accordingly.