M.R. CONSTRUCTION,MUMBAI vs. ADDL CIT CEN RG 5, MUMBAI

The facts relating to the loan transactions are stated in brief. A search and seizure action u/s 132 of the Act was conducted at the residence premises of the partners of the firm and survey operations u/s 133A of the Act was conducted at the office premises of the firm. The revenue took a print out of documents stored in the computer, which contained acknowledgment receipts

The Ld A.R submitted that the assessee has neither received the loans nor repaid them. When the search officials were pressuring the assessee, the partner of the firm accepted these transactions. Thereafter, the negative cash balance was sought to be arrived by combining the cash balance available in the books of the assessee and in the books of the partner Shri Jawahar Purohit. At that time, the loans were assumed as received on 1st April, 2008 and the repayments were assumed as made on the dates mentioned in the vouchers. He submitted that the vouchers were unsigned and the revenue officials have not cross verified the same with the alleged lenders. After entering these transactions, the negative balance was worked out in the hands of Shri Jawahar Purohit and the addition was made in his hands. The Ld A.R submitted that the 3 M/s. M.R. Construction credit for receipt of loan was given to the partner and not to the assessee. Accordingly, the Ld A.R submitted that the Addl. CIT was not justified in initiating the penalty proceedings in the hands of the assessee.

The Ld D.R, on the contrary, submitted that the partners and firm are interlinked with each other. He submitted that the statement of combined cash balance, i.e., by combining the accounts of the firm and the partner, was prepared after the search, since the accounts of the assessee were not written properly. Hence the assessing officer has to appoint Special auditors u/s 142(2A) of the Act to redraft the accounts. Even though the credit for the loan receipt was given to the partners account, since the acknowledgement receipt for repayment of loan has been prepared in the name of the assessee. Accordingly the Ld D.R submitted that the penalty proceedings have been rightly initiated in the hands of the assessee firm, even though the benefit of loan was given to the partner of the firm.

I heard the parties and perused the record. The facts discussed above would show that the question as to whether these loans were actually received and later repaid by the assessee, remains unanswered. Since the copy of receipt voucher was available in the computer of the assessee, the search officials have examined the partner and he has admitted the receipt of loan as well as repayment of the same by way of cash, admittedly in order to purchase peace of mind and to avoid litigation. I notice that the assessing officer did not examine the alleged lenders in order to vindicate his view. Hence the receipt and repayment of loans by way of cash was an inference drawn and in my view, the inference so drawn, even if it was accepted by the assessee with the intention of buying peace, would not lead to the conclusion that the assessee has actually received the loan or repaid the same by way of cash.

I also notice that the credit for loan receipt was given in the hands of partner Shri Jawahar Purohit while preparing the combined cash flow, meaning thereby, the benefit of loan receipt was given to the partner and not to the assessee. This action of the revenue shows that they have also accepted that the alleged loan was received by the partner of the firm and not by the firm.

The Ld D.R contended that the working of combined cash balance required that the credit for loan receipt should be given to the partner and hence the firm shall not be absolved from its liability, since it was a working of combined cash balance. I am unable to agree with the said contentions of Ld D.R. It is a fact that these loan transactions did not find place in the books of the assessee firm. Further these transactions have also been denied by the partner of the assessee firm at the first instance and only upon making further enquiries, he agreed to accept the same in order to purchase peace of mind. Thereafter, the credit for loan receipts was given to the partner of the firm and the repayment was also accounted in his hands. Under the Income tax Act, the partnership firm and the partners of the firm are two separate assessable entities. Hence, under the Income tax Act, these transactions should be considered as having done by the partner of the assessee firm only and not on the assessee.

In view of the foregoing discussions, I am of the view that the assessee firm cannot be penalised for the alleged financial transactions accounted for in the hands of the partner of the assessee firm. Accordingly I hold that the very initiation of penalty proceedings u/s 271D and 271E of the Act was not justified. Accordingly, I set aside the orders passed by Ld CIT(A) and the Addl. Commissioner of Income tax.

In the result, both the appeals filed by the assessee are allowed. Order has been pronounced in the Court on 12.7.2016