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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAMIT KOCHAR
सुनवाई क� तार�ख /Date of Hearing : 02-3-2016 घोषणा क� तार�ख /Date of Pronouncement : 30-05-2016 आदेश / O R D E R
PER RAMIT KOCHAR, Accountant Member
This appeal, filed by the assessee company, being 22-02-2013 passed by learned Commissioner of Income Tax (Appeals)- 18, Mumbai (hereinafter called “the CIT(A)” ), for the assessment year 2006-07, the appellate proceedings before the learned CIT(A) arising from the assessment order dated 1-12-2008 passed by the learned Assessing Officer (hereinafter called “the AO”) u/s 144 of the Income Tax Act,1961 (Hereinafter called “the Act”).
ITA 3557/Mum/2013 2
2. The grounds of appeal raised by the assessee company in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called “the Tribunal”) reads as under:-
“1. In the facts and circumstances of the case and in law the learned CIT(A) erred in confirming penalty of Rs. 22,05,551 levied u/s 271 (l)(c) of the Income-Tax Act, 1961.
It is respectfully submitted that in respect of penalty levied qua addition made u/s 68 in respect of unsecured loans, full and complete explanation was rendered qua the loan of Rs. 50,00,000 of Dr. Kaushal Pandey wherein the genuineness of the transaction, the identity and the creditworthiness of the lender were fairly substantiated hence and no penalty for concealment could be levied qua this loan.
3. It is respectfully submitted that out in respect of addition of Rs. 2,00,000 made qua unexplained share capital full details and explanation was rendered qua the capital contribution of Rs. 100,000 made by Mr. Laxmikant Khanolkar wherein the genuineness of the transaction, identity and creditworthiness of the party were fairly substantiated and hence no penalty for concealment could be levied in respect of this amount.
4. It is respectfully submitted that no concealment penalty can be levied qua addition of Rs. 17,81,725 being 10% of total expenses disallowed on an estimated lump sum basis.
5. It is respectfully submitted that the appellant's is not a fit case for levy of any penalty whatever u/s 271 (1) (c).”
The brief facts of the case are that three additions were made by the Revenue in the assessment completed u/s 144 of the Act vide assessment order dated 1st December, 2008 which are as under:-
(i) Unsecured Loans Rs. 45,07,100 – Loans received during the year was Rs. 80,75,100 & details of Rs. 35,68,000 was submitted hence balance of Rs. 45,07,100 was treated as unexplained Cash Credit u/s. 68.
(ii) Share Subscription Rs. 2,00,000 - The Company was incorporated on 18.08.2005 hence this is 1st year of Company during which Share capital of Rs. 2 Lacs was received however ITA 3557/Mum/2013 3 no details as to source of Share Capital was filed hence treated as unexplained Cash Credit u/s 68.
(iii) Expenses Disallowed Rs.17,81,725 - The assessee has debited expenses of Rs. 1,78,17,256 in the P&L Account submitted hence 10% was disallowed.”
Penalty proceedings were initiated by the Revenue u/s 271(1)(c) of the Act against the assessee company with respect to the additions made by the Revenue in quantum assessment framed against the assessee company . The assessee company filed first appeal before the learned CIT(A) against quantum additions which appeal was dismissed by the learned CIT(A). Mr. Laxmikant Khanolkar, (the erstwhile Director-Shareholder) was served with the notices as the existing Director Mr. Jilani K. Shaikh was not traceable. The case was represented by Shri Laxmikant Khanolkar, the erstwhile shareholder/director in the quantum assessment /penalty proceedings as well in the appellate proceedings . Submissions were made by Shri Laxmikant Khanolkar which were considered by the A.O. in the quantum assessment proceedings as well as the remand proceedings , whereby the learned CIT(A) dismissed the appeal of the assessee company with respect to the quantum additions made by the Revenue . The assessee company produced the audited accounts, details with ROC/Auditors which is not an explanation as held by the AO , because the assessee company failed to produce the books of accounts, bank statements , expenses vouchers to substantiate the claim. However, the A.O. held that the assessee company has concealed/furnished in-accurate particulars of income thereby the AO levied penalty on the total income @ 100% of the tax sought to be evaded and the minimum penalty worked out to be Rs. 22,05,551/- which was levied by the AO vide penalty orders dated 27- 03-2012 u/s 271(1)(c) of the Act , which was challenged by the assessee company before the learned CIT(A). Similar situations prevailed at the time of proceedings before the learned CIT(A) as again Shri Laxmikant ITA 3557/Mum/2013 4 Khanolkar(erstwhile Director/Shareholder) represented the appeal of the company as existing Directors Mr. Jilani K. Shaikh was not traceable. In appeal before the learned CIT(A), the assessee company submitted as under:-
“The learned AO has not considered on merits the detailed submissions made in reply to show cause notice and has relied merely on the additions made in quantum assessment and the sustaining of such additions in quantum appeal.
The learned AO did not consider the voluminous evidence referred to in penalty submissions, as he was duty bound to and did not appreciate that the evidence on record clearly showed that the (a) the capital contribution of Rs.1,00,000/- made by Mr. Khanolkar could not be regarded as concealed income of the appellant, (b) The loan from Dr. Pandey Rs.50,00,000/- could not be regarded as concealed income of the appellant, (b) The loan from Dr. Pandey Rs.50,00,000/- could not be regarded as concealed income of the appellant and (c) No penalty could be levied qua the disallowance made on estimated basis.
As explained hereafter all the decisions referred to and relied on by the learned AO to justify the levy of impugned penalty are distinguishable.
The decision relied on by the learned A.O in the case of Dharmendra Textiles was prior to decision of the Hon. SC in the case of Reliance Petro Products and the old decision was qua different statute.
The decision of Hon. SC relied in Dilip Shroffs case in fact supported the appellant.
The decision of Hon.SC in Kanchwala Gem's case referred to and relied upon by the learned AO does not support his case. In the first instance this is a case of quantum addition in Ex-parte assessment made u/s.144 and not of penalty qua additions made u/s.144. More importantly, the case of the appellant is that qua major additions in respect ITA 3557/Mum/2013 5 of loans and investments, the Appellant had submitted full details and complete supporting evidence and there was no scope for any guess work even in 144 assessment. Thus, this case is clearly distinguishable.
The decision of Zoom Developers relied on by the learned AO is distinguishable. In the case before the Delhi High Court the issue was disallowance of claim of deduction that could not be sustained for want of evidence. In the case in reference the issue is quantum addition made for loans, capital contributions and expenses on hyper technical grounds in the face of voluminous and clinching evidence and in an arbitrary manner on an estimated basis.
The decision of Guj. High Court in the case of Vidya Gauri Natverlal is also distinguishable in that in that case the disclosure made in the return was found to be false or inaccurate.
In the case before the learned AO the learned AO has nowhere shown or even hinted that the voluminous evidence filed and detailed submissions made by the appellant where in any way inaccurate or false or unproved.
• Full and detailed submission • The explanation given was fully substantiated with detailed documentary evidence such as (a) Confirmation from parties (b) bank statements of parties reflecting the amounts paid and (c) the balance sheet of parties reflecting the investment/loans in reference.
• There is more than fair evidence to substantiate appellant's explanation qua these amounts.
• The explanation rendered and the evidence submitted was not found to be untrue or was not disproved.
ITA 3557/Mum/2013 6 • Thus, the onus placed on the appellant by section 271 (1)(c) was fully discharged. b. It is thus, submitted that no penalty whatever can be levied in respect of' (a) Capital Contribution by Mr. Khanolkar - Rs.1,00,000 (b) Loan of Mr. Khanolkar - Rs. 12,68,000 (as already accepted as proved in assessment) and (c) Loan of Dr. Kaushal pandey - Rs.50,00,000. It is therefore submitted that no penalty can be levied qua the above amounts aggregating Rs. 63,68,000. c. As regards the balance capital contribution of Rs.1,00,000, it was clear that the same was contributed by Mr. Jilani Shaikh, the promoter of the appellant. The accounts of the appellant were audited and the appellant had also filed return of allotment. Thus, qua this amount also no penalty was tenable, more so, as this being the first year of the appellant and the capital having been contributed in the first few days of company's existence the appellant company could not conceivably have earned this income let alone concealed income. Thus, even qua the balance capital amount also no penalty is justified. d. Qua the balance loan amount of RS.18,07,100 (i.e. 80, 75,100-62,68,000) also no penalty is leviable in that: (a) The accounts of the appellant were audited and in the course of audit the loans were verified. (b) The amounts were received in cheque and (c). This being the first year of the company, and since the business was carried for only seven months it was inconceivable that the company could have earned so much income and that too as undisclosed income. e. As regards the disallowance of expenses of Rs.17,81,275 made on estimated and lumpsum basis, it is well settled and qua such arbitrary disallowance made on estimated basis no penalty for concealment can be levied. f. Without prejudice to the above it is also submitted that penalties cannot be levied qua multiple additions as this would amount to a double jeopardy not permissible in law. In an event the expenses of Rs.17,81,275 are held to be ITA 3557/Mum/2013 7 unexplained then the same would form source tor the alleged un explained loans and capital; more so as the amounts of each class of additions is almost equal and vice versa. g. It is submitted without prejudice that at the highest penalty can be levied only qua the amount of Rs.19,07,100 (i.e the peak after squaring off the multiple additions). h. It is well settled that the assessment and the penalty proceedings are separate and distinct. It is well settled that merely because an addition is made in assessment and sustained in appeal that by itself cannot justify levy of a penalty.”
The learned CIT(A) after considering the submissions of the assessee and assessment order, dismissed the appeal of the assessee company and confirmed the penalty levied by the AO vide appellate orders dated 22-02- 2013.
4. Aggrieved by the appellate orders dated 22-02-2013 of the learned CIT(A), the assessee company is in appeal before the Tribunal.
The learned Counsel for the assessee company submitted at the outset that the quantum appeal was decided by the Tribunal in for the assessment year 2006-07 vide orders dated 30.06.2015 in assessee company’s own case wherein the Tribunal observed as under:-
“The aforesaid appeal has been filed by the assessee against the impugned order dated 21.10.2010, passed by CIT(A)-18, Mumbai for the quantum of assessment passed u/s 144 for the assessment year 2006- 07 on the following grounds:
ITA 3557/Mum/2013 8 “1. The Learned CIT(A) erred in confirming an addition of Rs. 45,07,100/- made u/s 68 in respect of alleged unexplained loans.
2. The Learned CIT(A) erred in confirming the said addition despite voluminous evidence filed in support of the contention of the appellant. She erred in rejecting the voluminous evidence and explanation filed by the appellant on hyper technical grounds which were not tenable in the facts and circumstances of the case.
3. The learned CIT(A) erred in sustaining an addition of Rs. 2,00,000/- made on account of the alleged unexplained addition to share capital.
4. The learned CIT(A) erred in sustaining an addition of Rs. 17,81,725/- made on account of disallowance of 10% of total expenses claimed on ad-hoc basis.
5. The learned lower authorities erred in making huge additions in reference by relying solely on the assessment made u/s 144 and by replying on hyper technical grounds and completely ignoring the fact the accounts were audited”.
2. The facts in brief, as culled out from the order of the CIT(A) are that, the assessment proceedings were finalized u/s 144 mainly on the ground that various notices sent to the assessee-company were not responded, because the promoter/director Mr. Jilani K Shaikh, was not traceable. The other Director Mr. Laxmikant G Khanolkar had also resigned and ceased to be Director w.e.f. 13.01.2007. However Mr. Khanolkar’s duly appeared before the AO and conveyed that he had no contact with Mr. Shaikh and he has no excess to the books and records of the company. The Ld. CIT(A) has also noted that the assessment year 2006-07 was the first year of assessment as company itself was incorporated on 18.08.2005 and both the Directors were holding 50% of shares each. Since the assessee could not produce the books of accounts, the following additions were made by the AO on the basis of best judgment assessment u/s 144:-
ITA 3557/Mum/2013 9 (i) Unsecured loans as appearing in the Balance-sheet which was partly confirmed at Rs. 45,07,100/- out of total loan amount of Rs. 80,75,100/-; (ii) Share subscription money amounting to Rs. 2 lakhs; and (iii) Ad-hoc disallowance of expenses @ 10% of the total amount debited to the P&L account of Rs. 1,78,17,256/-.
3. Before the CIT(A), regarding unsecured loans of Rs. 80,75,100/- it was submitted that the details in respect of Rs. 35,68,000/- were furnished, which were given by Mr. Khanolkar and same has been accepted by the AO. Regarding the balance amount of Rs. 45,07,100/-, it was explained during the course of Appellate Proceedings that major loan was given by are, Dr. Kaushal Pandey amounting to Rs. 50 lakhs to the assessee-company. Dr Pandey’s account with the Indian Overseas Bank was also filed reflecting following debit amounts which were transferred to the account of the assessee company: 07.12.2005 Rs. 10,00,000 09.03.2006 Rs. 15,00,000 09.03.2006 Rs. 25,00,000 The copy of account of the assessee with Dr. Kaushal Pandey was also furnished.
Since all these were in the form of additional evidences, the matter was remanded to the AO to submit the remand report. During the remand proceedings before the AO, the assessee submitted as under: (a) That, Mr. Khanolkar had given loan of Rs. 35,68,000/- to appellant company. (b) That, Mr. Khanolkar had to pay Rs. 23,00,000/- to M/s Silicon Valley Systems which is a sister concern of M/s Technozone.
ITA 3557/Mum/2013 10 (c) That, the amount of Rs. 23,00,000/- due to M/s Silicon Valley Systems was adjusted, hence the balance receivable from the company on 31.03.2006 was Rs. 12,68,000/-. (d) That, an amount of Rs. 50,00,000/- was received from Dr. Kaushal Pandey, bank account copy is enclosed reflecting withdrawal of such amount.
(e) Thus, total amount of Rs. 62,68,000/-, i.e. Rs. 12,68,000/- from Mr. Khanolkar and Rs. 50,00,000/- from Dr. Kaushal Pandey stands explained, leaving balance of Rs. 18,07,100/- for which there are no requisite details, hence the maximum amount that can be added is only Rs. 18,07,100/- u/s 68.
5. The Ld. CIT(A), however, confirmed the addition on the ground that, firstly that there is nothing on record to suggest that, that the amount of Rs. 23 lakhs was adjusted with M/s Silicon Valley Systems and secondly, the bank account of Dr. Kaushal Pandey does not suggest that amount of Rs. 10 lakhs on 07.12.2005 and amount of Rs. 25 lakhs on 09.03.2006 were factually transferred to M/s Techzone account. Lastly, in absence of books of accounts, the claim made by the assessee cannot be verified.
Regarding share application money, it was submitted on behalf of the assessee that both the Directors have contributed Rs. 1 lakh each towards share capital and in support, a copy of the bank account with City Bank and the amount paid through cheque to the assessee company was filed. The Balance-sheet of the Director reflecting investment of Rs. 1 lakh in shares of M/s Techzone was also filed. These evidences were forwarded to the AO for remand report, wherein, the AO reported that copy of share application Form and copy of share certificate were not submitted. The Ld. CIT(A) too confirmed the said addition on the ground that share application form and share certificate has not been filed. However, he has held in Para 4.1 he held that addition of Rs. 1 lakh u/s 68 is being confirmed.
7. Regarding adhoc disallowance of expenses @ 10% it was submitted by the assessee that in the business of mobile phones and other electronic items ITA 3557/Mum/2013 11 the margin is being low and being the first year of the business and looking to the highly competitive nature of this business, the net profit margin of the assessee was very low. If such a huge disallowance is made, then net profit margin will increase to 12% to 13% which is not possible in the business line of the assessee. However, the Ld. CIT(A) confirmed the said disallowance on the ground that no information or evidences were filed in support of the expenses.
Before us, the Ld. Counsel for the assessee submitted that there was reasonable cause for not producing the books of accounts, as the Managing Director, Promoter was not traceable who had kept the entire books of accounts and the records of the company. Whatever evidences could be made available during the course of the appellate proceedings, the same were furnished. The details and evidences which were filed before the CIT(A) goes to discharge the prima facie onus of the assessee that loans appearing in the Balance-sheet were not only genuine but also had come from confirmed sources for which particulars of bank accounts and confirmed copy of ledger accounts were also filed. Once the loans have been received through account payee cheques duly reflected in the bank accounts of the creditor and also the copy of ledger account of the assessee maintained by them, creditworthiness stands proved and without there being any adverse material on record, no addition can be sustained u/s 68. Similarly, regarding share application money, he submitted that Director himself has given copy of his bank account vide which, the share application money had been given, therefore, such an addition could not have been made in the hands of the assessee-company. Regarding expenses also he submitted that the same is very high and excessive looking to the fact that in assessee’s business the net profit margin is very low.
On the other hand, the Ld. DR strongly relying upon the order of the CIT(A), submitted that the additions have been confirmed only when the assessee could not discharge its onus which laid upon it. Accordingly, the order of the CIT(A) should be affirmed.
ITA 3557/Mum/2013 12
We have heard the rival submissions, perused the relevant finding given in the impugned order and material on record. It is an undisputed fact that the assessee company was incorporated on 18.08.2005, and assessment year 2006-07 was the first year of assessment. The two shareholders (having shares 50% each), were also the Directors of the company who had broke-up and the main Promoter cum Managing Director, Mr. Jilani K Shaikh was untraceable. The other Director who has participated in the assessment proceedings also has ceased to be the Director w.e.f. 13.01.2007. In wake of these events, the regular books of accounts and most of the records which were in the possession of the Promoter Director could not be produced before the authorities below, accordingly the assessment was framed under best judgment assessment u/s 144. During the course of the appellate proceedings, the assessee had produced various third party evidences in support of its contention qua the additions made by the AO. Now so far as the addition on account of unsecured loans for sums aggregating to Rs. 45,07,100/- is concerned, it is seen from the impugned order as well as material placed on record that the major loan amount of Rs. 50 lakhs was received by the assessee from Dr. Kaushal Pandey. In support of such a loan, his bank accounts were filed reflecting the transfer of money to the assessee company. From the perusal of the bank statement, it is evident that the clearing is shown in the name of M/s Techzone Info i.e. the assessee-company which has been credited to the assessee’s bank account. Such a bank statement is further corroborated by confirmed copy of ledger account of the assessee company in the books of Dr. Kaushal Pandey, which has been duly signed and confirmed by him along with the details of the PAN. That apart, a loan amount of Rs. 35,68,000/- has also been shown to have been given by the Director, Mr. Khanolkar who has represented the appellate Proceedings and the assessment Proceedings. The assessee had given the reconciliation during the course of the remand proceedings, the extract of which have been already incorporated ITA 3557/Mum/2013 13 above in the foregoing paragraphs of this year. To the extent of Rs. 62,68,000/- out of total loan amount of Rs. 80,75,100/- stands explained in wake of these evidences. Further, the assessee has also placed the copy of acknowledgment of return of income and Balance-sheet of Dr. Kaushal Pandey, Director Mr. Laxmikant Khanolkar along with the relevant schedule of loan and bank accounts in the paper book before us. All these evidences prima facie goes to prove the nature and the source of credit as appearing in the Balance-sheet of the assessee as well as the primary ingredients of the genuineness of the loan transaction. However, as admitted by the assessee, before the CIT(A), the amount to the extent of Rs. 18,07,100/- out of total loan amount remained “unexplained”, hence such an amount is to be added u/s 68. Accordingly, addition of Rs. 18,07,100/- stands confirmed. Thus, Ground No. 1 & 2 as raised by the assessee is treated as partly allowed.
As regards the addition on account unexplained amount of share capital, we find that the same has been given towards share subscription by the Directors themselves which has been explained from their Balance sheet and by showing relevant debit entries in their bank accounts. Thus, the source of share application money in the books of the assessee firm cannot be held to be unexplained simply because share application money form could not be filed. Accordingly, the addition on this score also stands deleted.
Lastly, regarding ad-hoc addition on account of disallowances of expenses of Rs. 17,81,725/-, we find that the same has been made on the ground that assessee could not file supporting documents. The assessee’s case before us is that, this being the first year of business operation and the net profit margin in trading of Mobile phone and electronic item is very low, therefore, such a huge addition cannot be sustained as it will go to enhance the net profit rate. Looking to the overall circumstances of the case that books of accounts and supporting documents were not traceable and also looking to the fact that such an ad-hoc disallowance will go to enhance the net profit rate, we ITA 3557/Mum/2013 14 in the interest of justice, reduce the ad-hoc disallowance to the tune of 5%. Accordingly, the addition on account of ad-hoc disallowance of the expenses debited in the profit and loss account is partly confirmed to 5% i.e. the assessee will get relief of Rs. 8,90,863/-.
In the result, appeal of the assessee is partly allowed.”
It is the contentions of the ld counsel for the assessee that since the Promoter/ Managing Director of the Company Mr Jilani K Sheikh is not traceable , the assessee company was represented by erstwhile Directors/Shareholder , Mr. Laxmikant G Khanolkar and due to this extra-ordinary situation, the details submissions, confirmations, books of accounts etc could not be produced and hence is a bonafide explanation to take the company out of clutches of penalty provisions u/s 271(1)(c) of the Act. The accounts were duly audited u/s 44AB of the Act as well under the Companies Act,1956. The details of ad-hoc disallowance was very high and margins in trading of mobiles and electronic items is low i.e. 2-3% while with this additions of expenses, GP rate goes upto 7-8% and despite Tribunal giving relief the same is high and in any case penalty is not exigible as the assessee company has given bonafide explanation. The ld DR supported the orders of the authorities below.
6. We have considered the rival contentions and perused the material on record including case laws relied upon .Thus , it is observed that out of the additions made towards unsecured loan of Rs. 45,07,100/- raised by the assessee company by the AO and sustained by the learned CIT(A), the additions to the tune of amount to the extent of Rs. 18,07,100/- of the unsecured loans raised by the company had been sustained by the Tribunal in quantum additions proceedings , while the rest of the amount of addition of Rs 27,00,000/- has been deleted by the Tribunal vide orders dated 30-06- 2015 in , hence, in our considered view, penalty ITA 3557/Mum/2013 15 u/s 271(1)(c) of the Act on the amount of unsecured loans raised by the assessee company to the extent of Rs. 18,07,100/- which has been sustained by the Tribunal can be sustained , while the penalty u/s 271(1)(c) of the Act levied on the unsecured loans of Rs. 27,00,000/- which are accepted by the Tribunal in quantum proceedings by way of deletion of the addition of the amount of Rs.27,00,000/- of unsecured loans raised by the assessee company in ITA No. 9138/Mum/2010 is ordered to be deleted. We order accordingly.
With respect to the addition of Rs. 2 lakhs towards shares subscription, the Tribunal has deleted the additions of Rs 2 lacs so made in quantum assessment so confirmed by learned CIT(A) , vide orders dated 30-06-2015 . Since the quantum addition of Rs.2 lacs towards share subscription has been deleted by the Tribunal, the penalty cannot be sustained on the said amount and hence is ordered to be deleted .We order accordingly.
With respect to the ad-hoc addition towards disallowance of expense of Rs. 17,81,725/- @ 10% made by the AO and sustained by the learned CIT(A) , the Tribunal reduced the disallowance of said expenses to 5% i.e. to Rs. 8,90,863/- . The assessee company failed to produce the books of accounts , bank statements and vouchers to substantiate its claim of deductions of expenses made by it in the return of income filed with the Revenue. The assessee company has shown the reasons that the main director Mr Jilani K Shaikh is not tracable. In view of Tribunal accepting the contentions of the assessee company that in trading of mobile and electronic items , the margins are low and this being the first year of operations , the disallowance was restricted to 5% of the expenses so claimed ,instead of 10% of the expenses disallowed by the AO and sustained by the learned CIT(A). It was incumbent on the assessee company to have produced the books of accounts and other ITA 3557/Mum/2013 16 cogent material to substantiate its claim of deduction of expenses to prove the claim made in the return of income filed with Revenue, which the assessee company failed to do so. Since the Tribunal has reduced the disallowance of expenses to 5% from the earlier 10% of the claim of the expenses, the assessee company will get proportionate relief in the penalty levied u/s 271(1)(c) of the Act by the Revenue on this count. We order accordingly.
In the result, the appeal filed by the assessee company in ITA N0. 3557/Mum/2013 for the assessment year 2006-07 is party allowed.