M/S. Bhandari Construction Company,, ... vs Assessee

2. At the time of hearing the Ld. Counsel for the assessee did

not press Grounds of appeal No.1 & 5 for which the Ld.

Departmental Representative has no objection. Accordingly, the

above 2 grounds are dismissed as 'not pressed'. Ground of

appeal No.6 being general in nature is dismissed.

3. Grounds of appeal No.2, 3 and 4 by the assessee read as

under :

2

"2. In the facts and circumstances of the case and in law, the assessment order for A.Y. 1998-99 as framed by the learned Assessing Officer u/s.153 C r.w.s.153 A of the I.T. Act 1961 vide order dt.28/12/2007 being bad in law, consequently the impugned penalty is also bad in law and void ab initio and hence the same may please be deleted.

3. The learned C.I.T.[A] has erred in confirming the penalty on alleged unproved loan of Rs.11,50,000.00. The order of the leaned C.I.T.[A] being arbitrary, perverse and devoid of merits and based on presumptions and surmises the same may please be deleted.

4. The learned C.I.T.[A] has erred in confirming the penalty on interest of Rs.2,53,000.00 on alleged unproved loan of Rs.11,50,000.00. The order of the learned C.I.T.[A] being arbitrary, perverse and devoid of merits and based on presumptions and surmises the same may please be deleted."

4. Facts of the case, in brief, are that the assessee is a

partnership firm engaged in the business of builders and

developers. A search u/s.132(1) of the I.T. Act was carried out

in the case of Shri Shreeram H. Soni on 29-07-2003. During the

course of search a large number of seized documents relating to

the money lending business were found and seized. These

documents are mostly in the form of blank promissory notes

(signed by the borrowers), blank undated cheques duly signed by

the borrowers. Some of the documents found during the course

of search, i.e. promissory note along with blank cheque of Rs. 5

lakhs are related to the assessee firm. While passing the order

u/s.153A in the case of Shri Shreeram H. Soni the fact of

borrowing cash loan and payment of interest as mentioned in

the seized document was proved. On the basis of such seized

material and assessment order passed u/s.153A in the case of

Shri Shreeram H. Soni, the Addl.CIT, Central Range-2, Pune

forwarded satisfaction note to the AO having jurisdiction over

the assessee firm note for issue of notice u/s.153C. In response 3

to notice u/s.153C r.w.s. 153A the assessee filed its return of

income for A.Y. 1998-99. During the course of assessment

proceedings the Assessing Officer noted that assessee has shown

outstanding unsecured loans taken from various parties as on

31-03-1998 at Rs.1,07,17,000/-. During the course of

assessment proceedings the Assessing Officer asked the

assessee to furnish loan confirmations from those parties. The

assessee failed to furnish loan confirmations of Rs.5 lakhs taken

from Shri Shreeram H. Soni. So far as the confirmations filed for

the remaining loans, the AO noted that although the assessee

has filed the confirmations which are new loans but these are

without PAN Numbers and addresses. The details of such loans

as mentioned by the AO at page 3 of his order are as under :

Sl.No. Name of the party Amount 1 Smt. Sangita A. Lunkad 4,00,000/- 2 Ashok S. Behre (HUF) 1,00,000/- 3 Smt. Sharmila V. Shah 50,000/- 4 Anil B. Lunkad 2,00,000/- 5 Smt. Jyoti P. Chordiya 1,15,000/- 6 L.B. Bamb 1,25,000/- 7 Ramanlal B. Chordiya 1,30,000/- (HUF) 8 Smt. Rajashree N. Rajstha 2,00,000/- 9 Smt. Swapna Yogesh Shah 50,000/- 10 Smt. Sushila B. Lunkad 2,00,000/- 11 Santokchand Surana 2,00,000/- 12 Yogesh B. Shah 50,000/- 13 Mitesh H. Patel 2,00,000/- 14 Tanna Enterprises 50,000/- 15 Perfect Trading Co. 50,000/- Total Rs.21,20,000/-

5. The Assessing Officer asked the assessee to prove the

genuineness of the above loan transactions by giving their PAN

Numbers, Bank Account extracts etc. In absence of any

compliance of the above to the satisfaction of the Assessing

Officer, the Assessing Officer held that assessee failed to prove 4

the genuineness and credit worthiness of the lenders of these

loans. He therefore made addition of Rs.21,20,000/- u/s.68 of

the I.T. Act. Further, he also made addition of Rs.5 lakhs

obtained from Shri Shreeram H. Soni u/s.68 of the I.T. Act.

Thus in effect he made addition of Rs.26,20,000/- to the total

income of the assessee u/s.68 of the I.T. Act. Since the assessee

could not prove the genuineness of the loan creditors the

corresponding interest amounting to Rs.5,76,400/- was also

disallowed by the Assessing Officer. The Assessing Officer also

made certain other additions to the total income of the assessee

such as interest on debit balance of partners amounting to

Rs.8,16,977/- and estimated profit on sales at Rs.13,55,816/-.

He also disallowed donation of Rs.35,052/-. After setting off the

brought forward losses of the preceding assessment years

amounting to Rs.48,79,680/-, the Assessing Officer determined

the total income at Rs.19,28,545/-.

6. The assessee preferred an appeal before the CIT(A)

contesting the addition of Rs.21,20,000/- made u/s.68 of the

I.T. Act. The assessee did not contest the addition of

Rs.5,00,000/- u/s.68 being the loan from Shreeram H.Soni.

Based on the remand report of the Assessing Officer the

Ld.CIT(A) allowed a relief of Rs.14,70,000/- added u/s.68 of the

I.T. Act. He also allowed proportionate interest to the extent of

Rs.3,23,400/- and sustained addition of Rs.2,53,000/-. He

however upheld the proportionate disallowance of interest on the

overdrawn balance of the partners and the estimation of profit at

8%. The Revenue preferred an appeal before the Tribunal and

the Tribunal upheld the view of the CIT(A) and dismissed the

appeal filed by the Revenue.

5

7. Subsequently, the Assessing Officer initiated penalty

proceedings u/s.271(1)(c) of the I.T. Act. Rejecting the various

explanations given by the assessee the Assessing Officer levied

penalty of Rs.12,51,530/- on account of the following additions

sustained :

Unexplained cash credit u/s.68 11,50,000/- (6,50,000 + 5,00,000) Disallowance of proportionate interest 2,53,000/- on the unexplained loans Disallowance of proportionate interest 8,16,977/-

on the loans diverted for personal use by the partners of the firm Estimated profit 13,55,816/-

8. In appeal the Ld.CIT(A) deleted the penalty levied by the

Assessing Officer on account of last 2 items, i.e., proportionate

interest on the loans diverted for personal use amounting to

Rs.8,16,977/- and estimated profit amounting to Rs.

13,55,816/-. He however sustained the penalty levied by the

Assessing Officer on account of the addition of unexplained cash

credit of Rs.11,50,000/- and proportionate interest on

unexplained loans of Rs.2,53,000/-. While doing so, he

observed that the assessee on its own has accepted the addition

of Rs.5 lakhs obtained from Shri Shreeram H. Soni. Similarly,

the CIT(A) in the appellate order has confirmed the addition of

Rs.6,50,000/- being loan obtained from 2 persons. The

confirmatory letters filed by the assessee during appellate

proceedings with respect to Shri Santokchanda Surana and Shri

Mitesh Patel were withdrawn in the light of the examination

carried out by the Assessing Officer during the assessment

proceedings as the PAN numbers mentioned on the confirmation

letters were in the name of some other persons. Relying on 6

various decisions the Ld.CIT(A) noted that assessee was unable

to explain the source of Rs.5 lakhs and Rs.2.50 lakhs and Rs.4

lakhs respectively. According to him where no explanation

whatsoever is furnished for cash credits in the books of the

assessee, penalty is leviable u/s.271(1)(c) of the I.T. Act.

9. Aggrieved with such order of the CIT(A) the assessee is in

appeal before us.

10. The Ld. Counsel for the assessee made two fold

arguments. He submitted that the assessee had filed the

original return disclosing the loan creditors. In response to

notice u/s.153C the assessee filed the return. The issue of

notice u/s.153C was based on some promissory notes of Rs.5

lakhs found from the residence of Shri Shreeram H. Soni. He

submitted that no incriminating materials were found, therefore,

in absence of any incriminating materials found, no penalty

u/s.271(1)(c) of the I.T. Act can be levied. He submitted that

assessment proceedings and penalty proceedings are separate

and distinct. Merely because some addition has been made the

same does not call for automatic levy of penalty u/s.271(1)(c) of

the I.T. Act. The assessee can rely on fresh materials during

penalty proceedings. He submitted that due to some reasons the

assessee could not challenge the validity of the assessment

u/s.153C in absence of any incriminating materials. But the

fact remains that based on the creditors appearing in the

balance sheet prior to the date of search penalty has been levied.

10.1 Referring to the decision of Hon'ble Bombay High Court in

the case of CIT Vs. Continental Warehousing Corporation vide

ITA No.523/2013 order dated 21-04-2015 he submitted that the 7

Hon'ble High Court in the said decision after considering the

decision of Hon'ble Delhi High Court in the case of Anil Kumar

Bhatia has upheld the decision of the Special Bench of the

Tribunal in the case of All Cargo Global Logistics Ltd. where it

has been held that the assessment u/s.153A will be made on the

basis of the incriminating material which in the context of

relevant provisions means (1) books of account or other

documents found in the course of search but not produced in

the course of original assessment and (2) undisclosed income or

undisclosed property discovered in the course of search.

10.2 Referring to the copy of the audited profit and loss account

and balance sheet filed along with the original return the Ld.

Counsel for the assessee drew the attention of the Bench to

pages 11 and 12 of the audited accounts which gives the details

of loans and advances. He submitted that all the cash credits

added by the Assessing Officer appear in the loans and advances

account filed along with the original return of income.

Therefore, no penalty u/s.271(1)(c) of the I.T. Act is leviable since

the addition is not based on any incriminating material found

during the course of search in the case of Shreeram H. Soni.

10.3 In his alternate argument the Ld. Counsel for the assessee

drew the attention of the Bench to page 4 of the assessment

order and submitted that the Assessing Officer has made the

addition on the ground that the assessee was not able to

produce the PAN, bank account details of the loan creditors. He

has not proved the loans to be bogus. Referring to the decision

of the Hon'ble Bombay High Court in the case of CIT Vs.

Upendra V. Mithani vide ITA No.1860 of 2009 the Ld. Counsel

for the assessee drew the attention of the Bench to the following: 8

"The issue involved in the appeal revolves around deletion of penalty u/s.271(1)(c) of the I.T. Act. The Tribunal has concurred with the view taken by the Commissioner of Income Tax (A). The Commissioner of Income Tax (A) has rightly taken a view that no penalty can be imposed if 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. If the assessee gives an explanation which is unproved but not disproved, i.e. it is not accepted but circumstances do not lead to the reasonable and positive inference that the assessee's case is false. The view taken by the Tribunal is a reasonable and possible view. The appeal is without any substance. The same is dismissed in limine with no order as to costs."

He accordingly submitted that in absence of any categorical

finding by the Assessing Officer that the loan creditors are bogus

no penalty u/s.271(1)(c) can be levied.

11. The Ld. Departmental Representative on the other hand

heavily relied on the order of the CIT(A). He submitted that the

assessee was unable to prove the identity and credit worthiness

of the loan creditors and the genuineness of the transactions.

Therefore, penalty levied u/s.271(1)(c) was correctly upheld by

the CIT(A) on the amount of Rs.11,50,000/- and the

proportionate interest thereon.

12. The Ld. Counsel for the assessee in his rejoinder

submitted that the arguments of the Ld. Departmental

Representative are applicable to a normal assessment. However,

this is an assessment u/s.143(3) r.w.s. 153C. Therefore, in

absence of any incriminating material, penalty u/s.271(1)(c) of

the I.T. Act is not leviable.

13. We have considered the rival arguments made by both the

sides, perused the orders of the Assessing Officer and the CIT(A)

and the Paper Book filed on behalf of the assessee. We have also

considered the various decisions cited before us. We find during 9

the course of search at the premises of one Shri Shreeram H.

Soni blank promissory notes (singed by the borrower) and blank

undated cheques duly signed by the borrowers were found which

contain the promissory note along with the blank cheque of Rs.5

lakhs relating to the assessee. On the basis of the same, the

Assessing Officer issued notice u/s.153C r.w.s.153A. Although

various additions were made we are confined to the penalty

levied on addition of Rs.11,50,000/- made by the Assessing

Officer u/s.68 of the I.T. Act and proportionate interest thereon

amounting to Rs.2,53,000/-.

13.1 So far as the addition of Rs.5 lakhs is concerned being

loan obtained from Shri Shreeram H. Soni it is a fact that the

assessee has admitted and not contested the addition in the

quantum appeal. However, the fact of obtaining loan from Shri

Shreeram H. Soni was found from the premises of Mr. Soni in

shape of blank cheque of Rs.5,00,000/- and blank promissory

note and based on the seized documents/papers notice

u/s.153C r.w.s. 153A was issued to the assessee. The loan

obtained from Mr. Soni was already reflected in the balance

sheet filed alongwith the original return of income which was

filed prior to the data of search. Merely because the assessee did

not contest the addition and accepted the same, penalty

u/s.271(1)(c) of the I.T. Act, in our opinion, in the given facts

and circumstances of the case is not leviable. We therefore

direct the AO to cancel the penalty on Rs.5,00,000/- and

proportionate interest thereon.

13.2 So far as the remaining amount of Rs.6,50,000/- is

concerned, i.e. loans obtained from 2 other persons namely Shri

Santokchanda Surana and Shri Mitesh Patel amounting to 10

Rs.2,50,000/- and Rs.4 lakhs respectively, it is the argument of

the Ld. Counsel for the assessee that these loan creditors were

already shown in the balance sheet as on 31-03-1998 and no

incriminating material was found during the course of search

relating to the above loan creditors.

13.3 We find some force in the above submission of the Ld.

Counsel for the assessee. Admittedly, apart from the addition of

Rs.5 lakhs no other addition has been made on the basis of

incriminating material found and seized from the premises of

Shri Shreeram H. Soni which relates to the assessee. The loan

amount of Rs.6,50,000/- obtained from different persons are

already appearing in the balance sheet filed in the original

return of income and nothing was detected due to the search.

Further, the Assessing Officer in the assessment order has made

addition on the ground that although the assessee filed the

confirmation letters, however, the assessee could not file the

PAN numbers, and addresses of the concerned loan creditors.

This in our opinion may be sufficient for making addition in the

quantum proceedings but certainly not in the penalty

proceedings for levy of penalty u/s.271(1)(c) of the I.T. Act in an

assessment framed u/s.153C r.w.s. 153A. In this view of the

matter we hold that the assessee is not liable to penalty

u/s.271(1)(c) of the I.T. Act on the amount of Rs.6.50 lakhs since

the same was not based on any incriminating material found

during the course of search and the addition was based on the

basis of loan creditors found from the balance sheet already filed

prior to the search along with the original return of income. We

accordingly set aside the order of the CIT(A) and direct the AO to

cancel the penalty levied on addition of Rs.11,50,000/- and 11

proportionate interest thereon. The grounds raised by the

assessee are accordingly allowed.

14. In the result, the appeal filed by the assessee is partly

allowed.

Pronounced in the open court on 17-06-2015.

Sd/- Sd/- (VIKAS AWASTHY) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER

satish Pune Dated: 17th June, 2015

Copy of the order forwarded to :

1. Assessee 2. Department 3. CIT(A)-II, Pune 4. CIT-II, Pune 5. The D.R, "B" Pune Bench 6. Guard File

By order

// True Copy // Senior Private Secretary ITAT, Pune Benches, Pune