M/S Pawan Oil Industries,, Hyderabad vs Assessee

M/s Pawan Oil Industries, Asst. Commissioner of Income- Gaganpahad, R.R. District. tax, Circle - 8(1), Hyderabad. PAN - AACFP3655J

(Appellant) (Respondent)

Assessee by Shri Mohd. Afzal Revenue by Shri Rajat Mitra

Date of hearing 12-01-2015 Date of pronouncement 21-01-2015

O RDE R

PER SAKTIJIT DEY, J.M.:

This appeal by assessee is directed against imposition of penalty u/s 271(1)(c) of the Act by AO and confirmed by ld. CIT(A) pertaining to AY 2008-09.

2. Briefly the facts are, assessee a partnership firm is engaged in the business of manufacturing and trading vegetable oils. For the AY under consideration, assessee filed its return of income on 29/09/2008 declaring income of Rs. 25,31,950. During the assessment proceeding, AO while examining the balance sheet of assessee as on 31/03/2008, noticed that assessee has shown unsecured loan creditors of Rs. 5,43,73,712, out of which, fresh unsecured loan obtained during the relevant FY was to the extent of Rs. 35 lakhs. AO, therefore, called upon assessee to submit confirmation letters from the unsecured loan creditors to prove the 2 ITA No. 29/Hyd/2 014 M/s Pawan Oil Industries.

loan transactions. In response to the query raised by, as noted by AO in the assessment order, assessee submitted confirmation letters from all the loan creditors. AO after verifying the confirmation letters, however, was of the view that the creditworthiness and genuine of the loans were required to be further examined. For this purpose, AO issued summons to all the loan creditors to appear before him and testify with regard to the loan transactions. AO also directed loan creditors to produce their bank passbooks, income tax assessment particulars, etc. As noted by AO in the assessment order, out of 16 loan creditors to whom summons were issued by him, 12 persons appeared before him and four persons did not appear. AO, therefore, issued a show cause notice to assessee vide letter dated 09/12/2010 requiring to show cause as to why loan transactions relating to these four creditors, which were not proved to his satisfaction should not be added back. In reply to the show cause notice, assessee vide letter dated 29/12/2010, though, claimed that the loan transactions are genuine and most of the creditors are income tax assessees, however, assessee stated that to buy peace with the department and avoid penalty proceeding, it is prepared to accept unsecured loan availed from eight persons totaling to Rs. 18 lakh as its income from other sources for the AY under consideration, the details of which are as under:

(Rs.)

1. B. Anita 3,00,000

2. Kalidas Krishna Balam-HUF 3,00,000

3. Vinod Sankla 2,00,000

4. Anand Joshi 2,00,000

5. Gyaneshwari Devi 3,00,000

6. Chitra Tiwari 2,00,000

7. Vandana Tiwari 2,00,000

8. Kamal Dangra 2,00,000 18,00,000 3 ITA No. 29/Hyd/2 014 M/s Pawan Oil Industries.

======= In terms with the offer made by assessee in the aforesaid letter, AO completed assessment u/s 143(3) vide order dated 30/12/2010 by adding the amount of Rs. 18,00,000, as agreed by assessee. Since the addition was made on agreed basis, assessee did not prefer any appeal against assessment order, so passed. However, as a consequence of the addition made, proceeding for imposition of penalty u/s 271(1)(c) was initiated and in response to the show cause notice, assessee submitted its explanation stating therein that though all the loan creditors are genuine but the addition of Rs. 18,00,000 was accepted with a view to buy peace with the department. AO, however, rejecting explanation of assessee passed an order u/s 271(1)(c) of the Act on 22/06/2011 imposing penalty of Rs. 5,56,200. Being aggrieved of the penalty order passed by AO, assessee preferred appeal before ld. CIT(A).

3. Ld. CIT(A) having confirmed imposition of penalty, assessee is before us.

4. Ld. AR reiterating the submissions made before the departmental authorities submitted that AO while imposing penalty has proceeded under mistaken presumption that assessee has not submitted confirmation letters in respect of loan creditors. However, the assessment order as well as other facts and materials on record would clearly prove that confirmation letters relating to all loan creditors were submitted before AO at the time of assessment proceeding wherein not only the identity of the creditors were establish but all other details relating to loan transaction was also given. Moreover, in response to the summons issued, 12 out of 16 loan creditors appeared before AO with the required details and confirmed of having advanced loans to assessee. Even in respect of 4 persons, who did not appear in response to the summons, assessee again produced confirmation letters given by them along with their bank statements and income-tax assessment details to prove the 4 ITA No. 29/Hyd/2 014 M/s Pawan Oil Industries.

genuineness of the loan transaction. It was submitted that in most of the cases, assessee while paying interest to the creditors deducted tax and paid to the Government account and respective loan creditors have also filed their returns claiming refund of the tax deducted at source. Assessee also repaid the loan to the creditors through account payee cheque in FY 2010-11. It was submitted, though, all these facts were brought to the notice of AO at the time of penalty proceeding, without properly considering the evidences brought on record and without properly examining the explanation submitted by assessee, AO has passed order imposing penalty u/s 271(1)(c). It was submitted by ld. AR, neither in the assessment order nor in the penalty order, AO has given a conclusive finding that assessee has either concealed its income or furnished inaccurate particulars of income. Therefore, it cannot be said that explanation offered by assessee is not bonafide as AO has not disproved the claim of assessee. Ld. AR submitted that ld. CIT(A) has also without properly appreciating the facts of assessee's case has applied the principles of law as decided in some cases and confirmed the penalty. Ld. AR submitted that unless the explanation of assessee is proved to be not bonafide or to the satisfaction of AO, it cannot be rejected arbitrarily for the purpose of imposing penalty u/s 271(1)(c). He submitted that before imposing penalty it has to be proved that the explanation submitted by assessee is false. Ld. AR submitted that merely because assessee during assessment proceeding agreed for accepting some of the loans as its income, that by itself cannot be a ground to impose penalty u/s 271(1)(c). In support of such contention, he relied upon a decision of Hon'ble Karnataka High Court in case of CIT Vs. Manjunatha Cotton & Ginning Factory, [2013] 53 (I) ITCL 2 wherein it is held that merely because assessee agreed for addition and accordingly assessment order was passed, making such addition, and assessee has also paid the tax and interest thereon, then, in absence of any material on record to show concealment of income, it cannot be inferred that addition was on account of concealment. The Hon'ble 5 ITA No. 29/Hyd/2 014 M/s Pawan Oil Industries.

High Court further held that if the explanation furnished by assessee is not found to be false and if it is bonafide, then, no penalty can be imposed u/s 271(1)(c). He also relied upon a decision of ITAT, Delhi Bench in case of Mr. Saket Agarwal Vs. ITO in ITA No. 3194/Del/2012 dated 20/06/2013 wherein it was held that if assessee gives explanation which is unproved but not disproved, then, penalty is not imposable. Thus, ld. AR submitted that in the facts of the present case, imposition of penalty u/s 271(1)(c) is not justified.

5. Ld. DR, on the other hand, relied upon the reasoning of AO and ld. CIT(A).

6. We have considered the submissions of the parties and perused the orders of revenue authorities as well as other material on record. Undisputedly, in the present case, penalty has been imposed on account of addition of unsecured loan of Rs. 18 lakhs by AO while completing assessment for the impugned AY. It is also not in dispute that addition of the unsecured loan was on agreed basis. However, it is explicit from the assessment order as well as other materials on record, that during the assessment proceeding, assessee has not only furnished the confirmation letters relating to all the loan creditors, but, 12 out of the 16 loan creditors appearing in person before AO not only confirmed the loan transaction but also submitted the details called for by AO. On perusal of the show cause letter dated 09/12/2010 issued by AO, a copy of which is at page 70 of assessee's paper book, it is very much clear that AO has raised doubt with regard to only four creditors, namely, i) Gyaneshwari Devi, ii) Asha Agarwal,

iii) Vandana Tiwari and iv) Chitra Tiwari, who did not appear before him in response to the summons issued during assessment proceeding. He, therefore, proposed to add the loan amount relating to the aforesaid four creditors as income of assessee u/s 68 of the Act. So far as other creditors are concerned, as it appears from the aforesaid show cause notice, AO had no dispute with regard to 6 ITA No. 29/Hyd/2 014 M/s Pawan Oil Industries.

genuineness of them. However, surprisingly enough, assessee in its letter dated 29/12/2010 though claimed all the .loan transactions to be genuine, but, he nevertheless came forward to accept unsecured loan to the extent of Rs. 18 lakh relating to 8 creditors as income from other sources and accordingly assessment was made. Neither from the assessment order nor any other material placed before us it is forthcoming why and under what circumstances, assessee agreed for addition of the aforesaid amount. Even, in course of hearing before us, neither ld. AR nor ld. DR could throw any light on the reasoning of such agreed addition when show cause letter dated 09/12/2010 is raising doubt only with regard to four loan creditors. Be that as it may, as can be seen, even out of four persons, credits relating to whom were doubted by AO, on the basis of explanation subsequently AO accepted the credit relating to Asha Agarwal to be genuine. So far as the other three creditors are concerned, on a perusal of assessee's reply dated 16/12/2010, a copy of which is at page 769 of the paper book, it is very much evident that assessee not only furnished fresh confirmation letters from these three creditors along with their income tax particulars and bank statements, but, also stated the reasons for which they did not appear before AO in response to the summons issued. From the aforesaid facts, it is evident not only assessee has submitted confirmation letters establishing the identity of the loan creditors but majority of the loan creditors also before AO confirmed the loans. It further appears, most of these loan creditors are income-tax assessees and they have also produced their bank statement in support of the loan transaction. In these circumstances, merely because assessee accepted loan to the extent of Rs. 18 lakh relating to 8 creditors for whatever may be the reason, ipso-facto, it will not lead to the conclusion that assessee has concealed its income or furnished inaccurate particulars of income relating to the amount accepted by assessee as its income. There cannot be any doubt with regard to the fact that assessment and penalty are two separate and distinct proceedings. Addition made in assessment proceeding cannot 7 ITA No. 29/Hyd/2 014 M/s Pawan Oil Industries.

automatically lead to imposition of penalty u/s 271(1)(c). For imposition of penalty u/s 271(1)(c), two conditions are required to be satisfied i.e. there must be concealment of income by assessee or furnishing of inaccurate particulars of income. Moreover, explanation submitted by assessee in terms with section 271(1)(c) have to be proved to be not bonafide or unsatisfactory. Further, the fact that assessee has deducted tax at source while crediting interest to some of the loan creditors have not been disputed by the department. Furthermore, the claim of assessee that outstanding loan amount was repaid by assessee by way of account payee cheque in FY 2010-11 also remain uncontroverted. All these facts and evidences were required to be examined/appreciated independently in course of penalty proceeding to come to a definite conclusion that assessee either has concealed its income or furnished inaccurate particulars of income. However, perusal of assessment order and the penalty order would make it clear that there is no specific and conclusive finding of either concealment of income or furnishing of inaccurate particulars of income by assessee. Moreover, it is the duty of AO to examine whether the explanation furnished by assessee is bonafide or not. Merely because assessee agreed for addition of a part of unsecured loan as its income, its explanation cannot be presumed to be false or unacceptable without bringing evidence on record to prove it otherwise. Therefore, considering the totality of facts and circumstances, we are of the view that as AO has not established on record that assessee has either concealed its income or furnished inaccurate particulars of income, imposition of penalty u/s 271(1)(c) is not justified. In support of such view, we rely upon the decision of the Hon'ble Karnataka High Court in case of Manjunatha Cotton and Ginning Factory (supra). Ld. CIT(A) also failed to examine the factual aspect in proper perspective. It appears from the order of ld. CIT(A) that without examining the facts, he has tried to apply the legal principles laid down in certain judicial precedents. In the aforesaid view of the matter, we hold that imposition of penalty in the present 8 ITA No. 29/Hyd/2 014 M/s Pawan Oil Industries.

case is not justified. Accordingly, we direct the AO to delete the same.

7. In the result, appeal of assessee is allowed.

Pronounced in the open court on 21/01/2015.

Sd/- Sd/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, Dated: 21 st January, 2015 kv

Copy to:-

1) M/s Pawan Oil Industries, C/o Mohd. Afzal, Advocate, 11-5-465, Sherson's Residency, Flat No. 402, Criminal Court Road, Red Hills, Hyderabad - 500 004.

2) ACIT, Central Circle - 8(1), Hyderabad.

3) CIT(A)-III, Hyderabad

4) CIT-II, Hyderabad

5) The Departmental Representative, I.T.A.T., Hyderabad.