Monday, June 20, 2011

Scrutiny, submission by Assessee

In action on part of assessee can be costly in assessment and penalty proceedings- learning from recent ruling.

Duties of assessee:

It can be said that duties of an assessee include inter alia furnishing a correct return of tax base say income or other subject matter of taxation as the case may be. To furnish related documents and to make his explanations as required under law by filing relevant reports and statements or as may be required by the Assessing Authority for ascertaining tax base (say income) and tax payable (say income-tax). The assessee is required to prove genuineness of his transactions and reliability of his accounts and other statements relied on by him.

Evidence to be produced:

The assessee is also required to produce evidence about his claims of income, exempted income, allowable expenditure, assets and liabilities and various claims made by him to seek relief and to determine income properly as per law.

In respect of liabilities in nature of current liabilities or loan liability and some receipts which are claimed as not taxable, assessee is required to produce reasonable evidence and basis on which he had preferred his claims.

When the AO asks for any evidence, assessee must provide reasonable evidence so that at least it can be said that he has discharged his onus. For example, in case of liabilities he must give particulars of creditors ( name , address, PAN , purpose and nature of liability etc.) to discharge initial burden or onus. In fact the assessee in his own interest must make full efforts to produce latest confirmations, and new address etc. If the AO has asked to produce creditors, he must make sincere efforts to produce them and must also inform the AO about his efforts and results. Even if his own efforts does not yield result and the creditor is not willing to come forward, then assessee can request the AO to issue notices to creditors for their appearance etc.

If the assessee does not discharge his preliminary responsibility of furnishing relevant details and evidence, he may be burdened with additions and tax thereon as well as penalty for concealing particulars of income.

Evidence Act:

In this regard section 106 of Indian Evidence Act is also relevant and has been applied by court in a recent ruling. The said provision with high lights reads as follows:

106. Burden of proving fact specially within knowledge - When any fact is specially within the knowledge of any person, the burden of proving that fact is upon him.

Illustrations

(a) When a person does an act with some intention other than that which the character and circumstances of the act suggest, the burden of proving that intention is upon him.

(b) A is charged with traveling on a railway without a ticket. The burden of proving that he had ticket is on him.

On reading of the above provision we find that when a fact is specially within knowledge of any person, the burden of proving that fact is upon him. Thus, when a fact is especially in knowledge of assessee, it is on him to prove the fact. Therefore, accounting entries and adjustments made by assessee are considered as fact within his knowledge, therefore assessee is required to prove the facts. If he fails to prove the facts, adverse inference can be drawn against him.

However, in this regard, it is necessary to consider all other aspects related with a transaction. If a transaction took place long ago, and there is no continuity of dealing with party concerned, the assessee can only give the last known address of concerned party. However, there must be at least that much effort to establish facts as they prevailed on the day of transaction. If there is no action by the assessee to prove facts, then authorities can definitely draw adverse conclusions. In view of author, production of third parties cannot be considered as fact in special knowledge of assessee, and therefore, this provision should not be applied in that regard. With respect, author feels that the Tribunal and High Court In the case of M/s. Aggarwal Financers, were not correct in applying this provision, merely because assessee could not produce the creditors before the AO.

Recent case before Punjab and Haryana High Court:

In case of M/s. Aggarwal Financers, Ladwa Vs. CIT 2011 -TMI - 203225 decided on 19 April 2011 a matter of penalty levied for concealment of income which was confirmed by the ITAT, came for consideration on appeal of assessee. The honorable High Court considered the provisions Sections 68 and 271(1)(c) of the Income-tax Act and section 106 of the Evidence Act .

In this case the Tribunal has recorded a finding that in spited of repeated opportunities the assessee failed to establish the nature, source and creditworthiness of liabilities shown by assessee.

Court held that on a harmonious construction of Section 106 of the Evidence Act and Section 68 of the Act will be that though apart from establishing the identity of the creditor, the assessee must establish the genuineness of the transaction as well as the credit worthiness of his credit - The burden is on the assessee to prove the genuineness of the transaction - In the present appeal, since in spite of various opportunities provided to the assessee, the creditors could not be produced, therefore, it can be said that the assessee attempted to conceal the particulars by furnishing inaccurate particulars .

The court further held that the addition made on this account would not automatically justify the imposition of penalty, under Section 271(1)(c) of the Act, no penalty can be imposed if the facts and circumstances are equally consistent with the hypothesis that it does, However, in the present appeal, since the assessee has not explained cash credits, therefore, the penalty has been rightly levied. The impugned order of the ITAT was thus upheld and the appeal of assessee was dismissed.

Questions before the High Court:

The following substantial questions of law were claimed for determination of the High Court ( with highlights provided by author):

"(i) Whether in the facts and circumstances of the present case the action of the authorities below, in passing the penalty order under Section 271(1)(c) of the Act thereby holding the concealment of income, when all the cash credits were duly explained by the appellant assessee, is legally sustainable in the eyes of law?

(ii) Whether under the facts and circumstances of the present case the action of the authorities below in imposing penalty even when the onus was discharged by the appellant assessee in toto is legally sustainable in the eyes of law?

(iii) Whether under the facts and circumstances of the present case the action of the authorities below in imposing penalty for concealment of income, merely on the basis of presumptions, is legally sustainable in the eyes of law?

(iv) Whether under the facts and circumstances of the present case the action of the authorities below in passing orders (Annexure A-1 to A-3) even when the genuineness of the transactions were fully explained by the appellant assessee, therefore, discharging its onus, is legally sustainable in the eyes of law?

(v) Whether under the facts and circumstances of the present case the action of the authorities below in passing the impugned orders (Annexure A-1 to A-3) are legally sustainable in the eyes of law?

Comments of author:

A reading of above questions, particularly highlighted portions suggest that the assessee has claimed to have discharged his onus by furnishing explanations and evidence about cash credits and that tax authorities have applied some presumptions. However, there is no challenge of facts as found by Tribunal as wrong or perverse.

The assessee must have challenged the facts as recorded by Tribunal as wrong and perverse. Without that, the facts as found by the Tribunal have to be considered as final.

Facts as noticed by the High Court:

the assessee filed its return of income for the assessment year 1998-99, on 31.10.1998, declaring income of Rs. 6,889/-.

The assessing officer, however, made assessment under Section 148 of the Act.

Certain short-comings and deficiencies were detected by the assessing officer in the return filed.

The AO noticed that the deposits made by the creditors of the assessee as shown in the books of account were not genuine.

No confirmation and verification had been furnished by the assessee.

The AO made an addition of Rs. 1,97,000/-.

The AO also disallowed 1/4th of the actual expenses of Rs. 67,767/- he added a sum of Rs. 16,942/-.

Pursuant to the additions and disallowances notice under Section 274 read with Section 271(1)(c) of the Act was issued. The assessing officer, vide order dated 24.12.2004, held that there was concealment of income by the assessee and accordingly imposed a penalty of Rs. 68,949/-

Appeals against the imposition of penalty carried by the assessee before the CIT(A) and the Tribunal both were dismissed. Thus CIT(A) and Tribunal had concurrently held that there was concealment of income and assessee was liable to penalty.

Observations and order of the High Court:

High Court heard learned counsel for the parties and have perused the record.

The Tribunal while upholding the findings of CIT(A) and the assessing officer, imposing penalty had recorded as under ( highlights added by author for analysis):

"We are aware that the penalty is not imposable if there is no conscious breach of law as was held by the Hon'ble Apex Court in the case of Hindustan Steel Ltd. Vs. State of Orissa 1969 -TMI - 39958 – (SUPREME Court) and at the same time, for imposition of penalty, the conduct of the assessee must be conscious. Hon'ble Gujarat High Court in the case of AM Shah & Co. vs. CIT (108 Taxman 137) (Guj.) even went to the extent that the concealment/ inaccuration occurring up to final stage must be considered. Even otherwise, a harmonious construction of Section 106 of the Evidence Act and Section 68 of the Act will be that though apart from establishing the identity of the creditor, the assessee must establish the genuineness of the transaction as well as the credit worthiness of his credit. The burden is on the assessee to prove the genuineness of the transaction. In the present appeal, since in spite of various opportunities provided to the assessee, the creditors could not be produced, therefore, it can be said that the assessee attempted to conceal the particulars by furnishing inaccurate particulars. We are aware that the addition made on this account would not automatically justify the imposition of penalty, under Section 271(1)(c) of the Act, no penalty can be imposed if the facts and circumstances are equally consistent with the hypothesis that it does. In the present appeal, since the assessee has not explained cash credits, therefore, we are of the view that the penalty has been rightly levied. The impugned order is upheld. Consequently, this appeal is also dismissed."

High Court's ruling:

The Tribunal on appreciation of material had affirmed the orders of the authorities below and arrived at the conclusion that there was concealment of income on the part of the assessee.

The penalty under Section 271(1)(c) of the Act had, thus, been rightly levied.

Nothing could be shown that the findings recorded by the authorities below were perverse or erroneous in any manner.

In view of the above, no substantial question of law arises and the appeal is dismissed.

Observation of author:

The Tribunal has recorded facts as follows:

That in spite of various opportunities provided to the assessee, the creditors could not be produced, therefore, it can be said that the assessee attempted to conceal the particulars by furnishing inaccurate particulars.

that the assessee has not explained cash credits.

It seems that Tribunal in its order has not at all recorded facts about what evidences were produced by assessee, whether assessee furnished names, address, PAN, confirmations etc. is not recorded.

Apparently the Tribunal has come to conclusions of concealment only because the assessee could not produce creditors. In view of the author either the counsels of assessee did not provide any evidence before authorities or the approach of the Tribunal was not fully correct. Production of creditor may not always be within control of the assessee.

If assessee based on his information and record is able to prima facie establish the nature and source of credit then primary onus of assessee stands discharged. For production of creditors the tax authorities are empowered to issue notices, there is no finding about issuance of notices by assessee or the AO to the creditors to produce creditors before AO.

In this case the assessee should have challenged findings of Tribunal as incomplete, incorrect and perverse and should have produced some evidence in this regard before the High Court. In absence of the same the high Court took the findings of Tribunal as final and confirmed penalty by holding that there is no substantial question of law.

With due respect the author also differ from the views of the High Court. This is because, the Tribunals finding is based only on one factor that is failure of assessee to produce creditors.

Failure to produce third party- not hit by S.106 of Evidence Act:

As noted earlier as per section 106 of the Evidence Act - When any fact is specially within the knowledge of any person, the burden of proving that fact is upon him.

Now the question comes is whether production of a third party before the AO can be considered as covered by this provisions. In view of the author, to produce a third party is not covered by this provision. It cannot be considered as `specially within the knowledge of assessee…. , therefore, with due respect, author feels that the Tribunal has not applied this provision correctly in the facts and circumstances of the case.

Learning from this case:

The assessee should have furnished whatever evidence he had about creditors – even old confirmations, evidence of receipt of money like money receipt issued by assessee, evidence of payment of interest and receipt of creditor, clearing of cheques received and paid etc.

The assessee could have issued notices to the creditors and requested them to present evidence before his AO.

If creditors did not respond, the assessee could have requested the AO to issue notices to creditors.

Assessee could have given reasons for his inability to produce creditors and produce evidence available with him.

The assessee should have made petition before Tribunal to make a reference of evidence produced before lower authorities and Tribunal. Non recording of such facts should have been challenged before High Court also. Not challenging the facts found by Tribunal was apparently a serious mistake.

The assessee must have made out a case of discharge of primary onus for explanation of the nature and source of money. Before the High Court also any evidence was not produced. That is why the High Court has recorded that "nothing could be shown that the findings recorded by the authorities below were perverse or erroneous in any manner".

The assessee must have challenged findings of Tribunal as perverse and should have made out case about reasonable evidence available.

The assessee must have claimed that in the facts and circumstances of the case Section 106 of the Indian Evidence act was not applicable.

By: C.A. DEV KUMAR KOTHARI .
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Dear Friends : The emails are schedule to be posted in the blog and will sent to the group on carious dates and time fixed. Instead of sending it on one day it is spread on various dates. regards. R R Makwana
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