Penalty proceedings : Whenever an addition/disallowance is made, initial burden is upon assessee to prove that it is not his concealed income or he has not furnished inaccurate particulars of such income
- When an explanation is offered, the onus stands shifted on to the Revenue whereby it has to be shown that the explanation offered by the assessee is false or assessee has not been able to substantiate his explanation and failed to prove that such explanation is bona fide and all the facts relating to the same and material to the computation of his total income have not been disclosed
[2010] 5 taxmann 70 (Mum. - ITAT)
ITAT, MUMBAI 'H' BENCH, MUMBAI
ITO v. Heaven Distillery Pvt. Ltd.
ITA No. 742/Mum/2008
May 14, 2010
FACTS
The assessee is a Company registered under the Companies Act and it was engaged in the business of Mending and bottling of IMFL. In respect of the previous year relevant to the assessment year 2000-2001 assessee declared total income of Rs.52,380/- and the same was processed accordingly under section 143 (1) of the Act. According to the Assessing Officer provisions of section 115JA are applicable to the assessee-company. Since assessee did not compute deemed total income under section 115JA of the Act, the case was selected for scrutiny and a notice was issued under section 143 (2) of the Act, in response to which, Shri G.P. Mehta, Authorised Representative appeared from time to time and furnished relevant details. Assessment was thereafter completed by determining net taxable income at Rs.47,53,290/- and simultaneously penalty proceedings were initiated on the ground that assessee concealed the income/furnished inaccurate particulars of income which is evident from the following additions/disallowances.
1. Disallowance of depreciation on Rs.,84,109/ -building and machinery
2. Addition made u/s. 145A Rs. 4,41,002/-
3. Fee's paid to Sandeep Solanki for Rs. 12,000/-Valuation of Bldg. & Machinery.
4. Disallowance out of salary & wages Rs. 1,57,340/-
5. Disallowance of discount on sale Rs. 7,98,692/-
Addition made u/s.68 on account of Rs.l 1,50,728/-unsecured loan
As regards the addition made by the Assessing Officer under section 68 of the Act, the case of the assessee was that loan confirmations were filed and creditors responded to the letters written by the Assessing Officer by confirming the credits in writing ; Summons having not been issued it cannot be said that the assessee had failed to prove the genuineness of the loan transactions. The Assessing Officer, however, observed that only some creditors have filed affidavits. Moreover, the Assessing Officer issued summons under section 131 of the Act in the month of January, 2003 but nobody attended. Since preliminary onus is upon the assessee, in the absence of proving creditworthiness, the Assessing Officer concluded that assessee had concealed income by filing inaccurate particulars.
Learned CIT (A) observed that objection of the assessee with regard to jurisdiction of the Assessing Officer to initiate penalty proceedings is factually incorrect. He noticed that the Assessing Officer had recorded his satisfaction in the assessment order by mentioning that 'proceedings under section 271 (1) (c) are initiated separately for furnishing inaccurate particulars of income'. Thus proceedings were held to be in accordance with law.
However, on merits, he found that it was not a fit case of levy of penalty. It may be noticed that the learned CIT(A) incorporated the written submissions in his order and accepted the plea of the assessee
HELD
In order to consider the issue in dispute, it may be necessary to appreciate the scope and ambit of the provisions of section 271 (1) (c) read with explanations therein. Section 271 (1) (c) comes into play when an assessee concealed particulars of his income or furnished inaccurate particulars of such income. Explanation 1 to Section 271 (1)(c) is a deeming provision which enlarges the scope of expression "concealment" and "furnishing of inaccurate particulars of income". It says that any amount added or disallowed in computing the total income shall be deemed to represent the income in respect of which particulars have been concealed. In other words, whenever an addition/disallowance is made, the initial burden is upon the assessee to prove that it is not his concealed income or he has not furnished inaccurate particulars of such income.
When an explanation is offered, the onus stands shifted on to the Revenue whereby it has to be shown that the explanation offered by the assessee is false or assessee has not been able to substantiate his explanation and failed to prove that such explanation is bonafide and all the facts relating to the same and material to the computation of his total income have not been disclosed. It is not for the Assessing Officer to prove beyond reasonable doubt that the assessee has furnished inaccurate particulars of income or has concealed income referable to the additions/disallowances made. In the case of Union of India vs. Dharmendra Textiles (2008) 306 ITR 277 Hon'ble Apex Court had an occasion to consider the scope and ambit of Explanations to section 271 (1) (c) of the Act and, while noticing that the Court cannot read anything into a statutory provision or a stipulated condition which is plain and unambiguous and the language employed in a statute is the determinative factor of legislative intent the Hon'ble Court concluded that the explanations indicate the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing the return of income. In the case of K.P. Madhusudhan vs. CIT 251 ITR 99 the Hon'ble Apex Court observed that when a notice is issued under section 271 (l) (c) of the Act, an assessee can be said to have been put to notice that explanation to section 271 (1) (c) is invoked and initial burden is upon the assessee to prove his bonafides. In other words, no express location of the explanation is necessary. As and when addition/disallowance is made there is a deemed concealment or furnishing of inaccurate particulars of income on which penalty is imposable and the initial burden is upon the assessee to file explanation and substantiate his explanation to prove the bonafides or to show that the transactions are genuine. In a recent un-reported decision of the ITAT, Mumbai Benches (Ultramarine and Pigments Limited ITA. No. 1325/Mum/2007 dated 20th April, 2010) the Bench had taken note of latest decision of the Apex Court in the case of Reliance Petrol Products Pvt. Ltd. 322 ITR 158 and, upon analyzing the gamut of case law on the issue, the Bench had observed that upon invoking explanation to section 1 1 (1) (c) of the Act there is no further onus on the Assessing Officer to establish mens rea and it is for the assessee to satisfactorily discharge the onus of proving the bonafides with regard to claim of depreciation ere, We have also gone through the case law relied upon by the learned Counsel wherein decisions were rendered by applying the above mentioned principles to the facts of those cases.
RELEVANT EXTRACTS:
20. We have carefully considered the rival submissions and perused fie record. In order to consider the issue in dispute, it may be necessary to appreciate the scope and ambit of the provisions of section 271 (1) (c) read with explanations therein. Section 271 (1) (c) comes into play when an assessee concealed particulars of his income or furnished inaccurate particulars of such income. Explanation 1 to Section 271 (1) (cj is a deeming provision which enlarges the scope of expression "concealment" and "furnishing of inaccurate particulars of income". It says that any amount added or disallowed in computing the total income shall be deemed to represent the income in respect of which particulars have been concealed. In other words, whenever an addition/disallowance is made, t]/e initial burden is upon the assessee to prove that it is not his concealed income or he has not furnished inaccurate particulars of such income. Explanation 1 to section 271 (1) (c) lays down the procedure to discharge the burden as under :
(a) when such person offers explanation and substantiates the same; or
(b) proves that all facts are on record and material to the computation of his total income have been disclosed and explanation is bonafide.
21. When an explanation is offered, the onus stands shifted on to the Revenue whereby it has to be shown that the explanation offered by the assessee is false or assessee has not been able to substantiate his explanation and failed to prove that such explanation is bonafide and all the facts relating to the same and material to the computation of his total income have not been disclosed. It is not for the Assessing Officer to prove beyond reasonable doubt that the assessee has furnished inaccurate particulars of income or has concealed income referable to the additions/disallowances made. In the case of Union of India vs. Dharmendra Textiles (2008) 306 ITR 277 Hon'ble Apex Court had an occasion to consider the scope and ambit of Explanations to section 271 (1) (c) of the Act and, while noticing that the Court cannot read anything into a statutory provision or a stipulated condition which is plain and unambiguous and the language employed in a statute is the determinative factor of legislative intent the Hon'ble Court concluded that the explanations indicate the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing the return of income. In the case of K.P. Madhusudhan vs. CIT 251 ITR 99 the Hon'ble Apex Court observed that when a notice is issued under section 271 (l) (c) of the Act, an assessee can be said to have been put to notice that explanation to section 271 (1) (c) is invoked and initial burden is upon the assessee to prove his bonafides. In other words, no express location of the explanation is necessary. As and when addition/disallowance is made there is a deemed concealment or furnishing of inaccurate particulars of income on which penalty is imposable and the initial burden is upon the assessee to file explanation and substantiate his explanation to prove the bonafides or to show that the transactions are genuine. In a recent un-reported decision of the ITAT, Mumbai Benches (Ultramarine and Pigments Limited ITA. No. 1325/Mum/2007 dated 20th April, 2010) the Bench had taken note of latest decision of the Apex Court in the case of Reliance Petrol Products Pvt. Ltd. 322 ITR 158 and, upon analyzing the gamut of case law on the issue, the Bench had observed that upon invoking explanation to section 1 1 (1) (c) of the Act there is no further onus on the Assessing Officer to establish mens rea and it is for the assessee to satisfactorily discharge the onus of proving the bonafides with regard to claim of depreciation ere, We have also gone through the case law relied upon by the learned Counsel wherein decisions were rendered by applying the above mentioned principles to the facts of those cases.
11. Now we may turn to the facts of the case on hand. As regards the claim of depreciation of building and machinery the Assessing Officer observed in pages 8 and 9 of the assessment order that (he assessee has grossly failed to produce any documentary evidence to tablish its claim that building and machineries were put to use for business purpose such as purchase of raw materials, excise records, wage register, consumption of power etc., In his opinion it is established beyond doubt that the building and machineries of erstwhile proprietary concern were not put to use for the purpose of assessee's business of production of IMFL. Despite a categorical finding, the assessee had not furnished any evidence, during the course of penalty proceedings, to establish that building and machinery was used for its business. This shows that except giving a bald explanation the assessee has not substantiated the explanation or proved the bonafides of its claim. therefore, Assessing Officer concluded that the assessee wrongly claimed depreciation on the building and machinery which was not used for business purpose and such claim had made with an intention to reduce the tax liability of the current year. Learned CIT(A) observed that the Assessing Officer ought to have examined the claim during the course of penalty proceedings. In our considered opinion the onus is upon the assessee to prove that the building and machinery was put to use. Such information would be within the personal knowledge of the assessee and the Assessing Officer cannot be called upon to prove the negative i.e. non-user of such assets. At any rate, in view of Explanation to section 271 (1) (c) of the Act the burden is upon the assessee to file proper explanation and substantiate such explanation with supporting material. In the instant case no such material was brought on record. Learned Counsel submitted that the Assessing Officer did not specify as to what documents are required to prove that the machinery was used for the purpose of packing of finished goods. He further submitted that the assessee-company had acquired the assets from M/s. R.N. Products (firm) whereas the Assessing Officer mistakenly mentioned that it was acquired from the proprietary concern which shows that there is non-application of mind. However, in our considered opinion the factum of user of building and machinery has to be proved-whether the building and machinery was taken over by the firm or from the erstwhile proprietary concern. As could be noticed from the Special Audit report, proprietary concern of Mrs. Latha Parikh was originally engaged in manufacturing of packing materials whereas by the time the assessee-company had taken over the fixed assets etc., it was a firm viz. M/s. R.N. Products. Since the assessee has not proved that it was put to use it cannot be said that the assessee substantitated its explanation. Thus we are of the opinion that it is a fit case for levy of royalty and hence the order of the learned CIT(A), on this issue is set aside.
24. Similarly, as regards the addition made under section 1 i5A of the Act the case of the assessee is that the addition made was without, any reference to statutory records. It is noticed from the assessment order that the addition was made on estimate basis on the ground that the basis followed by the assessee is likely to result in distorted picture of true state of business for computing the chargeable income. In our opinion the bonafides of the explanation cannot be disputed. As rightly observed by the learned CIT(A) the assessee having tendered his explanation which is bonafide, during the penalty proceedings the Assessing Officer ought to have shown that it is a false explanation. In the absence of such observation we are of the view that there is no case for levy of penalty with reference to addition of Rs. 4,4 1,002/-.
25. As regards disallowance out of salary and wages the case of Assessing Officer is that excessive provision was made by the assessee whereas the assessee vide letter dated 20-10-2003 submitted that the allegation of Special Auditor that the payment for the month of March, 2000 was made in the month of March 2000 itself was factually incorrect and details of payment were submitted in the explanation. In other words, allegation of the Special Auditor is that payment is made for 13 months whereas fact remains that payments were made only for 12 months. Under these circumstances, merely because the explanation of the assessce-company was rejected without arriving at the conclusion that it is a false claim, penalty cannot be levied. Under these circumstances, we agree with the findings of the learned CIT(A) on this issue and thus uphold the Order of the learned CIT(A).
26. As regards disallowance of discount on sales the case of the
assessee is that confirmatory letters were never called for and hence they were not furnished as otherwise complete details are available with the assessee. However, it is noticed that the Assessing Officer issued a show cause notice calling upon assessee to furnish the basis of discount and details of sales made to each party and to establish the genuineness of discount. Except furnishing self-generated vouchers the assessee has not furnished the details called for. Under these circumstances the Assessing Officer doubted the genuineness of the alleged discount and accordingly disallowed the same. Even during the penalty proceedings, except merely slating that complete details were filed vide Annexure No. 43 (presumably self-generated vouchers) no other information was furnished. In other words, the assessee failed to substantiate its explanation of genuineness of the alleged discount. Though the learned CIT(A) merely reproduced the written submissions of the assessee, it is not specified as to what was contained in Annexure-43 in addition to self-generated vouchers. Even before us no material whatsoever was filed by the assessee to indicate that basic details were furnished to support its stand that discount was allowed on sales. Under these circumstances, we arc of the view that the assessee has not discharged the burden iced upon it under Explanation to section 271 (1) (c) of the Act. In other words, mere furnishing an explanation, without substantiating the same, particularly in a case where an addition was made by the Assessing Officer and confirmed by the CIT(A) on the ground that genuineness of the discount is in doubt. We therefore, set aside the Order of the learned CIT(A) on this issue and hold that penalty levied by the Assessing Officer on this count is in accordance with law.
27. As regards unsecured loans and addition made under section 68 of the Act the case of the Assessing Officer was that the assessee failed to prove their identity, genuineness and creditworthiness he has also referred to the comments of the Special Auditor stating that most of the loan confirmations do not bear GIR/PA Nos. and most of the loan confirmations are in the name of M/s. R.R. Products, proprietary concern of Shri Lata Parikh or M/s. R.N. Products (Firm). Though confirmation letters were filed the Assessing Officer observed that summons issued to most of the loan creditors have been returned back by the postal authority and hence mere furnishing of an affidavit of so-colled lenders cannot make the loan genuine and also pointed out that one of the loan creditors i.e., Atlantic Agencies filed a letter denying any business or loan transaction with the assessee-company. He also noticed that most of the persons are small agriculturists who were not capable of lending such huge amounts. In view of the fact that initial onus is upon assessee to prove identity, genuineness and capacity of the loan editors and the assessee having failed to prove genuineness and . ditworthiness, the Assessing Officer disallowed cash credits to the tune of Rs.l 1,50,728/- under section 68 of the Act and in the absence of any further material produced even during the penalty proceedings, he concluded that it was a fit case for levy of penalty. In the assessment order it was mentioned that in the month of January, 2003 summons were issued to various loan creditors and nobody responded to the summons. Though non-attendance in response to summons was in the knowledge of the assessee, even in the penalty proceedings assessee did not choose to furnish either the correct address or ensured attendance of some of the creditors. At any rate, no information was furnished to prove the creditworthiness of the creditors. Under these circumstances, claim of the assessee that confirmatory letters is sufficient compliance to the requirements under section 68 of the Act is not in accordance with law. An explanation tendered by the assessee, in the penalty proceedings should be substantiated with documentary evidence which should prima facie show that the credits are genuine. In the instant case, Assessing Officer mentioned that most of the loan creditors are not income tax assessees and the assessee failed to establish identity and genuineness the creditors, apart from the fact that they do not have creditworthiness. Therefore, it cannot be said that explanation of the assessee is substantiated with proper material and thus Assessing Officer was justified in levying penalty under section 271 (1) (c) of the Act with reference to the addition made under section 68 of the Act. Order passed by the learned CIT(A) on this aspect is therefore set aside.
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