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2016 (2) TMI 899 - HC - Income TaxViolation of the principles of natural justice - fictitious payments of commission - Held that - While the wisdom of applying Section 33 of the IEA to the evidence of Mr. Meattle may be doubtful, the Court is of the view that de hors the evidence of Mr. Meattle, the evidence of Mr. Jhunjhunwala was by itself sufficient to draw an adverse inference against the Assessee that the payments of commission were fictitious. The Court is not persuaded to hold that Mr. Jhunjhunwala had made contradictory and inconsistent statements particularly since he was never confronted with those inconsistencies and contradictions by the Assessee. If, as is urged by the Assessee, Mr. Meattle s statements are to be entirely kept aside, then Mr. Jhunjhunwala s statements can be examined for their intrinsic worth. The Assessee took a calculated risk in declining to cross-examine Mr. Jhunjhunwala on the understanding that it had to be preceded by the cross-examination of Mr. Meattle. Two conclusions that could be drawn from the above narration are that there is no violation of principles of natural justice as far as the Assessee is concerned, and the uncontroverted statements of Mr. Jhunjhunwala were sufficient to substantiate the case of the Revenue against the Assessee. Penalty u/s 271(1)(c) - Held that - Here the question is not mere making of a wrong claim but in making a claim that is demonstrably false. With the Assessee failing to establish the genuineness to the commission payments the essential conditions for attracting penalty under Section 271 (1) (c) of the Act stood fulfilled. The impugned orders of the ITAT and the CIT (A) deleting the penalty are hereby set aside. The penalty as ordered by the AO is restored. The question framed is answered in the negative, i.e., in favour of the Revenue and against the Assessee.
Issues Involved:
1. Legitimacy of commission payments claimed by the Assessee. 2. Adequacy of opportunity provided for cross-examination of witnesses. 3. Application of Section 33 of the Indian Evidence Act. 4. Imposition of penalty under Section 271 (1) (c) of the Income Tax Act. Detailed Analysis: 1. Legitimacy of Commission Payments: The Assessee claimed deductions for commission payments made to sub-agents for various contracts over the assessment years 1981-82, 1982-83, and 1983-84. The Assessing Officer (AO) initially allowed these deductions but later reopened the assessments under Section 148 of the Income Tax Act, based on statements from Mr. M.K. Meattle, Managing Director of the payee companies, who admitted that these transactions were hawala entries. 2. Adequacy of Opportunity for Cross-Examination: The Assessee was given opportunities to cross-examine Mr. Meattle and Mr. Jhunjhunwala, whose statements were crucial to the Revenue's case. The ITAT initially remanded the matter to the AO for further cross-examination. However, Mr. Meattle could not be traced, and the Assessee declined to cross-examine Mr. Jhunjhunwala without first cross-examining Mr. Meattle. The ITAT concluded that the Assessee had adequate opportunity but chose not to utilize it. 3. Application of Section 33 of the Indian Evidence Act: The ITAT applied Section 33 of the Indian Evidence Act, allowing the use of Mr. Meattle's statement despite his unavailability for cross-examination. The High Court noted that while the wisdom of applying Section 33 might be doubtful, the uncontroverted statements of Mr. Jhunjhunwala were sufficient to substantiate the Revenue's case against the Assessee. The Court held that the Assessee's failure to cross-examine Mr. Jhunjhunwala allowed the AO to draw an adverse inference. 4. Imposition of Penalty under Section 271 (1) (c): The Revenue also imposed a penalty under Section 271 (1) (c) of the Act, which was initially set aside by the CIT (A) and the ITAT. The High Court found that the Assessee failed to discharge the onus of proving the genuineness of the commission payments. The Court held that the adverse inference drawn from the Assessee's failure to cross-examine Mr. Jhunjhunwala applied equally to the penalty proceedings. The Court restored the penalty, emphasizing that the Assessee's claim was not merely wrong but demonstrably false. Conclusion: The High Court upheld the ITAT's findings regarding the disallowance of the commission payments and the imposition of penalties. The Court dismissed ITA No. 439 of 2003, affirming the ITAT's decision, and allowed ITA No. 156 of 2014, restoring the penalty imposed by the AO. The Court concluded that there was no violation of principles of natural justice and that the Assessee's failure to cross-examine Mr. Jhunjhunwala justified the adverse inference drawn by the AO.
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