2010 (5) TMI 583 - AT - Income Tax

Penalty - Addition - Unexplained creditor - The assessee did not furnish details like confirmation from that other party and period corresponding to purchase of yarn, or placing of order or dispute for recovery - The claim of the assessee was not supported with evidence inasmuch as he was unable to produce evidence about the nature of meetings and the persons who attended the meeting - The fact of incurring of expenditure was not doubted but what was doubted was the business purpose of the expenditure - the penalty in respect of addition of Rs.90,000 is deleted Even though onus of the assessee during the assessment proceedings is confined to submitting evidence regarding identity of the creditor, creditworthiness of the creditor and genuineness of the transaction - No party having paid money to the assessee for purchase of the goods would forgo its money if it cancels the order - There is nothing to show that the details of the funds as claimed by the assessee have actually come from the alleged purchaser or of alleged transaction or of allege failure of the transaction - Thus the explanation furnished by the assessee cannot be treated as bona fide Regarding the third condition that all the facts relating to the explanation and computation of income has been disclosed by the assessee - in the present case details of the identity of the creditor or of the broker or of the terms and conditions of the purchase or of attempts to import the goods from Singapore, or of attempt to return the money and or, of attempt to settle the dispute have not been provided - penalty is leviable under Explanation 1(B) to Sec. 271(1)(c) in respect of addition of Rs.7 lakh - In the result, appeal filed by the assessee is partly allowed

Summary

Issues Involved:
1. Confirmation of Penalty under Section 271(1)(C) of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

Confirmation of Penalty of Rs. 2,83,412/- under Section 271(1)(C):
The primary issue in this appeal is the confirmation of a penalty of Rs. 2,83,412/- levied by the Assessing Officer (AO) under Section 271(1)(C) of the Income Tax Act, 1961. The penalty was imposed due to two additions made during the assessment:
1. Addition of Rs. 7,00,000/- on account of unexplained creditors.
2. Disallowance of Rs. 90,000/- of hotel expenses claimed for business purposes.

Unexplained Creditors (Rs. 7,00,000/-):
- Facts and AO's Findings: The assessee claimed that Rs. 7,00,000/- was received from M/s. Shree Corporation as an advance for supplying polyester textured yarn imported from Singapore. However, the market declined, and the party refused to take the goods. The assessee failed to provide confirmation from the other party, details of the broker, or any evidence of the transaction. Consequently, the AO added Rs. 7,00,000/- under Section 68 of the Act and initiated penalty proceedings.
- Assessee's Explanation: The assessee argued that the addition was based on probability, the explanation was bona fide, and no actual income was earned. The assessee claimed the broker disappeared, making it impossible to settle the matter.
- AO's Rejection: The AO rejected the explanation due to lack of evidence regarding the identity of the creditor, details of the broker, and the nature of the credit. The AO deemed the sum as concealed income and levied the penalty.
- CIT(Appeals) Decision: The CIT(A) upheld the penalty, stating that the assessee failed to provide evidence of the creditor's identity, the genuineness of the transaction, or any reason why the creditor did not seek a refund or supply of goods.
- Tribunal's Decision: The Tribunal noted that the assessee did not furnish any evidence about the creditor or broker and failed to substantiate the explanation. The explanation was deemed vague and not bona fide. The Tribunal confirmed the penalty for the addition of Rs. 7,00,000/- under Explanation 1(B) to Section 271(1)(C).

Disallowance of Hotel Expenses (Rs. 90,000/-):
- Facts and AO's Findings: The assessee claimed Rs. 90,000/- as hotel expenses for business promotion. The AO disallowed the claim due to lack of evidence.
- Assessee's Explanation: The assessee argued that the expenses were incurred for business purposes, and the expenditure was actually paid. The addition was made on the ground that details of the person who attended the meeting were not furnished.
- CIT(Appeals) Decision: The CIT(A) upheld the penalty, stating that the assessee did not show who stayed in the hotel, the nature of the expenditure, or whether any meetings were conducted.
- Tribunal's Decision: The Tribunal found that the expenditure was incurred but the business purpose was not established. Citing the decision in CIT v. Reliance Petroleum Products, the Tribunal canceled the penalty for the addition of Rs. 90,000/-.

Conclusion:
The appeal was partly allowed. The Tribunal canceled the penalty concerning the disallowance of Rs. 90,000/- for hotel expenses but confirmed the penalty for the addition of Rs. 7,00,000/- on account of unexplained creditors. The Tribunal emphasized that the explanation for the Rs. 7,00,000/- addition was not substantiated, not bona fide, and lacked material facts necessary for assessment, thus attracting the penalty under Explanation 1(B) to Section 271(1)(C).