2012 (9) TMI 558 - AT - Income Tax

Penalties u/s. 271(1)(C) - disallowing the commission paid by the company - CIT(A) deleted the levy - Held that - Addition in this case has been primarily made on the basis of statement given by Mr. Meattle and Jhunjhunwala, Directors of the company as during the course of penalty proceedings assessee company requested the AO to cross examine both the directors whose statement was relied upon by the AO in disallowing the commission paid by the company. As agreeing with the CIT(A) s observation that penalty proceedings is separate proceedings and AO should have allowed cross examination of both the persons which has been denied due to time baring matter when the set aside order was passed on 25.3.1996. Thus, the whole assessment / reassessment is based upon the statement of two persons mentioned above and no opportunity was allowed in the penalty proceedings to cross examine them. Thus penalty levied without allowing opportunity to the company for cross examination of both the persons are liable to be cancelled As assessee company has given documents in support of the commission payments and the payments have been made by account payee cheques also & in the penalty proceedings assessee was not sought opportunity to cross examine those two persons, the same was not provided by the Assessing Officer no levy of penalty u/s. 271(1)(c) can be warranted - in favour of assessee

Issues Involved:
1. Reopening of assessments based on alleged bogus commission payments.
2. Opportunity for cross-examination of witnesses.
3. Satisfaction for initiation of penalty proceedings under Section 271(1)(c).
4. Validity of penalty levied without cross-examination.
5. Admissibility of evidence and statements without cross-examination.
6. Impact of retrospective amendment (Section 271(1B)) on penalty proceedings.
7. Consideration of quantum and penalty proceedings as separate.
8. Debatability of issues and the impact on penalty.

Detailed Analysis:

1. Reopening of Assessments Based on Alleged Bogus Commission Payments:
The assessments for the years 1981-82, 1982-83, and 1983-84 were reopened based on information that the commission payments made to three companies were bogus. The Assessing Officer (AO) claimed that the amounts paid by cheques were received back in cash by the assessee company.

2. Opportunity for Cross-Examination of Witnesses:
The statement of Mr. M.K. Meattle, Managing Director of the three companies, was recorded, indicating that the commissions were havala entries. The AO offered the assessee an opportunity to cross-examine Mr. Meattle, which the assessee did not avail, requesting more time instead. The ITAT and AO held that the assessee failed to demonstrate the genuineness of the commission payments and did not avail the cross-examination opportunity, thus confirming the additions.

3. Satisfaction for Initiation of Penalty Proceedings Under Section 271(1)(c):
The Commissioner of Income Tax (Appeals) [CIT(A)] observed that the AO did not record his satisfaction for the initiation of penalty proceedings under Section 271(1)(c). The CIT(A) noted that the AO relied primarily on the ITAT's findings without new facts to justify that the assessee concealed income or furnished inaccurate particulars.

4. Validity of Penalty Levied Without Cross-Examination:
The CIT(A) held that the penalty was levied without allowing the assessee to cross-examine Mr. Meattle and Mr. Jhunjhunwala, whose statements were used for making the disallowance. The CIT(A) emphasized that the penalty proceedings are separate and the AO should have allowed the cross-examination, which was denied due to time constraints.

5. Admissibility of Evidence and Statements Without Cross-Examination:
The CIT(A) noted that the statements of Mr. Meattle and Mr. Jhunjhunwala were contradictory and casual. The CIT(A) held that without cross-examination, these statements had no legal standing. The CIT(A) also cited several case laws supporting the view that adverse inference cannot be drawn based on statements without cross-examination.

6. Impact of Retrospective Amendment (Section 271(1B)) on Penalty Proceedings:
The Delhi High Court remanded the matter back to the ITAT for reconsideration on merits in light of the retrospective amendment of Section 271(1B), which deems the AO's order of assessment or reassessment containing a direction for initiation of penalty proceedings as satisfaction for initiating penalty.

7. Consideration of Quantum and Penalty Proceedings as Separate:
The ITAT, upon remand, noted that the quantum and penalty proceedings are separate. The ITAT agreed with the CIT(A) that the AO should have allowed cross-examination during penalty proceedings. The ITAT found that the assessee's explanation was not found to be malafide or false but could not be substantiated due to lack of cross-examination.

8. Debatability of Issues and the Impact on Penalty:
The ITAT observed that the assessee's appeal against the quantum addition was admitted by the High Court, indicating that the issue was debatable. The ITAT referred to several case laws, including the Supreme Court's decision in Reliance Petroproducts, which held that penalty is not automatic upon confirmation of quantum addition if the issue is debatable.

Conclusion:
The ITAT upheld the CIT(A)'s order canceling the penalties, emphasizing the lack of opportunity for cross-examination and the debatable nature of the issues. The appeals filed by the Revenue were dismissed, and the penalties levied by the AO were confirmed to be deleted.

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