2012 (11) TMI 754 - AT - Income Tax

Penalty u/s 271(1)(c) of the Act assessee was required to furnish the details of consultancy expenditure alleged that assessee was not able to file the invoice or the bill Held that - Assessee claimed payment of professional charges in two years. The expenditure in both the years is substantial compared to other expenses debited in profit and loss account - In respect of professional charges, admittedly there is no evidence to prove that they were incurred for the purpose of business. The ostensible reason is that looking to the nature of services, no documentation could be made in respect of services rendered - no basis has been provided for computing the payment either in this or in the next year. This has to be seen in the context of the fact that no business has been conducted in these two years and there is no change in the investments also - mere showing the expenditure under a separate head consultancy charges does not lead to inference that all the facts were disclosed - payment has no nexus whatsoever with the business of the assessee and that the explanation furnished by the assessee is not bona fide. Accordingly, the levy of penalty is upheld - appeals dismissed

Summary

Issues Involved:
1. Levy of penalty under Section 271(1)(c) of the Income Tax Act.
2. Disallowance of consultancy expenditure.
3. Validity of the explanation provided by the assessee.
4. Bona fide nature of the assessee's claim.

Detailed Analysis:

1. Levy of Penalty under Section 271(1)(c):
The primary issue in both appeals is the levy of penalty under Section 271(1)(c) of the Income Tax Act. The assessee challenged the penalties of Rs. 5,10,286/- for the assessment year 2001-02 and Rs. 4,28,400/- for the assessment year 2002-03, confirmed by the CIT(Appeals). The penalty was imposed due to the disallowance of consultancy expenditure claimed by the assessee.

2. Disallowance of Consultancy Expenditure:
The assessee, engaged in investment business, claimed consultancy expenditure of Rs. 12.92 lakh paid to Shri Sandilya for liaison work and other services. However, the assessee failed to produce invoices, bills, or Shri Sandilya for verification. Consequently, the expenditure was disallowed as it was not substantiated to be incurred for business purposes. The Tribunal upheld this disallowance, emphasizing that no business activity necessitating such services was carried out during the year.

3. Validity of the Explanation Provided by the Assessee:
In penalty proceedings, the assessee argued that Shri Sandilya, a qualified professional, rendered services for which tax was deducted at source. However, the AO and CIT(Appeals) found no substantial evidence of services rendered. The Tribunal noted that the agreement with Shri Sandilya was not filed during assessment proceedings and was only produced later. The Tribunal concluded that the explanation provided by the assessee was not bona fide, as there was no documentation or proof of services rendered.

4. Bona Fide Nature of the Assessee's Claim:
The assessee contended that the payment was made in the course of business and was disclosed in the profit & loss account. However, the Tribunal observed that the assessee failed to substantiate the claim with proper evidence. The Tribunal also considered various judicial precedents, including CIT Vs. Reliance Petroproducts (P) Ltd. and CIT Vs. Zoom Communication (P) Ltd., and concluded that the explanation was not bona fide. The Tribunal upheld the penalty, emphasizing that the assessee did not discharge the burden of proof under Explanation-1 to Section 271(1)(c).

Conclusion:
The Tribunal dismissed both appeals, upholding the penalties for both assessment years. The Tribunal found that the assessee's explanation lacked bona fides and failed to provide sufficient evidence to substantiate the consultancy expenditure claimed. The penalties were deemed justified as the assessee could not demonstrate that the expenditure was genuinely incurred for business purposes.