2013 (11) TMI 670 - AT - Income Tax

Penalty u/s. 271(1)(c) - Onus of proving bonafides transaction - excessive or unreasonable payments to a person specified u/s.40A(2)(b), - Held that - The assessee s only defense is that the disallowance as finally sustained by the tribunal is on an estimate basis. There is no law that penalty cannot be levied where the income or the disallowance under reference involves estimation. - The tribunal in the instant case made the estimation in the absence of any specific data or information being led by the assessee in explanation of his case The burden to prove that the price paid is not excessive or unreasonable, particularly where made to a person specified u/s.40A(2)(b), and more so once a prima facie case is made out by the Revenue, as in the instant case, is on the assessee - If it is presumed that the assessee entered the distribution arrangement as there were no takers for distribution, that itself would be reason enough for him to become guarded and make an informed decision on a proper consideration of all the facts, i.e., acting independent of APPL, the producer, in which he is a director. In fact, as observed earlier, being a part of APPL, he would only be well aware of the market rates being quoted for the film. The assessee, has been clearly unable to make out any case in this regard. He, in fact, enters the agreement on MG basis, rather than on a revenue sharing basis, assuming all the risk. That the assessee had earned confirmed profits from another project/business, further indicts his case qua bona fides, vindicating the Revenue s stand. The assessee has thus failed to make a case on both the parameters - decision in the instant case, based on the well settled jurisprudence in the matter, rests on the finding of the fact of the assessee having not furnished any explanation, much less a valid one, qua the reasonableness of the purchase price in the facts and circumstances of the case. Further, he has also not explained his conduct, which clearly, given the surrounding facts and circumstances, indicts the bona fides of the transaction - Decided against Assessee.

Summary

Issues Involved:
1. Delay in filing the appeal.
2. Levy of penalty under Section 271(1)(c) of the Income Tax Act, 1961.
3. Reasonableness and bona fides of the transaction involving the purchase of distribution rights.
4. Assessment of the penalty based on estimation.

Detailed Analysis:

1. Delay in Filing the Appeal:
The appeal by the assessee was delayed by nine days. The delay was explained through an affidavit dated 13/2/2012, accompanying the assessee's condonation petition dated 14/2/2012. The Bench found the explanation satisfactory and condoned the delay, proceeding with the hearing.

2. Levy of Penalty Under Section 271(1)(c):
The core issue was the sustainability of the penalty levied under Section 271(1)(c) amounting to Rs. 9,98,500/-. The penalty was initially imposed by the Assessing Officer (AO) for the assessment year 2001-02 and confirmed by the Commissioner of Income Tax (Appeals).

3. Reasonableness and Bona Fides of the Transaction:
- Background Facts: The assessee claimed a loss of Rs. 102.36 lakhs on the distribution of a Bengali film 'Haar Jeet'. The loss was mainly due to the acquisition cost of distribution rights from a sister concern, M/s. Aftab Pictures Pvt. Ltd. (APPL), for Rs. 111 lakhs. The film was exhibited for approximately 100 days, generating receipts of Rs. 20.88 lakhs. The total expenditure was Rs. 123.24 lakhs, resulting in the claimed loss.
- Revenue's Stand: The AO inferred that the assessee interposed himself between related concerns to set off the loss against confirmed profits from another film, 'Baadal'. The AO restricted the claimed loss to Rs. 12.24 lakhs, disallowing Rs. 90.12 lakhs under Section 40A(2)(a).
- Tribunal's Decision: The tribunal, while confirming the disallowance, restricted it by treating the purchase cost at 75% of the production cost of the film, resulting in a disallowance of Rs. 30.25 lakhs.

4. Assessment of the Penalty Based on Estimation:
- Assessee's Argument: The assessee contended that the disallowance was based on an estimate and that the acquisition cost was reasonable given the production cost. The transaction should be viewed from a businessman's perspective, and the genuineness of the transaction was not doubted.
- Revenue's Argument: The Revenue argued that the assessee failed to substantiate the reasonableness of the expenditure. The onus was on the assessee to prove the bona fides of the transaction, failing which Explanation 1 to Section 271(1)(c) would apply, deeming the assessee to have concealed or furnished inaccurate particulars of income.

Findings:
- Factual Nature of the Issue: The issue was primarily factual, focusing on whether the assessee had a reasonable and bona fide explanation for the purchase price of the distribution rights. The standard of proof for sustaining a penalty is higher than for a disallowance.
- Assessment of Bona Fides and Reasonableness: The assessee's explanation was found lacking. The transaction was not in the regular course of business, and the timing and nature of the agreements raised doubts about the bona fides. The assessee failed to provide any basis or justification for the purchase price.
- Legal Mandate and Onus: The onus to establish the transaction's bona fides and reasonableness was on the assessee. The assessee did not furnish any explanation or material to substantiate the purchase price, leading to the conclusion that the transaction was a device to save on tax liability.
- Penalty Justified: The tribunal noted that the disallowance was made due to the absence of specific data from the assessee. The assessee's argument that penalty cannot be levied on estimated disallowance was not accepted. The tribunal upheld the penalty, finding that the assessee failed to make a case for the reasonableness of the purchase price and the bona fides of the transaction.

Conclusion:
The assessee's appeal was dismissed, and the levy of penalty under Section 271(1)(c) was confirmed. The tribunal emphasized that the burden of proof was on the assessee to substantiate the reasonableness and bona fides of the transaction, which the assessee failed to do. The decision was pronounced in the open court on 03/05/2013.