2014 (5) TMI 11 - HC - Income Tax

Penalty - Addition @ 2% as commission Accommodation entries Penalty u/s 158BFA(2) of the Act Held that - It is purely a finding of fact by the ITAT and imposition of penalty is based on the order of the ITAT where the addition was sustained after elaborate discussion by the ITAT - Penalty under sub-section (2) of Sec. 158 BFA of the Act is provided where the AO computes income in excess of what is declared by the assessee for the block period the contention of the assessee that the penalty provisions contained in Sec. 271(1) (c) of the Act so also Sec. 158 BFA(2) are pari-materia, cannot be said to be correct as both are independent sections and in different situations - if the assessee fulfills the criteria, then no penalty is leviable but, there is a categorical finding by all the three authorities that the assessee was involved in undisclosed transactions and had huge credits in the bank account to the tune of more than Rs.2.5 crores and in case the search operation would not have taken place, would have gone unnoticed. Overwhelming evidence on record clearly proves that all these transactions were out of books and the Tribunal, after considering the connected case of Vora Group, where three percent commission was assessed, assessed only two percent it cannot be said to be merely on the basis of estimated/adhoc basis but after considering the overall facts and circumstances of various searches in the group and after appreciation of evidence on record - the penalty envisaged under sub-section (2) of Section 158 BFA, is entirely on different background as compared to one that can be imposed under Section 271(1)(c) of the Act - the AO has not committed any error in imposing such penalty or the Tribunal in confirming the same the order of the Tribunal is upheld as no substantial question of law arises for consideration Decided against Assessee.

Summary

Issues Involved:

1. Legitimacy of transactions and accommodation entries.
2. Imposition of penalty under Section 158 BFA(2) of the Income Tax Act.
3. Assessment of commission rate.
4. Evaluation of evidence and findings by the ITAT.

Detailed Analysis:

1. Legitimacy of Transactions and Accommodation Entries:
The appellant-assessee, a private limited company engaged in the manufacturing of industrial chemicals, was implicated in a search operation targeting the Thakkar Group. Incriminating documents were found, leading to a notice under Section 158 BD of the Income Tax Act. The respondent-revenue claimed that the Thakkar Group fabricated documents to obtain delivery notes in the names of various concerns. The ITAT found that the Thakkar Group, including the appellant, used accommodation entries by issuing fictitious bills through paper concerns. The modus operandi involved receiving cash, depositing it in bank accounts of fictitious concerns, and issuing cheques/DDs/Pay orders.

2. Imposition of Penalty under Section 158 BFA(2) of the Income Tax Act:
The core issue before the AO was the treatment of transactions in the appellant's hands, particularly given the evidence that the appellant's Director had provided signed blank cheque books and letterheads to Mr. Mayur M. Thakkar. The ITAT upheld a 2% commission rate on the entire transaction, deeming this an adequate consideration. The AO imposed a penalty of Rs. 3,03,898/- under Section 158 BFA(2), based on the ITAT's findings. The CIT(A) initially deleted the penalty, but the ITAT reversed this decision, concluding that the addition was based on material detected during the search operation, thus constituting undisclosed income.

3. Assessment of Commission Rate:
The ITAT, in quantum proceedings, sustained an addition by working out a 2% commission rate on the accommodation entries, noting that in a connected case of Vora Group, a 3% commission was assessed. The ITAT justified the 2% rate as reasonable and justifiable, considering the appellant's role in providing accommodation entries. The appellant's counsel argued that the commission rate was based on assumptions and lacked evidence, but the ITAT found the rate appropriate based on the evidence of unaccounted transactions.

4. Evaluation of Evidence and Findings by the ITAT:
The ITAT's findings were based on substantial evidence, including bank records and the involvement of the Thakkar family. The ITAT noted that the appellant's bank account transactions were not recorded in their books of accounts, and the addition was based on material found during the search. The ITAT concluded that the penalty was justified as the undisclosed income was detected through search operations. The court found that the ITAT's order was not perverse and was based on a pure appreciation of evidence, thus no substantial question of law arose from the ITAT's order.

Conclusion:
The appeal was dismissed in limine, affirming the ITAT's decision to sustain the penalty and the 2% commission rate on the undisclosed income. The court held that the ITAT's findings were based on substantial evidence and proper appreciation of the facts, and no substantial question of law was involved.