2017 (2) TMI 1120 - AT - Income Tax

Levy of penalty u/s. 271(1)(c) - additions made u/s. 69C and u/s. 68 - cash credit entries found in the books of account of partnership firm in which the assessee was a partner - Held that - In the present case, we find that addition u/s. 68 has been made on the basis of entries in the diaries found during survey at the premises of one of the former Director of the assessee company. There is no evidence on record to show that any transfer of money either through cheque or cash during the year under consideration was recorded in the books of account of the assessee. Under such circumstances we are of the opinion that the addition u/s. 68 is not sustainable. The Hon ble Punjab and Haryana High Court in the case of Smt. Shanta Devi Vs. Commissioner of Income Tax (1987 (10) TMI 26 - PUNJAB AND HARYANA High Court ) deleted the addition u/s. 68 in the hands of assessee, where cash credit entries were found in the books of account of the partnership firm in which the assessee was partner. Since, the addition made u/s. 68 is itself not sustainable there is no question of levy of penalty on such addition. Thus, we are of the considered view that levy of penalty u/s. 271(1)(c) of the Act on addition made u/s. 68 of the Act is liable to be set aside. One of the contention of the assessee before the First Appellate Authority was to grant the benefit of telescoping in penalty proceedings in respect of the additions made during assessment. The Commissioner of Income Tax (Appeals) rejecting the contentions of the assessee on merits and accepting the alternate submissions of the assessee granted the benefit of telescoping. Neither the ld. AR nor the ld. DR could substantiate the error in the findings of Commissioner of Income Tax (Appeals) in extending the benefit of telescoping. Thus, we uphold the benefit of telescoping granted by the Commissioner of Income Tax (Appeals). Accordingly, the solitary ground raised by the Department in appeal and the submissions of the assessee assailing penalty on addition made u/s. 69C are dismissed. -Decided in favour of assessee.

Issues Involved:
1. Levy of penalty under Section 271(1)(c) of the Income Tax Act, 1961.
2. Addition under Section 68 of the Act for unexplained cash credits.
3. Addition under Section 69C of the Act for unexplained expenditure.
4. Benefit of telescoping in penalty proceedings.

Issue-wise Detailed Analysis:

1. Levy of Penalty under Section 271(1)(c):
The primary issue involves the levy of penalty under Section 271(1)(c) for concealment of income. The assessee accepted the additions made during the assessment and did not file an appeal, resulting in the finality of the assessment order. However, it is well-established that assessment proceedings and penalty proceedings are distinct. The Tribunal referred to the jurisdictional High Court's decision in Commissioner of Income Tax Vs. Dharamchand L. Shah, which held that additions in assessment do not automatically justify penalty under Section 271(1)(c). Thus, the mere acceptance of additions does not necessitate the imposition of penalty.

2. Addition under Section 68 for Unexplained Cash Credits:
The addition of ?3.70 crores under Section 68 was based on entries in diaries found during a survey at the premises of a former director. The Tribunal noted that for an addition under Section 68, the amount must be found credited in the books of the assessee, and the assessee must fail to provide a satisfactory explanation. In this case, there was no evidence of any transfer of money recorded in the assessee's books. The Tribunal cited the Punjab and Haryana High Court's decision in Smt. Shanta Devi Vs. Commissioner of Income Tax, which clarified that books of account of a partnership firm cannot be treated as those of an individual partner. Hence, the addition under Section 68 was deemed unsustainable, and consequently, the penalty on this addition was set aside.

3. Addition under Section 69C for Unexplained Expenditure:
The addition of ?65,62,669/- under Section 69C was for unexplained expenditure. The Commissioner of Income Tax (Appeals) granted the benefit of telescoping, observing that the Assessing Officer's computation included disallowances under Sections 40A(3) and 40(a)(ia) without justifiable reasons. The Tribunal upheld this finding, noting that the Assessing Officer did not provide a rationale for denying the telescoping benefit. The Tribunal concluded that the penalty on the addition under Section 69C should be reworked, considering the telescoping benefit.

4. Benefit of Telescoping in Penalty Proceedings:
The assessee contended for the benefit of telescoping in penalty proceedings. The Commissioner of Income Tax (Appeals) accepted this alternative submission and directed the Assessing Officer to verify the computation, excluding disallowances under Sections 40A(3) and 40(a)(ia) and granting the telescoping benefit. The Tribunal upheld this direction, finding no error in the Commissioner’s approach.

Conclusion:
The Tribunal partly allowed the assessee's appeal by setting aside the penalty on the addition under Section 68 and upheld the benefit of telescoping for the addition under Section 69C. The Revenue's appeal was dismissed, affirming the Commissioner of Income Tax (Appeals)'s decision to grant the telescoping benefit. The order was pronounced on December 30, 2016.

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