2017 (3) TMI 1265 - HC - Income Tax

Penalty proceedings under Section 271(1)(c) - unexplained cash credit standing in the assessee s books in the names of minor sons of the partners of the assessee firm - Held that - We cannot loose sight of the fact that the minors in question were children of the partners in the firm and therefore, it had to be the partners who would have both arranged the gifts and also made the decisions to introduce money into the firm in name of the minors. It was therefore for them to have established the genuineness of the transaction as otherwise, in such circumstances, it would be to allow assessee s to place the minors in between themselves and the firm to escape the consequences in law by citing the rule - revenue cannot look into the source of the source. Further, in the facts of the instant case, the question of examining the source of the source may have been an issue in the quantum proceedings in which as has been candidly stated by Shri. Bansal, the findings recorded against the assessee have attained finality. In the instant proceedings, the penalty was imposed because the assessee did not offer any explanation to the assessing officer in the first instance and then the penalty was sustained because his explanation furnished before the CIT(Appeals) was rejected. The provision of Explanation 1 to section 271 (1) (c) having been thus invoked, no further enquiry was required in the facts of this case. - Decided against assessee.

Summary

Issues:
1. Penalty proceedings under Section 271 (1) (c) of the Income Tax Act, 1961.
2. Applicability of Explanation 1 to Section 271 (1) (c) of the Act.
3. Assessment of unexplained cash credits and loans.
4. Burden of proof on the assessee.
5. Validity of penalty imposition.

Analysis:

1. The case involved an income tax appeal under Section 260A of the Income Tax Act, 1961, against the order of the Income Tax Appellate Tribunal regarding penalty proceedings under Section 271 (1) (c) for the Assessment Year 1990-91. The Assessing Officer had made additions to the assessee's income due to cash credit entries in the books of the firm. These credits were disbelieved as bogus gifts from strangers and loans without proper substantiation.

2. The Tribunal confirmed the additions, leading to penalty proceedings under Section 271 (1) (c) of the Act. The Assessing Officer imposed a penalty invoking Explanation 1 to the section due to the assessee's failure to provide any explanation. The CIT (Appeals) rejected the explanation furnished by the assessee, emphasizing the lack of genuineness in the claimed gifts and loans.

3. The Tribunal reduced the penalty amount but upheld the imposition based on the facts of the case. The firm failed to substantiate the source of funds represented by cash credits and loans. The burden of proof was on the assessee to explain the transactions, which they failed to do satisfactorily. The authorities found the explanations provided to be false and a means to introduce unaccounted money.

4. The CIT (Appeals) concluded that the minors' parents, who were partners in the firm, orchestrated the scheme of introducing unaccounted money through gifts from strangers and loans. The authorities rightly disbelieved the explanations provided by the assessee, as they lacked evidence to support their claims. The burden to establish the genuineness of transactions fell on the assessee, which they failed to meet.

5. The High Court upheld the penalty imposition, citing the invocation of Explanation 1 to Section 271 (1) (c) due to the assessee's failure to provide a satisfactory explanation. The court rejected the argument that the minors' inability to explain the source of their funds absolved the assessee of liability. The penalty was sustained as the assessee did not offer any explanation initially and the subsequent explanation was found to be false. The court ruled in favor of the revenue and dismissed the appeal.

This detailed analysis of the judgment highlights the key legal issues, the sequence of events leading to the penalty imposition, and the court's reasoning behind upholding the penalty based on the failure of the assessee to substantiate the claimed transactions.