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TMI Blog2016 (7) TMI 901X X X X Extracts X X X X X X X X Extracts X X X X ..... 2) That the addition to income Rs. 10,63,184/- was confirmed finally by the ld. ITAT after providing the relief Rs. 8,50,000/-. As per law the tax amount @ 60% on this addition is calculated to Rs. 6,37,911/-. The penalty can be either Nil or 100% of the tax amount. The ld. AO imposed penalty @ 156.76% which is much even more than the 100%. The appellant is in appeal before the Hon'ble ITAT for seeking total relief from the penalty imposed. 2. In the present appeal, the appellant-assessee has challenged the penalty of Rs. 10,00,000/- imposed and sustained against him u/s. 158BFA (2) of the Income Tax Act, 1961 (in short, 'Act of 1961') on the additions made and reduced by the appellate authorities based on preponderance of probabilities or assumed inferences drawn from the loose papers or material collected by the revenue admittedly from the possession of the third person that too without having proved any nexus thereof with the appellant. 2(i) That the assessee, being an individual, is a finance broker, earning commission from finance providing advances/loans. The assessee has been deriving his income from brokerage, speculation and interest etc. 3. That during the search & se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in such loose papers and emphatically stated that these transactions in any manner do not belong either to the assessee or to him. With regard to one loose paper, he simply stated that the contents of such loose paper were copied by him on the request of some person at the business premise of M/s AI group; but denied any relation thereof with him. 7. However, the AO vide its assessment order dated 28-02-2005 passed u/s. 158BC of the Act of 1961 contrary to the statement of Sh. Vinay Gupta recorded on oath and also the reply statements of the appellant-assessee and Sh. B.S. Bhandari as submitted hereinbefore and without proving nexus with the appellant of such loose papers, so seized from III person, and entries contained therein, alleged the same belonged to the appellant-assessee. The AO assumed that the entries in such loose papers are in the name of BH, so all entries pertain to Sh. B.S. Bhandari; however, treated such Sh. B.S. Bhandari to be a benami person of the appellant-assessee on the pretext that he is an employee and relative of the appellant-assessee. On extraneous and irrelevant considerations and merely based on preponderance of probabilities, assumed and presumed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant-assessee so observed by the AO, held that the addition of Rs. 8,50000/- made by the ld. CIT (A) was not justified. Accordingly, this Hon'ble Tribunal, vide its order dated 13.04.2011, deleted the addition of Rs. 8,50000/-. On the basis of mere preponderance of probabilities, this Hon'ble Tribunal sustained the addition of Rs. 10,63,184/-. 10. The revenue further filed D.B. Income Tax Appeal No. 361/2011 before the Hon'ble Rajasthan High Court, at Jaipur Bench, Jaipur; however, the same has been dismissed vide order dated 11-08-2014. The copy of the order of the Hon'ble High Court will be produced immediately on demand. 11. The Assessing Officer initiated the penalty proceedings under Section 185 BFA(2) of the Act of 1961 and imposed the penalty vide its order dated 25.10.2011 assuming that the appellant-assessee has admitted addition of Rs. 10,13,184/- worked out by himself as peak credit before the CIT(A) the finding of the A.O. in assuming admission of the appellant is contrary to record as apparently, the appellant never admitted such addition, rather, the peak credit was worked out only on the directions of the CIT(A) as per record made available to him. The relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f non mention of furnishing of inaccurate particulars of income or concealment of income. Therefore such objection cannot be sustained. As regards another objection of the AO that at any stage the appellant has not accepted the finding of the AO or appellate authorities and that such finding is not supported by any incriminating documents, it may be noted that the findings of the AO that income arising on the basis of transactions recorded in the books of accounts of M/s Ashish International in the name of "Bhandari" and Mr. Bhandari was benami of his appellant is confirmed by the first appellate authority and such finding of the first appellate authority is further sustained by the Hon'ble ITAT Though it is correct that no specific incriminating documents were found or seized from the possession of the appellant but on the basis of corroborative evidences the first appellate authority very specifically gave the finding that income arising on the basis of that transaction with Ashish International and Bhandari was essentially pertaining to the appellant. Therefore even this contention of the appellant cannot be accepted. Another main objection of the appellant is that all such addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he fact that as the transaction were very much there in the book of accounts of Ashish International in the name of Mr. Bhandari and Bhandari happened to be close associate employee of the appellant and in the case of Mr. Bhandari also the department has taxed such income on protective basis and in any case any one of the two has to bear the tax liability. As regards the contention of the appellant hat there was no mens-rea on the part of the assessee to evade the tax, it may be stated that the Hon'ble Supreme Court in the case of Union of India vs. Dharmendra Textile Processors & Ors (2008)306 ITR 270 has held that the explanation appended to section 271(1)(c) of the IT Act indicate the element of strict liability on the assessee for concealment for giving inaccurate particulars of income. The Hon'ble court has held that penalty u/s 271(1)(c) of the IT Act is a civil liability and wilful concealment is not an essential in gradient for imposition of penalty us/ 271(1)(c), such finding has further been reiterated by Hon'ble Apex Court in the case of CIT vs. Atul Mohan Jindal (2009) 317 ITR 1 wherein the Hon'ble Court held that the penalty preferred to in sec. 271(1)(c) of IT Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m proceedings. It is settled law that before the penalty can be imposed, the entirety of circumstances of the quantum proceedings must reasonably be point to the conclusion that the assessee had consciously concealed the particulars of his income or had furnished inaccurate particulars to evade tax willfully or whether the additions made by the Assessing Officer (in short, 'AO') was mere on preponderance of probabilities or estimation drawing inferences on extraneous or irrelevant considerations ?; or whether such addition was reduced by the appellate authorities?; and if so, what is the impact of such reduced additions on the penalty proceedings?. Even for the purposes of penalty u/s. 158BFA (2) of the Act of 1961, it has also to form opinion that the additions so made on preponderance of probabilities drawing mere inferences from the loose papers seized from the III party, as reduced by the appellate authorities, can be said to be the assessment of undisclosed income within the meaning of section 158BB of the Act of 1961 wherein the assessment has been made u/s. 158BC and not u/s. 158BD of the Act of 1961. In the case of Commissioner of Income-tax v. Anwar Ali reported in [1970] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reasons given in the original order of assessment. Apparently and patently, as per Para 10 of the assessment order and appellate order passed in quantum proceedings, following facts are admitted on record:- There was a search and seizure proceeding on the premises of third person, namely, AI Group; and (A) Loose papers, CEFARI diaries and the computer printout or data were seized from the possession of such AI Group; and (B) The addition relevant to the penalty impugned in present appeal was made and sustained drawing inferences from the loose papers, Cefari Diaries and other computer data found and seized from the possession of AI Group; and (C) As per revenue itself in such loose papers, there was no name appearing of the appellant-assessee Madho Das Bangard; and (D) Any of the loose paper or material collected during search from the premises of third person AI Group, were not in hand writing of the appellant-assessee; and (E) Shri Vinay Gupta, the key person of the AI Group, in his statement, as mentioned hereinbefore, has not alleged the name of appellant-assessee Madho Das Bangard; and (F) Rather, in answer to question No.9, he has specifically denied to have any k ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other records of and found from so called M/s Ashish International group do not have any financial relations with him or with me or with my firm M/s M.D. Bangard. 3. As far as your statement that Sh. B.S. Bhandari is benami of mine and have done financial transactions on my behalf with M/s Ashish International group is completely under wrong presumptions. There is no paper found in my or Mr. B.S. Bhandari's handwriting during the search at my places or at the places of M/s Ashish International group in this regard, as had there been this case of availability of such papers with your office, the copy of the same would have been provided to us with the photo state copy of the seized papers from M/s Ashish International group provided to us along with the above referred notice. 4. However, we agree with the transactions of Rs. 19497/- and Rs. 4614/- given in the last table of your above referred table which are pertaining to purchase of wooden material i.e. plywood etc. 5. We strongly object for your making addition to my income based on the transactions as referred to in your above letter and humbly request that when I do not have any relation with the transactions, I should no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bad handwriting lying there having some entries therein and I was requested by some person there to make the fair copy of the paper. As a matter of courtesy I copy the entries on another paper and it appears that the same copies paper was found in search by your department from the said M/s Ashish International group. I state the hand writing on the paper appears to be of mine but the contents of the paper has no relation with me. Since I do not have any kind of connection with the contents of the paper, I can not explain anything about the entries therein including the source etc." The A.O. in assessment order passed during quantum proceedings has totally failed to prove such loose papers or material collected from AI Group to belong to appellant-assessee in any manner. There was no material with the A.O. on record to prove nexus of such loose papers and material seized from third person and entries contained therein belonging to the appellant-assessee. The revenue utterly failed to prove so. Even Shri Vinay Gupta in his statement did not allege the name of the appellant, which is corroborated by the material seized from the third person being not containing the name of appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and protective basis in the hands of Shri B. S. Bhandari, for which reference to the Assessing Officer of Shri B. S. Bhandari is being made." Further, the CIT (A) himself in quantum proceedings has deleted all the additions; and directed the appellant to work out the peak credit on the basis of material provided to the appellant. It was only on the directions of the CIT(A), the appellant worked out the peak of the entries reflected in such loose papers; on the basis of which the addition was sustained on preponderance of probabilities. The relevant findings of CIT (A) (relevant at APB - 120-121) are reproduced here in below:- "4.34 Conclusion:- Addition of Rs. 11,34,000/- on account of undisclosed interest on such loan of Rs. 18,00,000/- to Shri Vinay Gupta I. The Ld counsel has filed the copy of the assessment order dated 13/2/2004 passed by the ITO Ward (1) (1) Jaipur in the case of Shri B S Bhandari, who had accepted in this case that he (Shri B S Bhandari) had not given any money to Shri Vinay Gupta. Be as it may, since the AO accepted that no transaction took place on the strength of the promissory note of Rs. 18,00,000/- hence there remains no scope for addition of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck period income by the learned A.O. are deleted On account of alleged undisclosed loan to Ahsish International Group Rs.18,65,000/- On account of alleged undisclosed Credits appearing in Bhandari Ji Account Rs.17,12,100/- On account of alleged undisclosed transfer charges Rs.1,13,898/- On account of alleged undisclosed interest Rs.5,14,982/- This decides the grounds of appeal No.2 to 6. Ground of appeal No.1 is total of grounds of appeal Nos.2 to 7." This Hon'ble Tribunal in quantum proceedings held thus:- "12. After going through these findings, we find that the AO was required to give papers to the assessee to work out the peak cash/investment as there were over lapping entries in the computer of M/s. Ashish International Group. However, no working of relevant papers were given by the AO to the assessee. Thereafter, the assessee was required to work out the peak and the peak was worked out at Rs. 10,63,184/-. Thereafter, the ld. CIT (A) by observing that credit of Rs. 3,50,000/- on 2.7.2001 and Rs. 5,00,000/- is in the name of Mukesh (PC), could not be explained. Therefore, these entries are also liable to be added in the hands of assessee. Accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns so sustained was on the basis of peak worked out by the appellant on the directions of the first Appellate Authority; however, the CIT(A), assumed the undisclosed income of the appellant without proving nexus of the loose papers or diaries so seized from III person AI Group with the appellant. There was no material with the CIT (A) or the AO to hold that the transactions appearing in loose papers found and seized from the AI Group pertains to the appellant. The findings of the A.O. and CIT (A), being perverse in imposing the penalty, ignoring that the additions were made and sustained mere on preponderance of probabilities drawing hypothetical inference, are liable to be quashed and the penalty is liable to be cancelled on this count alone. The additions made and sustained were on preponderance of probabilities, which is proved by the findings of the A.O. and CIT (A) itself; inasmuch as, apparently as per order of CIT (A) itself, in the assessment order dated 13-02-2004 passed in case of Shri B.S. Bhandari, the revenue had accepted that Shri Bhandari had not given any money to Shri Vinay Gupta. CIT (A) deleted all the additions made by the A.O. Further, the CIT (A) having adopt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reponderance of probabilities of peak credit theory; as such, the CIT (A) being the superior Assessing Officer and being the powers of the CIT (A) coterminus and co-extensive with that of the A.O, had to record his satisfaction afresh under Section 158BFA of the Act of 1961. As such, the penalty so imposed and sustained is also liable to be deleted on that count alone. The addition so made and sustained at the reduced figure was on estimate or preponderance of probabilities is proved by the fact that the third party statement has no relevance against the appellant in absence of cross-examination; though in the present case, in such third party statement, otherwise also, nothing incriminating has been alleged or stated against the appellant. Further, otherwise also, the loose papers and loose diaries or articles seized from the possession of third person have no evidentiary value against the appellant in view of Section 34 of the Evidence Act, 1872, the books of account or the material found in possession of third person are not alone sufficient to charge the appellant with liability. Apparently, there is no material on record to corroborate the hypothetical inferences drawn by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one be sufficient to charge any person with liability." The Hon'ble Supreme Court in that case of CBI Vs. V. C. Shukla (Supra) relied on the case of Yeshuvadayan Vs. Subba Naicker, reported in AIR 1919 Madras 132, wherein it has been observed that "S. 34, Evidence Act, lays down that the entries in books of account, regularly kept in the course of business are relevant, but such a statement will not alone be sufficient to charge any person with liability. That merely means that the plaintiff cannot obtain a decree by merely proving the existence of certain entries in his books of account even though those books are shown to be kept in the regular course of business. He will have to show further by some independent evidence that the entries represent real and honest transactions and that the moneys were paid in accordance with those entries. The legislature however does not require any particular form or kind of evidence in addition to entries in books of account, and I take it that any relevant facts which can be treated as evidence within the meaning of the Evidence Act would be sufficient corroboration of the evidence furnished by entries in books of account if true." While ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, such sale entries were not found in the books of assessee. The cross-examination of Haji Usman Kutti was not offered to the assessee and on the basis of such entries so found in books of Haji Usman Kutti, the assessment order made against the assessee. A Larger Bench of the Hon'ble Supreme Court in Para 5 of the case held that in absence of the crossexamination, the entries of third person, cannot be believed to be true against assessee. "5. The second part of her proviso lays down that where a return has been submitted, the assessee should be given a reasonable opportunity to prove the correctness or completeness of such return This requirement obviously applies at the first stage of the enquiry before this Sales Tax Officer comes to the conclusion that the return submitted by the assessee is incorrect or incomplete so as to warrant the making of a best judgment assessment. The question is what is the content of this provision which imposes an obligation on the Sales Tax Officer to give and confers a corresponding right on the assessee to be afforded, a reasonable opportunity "to prove the correctness or completeness of such return". Now, obviously "to prove" means to esta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y constituted infraction of the right conferred on the assessee by the second part of the proviso and that vitiated the orders of assessment made against the assessee. Cross examination of the third person, whose statement or books of account, are relied against the assessee, is essential in view of the principle of natural justice. It is settled law that, in absence of crossexamination, any statement of third person or the material collected from the possession of third person, cannot be utilized against the assessee, as only the cross-examination is the most efficacious method of establishing truth and exposing falsehood. In the case of CIT Vs. Shakuntla Devi Khetan reported in 2013 352 ITR 482 (Madras), the Revenue Authorities assumed higher turnover of the assessee than that disclosed by him in his books of account on the basis of the information collected in search operation conducted in case of third person. In Para 8, the Hon'ble Court held thus:- "8. The Tribunal, therefore, rightly found that the Department could not have made the addition merely on the basisi of the statement of third parties. Consequently, the Tribunal set aside the order of the first appellate autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es alleged to have been taken by the AI Group, in fact, the same might belong to its own income of AI Group; inasmuch as in answer to question No.11, as reproduced hereinbefore, Shri Vinay Gupta has categorically admitted that all the entries found in loose papers from their possession, do not belong to Mr. Bhandari. The possibility of escaping from the tax liability by the AI Group could not be ruled out, which aspect had totally been ignored by the revenue in quantum proceedings; and the same being having relevance direct nexus with the impugned penalty relevant to the additions has to be considered in the penalty proceedings. Merely that the additions made at the reduced figure by the Appellate Authorities in quantum proceedings, do not necessarily lead to imposition of penalty under Section 158BFA(2) of the Act of 1961 for want of determination of undisclosed income. In the case of Commissioner of Income Tax Vs. Harkaran Das Ved Pal, in the search operation conducted on one JMD Group, some material was gathered, and according to department the same reflected financial transaction of the JMD Group with the assessee. However, in search statement, the personals of JMD Group state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than what was found in the course of the search, the same could not be treated as undisclosed income determined under clause (c) of section 158BC. 29. Going back to section 158BFA(2), the Assessing Officer has been empowered to impose penalty on a person when the undisclosed income determined under clause (c) of section 158BC, is in excess of the undisclosed income returned by such person in pursuance of a notice under section 158BD/158BC. In other words, a pre-condition for the imposition of penalty under section 158BFA(2) is that there must be a determination of the undisclosed income by the Assessing Officer under clause (c) of section 158BC of the said Act. If this is not satisfied, then there would be no question of imposing any penalty." Nevertheless, as admitted by the CIT (A) that the provisions of Section 158BFA (2) of the Act of 1961 are analogous to the provisions contained in Section 271(1)(c) of the Act of 1961, the revenue has utterly failed to prove concealment or contumacious conduct on the part of the appellant. Even it has not been proved by the revenue that the appellant has acted in defiance of law or has furnished inaccurate particulars of his income. Even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imation, cannot be said to be correct only, it can be incorrect also. Therefore, in the facts and circumstances of the case, penalty was wrongly imposed by the Assessing Officer. In these circumstances, we find that the judgment of the hon'ble apex court, referred to by the learned counsel for the appellant, is not applicable, in the facts and circumstances of the present case. In the case of ACIT Vs Shanti Kumar Chabra reported in (2009) 121 TTJ 985 ITAT- JAIPUR), this Hon'ble Tribunal in Para 7-9 also held that when undisclosed income has been assessed on estimated basis then penalty under Section 158 BFA (2) cannot be sustained. 9. The addition of Rs. 2 lacs on account of stock is based on estimation. The addition on account of jewellery at Rs. 57,377 is also based on estimation. Similar is the position with the addition on account of debtors at Rs. 2,02,284. The assessee in his block return had declared the undisclosed trade debtors at Rs. 96,71,194. The AO accepted the total trade debtors on the basis of trial balance prepared on search on the basis of books of account found at Rs. 2,48,93,060. The AO allowed the claim of Rs. 4,63,000 on account of bad debts on the basi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the law of penalty is automatic. Of course, the Proviso to Section 158 BFA (2) enumerates the circumstances wherein no penalty is leviable but from that also it cannot be inferred that the absence of the circumstances so enumerated will attract the provision of penalty automatically. In the case of CIT Vs Dodsal Ltd. reported in (2009) 312 ITR page 172 (Bom.), the Hon'ble Bombay High Court also held that the penalty under Section 158 BFA (2) is discretionary and not mandatory. The discretion applied by the ITAT in deleting penalty, does not call for interference for the reasons so recoded. Against the judgment of the Bombay High Court, the SLP filed by the Revenue has been dismissed by the Hon'ble Supreme Court on March 20, 2009, affirming the view of the Bombay High Court, which is reported in (2009) 312 ITR (STAT) 332. 15. We have heard the rival contentions of both the parties and perused the material available on record. The ld A.O. while passing the assessment order, has discussed the imposition of penalty in paragraph No. 22 of the assessment order and in the said assessment order, it was mentioned as under:- 22.2 Kindly refer to your block return filed on 25/08/2004 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... block return has shown the undisclosed income of Rs. 4,52,220/- and tax liability as Rs. 2,84,889/- has been change. Subsequent to the passing of the assessment order, the matter was taken up by the assessee before the ld CIT(A). The first appellate authority has reduced the addition of Rs. 53,82,768/- to Rs. 19,83,184/-. This figure of arriving at Rs. 19,83,184/- was arrived after taking into considering the submission of the assessee. Thereafter the Tribunal has further reduced the amount of Rs. 19,83,184/- of the CIT(A) to Rs. 10,63,184/-. The reduction in amount was on the basis of peak income investment determined by the assessee himself on the basis of direction issued by the ld CIT(A). In our view, the basis for addition made by the A.O. was on account of diaries and entries made in the name of Bhandari on the assumption that Mr. Bhandari was the benami of the appellant. However, this very basis was subsequently modified by the ld CIT(A) and by the Tribunal , whereby both the authorities instead of deciding the quantum addition on the basis of Benami transaction in the name of Bhandari , have estimated the income of the assessee on the basis of the peak derived on the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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