ASSISTANT COMMISSIONER OF INCOME-TAX VS VS. G.V.S.L.KANTHA RAO-(ITAT)

This appeal is filed by the revenue against the order of the Commissioner of Income Tax (Appeals) [CIT(A)]-1, Guntur vide ITA.No.81/15-16/CIT(A)-1/GNT dated 30.11.2016 for the block assessment period 1995-2002 against the penalty imposed u/s 271D of the Act.

2. The assessee is an individual. A search u/s 132 was carried out in the assessee’s case along with Shri P.Bhaskara Rao in the group cases of M/s Virat Crane Bottling and Virat Crane Industries on 07.02.2002. During the course of search in the premises of Shri P.Bhaskara Rao, the employee of the assessee, incriminating material was found marked as Annexure A/PBR/7. In page No.5 and 6 of the seized material there was a noting of Rs.30 lakhs given to Shri Manik Rao and Rs.10 lakhs given to ANR. It is further indicated by the payment of interest of Rs.45,000/- per month for 16 months from April 1997 to July 1998 and Rs.20,000/- per month for the period of 16 months on Rs.10.00 lacs from April 1997 to July1998. The Assessing Officer (AO) held that the said amount was unaccounted advances given by the assessee to Shri Manik Rao and ANR and accordingly assessed the same along with accrued interest as undisclosed income for the block period. For the sake of clarity and convenience, we extract relevant part of the order of the block assessment dated 31.12.2008 u/s 143(3) r.w.s. 158BC & 254 of the Income Tax Act, 1961 (hereinafter called as ‘Act’) in page No.8 which reads as under:

“Thus the contention made by the assessee vide his letter dated 22.12.2006 that the transactions mentioned therein page No.5 & 6 of annexure A/PBR/7 seized from the residence of Sri P.Bhaskara Rao as pertaining to the loan taken by the assessee from Sri B.Manik Rao and not as the loan given by the assessee is not a fact. The contention of the assessee was only an after thought to some how mislead the Department and to exhibit the unaccounted and unrecorded loans advanced by him to Sri B.Manik Rao and Sri ANR for Rs.40 lakhs and the interest thereon as loans borrowed instead of the loans advanced by him. So this contention of the assessee is rebutted and proved as wrong through the enquiry conducted by the Department with Sri B.Manik Rao, who confirmed in writing that he never advanced any monies to Sri Kanta Rao and the said letter claimed to have been written to the assessee on 15-7-2006 for recovery of the loan was never written by him. Hence, the assessee’s contention based on this letter which was not owned up by Sri B.Manik Rao who was infact a debtor to the assessee but an effort was made to show him as a creditor is proved as wrong.

Hence, after giving the assessee an opportunity of cross examining the witness Sri P.Bhaskara Rao as directed by the Hon’ble ITAT and after making enquiries into the genuineness of the claims made by the assessee with regard to the interpretation of the notings found in Page No, 5 & 6 as loans borrowed instead of the loans advanced, the undisclosed income of the assessee as computed in the original assessment for the asst year 1998-99 for Rs.57,80,000/- on this issue and Rs.4,10,000/- for asst. year 1999-2000 is taken as undisclosed income in the form of monies advanced by the assessee towards loans and the interest accrued there on which were not admitted as income, is taxed as undisclosed income of the years forming part of the block Period and the undisclosed income is computed.”

3. The assessee went on appeal before the CIT(A) and the Ld.CIT(A) deleted the addition holding that the sum of Rs.40,00,000/- was not the money advanced by the assessee but it was the money borrowed by the assessee from Shri Manik Rao and ANR. For ready reference, we extract, relevant part of the order of the Ld.CIT(A) which is made available in page No.10 at para No.10.2 reproduced as under :

“10.2. With regard to page No.5, the content of the paper is extracted above. It is clear that the amount taken from Manik Rao was Rs.30 Iakhs and the interest payable is at 1.5% per month for Rs.45,000/- per month. An amount of Rs.10 lakhs was taken from ANR. There is a working of interest payable in the said paper. The total interest payable was worked out at Rs.21,90,000/.-. The total payment made towards interest is shown at 5,25,000/-. The AO mentioned that the figures contained in the paper relate to the payments made by the assessee and also mentioned that the interest figures relates to the interest received or receivable. I find that the presumption of the AO is not justified. A perusal of the paper itself clearly shows that the amount of Rs.40 lakhs was received by the assessee and was not paid. The entries made by way of payments and the accrual of interest also indicate that the amounts are payable.

There is no indication in the seized paper that the amount of loans was given by the assessee. Therefore, I hold that the observation of the AO that the appellant paid Rs.40 lakhs to two different persons is not correct. On the other hand, it is to be held that the appellant borrowed the amount and became a debtor. Interest is payable by him. The total of the amount of interest payable by him are noted in the said paper, As can be seen the total interest payable was Rs.21,90,000/-, out of which an amount of Rs.5,25,000/- was paid. I also find that the assessee did not record either the receipt of Rs.40 lakhs or the payment of Rs.5,25,000/-in his books of account. In so far as the amount received of Rs.40 lakhs is concerned, the said amount cannot be added to the income admitted. It cannot form part of the income by any of the deeming provisions of the Act. Therefore, the principal amount of Rs.40 lakhs received by the appellant cannot be added as the income of the appellant.”

4. Aggrieved by the order of the Ld.CIT(A), the revenue carried the matter to the Tribunal and the Tribunal in its order dated 19.12.2014 observed that the sum referred to in the loose sheets found during the course of search was related to the monies borrowed by the assessee but not the monies advanced by the assessee. For ready reference, we extract relevant part of the order of this Tribunal which reads as under : “10. Coming to the evidence given by Mr. Bhaskar Rao, on evaluation of the same, we agree that nothing much turns out on the same, for the reason that Mr. Bhaskar Rao has pleaded ignorance with respect to the contents of these documents. His statement is not of much help. Similarly, regarding the letter written by Shri Manik Rao in response to an enquiry by the Assessing Officer, we find that this does not help either way for the reason that he has completely denied any transaction with the assessee. A perusal of the letter demonstrates that Mr. Manik Rao states that he has neither received any advance nor given any loan to the assessee. If this letter is treated as evidence, then, the conclusions of the Assessing Officer that the assessee has given money to Mr. Manik Rao, would also be negated. Thus, under these circumstances, we can only examine the contents of the seized material and then come to a conclusion, whether it is a loan given or loan taken. There is no corroborative evidence to suggest the order of the Assessing Officer.

A perusal of the same demonstrates that Rs.7,20,000/- was interest upto the month of July, 1998 in Page No.5 of the seized material and this is appearing as 7.2 in page No.6 of the seized material. The other figures are also tallying. Thus, both the pages represent the same entries.

Expenses have been recorded in these notings and is also stated that stock has been sent. Mention is also made on credit notes. These notings of stock and credit notes demonstrates that it is an out go of expenditure.

This means that what was taken, is a loan from Mr. Manik Rao and Mr.ANR. Hence, the findings of the ld.CIT(Appeals) has to be upheld. If it was a loan given, then the figures of interest payments and expenditure as well as stock credits, being recorded and given credit does not arise. Thus, we agree with the findings of the ld.CIT(Appeals) on this issue and dismiss this ground of the Revenue.”

4.1. Since the Tribunal has held that the monies recorded in the loose sheets were borrowings made by the assessee but not the advances given by the assessee , the JCIT initiated penalty u/s 271D by issue of notice u/s 271D dated 18.06.2015. In response to the notice issued by the JCIT, the assessee filed his explanation objecting for initiation of penalty proceedings. The assessee submitted that penalty cannot be initiated unless there is an evidence to establish that the assessee has committed an offence during the course of assessment proceedings. Therefore, argued that the JCIT cannot initiate penalty proceedings mechanically without application of mind and without specifying the nature of violation. The assessee further submitted that the transactions appearing the name of Shri Manik Rao and ANR are not loans but trade advances. The Annexure A/PBR/7 shows the advances received from Mr.Manik Rao and ANR are not the loans but the trade advances and the seized material shows the expenditure of the stock payment of expenses, travelling outside etc. The assessee relied on the decision of CIT Vs. Rashmin K.Patel (2013) 54 ((I) ITCL, 11 (Guj. HC). Not being convinced with the explanation of the assessee, the JCIT imposed the penalty stating that there was no urgency or business needs and the assessee could not give any valid reason with evidence for the amount received by the assessee other than account payee cheque or draft and there was no business expediency for accepting the loans in cash.

5. Aggrieved by the order of the AO, the assessee went on appeal before the CIT(A) and the Ld.CIT(A) deleted the penalty and allowed the appeal of the assessee.

6. Aggrieved by the order of the Ld.CIT(A), the revenue has filed appeal before this Tribunal. During the appeal hearing, the Ld.DR argued that the Ld.CIT(A) has erred in deleting the penalty holding that there was a commercial expediency and the assessee had received the loans to meet the urgent business needs. Since the assessee failed to prove the commercial expediency, the assessee could have received the money in cheque or demand draft but not in cash, therefore argued that the JCIT rightly invoked the provisions of section 269SS of the Act and imposed penalty u/s 271D of the Act which required to be upheld.

7. On the other hand, the Ld.AR argued that in the instant case, initially,the AO treated the sum as income holding that the said sum was unexplained investment, accordingly, made the addition as undisclosed income in the block period. After the issue has gone to the appellate authorities i.e. to the Ld.CIT(A) and the ITAT in the second round, the appellate authorities have accepted the said sum as the amounts borrowed by the assessee but not the money advanced by the assessee and hence, the JCIT initiated penalty u/s 271D of the Act for contravention of the provisions of section 269SS of the act. During the course of assessment proceedings, the AO held that the said sum was advance given by the assessee and accordingly taxed the same as unexplained investment u/s 69 of the Act. The loose sheets were found in the premises of Shri P.Bhaskara Rao but not in his premises and the assessee has never accepted that he has taken the loans in cash. The assessee further submitted that it was the trade advance, but not the loan accepted in cash. Therefore, argued that the Ld.CIT(A) has rightly deleted the penalty and no interference is called for.

8. We have heard both the parties and perused the material placed on record. In the instant case, the JCIT has imposed the penalty for the block period as evidenced from the penalty order passed u/s 271D of the Act. As discussed earlier, initially, the AO held that the assessee had advanced the money from unaccounted sources and assessed the same as undisclosed income in the hands of the assessee and when the matter went to appeal,the Ld.CIT(A) has given a finding that it was not the monies advanced by the assessee , but it was the monies borrowed by the assessee, accordingly deleted the addition. The Hon’ble ITAT confirmed the finding of the Ld.CIT(A) that it was the monies borrowed by the assessee but not the monies advanced by the assessee. Subsequently the JCIT initiated penalty u/s 271D. Thus the department has taken two different stands i.e. while framing the assessment it was held as the monies advanced and assessed as undisclosed income and when the appellate authorities deleted the addition holding that the said sum represents loans borrowed, the department has made the ‘U’ turn and initiated penalty proceedings u/s 271D of the Act. The department is expected to take the consistent view on the facts of the case but not resort to approbate and reprobate stands. The department having held that he assessee has advances the sums outside the books of accounts on two rounds of appeal cannot hold that the said sum represents the loans accepted in cash without bringing the tangible evidence. On the similar facts Hon’ble Delhi High court in the case of Commissioner of Income-tax Vs.Standard Brands Ltd [2006] 155 TAXMAN 383 (DELHI) held that the Revenue could not on the one hand, contend that the amount as undisclosed income in the hands of the assessee and at the same time seek to initiate proceedings against the assessee for violation of the provisions of section 269SS of the Act which deals with cash deposits or loans in excess of Rs. 20,000/-. For ready reference we extract relevant part of judgement of the Hon’ble High court which reads as under:

7. On these facts, we are of the view that the Revenue could not on the one hand, contend that the amount of Rs. 3 lakhs is undisclosed income in the hands of the assessee and at the same time seek to initiate proceedings against the assessee for violation of the provisions of section 269SS of the Act which deals with cash deposits or loans in excess of Rs. 20,000.

8. The Revenue, having taken the stand that the income was undisclosed income in the hands of the assessee, it could not resort to proceedings under section 269SS read with section 271D of the Act, as held by the Tribunal.

8.1. Similar view was taken by the Hon’ble Delhi High court in Commissioner of Income-tax v .R.P. Singh & Co. (P.) Ltd. [2012] 21 taxmann.com 50 (Delhi). The coordinate bench of ITAT Mumbai 'D' Bench in Deputy Commissioner of Income-tax v.G.S. Entertainment[2009] 28 SOT 39 (Mumbai) (URO) following the decision of Hon’ble Delhi High court held that levy of penalty is not permissible once the amount is assessed as undisclosed income. For ready reference we extract the order of coordinate bench cited supra which reads as under:

4. We have considered the rival submissions. We find that it is not a case of regular assessment of the assessee. The block assessment of undisclosed income for the block period was framed by the Assessing Officer and the amount of Rs. 15 lakhs was added as undisclosed income of the assessee for the financial year 1998-99. Once the amount in question is assessed as the undisclosed income of the assessee in the block assessment for the block period of the assessee, the provision of section 269SS rule with section 271D cannot be resorted to. The issue in the present case is covered in favour of the assessee with the decision of Hon'ble Delhi High Court in the case of Standard Brands Ltd., (supra), wherein held that where the amount was undisclosed income in the hands of the assessee, it could not resort to proceedings under section 269SS rule with section 271D of the Act. Accordingly, the issue is decided in favour of the assessee and the order of the CIT(A) is confirmed and the ground of appeal of the revenue is dismissed.

8.2. Since the facts are identical respectfully following the judicial precedents we cancel the penalty levied u/s 271D of the Act and uphold the order of the Ld.CIT(A).

9. In the result the appeal of the revenue is dismissed.

The above order was pronounced in the open court on 20th September, 2018.

Sd/- Sd/-

(िी.दुगााराि) (धड.एस. सुन्दर ससह)

(V. DURGA RAO) (D.S. SUNDER SINGH)

न्याधयक सदस्य/JUDICIAL MEMBER लेखा सदस्य/ACCOUNTANT MEMBER धिशाखापटणम /Visakhapatnam

ददिांक /Dated : 20.09.2018