Cit vs Mak Data Ltd
2013 Latest Caselaw 308 Del

        THE HIGH COURT OF DELHI AT NEW DELHI
%                                      Judgment delivered on: 22.01.2013

+       ITA No.415/2012

        CIT                                              ... Appellant

                                        versus

        MAK DATA LTD                                     ... Respondent
Advocates who appeared in this case:
For the Petitioner           : Mr Sanjeev Sabharwal, Adv.
For the Respondent           : None


CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE R.V.EASWAR

                                  JUDGMENT

R.V.EASWAR, J

The following substantial question of law was framed by this Court on

11th October, 2012:-

"Whether the Tribunal fell into error in setting aside the order of penalty imposed by the AO and upheld by the CIT (A)?"

2. This is an appeal by the Revenue under Section 260A of the

Income Tax Act, 1961 („Act‟ for short) and it pertains to the assessment

year 2004-05. An assessment was completed upon the assessee under

Section 143(3) of the Act in which an addition of `40,74,700/- was made

in the following circumstances. There was a survey under Section 133A

on 16th December, 2003 in the course of which some documents

pertaining to the assessee were found and were impounded. These

documents consisted of blank transfer deeds for shares duly signed,

affidavits, share application forms, copies of bank accounts, income tax

returns and assessment orders of certain other companies. Those

documents were forwarded to the AO assessing the present assessee who

called upon the assessee to explain the contents of the documents and the

genuineness of the transactions represented by them. It appears that the

documents belonged to certain entities who had applied for shares in the

assessee company. What the AO wanted the assessee to do was to prove

the nature and source of the monies received as share capital, the

creditworthiness of the applicants and the genuineness of the transactions.

3. In response to the above notice which was issued on 26th October,

2006, the assessee stated as under:-

"It has been stated that the company had received share application money from different entities aggregating to a sum of `239 lacs during the past 3 years as:

        Assessment Year         Amount

        2002 - 2003             12,00,000




         2003 - 2004              1,06,50,000

        2004 - 2005              1,20,50,000

                                 2,39,00,000

The company with a view to avoid litigation and buy peace and to channelize the energy and resources towards productive work and to make amicable settlement with the Income Tax Department offers to surrender a sum of `56.49 lacs as income from other sources.

In this context we also wish to bring on record the fact that Sh. V. K. Aggarwal, Promoter Director of the company had offered a sum of `1,82,51,000/- for taxation as "income from other sources" in the hands of the partnership firm M/s. Marketing Services. Sh. V.K. Aggarwal is the partner of M/s. Marketing Services and the firm is being assessed with the CIT XI, New Delhi, this income of `1,82,51,000/- was duly subjected to tax by CIT XI in the following manner:

        Assessment Year          Amount

        2001 - 2002              `48,97,000/-

        2002 - 2003              `40,68,000/-

        2003 - 2004              `92,86,000/-

                                 `1,82,51,000/-

It has also been stated that Sh. V.K. Aggarwal, Promoter- Director of the assessee company has utilized this offered sum of `1,82.51 lacs for inducting funds into the books of the assessee company as share application money. It has been stated further that the additional fund flow to the extent of `56.49 lacs (239 lacs - 182.51 lacs) which remain unexplained is now being offered for taxation by the company

as its income from other sources. Subject to the condition that the offer of the surrender is by way of voluntary disclosure without admitting any concealment whatsoever or any intention to conceal and subject to non initiation of penalty proceedings and prosecution."

It appears that thereafter the assessee filed an application before the Addl.

Commissioner of Income Tax under Section 144A soliciting directions

for expediting the assessment proceedings and therein it indicated its

willingness to be assessed on an amount of `56.49 lacs as its income

under the head "income from other sources". It may be noticed that this

figure represents the difference between the amount of `239 lacs and

`1,82,51,000/-. After certain correspondence between the AO and the

Addl.CIT, a letter was issued on 27th December, 2006 containing the

directions of the Addl.CIT. The entire directions are reproduced in the

assessment order and is, therefore, not reproduced here for the sake of

brevity. It suffices to note that before the Add. CIT the assessee would

appear to have scaled down the offer from `56.49 lacs to `40.74 lacs on

the ground that the peak investment should be taken at `2,19,50,000/-

instead of `239 lacs as calculated earlier. The AO, on the basis of the

directions of the Addl. CIT called upon the assessee to furnish the

relevant documents and information regarding the fresh offer of

`40,74,000/-. The purpose appears to be merely to verify the

reconciliation between the earlier offer of `56.49 lacs and the revised

offer of `40.74 lacs. After having carried out the verification the amount

of `40.74 lacs was added as "income from other sources" with the

following narration "As per direction of the Addl. CIT Range-6 and

further discussion with the assessee's A.R. a sum of `40,74,000/- is

treated as income from other sources"

4. There was no appeal against the aforesaid addition by the assessee.

The addition of `40,74,000/- thus became final.

5. Subsequently the AO initiated penalty proceedings for furnishing

inaccurate particulars of its income under Section 271(1)(c) of the Act.

The gist of the assessee‟s reply was that the amount was offered as

income only to buy peace and avoid protracted litigation and with the

condition that no penalty or prosecution proceedings would be launched.

It was further stated that the offer was made before any investigation was

carried out into the matter and, therefore, was voluntary. Several

authorities were relied upon in support of the submission. However, the

submissions were rejected by the AO who, by the order dated 23.4.2007,

imposed the minimum penalty of `14,16,600/- for furnishing inaccurate

particulars of income to the extent of `40,74,000/-. The ultimate findings

of the AO on the basis of which the penalty was imposed were as

follows:-

"23. The reply furnished by the assessee has been considered & found to be unsatisfactory because of the following: -

a) In the return filed by the assessee the assessee has not offered the amount of `40.74 lacs for taxation voluntarily.

b) The assessee has surrendered the above amount of `40.74 lacs during course of assessment proceeding when the impounded material was confronted to the assessee which was impounded during course of survey u/s 133A of the IT Act, 1961 on 16.12.2003 at the business premise of Marketing Services.

c) The assessee has furnished inaccurate particulars of its income in the return of income filed on 27.10.2004 for the year under consideration.

d) The satisfaction was recorded at the time completing assessment proceedings u/s 143(3) of the I.T. Act, 1961.

e) The assessee has itself surrendered for tax, the addition sum of `40,74,000/- which it was asked to explain the source of share application money. Moreover, admitted facts need not to be proved by the Assessing Officer, as in this case, the assessee itself

admitted the concealment of income to the extent of `40,74,000/- by offering the amount for tax.

In view of the above facts and circumstances of the case, I am

satisfied that it is a fit case for imposition of penalty u/s

271(1)(c) read with section 274 of the IT Act, 1961."

6. The assessee preferred an appeal to the CIT(Appeals) who rejected

the submissions of the assessee and confirmed the penalty. A further

appeal was preferred by the assessee to the Income Tax Appellate

Tribunal („Tribunal‟ for short) in ITA No.1896/Del/2010. The levy of the

penalty was opposed on the ground that the surrender of income was

made suo moto before any investigation, that there was no other evidence

in the possession of the income tax authorities except the surrender, and

that the levy of penalty without recording any finding on the merits of the

assessee‟s plea was untenable. The Tribunal on examination of the facts

and the rival contentions cancelled the penalty recording the following

findings:-

(a) It was only after the directions of the Addl.CIT issued under

Section 144A that the assessee‟s offer was accepted and the

assessment was finalized;

(b) There was no material against the assessee to show any

concealment and this fact has been admitted by the AO himself;

there is not even any indication in the penalty order as to the

particular credit in respect of which the penalty was being imposed;

(c) The fact that the assessee surrendered the income only when it was

confronted with the documents found in the survey does not

adversely affect its case.

(d) The assessee did not admit that it had concealed the income to the

extent of `40,74,000/-; it had made it clear in the letter dated

22.11.2006 that the surrender was made without any admission of

concealment or intention to conceal.

(e) The offer was made in a spirit of settlement of the dispute with the

revenue and no investigation was carried out by the AO to prove

concealment.

In support of the aforesaid findings the Tribunal referred to several

authorities.

7. The contention of the revenue before us is that the Tribunal failed

to appreciate the provisions of Explanation-1 to Section 271(1)(c) of the

Act. We think that there is force in the contention. Section 271(1)(c)

provides for levy of penalty for concealing the particulars of income or

furnishing inaccurate particulars of the income. Explanation-1 is as

below:-

"Explanation 1.--Where in respect of any facts material to the computation of the total income of any person under this Act,--

(A) Such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the Commissioner to be false, or

(B) Such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him], then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed."

In the case before us the revenue is right in contending that there was

absolutely no explanation from the assessee in respect of the amount of

`40,74,000/-; when the AO called upon the assessee to produce the

evidence as to the nature and source of the amount received as share

capital, the creditworthiness of the applicants and the genuineness of the

transactions the assessee simply folded up and surrendered a sum of

`56.49 lacs in its hands initially, which was later scaled down to

`40,74,000/-. The assessee merely stated that with a view to avoid

litigation and buy peace and to channelize the energy and resources

towards productive work and to make amicable settlement with the

income tax department, it surrendered the income under the head "income

from other sources". In the absence of any explanation in respect of the

surrendered income, the first part of clause (A) of Explanation 1 is

attracted. It cannot be denied that the nature and source of the amount

surrendered are facts material to the computation of the total income of

the assessee. The Revenue is entitled to know the same and if the nature

and source of the amount are not explained, it is entitled to draw the

inference that the amount represents the assessee‟s taxable income.

Though this principle was originally confined to the assessment

proceedings, the Explanation has extended it to penalty proceedings also,

presumably on the assumption that the furnishing of an explanation

regarding the nature and source would have compromised the assessee‟s

position. It is the assessee who has received the monies and is in the

knowledge of all the facts relevant and material in relation to the receipt.

Therefore, it should be in a position to offer an explanation and disclose

the material facts regarding the same. The absence of any explanation is

statutorily considered as amounting to concealment of income. In the

absence of any explanation regarding the receipt of the money, which is

in the exclusive knowledge of the assessee, an adverse inference is sought

to be drawn against the assessee under the first part of clause (A) of the

said Explanation. This appears to be somewhat in the lines of Section

106 of the Evidence Act, the principle behind which has been extended to

the provisions of Section 271(1)(c) of the Act.

8. We are satisfied that the Tribunal fell into error in setting aside the

penalty imposed by the AO and upheld by the CIT(Appeals). We

accordingly answer the substantial question of law in the affirmative,

against the assessee and in favour of the revenue. The appeal of the

revenue is allowed with no order as to costs.

R.V.EASWAR, J

BADAR DURREZ AHMED, J JANUARY 22, 2013 Bisht