Case Law Details
K.S. Chawla & Sons (HUF) Vs JCIT (ITAT Delhi)
In the case of K.S. Chawla & Sons (HUF) Vs JCIT, the ITAT Delhi held that amounts considered as undisclosed income cannot simultaneously be considered as loans to attract penalties under Section 271D of the Income Tax Act. The appellants had been subjected to penalty proceedings under Section 271D for allegedly violating provisions related to cash loans, but the ITAT ruled in favor of the appellants, citing the settlement offer and acceptance of M/s Spaze Towers Pvt Ltd. The Settlement Commission had accepted an offer of additional income from M/s Spaze Towers Pvt Ltd, acknowledging the telescoping of personal expenses of promoters/directors. The ITAT noted that the same amount cannot be taxed in two different capacities, and therefore cannot be considered as loans. The absence of a lender-borrower relationship was emphasized, as the expenses incurred by M/s Spaze Towers Pvt Ltd were deemed personal expenses of the promoters/directors, not loans. The ITAT also highlighted the lack of recorded satisfaction by the Assessing Officer before initiating penalty proceedings under Section 271D, in accordance with judicial precedent. Consequently, the ITAT directed the Assessing Officer to delete the penalty levied against the appellants for the respective assessment years.
Key Points:
- The search and seizure operation on M/s Spaze Towers Pvt Ltd led to proceedings under Section 153A. During this, M/s Spaze Towers offered an income of Rs. 52.74 crores on account of bogus purchases.
- The Settlement Commission accepted this offer along with the telescoping of personal expenses of promoters/directors amounting to Rs. 16.43 crores.
- The Assessing Officer made additions in the appellants’ assessments based on these personal expenses but the CIT(A) deleted these additions.
- However, the CIT(A) advised the Assessing Officer to consider these amounts as loans/deposits under Section 269SS.
- Subsequently, penalty proceedings under Section 271D were initiated against the appellants.
- The ITAT Delhi held that the same amount cannot be treated as income and loan simultaneously.
- Relying on precedent, the ITAT emphasized that once an amount is treated as undisclosed income, penalties under Section 269SS/271D cannot be applied.
- Additionally, it was noted that there was no satisfaction recorded by the Assessing Officer before initiating penalty proceedings, as required by law.
- The decision highlighted that the alleged loans were actually personal expenses incurred by M/s Spaze Towers, and there was no lender-borrower relationship.
- The ITAT concluded that penalty under Section 271D was unjustified and directed its deletion for all appellants.
Conclusion: The judgment in K.S. Chawla & Sons (HUF) Vs JCIT clarified that personal expenses incurred by a company cannot be construed as loans to attract penalties under Section 271D. The decision underscores the importance of clear findings and adherence to procedural requirements in tax assessments and penalty proceedings.
FULL TEXT OF THE ORDER OF ITAT DELHI
This bunch of appeals is by different appellants preferred against separate orders of the ld. CIT(A) pertaining to the captioned assessment years. Since the underlying facts in the captioned appeals are identical for levy of penalty u/ s 271D r.w.s 269SS of the Income-tax Act, 1961 [hereinafter referred to as ‘the Act’ for short], all these appeals are being disposed off by this common order for the sake of convenience and brevity.
2. Facts, as culled out from the orders of the authorities below show that search and seizure operation u/s 132 of the Act was carried out on 17.02.2016 in the case of M/s Spaze Towers Pvt Ltd. Pursuant thereto, proceedings u/s 153A of the Act were initiated.
3. During the pendency of the assessment proceedings u/s 153A of the Act, on 30.11.2016, M/s Spaze Towers Pvt Ltd filed an application under chapter XIXA of the Act before the Settlement Commission. In the application so filed, M/s Spaze Towers Pvt Ltd offered for tax inter alia, an income of Rs. 52.74 crores on account of bogus purchases recorded in its books of account. M/s Spaze Towers Pvt Ltd. claimed telescoping of expenses of Rs. 16.43 crores incurred by it towards personal expenses of the promoters/directors of the company.
4. While the application filed before the Settlement Commission was pending for settlement, on the basis of statement of facts and fund flow statement filed by M/s Spaze Towers Pvt Ltd., the Assessing Officer made additions in the assessment order of the captioned appellants by making addition of the amount in the related captioned appellants by treating the personal expenses incurred by M/s Spaze Towers Pvt Ltd. and relating to the promoters/directors as income, disregarding the contention of the appellants that the very said amount has already been offered for tax by M/s Spaze Towers Pvt Ltd. in the Settlement Commission application filed before the Settlement Commission.
5. The Settlement application filed by M/s Spaze Towers Pvt Ltd. was finally settled by the Settlement Commission vide order dated 25.04.2018 framed u/s 245D(4) of the Act. The Settlement Commission accepted the offer of additional income of Rs. 52.74 crores on account of bogus purchases and allowed the benefit of telescoping of personal expenses of promoters/directors aggregating to Rs. 16.43 crores.
6. Meanwhile, the appellants preferred appeal before the ld. CIT(A) in respect of the additions made in their respective hands by the Assessing Officer, treating the personal expenses incurred by M/s Spaze Towers Pvt Ltd as their income.
7. The first appellate authority deleted the additions made by the Assessing Officer from the hands of the captioned appellants. However, while allowing the appeals of the appellants, the ld. CIT(A) observed as under:
“In view of the above discussion, the Assessing Officer is advised to take necessary action in the case of the appellant in the year under consideration with respect to loan/deposit taken from M/s Spaze Towers Pvt Ltd in cash and thus otherwise than by specified modes as per the provisions of the Act.”
8. Taking a leaf out of the above observations of the first appellate authority, penalty proceedings u/s 271D of the Act were initiated in the cases of the appellants alleging that by accepting loans from M/s Spaze Towers Pvt Ltd, all the appellants have violated the provisions of section 269SS of the Act, thereby exposing them to the penal provisions of section 271D of the Act. Penalty was accordingly levied in the respective hands of the promoters/directors.
9. Penalty so levied was agitated before the first appellate authority but without any success.
10. Before us, the ld. counsel for the assessee vehemently stated that once the Assessing Officer has treated the personal expenses incurred by M/s Spaze Towers Pvt Ltd as income of the assessee, then the same amount cannot be treated as loan in violation of the provisions of section 269SS of the Act. The ld. counsel for the assessee pointed out that against the deletion of the quantum addition, the revenue has preferred appeal before the Tribunal by taking a specific ground:
“Whether on the facts and circumstances of the case, the ld. CIT(A) failed to appreciate that there is no evidence that the amounts shown to have incurred as expenses or invested in assets have been received by the assessee as loan/deposit from M/s Spaze Towers Pvt Ltd in cash and the ledger account and confirmations submitted by the assessee before him showing receipt of amount in cash and repayment by cheque is an afterthought to reduce the tax liability.”
11. It is the say of the ld. counsel for the assessee that the revenue authorities are blowing hot and cold in the same breath. On the one hand, the amount spent by M/s Spaze Towers Pvt Ltd is treated as income and on the other hand, the same amount is treated as loan in violation of provisions of section 269SS of the Act.
12. The ld. counsel for the assessee placed reliance on the decision of the Hon’ble Delhi High Court in the case of Standard Brands Ltd 285 ITR 295.
13. Proceeding further, the ld. counsel for the assessee alternatively pleaded that penalty has been imposed on the direction/dictates of the ld. CIT(A), which is bad in law. It is the say of the ld. counsel for the assessee that the Assessing Officer who has been conferred the powers to make assessment and/or impose penalty must act independent without being influenced by the directions/dictates of any authority.
14. The ld. counsel for the assessee further stated that nowhere the Assessing Officer/JCIT has recorded any satisfaction before levying any penalty u/s 271D of the Act. Strong reliance was placed on the decision of the Supreme Court in the case of Jai Laxmi Rice Mills Ambala City 379 ITR 521.
15. Per contra, the ld. DR strongly supported the findings of the Assessing Officer. It is the say of the ld. DR that nowhere the ld. CIT(A) has directed the Assessing Officer to levy penalty. On the contrary, he has only advised the Assessing Officer to look into the matter in the light of relevant provisions of the Act. The ld. DR further relied upon the decision of the Supreme Court in the case of Adinath Builders [P] Ltd 261 Taxmann.com 168.
16. We have heard the rival submissions and have given thoughtful consideration to the orders of the authorities below. We have also carefully perused the assessment order and order of the first appellate authority in quantum proceedings. The undisputed fact is that the Settlement Commission, while accepting the settlement offer of additional income of Rs. 52.74 crores on account of bogus purchases has also accepted the telescoping of personal expenses of the promoters/ directors aggregating to Rs. 16.43 crores. The relevant findings of the Settlement Commission read as under:
“An action of Search / Survey was conducted on applicant u/s 132 of the Income Tax Act, 1962 (Act) on 17.02.2016. The applicant submitted letter dt. 11.3.2016 to Ld DD1T- Investigation Unit-Ill, Gurgaon (even well before receiving copies of seized documents), Stating the discrepancies in records totaling to Rs. 81.00 crs. (and not undisclosed income or surrender as stated in the rule-9 report by Ld Pr CIT). It is respectfully submitted that the applicant has addressed and considered each and every issue stated in the said letter dt. 11.3.2016 and offered a sum of Rs. 53.04 cr., in the present SOF, which shall be dealt with, in the subsequent paras apart from additional surrender of Rs. 1.65 crs in the hands of Sh Arvinder Dhingra (which rs also pending for adjudication before the Hon’ble Bench). Therefore, the total amount offered before the Hon’ble Settlement Commission pertaining to both the applications comes to Rs.54.69 cr. The applicant accepted that it had recorded inflated purchases to the tune of Rs.52.74 crs (app) under the head of construction expenses apart from another surrender of Rs.30.00 lacs and thereby suppressed the profits by Rs. 53.04 cr (app). The applicant used to pay to the said Vendors towards the inflated purchases in question by account payee cheques and the applicant used to get cash after deducting nominal charges as stated in detail in SOF.
Para 2.2.1 to para 2.2.4 Telescoping Of Cash Expenses of Directors/Promoters
The Ld Pr CIT has objected telescoping of such cash expenses in para No, 2.2.1 to 2.2.3 on the ground that such cash is utilized by Directors/Shareholders for their personal use.
The applicant has admitted to have spent cash (out of cash received through inflated purchases) on various activities as stated in detail in SOF totaling to Rs. 14,70,67,358/-. Since, the cash is spent out of available cash in hand generated out of additional income offered for tax, which has been duly recorded in Cash Flow statement submitted at page No. 27-30 of SOF, and the cash expenses so incurred have not been claimed as expenses in computing additional income offered before Hon’ble Bench, the same deserves to be deducted out of Cash Flow and thereby telescoping set off of cash should be allowed to that extent.
17. It is also not in dispute that taking a leaf out of the statement of facts and fund flow statement filed by M/s Spaze Towers Pvt Ltd, the Assessing Officer had made addition in the hands of the captioned appellants by treating the telescoped personal expenses as income of the promoters/directors. This means that at this stage, the Assessing Officer was convinced that the telescoped personal expenses, incurred by M/s Spaze Towers Pvt Ltd, were nothing but income of the promoters/directors.
18. When this addition was agitated before the ld. CIT(A), the ld. CIT(A), taking a leaf out of the decision of the Settlement Commission, came to the conclusion that the same income cannot be taxed in two hands in the same assessment year and, accordingly, deleted the additions.
19. However, while deleting the addition, the ld. CIT(A) though observed that the same should be considered as loans/deposits in the hands of the promoters/directors in the light of the relevant provisions of the Act. It is true that the ld. CIT(A) nowhere directed the Assessing Officer to initiate penalty proceedings but it is equally true that prior to this decision of the ld. CIT(A), the Assessing Officer never took a view that the impugned telescoped expenses incurred by M/s Spaze Towers Pvt Ltd was in fact, loan/deposit given by the said company to the promoters/directors.
20. Dehors the fate of quantum additions, the Assessing Officer cannot treat the same amount as income of the appellants as well as loans/deposits in the hands of the appellants.
21. The Hon’ble Delhi High Court in the case of Standard Brands Ltd [supra] held as under:
“6. Against the order dated 6-9-2000, the revenue preferred an appeal before the Income Tax Appellate Tribunal. By an order dated 6-10-2004, the Tribunal (in paragraph 9 of the said order) upheld the view taken by the Commissioner (Appeals) in his order dated 6-9-2000. The Tribunal held that the receipt was outside the scope of undisclosed income defined under section 158B(b) of the Act.
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 assessed and at the same time seek to initiate proceedings against the assessed 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 assessed, it could not resort to proceedings under section 269SS read with section 271D of the Act, as held by the Tribunal.”
22. Similar view was taken by the Hon’ble High Court of Delhi in the case of R.P. Singh & Co. [P] Ltd 340 ITR 217 wherein the Hon’ble High Court had the occasion to decide on the fact that once the share application money is treated as an undisclosed income of the assessee u/s 68 of the Act, whether the initiation of proceedings u/s 269SS r.w.s 271D of the Act is valid?
23. On these facts, the Hon’ble High Court observed as under:
“6. Mr. Kochar, learned counsel for the assessee, submitted that the said question does not arise in the case at hand inasmuch as both the Commissioner of Income-tax (Appeals) and the Tribunal have recorded a finding that once the Assessing Officer has treated it as an undisclosed income, it could not have proceeded on the foundation that it is a deposit. In our considered opinion, this submission canvassed by Mr. Kocnar has substantial force and the question raised by the Revenue really does not arise in this case. Needless to say that the said question may arise where the facts would be different but the same has no relevance to the case at hand. In view of the aforesaid analysis, the appeal being devoid of merit stands dismissed without any order as to costs”
24. The co-ordinate bench in the case of G.S. Entertainment ITSS 437/MUM/2004 had the occasion to consider similar issue. The relevant findings of the co-ordinate bench read as under:
“2. The learned Departmental Representative has relied on the order of the AO. He submitted that the amount of Rs. 15 lakhs was received by the assessee in cash as is recorded in the CD seized by the Department. He submitted that Shri Gautam Gupta has failed to confirm the transaction in the form of affidavit before the Revenue authorities. He submitted that CIT(A) should have taken note of the fact that cash receipt of Rs. 15 lakhs was towards part payment of the finance agreement dt. 28th July, 1998.
3. The learned Counsel for the assessee has opposed the submission of the learned Departmental Representative. He submitted that the amount of Rs. 15 lakhs was assessed by the AO as undisclosed income of the assessee for the block period of the assessee and therefore, the provision of Section 269SS of the IT Act, 1961 does not apply to the facts of the case. He submitted that the issue is covered in favour of the assessee with the decision of the Hon’ble Delhi High Court CIT v. Standard Brands Ltd. (2006) 204 CTR (Del) 48 : (2006) 285 ITR 295 (Del).
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 AO 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 r/w 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., cited 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 r/w 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.”
25. The aforesaid decisions are squarely applicable to the facts of the present appeals.
26. Coming back to the facts of the case as mentioned elsewhere, when the penalty proceedings were initiated by the JCIT, even the JCIT proceeded with the observations of the ld. CIT(A) who has advised to take necessary action as per the provisions of the Act. The JCIT then analyzed the provisions of section 269SS of the Act and after referring to one decision of the Supreme Court and two decisions of the Hon’ble High Court of Kolkata and Karnataka High Court, was convinced that there is a violation of provisions of section 269SS of the Act and, therefore, penalty u/s 271D of the Act is leviable and levied penalty accordingly.
27. It is a matter of fact that Spaze Towers was inflating its purchases and cash so generated was spent on the personal needs of the directors/promoters in the form of ceremonial functions, farm house construction etc. Nowhere the actual cash changed hands, but were spent on personal expenses of the promoters/directors. Merely because the promoters/directors agreed to repay the liability, the same cannot be construed as taking loans from Spaze Towers. Since Spaze Towers has incurred personal expenses of the promoters/ directors, the same cannot be construed as loans.
28. In our considered opinion, there must be a clear finding based on cogent and reliable material that the appellants took or accepted any loan or deposit in cash from Spaze Towers. In the absence of any cogent finding, it cannot be assumed that the appellants took or accepted loans/deposits otherwise than by an account payee cheque to invoke the provisions of section 269SS of the Act. Facts on record clearly show that Spaze Towers categorically declared/admitted of having incurred personal expenditure on behalf of the promoters/ directors before the Settlement commission which has been accepted by the Settlement Commission in its order dated 24.05.2018.
29. The Assessing Officer, at first, treated the said transaction as income of the assessee which is evident from the appellate proceedings in respect of the quantum additions. This also clearly shows that the Assessing Officer was not sure whether Spaze Towers has given any cash loan to the promoters/directors. Since Spaze Towers incurred expenditure towards the personal needs of the directors/promoters, the same was acknowledged as liability by the directors/promoters but the same cannot be construed as loan or deposit within the framework of section 269SS of the Act.
30. Considering the facts in totality, in our considered opinion the transaction is devoid of any lender – borrower relationship. In other words, the amount which is the subject matter of consideration in the present cases is out of tax paid from income/disclosed sources of Spaze Towers.
31. The Hon’ble Karnataka High Court in the case of Chamundi Granite 239 ITR 694 relied upon by the JCIT has also held that the ultimate aim of section 269SS is to prevent evasion of tax. Whereas, the facts of the appellants clearly shows that the taxes have been paid by Spaze Towers as per the order of the Supreme Court and there is no evasion of tax.
32. The Hon’ble Supreme Court in the case of Kum. A.B. Shanthi 255 ITR 258 has held that the object of introducing the provisions of section 269SS of the Act is to ensure that the tax payer is not allowed to give false explanation for his unaccounted money.
33. In the present cases, there is no dispute about the sources of money where from the expenditure had been incurred which has already suffered taxation in the hands of the company Spaze Towers and the very same money cannot be considered as representing undisclosed income of the appellants for which false explanation is being given as loan to attract the provisions of section 269SS r.w.s 271D of the Act.
34. On a perusal of the assessment order in the quantum proceedings, the order of the first appellate authority deciding the quantum additions and also the order of the JCIT levying penalty u/s 271D of the Act, we find that the assessment order as well as the order of the JCIT are devoid of any satisfaction regarding initiation of penalty proceedings u/s 271D of the Act.
35. The Hon’ble Supreme Court in the case of Jai Laxmi Rice Mills Ambala City [supra] has held that penalty u/s 271D is without any satisfaction and, therefore, no such penalty can be levied. The relevant findings of the Hon’ble Supreme Court read as under:
“In these appeals, we are concerned with the question as to whether penalty proceeding under Section 271D of the Income Tax Act (hereinafter referred to as “the Act”) is independent of the assessment proceeding and this question arises for consideration in respect of Assessment Years 1991-1992 and 1992-1993 under the following circumstances:
In respect of Assessment Year 1992-1993, assessment order was passed on 26.02.1996 on the basis of CIB information informing the Department that the assessee is engaged in large scale purchase and sale of wheat, but it is not filing income tax return.
Ex-parte proceedings were initiated, which resulted in the aforesaid order, as per which net taxable income of the assessee was assessed at Rs. 18,34,584/-. While framing the assessment, the Assessing Officer also observed that the assessee had contravened the provisions of Section 269SS of the Act and because of this the Assessing Officer was satisfied that penalty proceedings under Section 271E of the Act were to be initiated.
3. The assessee carried out this order in appeal. The Commissioner of Income Tax (Appeals) allowed the appeal and set aside the assessment order with a direction to frame the assessment de novo after affording adequate opportunity to the assessee.
4. After remand, the Assessing Officer passed fresh assessment order. In this assessment order, however, no satisfaction regarding initiation of penalty proceedings under Section 271E of the Act was recorded. It so happened that on the basis of the original assessment order dated 26.02.1996, show cause notice was given to the assessee and it resulted in passing the penalty order dated 23.09.1996. Thus, this penalty order was passed before the appeal of the assessee against the original assessment order was heard and allowed thereby setting aside the assessment order itself. It is in this backdrop, a question has arisen as to whether the penalty order, which was passed on the basis of original assessment order and when that assessment order had been set aside, could still survive.
4. The Tribunal as well as the High Court has held that it could not be so for the simple reason that when the original assessment order itself was set aside, the satisfaction recorded therein for the purpose of initiation of the penalty proceeding under Section 271E would also not survive. This according to us is the correct proposition of law stated by the High Court in the impugned order.
5. As pointed out above, insofar as, fresh assessment order is concerned, there was no satisfaction recorded regarding penalty proceeding under Section 271E of the Act, though in that order the Assessing Officer wanted penalty proceeding to be initiated under Section 271(1)(c) of the Act. Thus, insofar as penalty under Section 271E is concerned, it was without any satisfaction and, therefore, no such penalty could be levied.
These appeals are, accordingly, dismissed.”
36. The ld. DR had relied upon the decision of the Hon’ble Supreme Court in the case of Adinath Builders Pvt Ltd [supra]. We are of the considered opinion that the Hon’ble Supreme Court has dismissed the SLPs filed by the revenue and the ld. DR has relied upon the head notes, which cannot be considered as judgment of the Hon’ble Supreme Court as the Hon’ble Supreme Court has simply dismissed the SLPs without assigning any reason.
37. Considering the facts of the cases in hand from all possible angles, we do not find them to be fit cases for levy of penalty u/s 271D of the Act. We, accordingly, direct the Assessing Officer to delete the penalty levied in respect of the captioned appellants for all the assessment years under consideration. By this consolidated order, all the appeals are allowed and disposed off accordingly.
38. In the result, all the above captioned appeals are allowed.
39. All the stay applications accordingly become infructuous.
Order pronounced in the open court on 28/08/2019.
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