Brief summary of the case
Assessee being partnership firm was engaged in the business of builders & developers. A search u/s 132(1) of the I.T. Act was carried out in case of Shri Shreeram H. Soni on 29-07-2003. During search, blank promissory note and blank undated cheques worth Rs.5 Lacs related to the assessee-firm were found beside some other documents. On the basis of such seized material notice u/s 153C was issued on the assesse-firm. In response, assessee-firm filed its return for A.Y. 1998-99. During the assessment proceedings, A.O asked the confirmation of unsecured loans. The assessee failed to furnish loan confirmations of Rs.5 Lacs taken from Shri Shreeram H. Soni. Beside this some confirmations was filed by assessee-firm without having PAN and addresses. Since the assessee-firm failed to prove the genuineness of the loan transactions by giving their PAN, bank account extract etc to the satisfaction of A.O., an addition of Rs.2620000/- along with disallowing corresponding proportionate interest of Rs.576400/- was made to the income of the assessee. On an appeal, CIT(A) provided a relief of Rs.1470000/- along with proportionate interest to the extent of Rs.323400/- on the basis of remand report of A.O. Aggrieved revenue filed the appeal before Tribunal against the order of CIT(A) which was dismissed by ITAT.
Subsequently, A.O. initiated penalty proceeding u/s 271(1)(c) on account of various additions. However during the appellate proceedings, CIT(A) sustained the penalty amount to the extent of addition of unexplained cash credit of Rs.1150000/- and proportionate interest thereon of Rs.253000/-. Aggrieved with the penalty order, assessee filed appeal before ITAT.
Contention of the Assessee
Assessee argued that original return was filed disclosing the loan creditors including Rs.5 Lac entry. In response to notice u/s.153C the assessee filed the return. The issue of notice u/s.153C was based on some promissory notes of Rs.5 lakhs found from the residence of Shri Shreeram H. Soni. He submitted that no incriminating materials were found, therefore, in absence of any incriminating materials found, no penalty u/s 271(1)(c) of the I.T. Act can be levied. Merely because some additions was made, the same does not call for automatic levy of penalty u/s 271(1)(c) of the I.T. Act. It was further submitted that the assessment u/s.153A will be made on the basis of the incriminating material which in the context of relevant provisions means (1) books of account or other documents found in the course of search but not produced in the course of original assessment and (2) undisclosed income or undisclosed property discovered in the course of search. Since the assessee has already filed original return of income disclosing details of loans & Advances, therefore no penalty u/s 271(1)(c) is leviable since the addition is not based on any incriminating material found during the course of search in the case of Shreeram H. Soni. Moreover some addition was made on the ground of not proving the genuineness of the loan in the absence of PAN, bank account details, however it is not proved that loans are bogus hence penalty u/s 271(1)(c) is not leviable.
Contention of the Revenue
The Ld. DR on the other hand submitted that the assessee was unable to prove the identity and credit worthiness of the loan creditors and the genuineness of the transactions. Therefore, penalty levied u/s 271(1)(c) was correctly upheld by the CIT(A) on the amount of Rs.11,50,000/- and the proportionate interest thereon.
Decision of ITAT
So far as the addition of Rs.5 lakhs being loan obtained from Shri Shreeram H. Soni is concerned, it is a fact that the assessee has admitted and not contested the addition in the quantum appeal. However, the fact of obtaining loan from Shri Shreeram H. Soni was found from the premises of Mr. Soni in shape of blank cheque of Rs.5,00,000/- and blank promissory note and based on the seized documents/papers notice u/s.153C r.w.s. 153A was issued to the assessee. The loan obtained from Mr. Soni was already reflected in the balance sheet filed along-with the original return of income which was filed prior to the data of search. Merely because the assessee did not contest the addition and accepted the same, penalty u/s 271(1)(c) of the I.T. Act, in the given facts and circumstances of the case is not leviable. The loan amount of Rs.650000/- obtained from different persons were already appearing in the balance sheet filed in the original return of income and nothing was detected due to the search and such loans are not disproved by the A.O. rather are unproved.
In this view of the matter the assessee is not liable to penalty u/s 271(1)(c) of the I.T. Act since the same was not based on any incriminating material found during the course of search. The addition was based on the basis of loan creditors found from the balance sheet already filed prior to the search along with the original return of income. Accordingly the order of the CIT(A) set aside. The grounds raised by the assessee are accordingly allowed.