No Penalty for Doubtful addition U/s. 41(1) of Income Tax Act, 1961

Smt. Sumitra Devi Agarwal Vs. ITO (ITAT Jaipur)- The AO has questioned the genuineness of the liability and in absence of the requisite confirmation, has held the same to be a bogus liability. Where the liability itself has been held to be a bogus liability, where is the question of remission or cessation thereof. Thus, in the instant case, where the addition itself is doubtful under the provisions of section 41(1), the same cannot form the basis for levy of penalty.

INCOME TAX APPELLATE TRIBUNAL, JAIPUR

BEFORE: SHRI R.P. TOLANI, JM & SHRI VIKRAM SINGH YADAV, AM

ITA No. 687/JP/2011 Assessment Year : 2007-08

Smt. Sumitra Devi Agarwal Vs. ITO

Assessee by : Shri Manish Agarwal, CA

Revenue by : Shri O.P. Bhateja, Addl. CIT

Date of Hearing : 21/09/2015

Date of Pronouncement : 1/10/2015

ORDER

PER VIKRAM SINGH YADAV, AM

This is an appeal filed by the assessee against the order of the ld. CIT(A), Ajmer dated 27-05-2011 for the assessment year 2007-08 wherein the substantial ground of appeal raised by the assessee is that the ld. CIT(A) has erred in confirming the penalty of Rs. 1,51,930/- levied u/s 271(1)(c) of the Act.

2. Brief facts of the case are that in the quantum proceedings, credit balance shown in the books of accounts of the assessee in the name of M/s. Mayank Fabrics was held bogus and the amount of Rs. 5,18,000/- was treated as assessee’s income u/s 41(1)(a) of I.T. Act and added to the total income by the AO. The matter was carried in appeal before the ld. CIT(A) without any success and the matter has since attained finality as no further appeal was filed before the Tribunal. The AO thereafter levied penalty of Rs. 1,51,930/- u/s 271(1)(c) of the Act which the assessee appealed unsuccessfully before the Ld CIT(A). The assessee is now before us against the levy of said penalty.

2.1 Before we proceed to examine the matter of levy of penalty, it would be relevant to note the facts which have a bearing on the matter in more detail, the AO’s action and response/explanation of the assessee. 2.2. During the course of assessment proceedings on examination of balance sheet, AO found that the assessee has shown sundry credits of Rs. 5,18,000/- in the name and style of M/s. Mayank Fabrics. Information u/s 133(6) was called from M/s. Mayank Fabrics. M/s. Mayank Fabrics filed a written reply dated 21-08-2009 stating that no account is available in the name of M/s. Agarwal Texco Industries during the financial year 2006-07 in their books of account. Again vide office letter No. 965 dated 25-08-2009, M/s. Mayank Fabrics was provided copy of account in the books of assessee and requested to explain the difference. In response to this query, vide letter dated 4-09-2009 they have reiterated what waslstated in the earlier letter that no account is there in their books in the name of M/s. Agarwal Texco Industries.

2.3 These facts were made known to the assessee vide order sheet entry dated 13-10-2009 and requested to explain why the amount shown in the name of M/s. Mayank Fabrics should not be treated as income of the assessee. In response, the assessee filed reply dated 3-11-2009 stating as under:-

“There is credit balance of M/s. Mayank Fabrics of Rs. 5,18,000/- in the books of assessee. This balance comes from preceding financial year 2005-06. A copy of its accounts from preceding year is enclosed. As per the same, three cheques were received for Rs. 5,38,000/- and one cheque issued for Rs. 20,000/- in that year and balance of Rs. 5,18,000/- remained. A copy of our cash book of the above dates is also enclosed showing the details of cheque no. amount and the said cheques were credited in the bank account. Hence, the outstanding balance is correct, we could not understand why Mayank Fabrics denied for not having any account. While all the transactions are through cheques only. Hence, the balance shown in our books are correct…..’’

2.4. AO, on examination of the copy of ledger filed by the assessee alongwith reply dated 03-11-2009 found that there was credits into the account of assessee on following dates totaling to Rs. 5,38,000/-.

Therefore, in order to verify the correctness of assessee’s claim and that of M/s. Mayank Fabrics, information u/s 133(6) of the Act was called from Branch Manager, SBI, Madanganj-Kishangarh requesting them to provide the details of account holder from whose account the above cheques were issued and credited into assessee’s account. Similarly, M/s. Mayank Fabrics was again requested to supply a copy of their bank statement for the above period i.e. from 01-04-2005 to 15-04-2005. A reply was received vide letter No. BM dated 10-11-2009 from Branch Manager, State Bank of India, Madanganj-Kishangarh stating that the above cheques were issued by M/s. Vikas Industries, Subhash Colony, Madanganj-Kishangarh. In the meantime, M/s. Mayank Fabrics have also filed copy of their bank statement maintained with Oriental Bank of Commerce for the period 1-04-2005 to 15-04-2005. On examination of the same, it is found that no cheque has been issued to M/s. Agarwal Texcom Industry in these dates.

2.5. The above facts were made known to the assessee and in response, the assessee filed a written reply on 20-11-2009as under:-

‘’(1) As per our records we have the credit balance of Rs. 5,18,000/- in our books in the account of M/s. Mayank Fabrics for the year ended on 3 1-03-2007.

(2) As the party is not acknowledging the same, hence, we hereby surrendered the balance of Rs. 5,18,000/- for taxation to purchase the peace and to avoid further litigation.’’;

2.6. In light of above facts, the AO held that the credit balance shown in the name of M/s. Mayank Fabrics was bogus and the amount of Rs. 5,18,000/- was treated as assessee’s income u/s 41(1)(a) of I.T. Act and added to the total income.

2.7 Being aggrieved by the order of the AO, the assessee carried the matter before the ld. CIT(A) who dismissed the appeal of the assessee by observing (para 4.22) as under:-

“When the present case is examined in view of this legal position, it is found that appellant claimed bogus liability in respect of sundry credit balances of Rs. 5.18 lacs in the return filed by her. It was only when AO made enquiry from Mayank Fabrics that appellant agreed to surrender this amount. In such a situation AO has rightly concluded that appellant furnished inaccurate particulars of her income, in the return filed by her. It cannot be held that the surrender of income by appellant was voluntary, because the surrender was made only after detection of the same by AO. Under the present scheme of things only a minuscule percentage of returns are selected for scrutiny and in all other cases, income declared by the assessee is accepted u/s 143(1) without making any further enquiry. Appellant was well aware of this and tried to make undue advantage of this scheme of the Department. It is obvious that if her was not selected for scrutiny, she would have never surrendered the amount of Rs. 5,18,000/-. In this case, it is not established that the conduct and explanation of appellant was bona fide. The levy of penalty u/s 2 71(1) © is therefore, justified in this case pursuant to the decision of Dharmendra Textiles.”

2.8 The ld. AR in the written submission stated that cheques were received by the assessee from M/s. Mayank Fabrics only and thus the amount of Rs. 5,38,000/- was credited in the books of assessee in the name of M/s. Mayank Fabrics. Though, the cheques were issued by another party i.e. M/s. Vikas Industries to M/s. Mayank Fabrics however, the same were endorsed by M/s. Mayank Fabrics to the assessee and thus, were received by assessee from M/s. Mayank Fabrics and accordingly were credited in its name in the books of assessee. Merely because the cheques were not issued by M/s. Mayank Fabrics but were endorsed by it to the assessee, it cannot be alleged that the amount was not received by assessee in view of the fact that receipt of the amount by assessee was not doubted since the same has been received through banking channel. Further, the party issuing cheques is an existing concern identity of which is not doubted and thus the source of the amount stands proved. Thus, it remains a fact that the amount was in fact received by assessee through cheque and was partly repaid in the F.Y. 2005-06 and complete repayment was done in subsequent years. Thus, it cannot be alleged that the assessee has shown a false liability in its books of accounts. Further neither in the year under appeal nor in preceding assessment year, any entry in respect of any funds from M/s. Vikas Industries is written in the books of assessee.

2.9 The ld. AR further submitted that the law is well settled that though the finding recorded in the assessment orders are relevant for penalty proceedings, but these cannot be the foundation for holding the assessee guilty of concealment of particulars of income more particularly when no amount whatsoever was received during the year under appeal and the amount for which the assessee is held as concealing the particulars of income was the opening balances for which the credit entries were made in the books of accounts in preceding assessment years. Hon’ble Apex Court in the case of Eilly Lilly & Company reported in 312 ITR 225 has held that the penalty u/s 27(1)(c) is not an automatic or mandatory fallout of the addition made during the assessment proceedings. Merely because an addition had been made during assessment proceedings does not ipso fact constitute default of concealment on part of the assessee, therefore, the same should not be levied in routine manner. It is an admitted fact that the assessee had received a sum of Rs. 5,38,000/- through cheques in the F.Y. 2005-06 relevant to A.Y. 2006-07 out of which an amount of Rs. 20,000/- was repaid in the same year to M/s. Mayank Fabrics (creditor) through payee’s account cheque which as per that the party i.e. M/s. Mayank Fabrics was not accounted for in its books of accounts. However, such payment is not doubted by the ld. AO while making assessment for A.Y. 2006-07. Thus, the fact remained that assessee had made part repayment to the creditor during the same year of credit and the same was not doubted by the ld. AO. Thus, clear a dual approach has been adopted by the ld. AO which is evident from the fact that on the one hand he has accepted the payment made (through cheque) and on the other hand has doubted the closing balance solely on the basis of the so called information received from third party without in any manner making any verification about the correctness and truthfulness of such information.

2.10l The ld. AR of the assessee further relied on following case laws:-

(i)llll Narangs International Hotels (P) Ltd. vs. DCIT, Circle- 1(2), Mumbai, 137 ITD 53

(ii)lllll National Textile vs. CIT, 249 ITR 125 (Guj.)

(iii)llll Smt. Durga Devi Somani (ITA No. 672/JP/201 1 dated 3 1-10-2014)

(iv)lll Ashish Gupta (ITA No. 671/JP/2011 dated 17-10-2014)

(v)llll Ashok Kumar Kamdhar (ITA No. 684/JP/2011 dated 18-11-2011)

(vi)lll CIT vs. Reliance Petroproducts (P) Ltd. 36 DTR 449 (SC)

(vii)ll Goswami Smt. Chandralata, 125 ITR 700 (Raj.)

(viii)l ACIT vs. ARBRIL Pharmaceuticals (P) Ltd. 70-ITD-206/212

(viii)l ITO vs. Gurcharan Singh & Co. (Chd.) 72 TTJ 774

(ix)lll CIT vs. Ashok Takar ,170 Taxman 471 (Del.)

(x)llll CIT vs. Haryana Warehousing Corp. (ITA No. 871 of 2008- Punj. & Har.)

(xi)lll ACIT vs. Malu Electrodes (P) Ltd. , 127 TTJ 599 (Nag.)

(xii)ll Addl. CIT vs. Agarwal Misthan Bhandar, 131 ITR 619 (Raj.)

(xiii)l CIT vs. Suresh Chandra Mittal, 251 ITR 9 (SC)

2.11 The ld. DR relied on the orders of the AO and the ld CIT(A).

2.12 We have heard the rival contentions and perused the material available on record including the written submission of the assessee. In the instant case, the AO has made an addition of Rs. 5.18 lacs claiming the same to be a bogus liability and added the same to the total income of the assessee u/s 41(1)(a) of the Act. In this regard, from the perusal of the balance sheet, it is noted that the assessee’s has shown particulars of M/s. Mayank Fabrics amounting to Rs. 5.18 lacs under the head “sundry creditors”. The particulars of trade credits in name of M/s Mayank Fabrics were thus apparent and visible on the face of the balance sheet. During the course of assessment proceedings, the AO found that the assessee has received three cheques totaling to Rs. 5.38 lacs during the financial year 2005-06 relevant to assessment year 2006-07. This fact shows that these trade credits form part of the opening balance at the start of the financial year 2006-07 relevant to subject assessment year 2007-08 and these were not trade credits which were received during the subject assessment year. Thus, legally speaking, if trade credits are treated as credits whose liability has ceased to exist, the relevant entries exists in books of accounts and if they are held as bogus, they belong to earlier financial year 2005-06 and not to the year under consideration. Further,if that be the case, whether the said bogus liability can be brought to tax in the year under consideration and provisions of section 41(1) can come to the rescue of the AO as has been done in the instant case. In this regard, reference is invited to the decision of Hon’ble Gujarat High Court in the case of CIT vs Bhogilal Ramjibhai Atara in Tax Appeal No. 588 of 2013. In the instant case, the facts are that for the assessment year 2007- 08, the assessee filed return of income which showed, besides others, a sum of Rs.37.52 lacs by way of his debt. The Assessing Officer inquired into such outstanding dues of the assessee. The assessee supplied details of 27 different creditors. The Assessing Officer issued summons to all these so called creditors and questioned them about the alleged credit to the assessee. In detail, the Assessing Officer in his order of assessment recorded that number of parties were not found at the given address. Many of them stated that they had no concern with the assessee. Some of them conveyed that they did not even know the assessee. On the basis of such findings and considering that the debts were outstanding since several years, the Assessing Officer applied section 41(1) of the Income Tax Act, 1961 and added the entire sum as income of the assessee. The Assessing Officer held that liabilities have ceased to exist within the meaning of section 4 1(1) of the Act and therefore, the same should be deemed to be the income of the assessee. In the context of above facts, the Hon’ble Gujarat High Court held as under:-

‘’We are in agreement with the view of the Tribunal. Section 41(1)of the Act as discussed in the above three decisions would apply in a case where there has been remission or cessation of liability during the year under consideration subject to the conditions contained in the statute being fulfilled. Additionally, such cessation or remission has to be during the previous year relevant to the assessment year under consideration. In the present case, both elements are missing. There was nothing on record to suggest there was remission or cessation of liability that too during the previous year relevant to the assessment year 2007-08 which was the year under consideration. It is undoubtedly a curious case. Even the liability itself seems under serious doubt. The Assessing Officer undertook the exercise to verify the records of the so called creditors. Many of them were not found at all in the given address. Some of them stated that they had no dealing with the assessee. In one or two cases, the response was that they had no dealing with the assessee nor did they know him. Of course, these inquiries were made exparte and in that view of the matter, the assessee would be allowed to contest such findings. Nevertheless, even if such facts were established through bi-parte inquiries, the liability as it stands perhaps holds that there was no cessation or remission of liability and that therefore, the amount in question cannot be added back as a deemed income under section 41(c) f the Act. This is one of the strange cases where even if the debt itself is found to be non‑genuine from the very inception, at least in terms of section 41(1) of the Act there is no cure for it. Be that as it may, insofar as the orders of the Revenue authorities are concerned, the Tribunal not having made any error, this Tax Appeal is dismissed.’’

In our view, the reasoning of the above decision can be squarely applied to the facts under consideration. The AO has questioned the genuineness of the liability and in absence of the requisite confirmation, has held the same to be a bogus liability. Where the liability itself has been held to be a bogus liability, where is the question of remission or cessation thereof. Thus, in the instant case, where the addition itself is doubtful under the provisions of section 41(1), the same cannot form the basis for levy of penalty.

2.13 Further, we have noted the earlier decisions of the Coordinate Benches in the cases of Smt. Durga Devi Somani vs. ITO , Shri Ashish Gupta vs. ITO and Shri Ashok Kumar Kamdar vs. ITO (supra) where similar issue has been dealt with in detail and we are in agreement with the reasoning in the said decisions. Thus, in consideration of entirety of facts, circumstances and case laws as relied on by assessee, we delete the penalty of Rs 1,51,930 levied under section 271(1)(c) of the Act.

3.0ll In the result, the appeal of the assessee is allowed.

Order pronounced in the open court on 01/10/2015.