2016 (9) TMI 501 - AT - Income Tax

Tribunal Upholds Penalty Levy for Unexplained Cash Credits

ITO, Ward – 1 (1), Thane (W) Versus Amar Diamond Tools

The tribunal upheld the penalty levy under section 271(1)(c) of the Income Tax Act on cash credits considered unexplained and assessed under section 68. ... Penalty u/s. 271(1)(c) - addition on unexplained cash credits assessed u/s. 68 - Held that:- Entire transaction is, as apparent, calculated to introduce liquid capital in the firm for payment to the outgoing partner, whose share thus gets acquired by the outgoing partner, introducing his family members as partners in his stead. The stated depositors, with no financial means of their own, are only ostensible sources of finance, introducing cash together on an appointed day, as if they were waiting with cash in their hands to be deposited with the firm and, further, shifting the source thereof to non-specified identities. It is clearly a concerted action with a view and toward the distinct objective of maintaining the continuity of the business of the firm in wake of the departure of a person holding 50% interest therein. There is a complete lack of bona fides, and the genuineness of the transactions, highly suspect. As explained in CIT vs. Durga Prasad More [1971 (8) TMI 17 - SUPREME Court] it is the truth of the recitals in the documents (or the truth of their contents) that is relevant and is to be established, or else it would leave the door wide open for tax evasion by merely executing self-serving documents, and that the Revenue authorities were fully entitled to look at the surrounding circumstances to find out the reality of the transaction and not put blinkers while looking at documents produced before them. In the present case, we have ‘statements’ instead of ‘documents’, so that the said decision is in ratio fully applicable in the facts and circumstances of the case. The ld. CIT(A) has incorrectly shifted the burden of proof and furnishing a reasonable explanation, substantiating the same, on the Revenue. When the assessee’s case falls either under part (A) or (B) of Explanation 1 to section 271(1)(c), he is deemed to have concealed particulars of income. There is, further, in the admitted and undisputed facts and circumstances, no case for application of the decision in Reliance Petroproducts (P) Ltd. (2010 (3) TMI 80 - SUPREME COURT), which stands wrongly applied by the ld.CIT(A). What the said decision states is that where a claim is found as not correct or valid in law, the same cannot by itself lead to the levy of penalty. It is trite law that penalty proceedings are separate and distinct proceedings, and is to be levied on its’ own merits - Decided in favour of revenue Issues involved:Validity of penalty under section 271(1)(c) of the Income Tax Act on cash credits considered unexplained and assessed under section 68.Detailed Analysis:The appeal concerns the validity of a penalty imposed under section 271(1)(c) of the Income Tax Act on cash credits totaling Rs. 50 lakhs, treated as unexplained and assessed under section 68. The assessee-firm credited this amount to the accounts of five family members of a partner to pay off another partner who retired. The Assessing Officer invoked section 68 due to unsatisfactory explanations regarding the nature and source of the credits, confirmed by the first appellate authority. The creditors confirmed advancing cash loans, sourced from relatives and agriculture income. However, the explanation lacked substantiation for penalty purposes. The tribunal examined the facts and found discrepancies in the creditors' financial capacities, lack of evidence for agricultural income, and suspicious transactions aimed at maintaining the firm's capital post the outgoing partner's departure.The tribunal emphasized the need to establish the identity, creditworthiness, and genuineness of the credits independently. While the creditors confirmed their identities, the other aspects remained unproven. The tribunal highlighted the lack of financial capacity, absence of income sources, and questionable transactions involving the creditors. The tribunal deemed the explanation unsubstantiated and lacking credibility, falling under Explanation 1(A) to section 271(1)(c) for penalty imposition.The tribunal referred to legal precedents emphasizing the importance of providing a reasonable and substantiated explanation to avoid penalties. It rejected the application of certain decisions by the first appellate authority, asserting that penalty proceedings are distinct and must be evaluated on their own merits. The tribunal concluded that the case lacked substance and upheld the penalty levy under section 271(1)(c) due to the absence of a plausible and substantiated explanation for the cash credits.In light of the above analysis, the tribunal vacated the findings of the first appellate authority and upheld the penalty levy, allowing the Revenue's appeal.