TaxTMI 
TaxTMI 
2009 (10) TMI 927
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....confirming penalty to ₹ 12,27,526 under s. 158BFA(2) being arbitrary, uncalled for and bad in law, the same should be annulled and your appellant be given such relief(s) as prayed for. 2.1 The relevant facts as culled out from the impugned order are as under : "A search and seizure operation was conducted on 30th Aug., 1998 in case of the assessee and assessment order under s. 158BC was passed on 27th July, 2000 determining additional undisclosed income of ₹ 10,22,940 for the block period and penalty proceedings under s. 158BFA(2) have been initiated simultaneously. Though, the appeal has been filed against the block assessment order before the CIT(A) but later on, the appeal was withdrawn by the assessee. In course of penalty proceedings, in response to the subsequent show-cause notice issued by the AO, the assessee argued that no penalty was imposable as the reasons for initiating the penalty were not mentioned in the assessment order. But rejecting that argument, the AO mentioned that the order under s. 158BC/143(3) was passed after determination of an additional undisclosed income of ₹ 10,22,940 based on the books of account and other documents found....
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....ment has been made to point out as to how it is relatable to the assessee. In fact what transaction is supposed to be recorded in these "dumb documents" it was argued has also not been spelt out by the AO. The assessee's stand is that these are dumb documents as they neither show the nature of the transaction nor are they relatable to the assessee. Thus if the AO is of the view that it relates to the assessee he has to bring some evidence on record to establish how a specific document warrants an addition. 4.4 Assailing the finding of the tax authorities that the assessee has accepted the additions it was argued that the penalty order itself shows that against the block assessment order the assessee had filed an appeal in 2000. However, since till 2006 it was not decided and kept lingering accordingly exhausted with the whole proceedings the assessee finally withdrew the appeal and paid due taxes in order to buy peace. These facts it was submitted are found recorded in the penalty order itself. It was his submission that the psychology of an assessee who has agitated the additions in the appellate proceedings and finally withdraws the same to buy peace without gettin....
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....e assessment order that neither the printout is complete nor was it possible to ascertain the nature of the transactions and the purpose of different numbers mentioned therein. Despite these clear-cut speaking observations by the AO himself he proceeds to make additions resorting to estimation and pure guesswork based on suspicions and surmises. Attention was also invited to the penalty order on the basis of which it was argued that the factum of filing appeal against the block assessment order is recorded for which purposes the penalty order was kept in abeyance. It was reiterated that since in six years the appeals in the quantum proceedings could not be decided the assessee was persuaded to withdraw the same on the understanding that no penal action would be attracted. Having done so it was submitted penalty was imposed in a mechanical manner for which purpose heavy reliance was placed on the penalty order to argue that no effort was made in the penalty order to establish how the penal action was attracted qua each and every addition. As such on this basis alone it was argued it deserves to be quashed. 4.8 Referring to the impugned order it was further submitted that even in th....
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.... demonstrated from a bare reading of the discussions made by the AO in the block assessment order. 4.10 Addressing the documents specifically inviting attention to the written submissions before the Bench it was submitted that the material does not warrant any addition let alone penalty. For ready reference the relevant portion of the written submissions is reproduced hereunder : "(1) NCJ-2 : These loose sheets were found from the residence of Shri Nemchand Jain. However, these pages did not belong to the assessee and they related mainly to M/s R.J. Enterprises and M/s Cargo Corporation. This fact has been duly acknowledged by the AO in his order at para 2, p. 3. This goes to show that the papers found from the residence of the assessee did not necessarily belong to the assessee firm. They were in the nature of mixed pages belonging to various individuals and firms. (2) NCJ-1 : These were certain loose sheets found from the residence of Shri Nemchand Jain. Again here also most of the loose sheets related to N.C. Cargo Corporation and not to the assessee. This has been accepted by the AO at para 3, p. 3 of his order. However, arbitrarily he chose to treat the pp. 48 to 52 ....
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....: Asst. yr. 1995-96 ₹ 48,000 Asst. yr. 1996-97 ₹ 48,000 ₹ 2,42,000 ₹ 3,38,000 (3) NCJ-11, p. 11 : The AO has alleged at the last para, p. 3 of his order that the said page indicates the carrying of goods of the assessee company wherein the total cardamom purchase of 3850 kgs was recorded as against the disclosed purchases of 2550 kgs., thus resulting in unrecorded purchases of 1300 kgs. In this connection it was submitted to the AO that the particular loose sheet was a gate pass issued by one transport company namely N.C. Cargo Corporation for the carriage of cardamom purchased by the assessee from a supplier M/s Purushottamdas Agarwal of Sikkim. The assessee had made purchases from the said party through two bills containing 1250 kgs. and 1300 kgs. of cardamom and each purchase was supported by a sales permit issued by the CTO, Siliguri. The permit number as mentioned in the gate pass evidences the purchases which are as per the purchase invoice. The total quantity of the purchase as shown in the invoice and the permit issued by the sales-tax authority is 2550 kgs. of purchase (1250 + 1300) which is duly recorded in the assessee's books. The g....
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....printouts were totally unreliable, the AO has held, in the very next line of his order that 'however, from the set of accounts it is clear that these are business transactions, sales purchases are noted.' The AO has not provided any explanations or produced any evidences to show how the said computer printouts were held by him to reflect any sort of business activity, whose nature is also not determinable. He has further gone on to calculate the undisclosed income of the assessee based on these computer printouts. With a total predetermined mind, oblivious to all the glaring facts of the assessee's case, the AO has held the various rough notings appearing in all the separate computer printouts to be the stray figures of the unrecorded sales of the assessee. He has then summed up the various figures appearing in separate loose sheets and arrived at some vague imaginary figures of sales for certain years. Further, the AO had failed to identify the nature of the business activity to which the alleged sales belonged to. This fact has been duly admitted to by the AO at para 2, p. 5 of his order wherein he states 'the nature of the business is not clear'. The presumpt....
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.... or nature of the undisclosed source of income. No evidence, no information gathered during the course of search was produced by the AO." 4.11 Referring to the above written submissions it was submitted by him that the AO has calculated the undisclosed income on the basis of loose computer printouts in the following manner : Asst. yr. 1998-99 ₹ 51,950 Asst. yr. 1997-98 ₹ 52,650 Asst. yr. 1996-97 ₹ 1,69,460 ₹ 1,50,000 Asst. yr. 1995-96 ₹ 2,656 ₹ 4,26,716 4.12 On the basis of these arguments advanced supported by way of written submissions it was his contention that the very basis of the additions based on loose sheets and computer printouts the credibility and reliability of which were challenged and on observations made in the assessment order as discussed by the AO himself who casts serious doubt upon the credibility of the documents it was submitted the additions themselves were not warranted. However, since in order to buy peace the assessee chose to withdraw the appeal, in the quantum proceedings at least the penalty cannot be imposed mechanically. It was emphasized that in these documents which were at best rough notings the....
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....ng in good faith due to the flux of time the assessee accepted the additions. In these circumstances it was argued it cannot be said that the assessee is liable for penal action. It was argued that something much more than that is required in the penalty order before the assessee can be saddled with the penalty. It was emphasized that the fact that the assessee had chosen in 2000 to contest the quantum proceedings is a fact available on record. However, exhausted by 2006 the assessee chose to withdraw the same in November, 2006 after a prolonged gap of 6 years. The bona fide belief of the assessee that the discretion to levy the penalty or not to levy penalty would be exercised judicially with due consideration to the particulars of the case of the assessee which admittedly it was argued do not support even the block assessment order it was argued does not warrant any action of levying penalty in a mechanical manner. 4.16 Further inviting attention to s. 271(1)(c) of the Act, it was his submission that the underlying principles governing the imposition of penalty under s. 271(1)(c) would apply to s. 158BFA(2). The settled principles therein, it was his submission which are to be i....
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....case a search and seizure operation has been conducted wherein additions have been made which have been accepted the penalty was confirmed. It was emphasized that the undisclosed income as computed by the AO was never accepted by the assessee at any stage. Since the assessee had filed the appeal against the same simply because the additions were not contested in order to buy peace penalty has been mechanically imposed as though it is mandatory ignoring the settled principles of law that levy of penalty is discretionary and the discretion has not been exercised judicially. The documents being dumb documents, it was his submission that in fact did not warrant any addition the assessee has been put in this position due to an act of good faith in order to avoid prolonged litigation. 4.19 Inviting attention to p. 11 of the written submissions it was his submission that in the facts of that case namely CIT vs. Harkaran Das Ved Pal (2009) 222 CTR (Del) 438: (2009) 16 DTR (Del)348 before the Hon'ble Delhi High Court, the assessee had filed return of income for block period declaring undisclosed income at nil. However, in order to buy peace the assessee by a letter surrendered an amoun....
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....al some of which have been specifically considered in the orders of the Tribunal relied upon by the assessee : (i) CIT vs. Gurbax Lal & Co. (2002) 176 CTR (P&H) 82 : (2002) 256 ITR 133 (P&H); (ii) CIT vs. Saran Khandsari Sugar Works (2000) 246 ITR 216 (All); (iii) CIT vs. Dharamchand L. Shah (1993) 113 CTR (Bom) 214 : (1993) 204 ITR 462 (Bom); (iv) CIT vs. Abril Pharmaceuticals (P) Ltd. (2001) 70 TTJ (Ind) 60 : (1999) 70 ITD 206 (Ind); (v) Asstt. CIT vs. Sharp Springs & Staples Co. (P) Ltd. (1999) 65 TTJ (Rajkot) 74: (1999) 105 Taxman 241 (Rajkot)(Mag). 4.24 Accordingly on the basis of these facts, arguments and position of law it was submitted that the penalty deserves to be quashed. 5. The learned Departmental Representative, on the other hand, placed heavy reliance on the order of the authorities below. The arguments advanced on behalf of the assessee were strongly opposed by him. 5.1 It was the contention of the learned Departmental Representative that additions have been made very carefully and consciously by the AO. It was further contended that wherever and whenever in regard to any document not relatable to the assessee was noticed by the AO he himself took car....
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....cha. For ready reference the said portion is reproduced from the assessment order : "NCJ-1 : The loose sheets as found from the residence of Sri Nemchand Jain. A few papers are related to N.C. Cargo Corporation. Certain transactions are found incorporated in the pp. 48 to 52 and also pp. 56 to 58 which the assessee denied to be of their own. It was stated that those entries are related to Shri Jethmall Golcha, the father-in-law of Sri Rabindra Kr. Jain. They failed to offer any evidences for the case. The papers were found from the possession of Shri Nemchand Jain and hence this is treated as the undisclosed transaction of the firm. However due consideration was given to the fact that certain papers are duplicate in nature." 5.7 It was the submission of the learned Departmental Representative that since no evidence was offered in support of the said assertion the AO was justified in considering the same as relatable to the assessee as they were found in his possession. 5.8 Further addressing p. 3 of the assessment order it was submitted by the learned Departmental Representative that the AO in all fairness also records that certain papers are duplicate in nature and....
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....e assessee has admitted the concealment of certain income the law does not require the Department to prove again that the assessee has concealed in the penalty proceedings and reliance was placed upon the following judgments : (a) CIT vs. P.B. Shah & Co. (P) Ltd. (1978) 113 ITR 587 (Cal); (b) India Sea Foods vs. CIT (1978) 114 ITR 124 (Ker); (c) CIT vs. Krishna & Co. (1979) 13 CTR (Mad) 24 : (1979) 120 ITR 144 (Mad); (d) CIT vs. Rajaram Pannalal & Bros. (1980) 19 CTR (Cal) 35 : (1981) 127 ITR 679 (Cal); (e) Addl. CIT vs. Bhartiya Bhandar (1979) 13 CTR (MP) 159 : (1980) 122 ITR 622 (MP); (f) CIT vs. Standard Mercantile Co. (1986) 57 CTR (Pat) 85 : (1987) 166 ITR 39 (Pat); (g) H.V. Venugopal Chettiar vs. CIT (1985) 153 ITR 376 (Mad); (h) CIT vs. J.V. Appadurai Chettiar Co. (1997) 137 CTR (Mad) 510 : (1996) 221 ITR 849 (Mad); (i) Jain Brothers vs. CIT (2001) 168 CTR (Del) 297: (2001) 251 ITR 302(Del). 5.16 Addressing some of the judgments relied upon by the learned Authorised Representative it was his contention that in the order of the Mumbai Bench in the case of Dy. CIT vs. Koatex Infrastructure Ltd. (supra) the facts are distinguishable as therein 84 files were s....
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....e assessee should be addressed by him or not since the learned Authorised Representative has not argued the admission of the same. Accordingly whether they were to be treated as admitted or dismissed. 6. In response to the same it was clarified by the learned Authorised Representative that ground Nos. 1 and 2 raised originally in the appeal were not pressed and the assessee would only argue ground Nos. 3 and 4, in regard to which he had already advanced arguments. The additional ground it was submitted by him is not being argued as such no arguments were advanced for admission of the same. 7. In view of the above stand qua the additional grounds it was submitted by the learned Departmental Representative that by virtue of withdrawing quantum appeal the assessee has admittedly accepted the additions and as such the impugned order deserves to be upheld. 8. In reply the learned Authorised Representative contended that it has been argued by him that papers relied upon by the AO for making the additions were no evidences and were merely loose sheets and that too not in any chronological order. 8.1 It was his submission that the learned Departmental Representative on the basis of the....
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....elevance. What is relevant and crucial to be examined for the purpose of the present proceedings is the care and caution taken by the AO in making the additions in the block assessment proceedings since it is those additions which on facts have to be considered to decide the issue of levy of penalty. 9.1 Accordingly we consider it necessary to discuss the reasoning and the findings arrived at in the block assessment order for making the additions. A perusal of the block assessment order shows that the AO has made addition of ₹ 48,000 each in asst. yrs. 1995-96 and 1996-97 and another addition of ₹ 2,42,000 in asst. yr. 1996-97 in the block period giving the following reasons : "NCJ-2 as found from the residential premises are related to mainly M/s R.J. Enterprise, proprietor Robi Oswal i.e., Rabindra Kumar Jain and M/s N.C. Cargo Corporation. Separate proceedings under s. 158BD are being taken for the above two concerns. NCJ-1 : The loose sheets as found from the residence of Sri Nemchand Jain. A few papers are related to N.C. Cargo Corporation. Certain transactions are found incorporated in the pp. 48 to 52 and also pp. 56 to 58 which the assessee denied to....
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....ar 1996-97." 9.3 Similarly, qua the next addition no reason has been given to reject the explanation of assessee and the arguments on behalf of the assessee that the explanation has been rejected purely on suspicion is borne out from the reasoning given. Simply because the mistake is corrected after a lapse of time that itself should not lead to the conclusion that the certificate of an independent third party is self-serving as it is not a document created by the assessee in his own signature. At least some effort to cross-examine or cross-check the authenticity of the document should have been brought on record. Suspicion however strong cannot be the basis of disregarding a document except by way of procedures known to law. Any addition may be made on facts if the explanation is not satisfactory. However for imposing penalty thereon it is to be established that the explanation is false. There is a tremendous difference in satisfactoriness of the explanation and falsity of the explanation. Thus whether the facts warranted an addition is an argument which having been rejected in the quantum proceedings having done so the AO is bound to reappraise the same and come to a defini....
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....m's undisclosed income for the financial year 1997-98 i.e. asst. yr. 1998-99." 9.5 Thus from a perusal of the above it is seen that after holding that the nature of the transactions having different numbers and code names could not be ascertained and moreover they were not complete the AO in the next few sentences however contradicts himself in concluding that it is clear that they are business transactions again holding that the nature of transaction is not clear; he estimates profit at 10 per cent. The other additions have also been made more or less in an identical manner. 9.6 After having considered the nature of the discussion qua the additions and the documents in the block assessment order we consider it necessary to refer to the penalty order so as to see how the discretion vested in the AO has been exercised. 9.7 A perusal of the penalty order shows that penalty proceedings were initiated taking note of the fact that consequent to the search and seizure operation undisclosed income worked out by the AO by way of making additions was ₹ 10,22,940. 9.8 The AO in para 2 of the same records that against this undisclosed income the assessee preferred an appeal....
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.... on account of undisclosed sources of the assessee. Hence, where each and every addition was made on account of undisclosed sources, the assessee's contention that no reasons for initiating penalty under s. 158BFA(2) were not recorded stands refuted. Further, by having withdrawn its appeal against the order under s. 158BC/143(3), the assessee has in fact accepted the order under s. 158BC/143(3) and all the additions made therein. And as all the additions made were on account of undisclosed sources of the assessee, it also constitutes the fact that the sources are deemed to have been accepted as undisclosed by the assessee which were wilfully and intentionally evaded. Hence, in view of the above factual circumstances of the case, I hereby impose a penalty of 200 per cent of the amount of tax sought to have been evaded, i.e. 200 per cent of ₹ 6,13,763. Penalty imposed : 200 per cent of ₹ 6,13,763 = ₹ 12,27,526." 9.9 In the appellate proceedings the CIT(A) considered the facts as under : "This appeal arises out of the penalty order passed under s. 158BFA(2) of the IT Act, 1961 by the Dy. CIT, Circle-I, Siliguri, on 12th June, 2007. The appeal w....
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.... "The Authorised Representative has made a very brief submission during the appeal hearing stating that the penalty imposed @ 200 per cent was unreasonable when assessee did not deliberately suppressed any material fact or filed any inaccurate particulars. Only to buy mental peace, the assessee has paid the entire demand to avoid further litigation. Apart from this submission, in the statement of fact, the assessee also mentioned that detailed reasons for initiating the penalty proceeding have not been mentioned by the AO." 9.11 Considering the above submission the CIT(A) came to the following conclusion : "Regarding the first part of the submission that no satisfaction was recorded by the AO while initiating the penalty proceedings, has no merit. The fact of the case and the nature of concealment have been discussed elaborately by the AO in his order. The mode of evasion of tax and ultimate discovery of the same was possible as a result of the search when various incriminating documents have been seized. In course of assessment proceedings, on examination of those documents the facts of concealment have been established. The AO has discussed everything at lengt....
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....ome of ₹ 10,22,940." This fact clearly suggests that assessee has deliberately evaded tax furnishing inaccurate particulars of his income in the block assessment return. The assessee also failed to advance any explanation in course of penalty proceedings or the appellate proceedings in respect of non-disclosure of the undisclosed income in the block assessment return. Considering the facts and circumstances of the case, I hold that the learned AO has rightly imposed the penalty. Same is confirmed." 9.12 In the aforementioned facts and circumstances having exhaustively dealt with the material available on record it is glaringly observed that in the penalty proceedings the AO has proceeded on the footing that penal consequences per se were attracted solely on the ground that the appeal in the quantum proceedings stood withdrawn. 9.13 The said action of the AO cannot be upheld. It is a settled principle that the power of levying penalty or not is discretionary and not mandatory. The law requires that whenever the AO is to exercise his discretion then it is the AO alone who is to exercise that discretion and the appellate authority cannot exercise that discretion on....
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.... unable to uphold either the legality of the action taken or the legitimacy of the same. 9.15 The reasons alone are the link between the material on which certain conclusions are based and actual conclusions are drawn. They disclose how the mind is applied to the subject-matter for decision and reveal a rational nexus between the facts considered and the conclusion reached. Only in this way can opinion and decisions recorded be shown to be manifestly just, fair and reasonable which is why we are of the view the requirement of setting out reasons in the justice delivery system is embedded. Fair play and justice demand that justice must not only be done but must be seen to be done. A perusal of the penalty order and the impugned order does not disclose in any manner that the mind of the authority has been applied relevantly and rationally. The reasons for coming to the conclusion which have been set out by the AO and having done so it is only those reasons which can guide us as to what prevailed upon the AO to hold that penalty is to be levied. The decision-making process exhibited by the reasoning recorded in the order can be the sole guiding criteria for the appellate authority to....
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....e. The withdrawal after a prolonged time safely supports the arguments that the withdrawal was done for the sake of peace of mind and a conscious act of avoiding the litigation. The bona fide trust and faith in the fairness and judicious approach on the authorities that as and when called for the discretion would be exercised fairly and judiciously cannot be faulted with. The trust and faith reposed in the authority of law that the order will not be mechanically passed and would be passed after a fair and independent appraisal of the material on record considering the fact of withdrawal of the appeal in exhaustion or desperation or good faith cannot be said to be a case of accepting the additions. In these facts the CIT(A) was not justified in rejecting the assessee's appeal holding that the additions are accepted. No doubt it can never be overemphasized that the findings arrived at in the block assessment order have an impact on the penalty order. However, the same have to be reappraised by the AO in the penalty order on the touchstone of wilful and intentional evasion. However, on a careful reading of the penalty order we find no such exercise. It is seen that the AO takes no....
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....re advanced; however the action of the AO to levy penalty solely on account of withdrawal of the appeal in the quantum proceedings has also been upheld by the CIT(A) which is under challenge. In the facts as they stand we are of the considered view that the CIT(A) was not justified on facts in rejecting the arguments of the assessee outright. The background in which the additions stood accepted stands unaddressed by the Department. The law requires penalty proceedings to be decided separately and independently. The fact that the AO had proceeded mechanically in the penalty proceedings could not be lightly ignored. The fact that no reason apart from withdrawal of the quantum appeal in the penalty order showed that there was non-application of mind by the AO and the CIT(A) in the exercise of his powers cannot ignore the fact that in the penalty order there is no discussion whatsoever to suggest that any independent appraisal of addition or document for penalty proceedings has been done. This is a glaring shortcoming which goes to the root of the matter in the peculiar facts and circumstances of the present case. It is also seen that apart from the aspect about the factum that the app....