2008 (8) TMI 158 - HC - Income Tax

Cash credits penalty could not levied on the ground that the assessee could not produce the depositors after a lapse of 17 years from the date of the loan received from the parties by the assessee - Tribunal was wrong in confirming penalty relying upon the statements made by the depositors in some other proceedings assessee was not given any opportunity to confront the said depositors by way of cross examination no evidence of concealment penalty not justified

Summary

Issues Involved:
1. Levy of penalty under section 271(1)(c) of the Income Tax Act, 1961.
2. Rejection of the assessee's contention regarding the lapse of 17 years and inability to produce the depositor.
3. Applicability of penalty under section 271(1)(c) when income is assessed under section 68 of the Act.
4. Reliance on statements made by the depositor in other proceedings.
5. Applicability of the Explanation to Section 271(1)(c) for the assessment year 1967-68.

Issue-wise Detailed Analysis:

1. Levy of Penalty under Section 271(1)(c):
The court analyzed whether the penalty was justifiable under section 271(1)(c) for the assessment years 1966-67 and 1967-68. The assessee had filed returns showing "Nil" income, but the Income Tax Officer (ITO) determined additional income from undisclosed sources. The Tribunal upheld the penalty, but the High Court found that the assessee never admitted to concealing income. Referring to the case of Commissioner of Income Tax v. Bhimji Bhanjee and Co., the court concluded that the penalty should not have been levied since the income treated as undisclosed was not admitted as concealed by the assessee.

2. Lapse of 17 Years and Inability to Produce Depositor:
The court considered the argument that the long delay made it impossible for the assessee to produce the depositor. The ITO had initially accepted the genuineness of loans from four out of five parties. However, the penalty was based on the inability to produce one party, M/s Ramgopal Laxminarayan, who had allegedly confessed to not advancing the loan. The court found that the delay of 17 years was significant and that the assessee's inability to produce the depositor was reasonable. The court concluded that the penalty levied after such a long delay without valid reason was invalid.

3. Penalty under Section 271(1)(c) when Income Assessed under Section 68:
The court examined whether penalty under section 271(1)(c) could be levied when income is assessed under section 68. The Tribunal had held that the explanation to section 271(1)(c) raised a rebuttable presumption in favor of the revenue, which the assessee failed to rebut. The court, however, found that the assessee had not admitted to any concealment of income and that the income was assessed under section 68 as undisclosed sources, not as concealed income. The court held that the penalty under section 271(1)(c) was not applicable in this context.

4. Reliance on Statements Made by Depositor in Other Proceedings:
The Tribunal had relied on statements made by the depositor in other proceedings to confirm the penalty. The court found that these statements were made behind the assessee's back and without giving the assessee an opportunity to cross-examine the depositor. The court held that relying on such statements was unjust and that the penalty based on these statements was not valid.

5. Applicability of Explanation to Section 271(1)(c) for Assessment Year 1967-68:
The court analyzed the applicability of the Explanation to Section 271(1)(c) for the assessment year 1967-68. The assessee argued that the explanation did not apply as the final addition was less than 20% of the returned loss. The court referred to the case of Commissioner of Income Tax v. Prithipal Singh and Co., which held that the word "income" in section 271(1)(c) refers to positive income only and not to a loss. As the assessee was assessed at a loss, the court concluded that the penalty under section 271(1)(c) was not applicable.

Conclusion:
The court answered all questions in favor of the assessee and against the revenue. The penalty under section 271(1)(c) was found to be unjustifiable due to the significant delay, lack of admission of concealed income, and reliance on statements made in other proceedings without cross-examination. The court also held that the explanation to section 271(1)(c) did not apply to assessment years where the assessee was assessed at a loss.