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2016 (2) TMI 899 - DELHI HIGH COURT

2016 (2) TMI 899 - DELHI HIGH COURT - [2016] 382 ITR 639 - Violation of the principles of natural justice - fictitious payments of commission - Held that:- While the wisdom of applying Section 33 of the IEA to the evidence of Mr. Meattle may be doubtful, the Court is of the view that de hors the evidence of Mr. Meattle, the evidence of Mr. Jhunjhunwala was by itself sufficient to draw an adverse inference against the Assessee that the payments of commission were fictitious. The Court is not pers .....

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oss-examination of Mr. Meattle.

Two conclusions that could be drawn from the above narration are that there is no violation of principles of natural justice as far as the Assessee is concerned, and the uncontroverted statements of Mr. Jhunjhunwala were sufficient to substantiate the case of the Revenue against the Assessee.

Penalty u/s 271(1)(c) - Held that:- Here the question is not mere making of a wrong claim but in making a claim that is demonstrably false. With the Ass .....

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J For the Petitioner : Ms. Lakshmi Gurung along with Mr. P. Roy Choudhary, Standing counsels and Mr. Ishant Goswami and Mr. Rajesh Kumar, Advocates. For the Respondent : Mr. Ajay Vohra, Senior Advocate with Ms. Kavita Jha and Mr. Vaibhav Kulkarni, Advocates. ORDER DR. S. MURALIDHAR, J.: 1. ITA No. 439 of 2003 filed by the Assessee, Roger Enterprises Private Limited, under Section 260A of the Income Tax Act, 1961 ( Act ) is directed against the common impugned order dated 8th May 2003 passed by t .....

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ee company claimed to represent customers for supply of equipments required by various governments and semi-government departments/undertakings. According to the Assessee, it engages sub-agents to render the services of bringing proposals for prospective tenders/contracts; ensuring follow up with the customers and concerned departments; forwarding necessary marketing and business information; procuring necessary business information in connection with the items supplied; assisting the principals .....

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ember 1983 and 24th May 1983 respectively under Section 143 (3) of the Act, the AO allowed the deductions as claimed by the Assessee towards payment of commission as under: Asstt. Year Amount of commission Parties to whom paid Name of contract 81-82 21,86,042 Excavators India (P) Ltd. ( EIP ) Telecom Equipment from 1975 to 1980 82-83 33,30,162 10,47,810 Triveni International Production (P) Ltd. ( TIP ) Bahri & C. (P) Ltd. ( BCP ) Bulb Type Generator from 1978 to 1982 Casing Pipe contract for .....

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ned their permanent account numbers ( PAN ), bank statement of TIP, one of the recipient company, and day-to-day correspondence were filed with the AO. 6. In May 1987, a search was conducted on the entities to whom commission was purportedly paid by the Assessee. According to the Revenue, during the course of search, Mr. M.K. Meattle, Managing Director (MD) of the aforementioned three payee companies admitted in a statement given on 15th September 1987 that the transactions with the Assessee wer .....

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ho claimed to be a relative of Mr. Jajodia, the then MD of the Assessee. Mr. Meattle stated that money would be withdrawn from the bank accounts immediately after the commission cheques were deposited. Mr. Meattle stated that he did not receive any commission at the time of such withdrawal of cash because the deal was that 1% of commission would be paid after completion of transactions of ₹ 1 crore. According to Mr. Meattle, the receipt of commission was neither accounted for in the books .....

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me period for completing the reassessments was about to expire, by three separate orders dated 29th March 1990, the AO completed the reassessment for the three AYs in question and added back the amounts representing the commission purportedly paid by the Assessee. 10. Meanwhile, subsequent to the reassessment proceedings and during the pendency of the penalty and appellate proceedings, on 13th November 1990 the statement of Mr. Jhunjhunwala was recorded under Section 132 (4) of the Act by the As .....

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on the companies of which Mr. Meattle was the MD. As per the instructions of Mr. Jajodia, Mr. Jhunjhunwala handed over the cash immediately either to Mr. Jajodia or Mr. Lok Nath Saraf. 11. Aggrieved by the reassessment orders dated 29th March 1990, the Assessee filed appeals before the CIT (A). The appeals for AYs 1981-82, 1982-83 and 1983-84 were dismissed by the CIT (A) by orders dated 16th May 1991, 15th April 1991 and 27th May 1991 respectively. The CIT (A) held that adequate opportunity to .....

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accepted. The matter was therefore, restored to the file of the AO. 13. On remand, the AO asked the Assessee to be ready for cross-examination of Mr. Meattle and Mr. Jhunjhunwala on 27th February 1996. One day prior thereto, i.e., on 26th February 1996 the Assessee filed a letter with the AO requesting for supply of certain documents of the three payee companies (i.e EIP, TIP and BCP). On the day fixed for cross-examination at 11 am, Mr. Jhunjhunwala was present in the office of the AO. At the t .....

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g Mr. Jhunjhunwala. Accordingly, the Assessee declined to cross-examine Mr. Jhunjhunwala. Mr. Meattle did not turn up till 4 pm. Before the AO, counsel for the Assessee stated that they cannot wait for long for Mr. Meattle to appear and left the office of the AO at 4.05 pm. 14. The ITAT has in the impugned order noted that from the orders passed by the AO it transpired that the summons sent to Mr. Meattle at his last known address was received back unserved. The AO then requested the Deputy Dire .....

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orts by the AO, Mr. Meattle could not be traced and produced for his cross-examination. Accordingly, the AO then came to the conclusion that the Assessee was not interested in completing the proceedings. Accordingly, the AO decided to proceed with the reassessment. 15. For a second time, the CIT (A) dismissed the Assessee appeals and that is how the Assessee again approached the ITAT with ITA Nos. 1515 to 1517/D/97. By the impugned order dated 8th May 2003, the ITAT dismissed the appeals. The su .....

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er by Mr. Jajodia the bearer cheques drawn on companies of Mr. Meattle and that he used to withdraw the said amount and handed it over to one Mr. Loknath who was introduced to him by Mr. Jajodia. While it could not be said that Mr. Jhunjhunwala drew support from Mr. Meattle, both had their independent roles to achieve one goal, i.e., to help the Assessee company to justify its claim before the Revenue authorities with respect to the payment of commissions which, according to Mr. Jhunjhunwala, we .....

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ssessee. (v) The Assessee had failed to discharge the onus of showing that the payments of commission were genuine. 16. While admitting ITA No. 439 of 2003 on 27th March 2008, the Court framed the following questions of law for consideration: 1. Whether the Income Tax Appellate Tribunal was correct in law in proceeding with the appeal filed by the Assessee in the absence of Mr. Meattle having been served or made available for cross- examination by the Assessee? 2. Whether the Income Tax Appellat .....

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be no point in cross-examining Mr. Jhunjhunwala. No adverse inference could be drawn against the Assessee on that score. 19. Mr. Vohra submitted that the ITAT erred in applying Section 33 of the IEA in the facts of the present case. According to him, one of the conditions for applicability of Section 33 of the IEA, viz., an opportunity to cross-examine Mr. Meattle, was not fulfilled. The ITAT itself had by the earlier order dated 24th December 1993 held that only one opportunity had been granted .....

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ch 1991 in a response to specific question (Question No. 3) denied that Mr. Meattle used to give him blank cheques. According to him, the cheques used to be handed over by Mr. Loknath Saraf of the Assessee. In reply to Question No. 23 of statement recorded on 30th November 1990, Mr. Jhunjhunwala claimed not to know the company, M/s. Bahri & Co. Pvt. Ltd. However, in reply to Question No. 31 on the very date, i.e., 30th November 1990 and Question No. 2 dated 15th March 1991 Mr. Jhunjhunwala a .....

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nied that they were in his handwriting. Although he claimed to know Mr. Jajodia who was related to the MD of the Assessee, and had helped the Assessee in its bogus transactions without any vested interest, Mr. Jhunjhunwala was not assigned any remunerative work/assignment. This showed that Mr. Meattle and Mr. Jhunjhunwala were in collusion with each other in order to implicate the Assessee and to evade payment of taxes on the income earned by the companies of Mr. Meattle. According to him, these .....

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Tax v. Praveen Kumar Gupta (2008) 303 ITR 95 (Del). Reliance was also placed on the decision of the Supreme Court in Kishanchand Chellaram v. CIT (1980) 125 ITR 713 (SC). 22. Ms. Gurung, learned counsel for the Revenue, on the other hand pointed out that sufficient opportunities had been granted to the Assessee for cross-examination of the witnesses whose statements were recorded in the assessment proceedings. The Assessee chose not to cross-examine Mr. Jhunjhunwala despite sufficient opportuni .....

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e two persons in accordance with law and then re-consider the claim of payment of commission. It was to the above extent the impugned order was set aside and the matter was restored to the file of the AO for all the three AYs. It was made clear that other grounds urged by the Assessee regarding validity of the assessment proceeding were not pressed during the course of the said appeals before the ITAT and these grounds were rejected. 24. When the matter was remanded to the AO, the case was poste .....

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h November 1995. On that date there was no response from the Assessee. On 29th January 1996 summons were issued to both Mr. Meattle and Mr. Jhunjhunwala requiring them to attend the hearing before the AO on 19th February 1996 for the purpose of their cross-examination by the Assessee. The Dy. Director of Income Tax (Investigation) (Headquarters), Bombay requested by a letter dated 29th January 1996 to trace the witnesses and to inform the AO if there had been any change in their addresses. Mr. J .....

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was addressed to the DDIT on 19th February 1996 furnishing the last known address of Mr. Meattle. 25. By a letter dated 16th February 1996, the Assessee was asked by the AO to cross-examine the witnesses and to attend the proceeding on 27th February 1996. Three days prior thereto, i.e., on 23rd February 1996 the Assessee sent a letter requiring several documents so that there could be a meaningful cross-examination of the witnesses. The order sheet of the AO showed that on 27th February 1996 Mr .....

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. When till 4 pm Mr. Meattle did not turn up, the AR of the Assessee stated that they could not wait longer and that they reserved their right to cross-examine Mr. Meattle and all of them left the office of the AO at 4.05 pm. The AO noted that the Assessee submitted another letter dated 8th March 1996 and 12th March 1996 again stating that the proposed disallowance of commission payment should be dropped in view of the non-furnishing of the financial statement, income tax return etc. of the thre .....

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in the above facts it could be said that there was violation of the principles of natural justice. The further question that arises is whether there was non-compliance of orders passed earlier by the ITAT on 24th December 1993. 28. The Court is satisfied that as far as making Mr. Meattle available for his cross-examination is concerned, every effort was made by the Department to locate him. It could not be said that the failure to produce Mr. Meattle for cross-examination was deliberate. That do .....

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unwala. There have to be consequences as a result of the failure by the Assessee to avail of the above opportunities. In A E G Carapiet v. A Y Derderian AIR 1961 Cal 359, it was held that "wherever the opponent has declined to avail himself of the opportunity to put his essential and material case in cross-examination, it must follow that he believed that the testimony given could not be disputed at all." Here, the AO proceeded to draw an adverse inference and considered the statement .....

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wala had made contradictory and inconsistent statements particularly since he was never confronted with those inconsistencies and contradictions by the Assessee. If, as is urged by the Assessee, Mr. Meattle s statements are to be entirely kept aside, then Mr. Jhunjhunwala s statements can be examined for their intrinsic worth. The Assessee took a calculated risk in declining to cross-examine Mr. Jhunjhunwala on the understanding that it had to be preceded by the cross-examination of Mr. Meattle. .....

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s claimed by the Assessee. 33. In sum, as far as ITA No. 439 of 2003 is concerned, Question (2) is answered in the negative i.e., in favour of the Assessee and against the Revenue. However, Question (1) is answered in the affirmative i.e. in favour of the Revenue and against the Assessee. The net result is that the conclusion reached the impugned order of the ITAT is affirmed and ITA No. 439 of 2003 is dismissed. ITA No. 156 of 2014 34. ITA No. 156 of 2014 by the Revenue is directed against the .....

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see under Section 271 (1 ) (c) of the Act? 36. A perusal of the order of the CIT (A) reveals that one of the reasons for the deletion of penalty was only that the whole assessment, reassessment is based upon the statement of the two persons mentioned above and no opportunity was allowed in the penalty proceedings. It was held that the penalty levied without allowing opportunity to the company for cross-examination of both the persons are liable to be cancelled. It was concluded that the explanat .....

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very basis on which the CIT (A) proceeded in the matter was, therefore, erroneous. 38. As far as the ITAT is concerned, one factor that appears to have weighed with it was that the Assessee's quantum appeal had been admitted by this Court. It was therefore concluded that the issue is debatable and the penalty was accordingly not leviable. The mere pendency of the quantum appeal could not have led the ITAT to conclude that the issue was debatable. 39. It was contended by Mr. Vohra that it was .....

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of the penalty proceedings only on the basis of the statement of Mr. Jhunjhunwala. He submitted that in the penalty proceedings a standard of proof higher than preponderance of probabilities was called for. Therefore, even if it were to be held that Mr. Jhunjhunwala s statement could form the basis of the disallowance of the commission paid by the Assessee, it might not be sufficient to initiate penalty proceedings. Mr. Vohra submitted that the Assessee had disclosed all facts. There was a dist .....

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l for the Revenue, that after the insertion of Explanation 1 to Section 271 (1), wilful concealment was not an essential ingredient for attracting penalty. She referred to the decision in Chairman, SEBI v. Shriram Mutual Fund 2006 (5) SCC 361 where it is reiterated that the penalty under Section 271 (1) (c) of the Act was in the nature of a civil liability. This was reaffirmed by a larger Bench of the Supreme Court in Union of India vs. Dharmender Textile Processors (supra). 41. The Court first .....

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tions for attracting the penalty under Section 271 (1) (c) of the Act stand fulfilled in the present case. Further observed in Union of India vs. Dharmender Textile Processors (supra), the findings in the assessment (quantum) proceedings would be relevant and admissible in the penalty proceedings. The adverse inference against the Assessee for failing to cross-examine Mr. Jhunjhunwala would equally apply to the penalty proceedings. There was no necessity to again offer the Assessee a further opp .....

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