TMI Blog2013 (10) TMI 1540X X X X Extracts X X X X X X X X Extracts X X X X ..... n made u/s 2(24)(iv) of Income-tax Act, 1961, in the assessment year 2003-04. Assessing Officer has also levied penalty u/s 271(1)(c) in the assessment years 2005-06 2006-07 with respect to addition so made, ld. CIT(A) had deleted the same against which Revenue is in appeal before us. 3. The Rival contentions have been heard and records perused. Facts in brief are that the assessee is an individual deriving income from salary as Director of M/s.Mechman Feb Industries, share of profit from firm and interest income. There was search u/s 132(1) on 16.9.2005. During the course of search no incriminating material was found relating to payments made by Mechman Motors Private Limited to assessee. However, while framing assessment u/s 153A, the Assessing Officer made addition on account of loan amount received by the assessee from Mechman Motors Private Limited u/s 2(22)(e) and also taxed notional interest on such loan u/s 2(24)(iv) of the Income-tax Act, 1961. The ld. Authorized Representative placed reliance on the decision of Hon'ble Rajasthan High Court in the case of Jai Steels (India), 259 CTR 281, in support of proposition that no addition u/s 153A is to be made when no i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd which would also necessary support the interpretation that for the compacted assessment the same can be tinkered only based on the incriminating material found during the course of search or requisition of documents. 5. The ld. Authorized Representative also placed reliance on the following judicial pronouncements in support of the proposition that in the absence of incriminating material, no addition is warranted while framing assessment u/s 153A/153C :- (i) Alcargo Global Logistics Ltd. Vs. DCIT (2012) 137 ITD 287 (Mum) Special Bench, (ii) MGF Automobiles Ltd VS. ACIT Cent Circle-7, New Delhi ITA Nos.4212 4213/Del/2011 order dated 28.06.2013. (iii) Arun Sehlot ,Bhopal Vs. ACIT, 3(1), Bhopal IT(SS) A.Nos. 186 to 192/Ind/2012 order dated 30th April, 2013. (iv) Gurinder Singh Bawa DCIT , ITA Nos. 2075 2669 (MUM.) of 2010 order dated 16.11.2012. (v) ACIT(CC)-45, Mumbai Vs. M/s Pratibha Industries Ltd, Mumbai ITA Nos. 2197 to 2199/Mum/2008 order dated 19.12.2012. (vi) Shree Yamuna Proteins, Dahod Vs. ACIT, CC-1, Baroda IT(SS) A Nos.227 to 232/Ahd/2010 order dated 18.10.2012. (vii) ACIT Central Circle XXVII, Kolkata VS. Hindustan Storage Distribution C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iv) Weather any notice u/s 142(1) of 143(2) received prior to search. No As per ld. Authorized Representative no incrementing document/evidence/material/loose papers etc. were found during the course of search nor any evidence relating to the advance taken from Mechmen Motors Pvt. Ltd. was found during the course of search. It is settled law that where nothing incriminating is found in the course of search relating to any assessment years, the assessments for such years cannot be disturbed. Items of regular assessment cannot be added back in the proceedings u/s. 153C when no incriminating documents were found in respect of the addition disallowance amounts in the search proceeding. 9. As per ld. Authorized Representative no assessment proceeding in relation to the assessment year 2004-05 was pending on the date of search i.e. 16/09/2005 which will be more clear from the followings:- Sr. No. Particulars Remark (i) Date of search 16/09/2005 (ii) Date of filing of return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd and building for the business purposes of company namely Mechmen Motors Pvt. Ltd. for which no rent is charged by the assessee and company paid him advance. The Ld. CIT(A) confirmed the addition by holding that why the assessee has not charged rent? in this regard it is submitted that it is for the assessee to decide how to manage its business and not for the department vide Sasoon J. David Co. P. Ltd. vs. CIT (1979) 118 ITR 261, 275-6 (SC.), Addl CIT vs. Kuber Singh Bhagwandas (1979) 118 ITR 379,386-7 (MP-FB). In this case the Hon'ble Courts held as under:- Ordinary, it is for the assessee to decide whether any expenditure should be incurred in the course of its or his business, and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction therefore under section 37(1) even though there was no compelling necessity to incur such expenditure . 15. As per ld. Authorized Representative , during the year, the company has started keeping its vehicles on the said land and building construction thereon for which no rent is paid by the company to the assessee. Thus, the advance was given for the business purpose of the company and no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of loan availed from Vijaya Bank if decision is taken to give advance to the assessee such decision is not to give gratuitous advance to its shareholder but to protect the business interest of the company. 16. As per ld. Authorized Representative since advance was given by the company for the purpose of its business expediency, the same is not covered by the definition of deemed dividend u/s 2(22)(e). The ld. Authorized Representative also invited our attention to the accumulated profit of the company, which after considering the advance given to other Directors comes to negative figure in respect of which no addition can be made u/s 2(22)(e). As per ld. Authorized Representative, deemed dividend is to be worked out on accumulated profit at the beginning of the year for which reliance was placed on the decision in the case of Rajesh P. Ved, 126 TTJ 711 and B. M. Stock Holding Private Limited, 75 TTJ 898. As per ld. Authorized Representative, adjustment of depreciation in computing accumulated profit for the purpose of Section 2(22)(e) is to be made in view of decision in the case of Yasin Hotels Private Limited, 121 TTJ 713, Jamunadas Khimji Kothari, 92 ITR 105 (Bom) and Navn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the same and then transfer entire property in the name of the company after agreed consideration is fully paid to Mr. Pragati Agrawal. Since the company could not purchase land in its name, Mr.Pragati Agrawal entered into various agreement for purchasing land at Misrod and Ratanpur. It was a clear understanding between the company and Mr.Pragati Agrawal the land which will be purchased out of the advances given will be purely utilized for the purpose of the company, further the company will be using the land and building purchased out of the advances without any lease rent or any rent, in this process all the land which were purchased has been mortgaged with the bank from where the company has raised various loan like working capital and term loan. The appellant has already created mortgage on the above land for the purpose of raising loan for the company. Initially it was offered to State Bank of India, and then the same was mortgaged with ICICI Bank Limited. Finally, the same is mortgaged with UCO Bank, which is still mortgaged. Further, it is respectfully submitted that the entire advance which has been obtained by the appellant has been fully utilized for the use of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch most of the transactions were for the purpose of business, which also included the purpose of purchase of land, which was to be used by M/s. Mechman Motors for the purpose of its business and for which no rent was payable to the assessee by the company. An MOU was also entered between the assessee and the company in support of the said transaction. It is clear from the terms of MOU that advance was given to the assessee for the purpose of business and not for his personal use. Addition u/s 2(24)(iv) is warranted, when assessee is in receipt of some benefit or perquisite. However, in the instant case before us, the assessee was not in receipt of any benefit or perquisite in the ay A .Y. 200506 and 2006-07 in so far as amount in question was paid to the assessee for the purpose of purchase of land, which was to be used by the company for its business for which no rent was payable by the company to the assessee. Thus, it was not a gratuitous loan, but was given to assessee for purchase of land to be used by company for the purposes of its business. Fact that assessee has not charged any rent from the company for use of land by the company is also not in dispute. Thus, amount of not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company for the purchase of land, which was utilized by company for its business purpose without paying any rent to assessee. Furthermore, assessee had mortgaged this land to Banks for purpose of advancing loan to the company. Under these circumstances, no addition is warranted u/s 2(22)(e). 23. Furthermore, while computing deemed dividend, the accumulated profit is to be taken as it stood at the beginning of the year. Adjustment for depreciation is to be allowed out of such accumulated profit, in view of the decision in the case of Yasin Hotels Private Limited, 121 TTJ 713, Jamunadas Khimji Kothari, 92 ITR 105 (Bom) and Navneetlal C. Zaveri, 80 ITR 582 (Bom). During the course of hearing, our attention was also invited to the chart prepared after adjustment of depreciation and the addition made in the hands of other Directors on account of deemed dividend, no profit was left out for the purpose of making addition in the hands of assessee u/s 2(22)(e). The I.T.A.T., Coordinate Bench in the case of Prashant Agarwal, another Director in the same company in its order dated 7th December, 2010, taken the view that a deemed dividend is to be worked out on the basis of accumulated prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... point out any mistake in the amount of loan or advance, thus, the essence of concealment or inaccurate particulars gets diluted to a large extent. It is not the case of the A. O. that the appellant has completely failed to offer any explanation giving justification for the loan and advances. The appellant has explained the purpose of loan/advance, however, failed to impress the A.O. Furthermore, both the said sections provide that, if certain conditions are fulfilled, then certain sum will be taxed as income. Thus, the element of subjectivity is certainly involved in the case of both the said sections and may involve debatable issues with divergent views on the same set of facts. There may be divergent views as regards applicability of said sections at all or quantification of the amount of deemed income. The said sections bring within their ambit deemed income which is different from real income. I am of the considered opinion that no penalty is leviable in case of such deemed income. So far as addition of ₹ 10,32,000/on account of investment in plot is concerned, I am convinced with the submission of the appellant that the addition has not been made on the basis of stateme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be no penalty since the AO failed to bring on record something more to indicate and establish that there has been concealment on the part of the appellant [CIT v. Dhillon Rice Mills (2002) 256 ITR 447 (P H) and CIT v. Metal Products of India (1984) 150 ITR 714 (P H). In my considered view, penalty should not be exigible merely because income was estimated due to the inability of the appellant to prove its income. The tax payers who file the return necessarily deserve better treatment than those who do not file the returns at all. My proposition that penalty could not be imposed since the impugned addition ultimately sustained was based merely on estimate, finds further support from the decision of the P H High Court in Harigopal Singh v. CIT (2002) 258 ITR 85 (P H). 8. Penalty proceedings are not mechanical but the same were quasi-criminal and hence, penalty could not be levied in case of estimation of income. The AO had nor brought any evidence on record to prove conscious concealment on the part of the appellant nor had he brought any evidence to justify that the appellant furnished inaccurate particulars of its income. In the given facts and circumstances of the case, res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bstantiating evidence, in the impugned penalty proceedings, the penalty imposed u/s 271(1) is unsustainable on facts and in law. 11. In Durga Kamal Rice Mills v. CIT (2003) 130 Taxman 553 (Cal.) 265-ITR-25 (Cal.), it was held that for the purpose of quantum proceedings, it might attract a particular provisions for addition to the income of the appellant. But when it comes to the question of imposition of penalty, then independent of the findings arrived at in the quantum proceedings, the authority has to find out conclusively that the appellant owned and concealed the amount in question. In Dy. CIT v. Royal Metal Printers P. Ltd. (2005) 93 TTJ (Mum.) 119, the penalty imposed u/s 271 (1)( c) was held not justified. Reliance was placed on the decision of the IT A T Bangalore Bench in Bangalore Steel Distributors v. ITO (1995) 124 Taxman 94 (Bang. Trib.), wherein it was held that though addition made in the assessment order constituted material for the purpose of penalty proceedings, for the imposition of penalty, the AO is required to bring cogent material on record on the basis of which it could be established that the appellant had concealed the particulars of income or had fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een accepted, it is open to the Revenue to treat a particular sum as income from undisclosed sources. But from the mere fact that the explanation of the taxpayer has not been accepted, it cannot necessarily by inferred that the amount ultimately sustained on estimations as in the case of the appellant, under consideration constituted concealed income which would attract penalty u/s 271 (1)( c). The burden of proving that the appellant was guilty of offence is upon the Department. If apart from pointing out the falsity of explanation, or from rejecting the explanation, no material is brought in evidence by the AO to prove concealment, it was to be held that the onus resting on the Department has not been discharged. 14. As the proceedings for imposition of penalty and assessment proceedings are two separate and independent proceedings, separate and distinct provisions have been enacted in the Statute for initiation of the same. Therefore, the findings recorded by the authorities in the quantum appeal cannot be said to be decisive and conclusive factor in the penalty proceedings [CIT v. J.K. Synthetics Ltd. (1966) 219 ITR 267,270 (Del.)]. 15. Even under Explanation I, initial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total income have been disclosed by him, the Explanation shall not apply [Shiv Lal Tak v. CIT (2001) 251 ITR 373, 379-80 (Raj.)]. 17. In CIT vs. RM. Lalwani (2003) 22 SITC 112 (Raj. HC) it was held that the word may having been used, by the law framers in the charging section which is penal in character a significant amount of discretion has been vested with the AO to inflict or not to inflict penalty. Such discretion has to be exercised judiciously. This is more so because penalty is not a source of revenue to the Govt. and it should not be imposed merely because it is lawful to do so unless the contumacious conduct on the part of the appellant is established beyond all shadows of doubt. In the instant case, under consideration, the impugned penalty was imposed simply because the addition was upheld in quantum appeal without proving contumacious conduct on the part of the appellant. The word concealment as appearing in section 271 (1)( c) inherently carries with it the element of mens rea, as held by the All. HC in Bharat Rice Mill v. CIT (2005) 278 ITR 599 (All.). In the case of the appellant, under consideration, the impugned penalty was imposed without establishing mens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs precedes the rule of evidence incorporated in Explanation, so that there can be no valid initiation of proceedings, unless there is prima facie concealment. It was pointed out that the SC in K.C. Builders v. Asstt. CIT (2004) 265 ITR 562 (SC) had held that deliberateness is implied in the concept of concealment. Further, it has always been the law that penal provisions have to be construed strictly and narrowly and not widely as pointed out in Virtual Soft Systems Ltd. vs. CIT (2007) 289 ITR 83 (SC). The sum and substance of these precedents is that the concept a stands restored as a pre-requisite for jurisdiction. Explanation to section 271(1)(c), it may be pointed out, it not adverse to this inference, but only strengthens it inasmuch as penalty will be exigible under this provisions, where there is no explanation at all or explanation furnished is false. Even where appellant was not able to substantiate his explanation, penalty will not be exigible under the Explanation, if appellant's explanation is bona fide and appellant places all the facts and material available with him before the AO. In the case of the appellant, under consideration, the bona fide explanation s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcumstances under which difference in the amount of consideration and agreement was arisen. The assessee stated that at the time of execution of agreement, the seller has not brought the facts in the knowledge of assessee that there was high tension line above the land and the area shown by the seller was found less on physical measurement. Thus, we found that the addition was made only by seeing the figure of consideration in the agreement and sale deed without verifying the truth of the explanation offered by the assessee. Even that during course of assessment proceedings, the assessee has requested to summon Brijesh Kumar Shukla to confirm the fact, but the Assessing Officer has not acceded to assessee s request. In view of the judicial pronouncements that no penalty is leviable under section 271(1)(c), where the explanation offered by the assessee is not found to be false by the Department, Assessing Officer was not justified in levying the penalty and the CIT(A) after discussing the issue in detail recorded finding to the effect that it was not a fit case for levy of penalty. Our view is supported by the decision of Hon'ble Supreme Court in the case of Dilip and Shroff, 29 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oans from bank/financial institution, the loans so advanced to shareholder can not be brought in mischief of Section 2(22)(e) in terms of judicial pronouncements discussed above. When the companies are in receipt of loan from Bank, on the condition of providing personal guarantee by the Director or collateral securities of personal property of Director and a Board s resolution is passed for making the Director agreeing to provide his personal guarantee etc. and in consideration of it the Director who is also shareholder of company is allowed to withdraw fund form the company, to that extent, the advance given by the Company cannot be treated as deemed dividend within the meaning of Section 2(22)(e), in terms of judicial pronouncements discussed above. 29. Respectfully following the decision of coordinate bench, we do not find any merit for the additions made in assessment year 2005-06 and 2006-07 under Section 2(24)(iv) and 2(22)(e) of the Income-tax Act, 1961. 30. In the result, the appeals of assessee for assessment year 2003-04 and 2004-05 are dismissed, whereas appeals for assessment year 2005-06 and 2006-07 are allowed in part. This order has been pronounced in the open ..... X X X X Extracts X X X X X X X X Extracts X X X X
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