S. 271(1)(c) - Penalty levied on the basis of bald statement rendered behind the back of the assessee and without providing any effective opportunity for cross examination are not legally sustainable

DCIT vs M/s Roger Enterprises (P) Ltd

Penalty cannot be imposed on debatable issue, merely because disallowance has been made and confirmed by ITAT no penalty is leviable.

On the basis of information received by AO the commission paid by assessee in the said years was bogus and the amounts paid to the said companies by cheques towards commission had been actually received back by the assessee company in cash. The statement of Mr. M.K. Meattle, MD of the above three companies was recorded u/s. 131 and in his statement Mr. M.K. Meattle informed the AO that commission paid to M/s Roger Enterprises Pvt. Ltd. by the three companies were havala entries. Mr. M.K. Meattle informed that the modus operandi was that Mr. Jhunjhunwala used to fill up the paying slip for depositing the cheques issued by M/s Roger Enterprises Pvt. Ltd. in the name of these three companies and M/s Roger Enterprise had accounts in the same branch of the bank. Mr. Jhunjhunwala used to take blank cheques signed by Sh. M.K. Meattle fill up the amounts in his own handwriting and withdraw the cash as the cheques were bearer cheques and the cash withdrawn was returned to M/s Roger Enterprises Pvt. Ltd and Shri Meattle never got 1% commission promised to him. Sh. M.K. Meattle also stated that Shri A.K. Jhunjhunwala used to take his signatures on some papers which were in the nature of correspondence made in the name of three companies. The AO further observed that Sh. M.K. Meattle was asked to appear again on 13.3.1990 at 10 AM for cross examination and a copy of statement of Sh. Meattle was forwarded to the company and to appear on 13.3.90 for cross examining. However, the assessee company filed letter requesting for six weeks time for cross examining Shri Meattle. Hence, the assessee company did not avail the opportunity to cross examine him which established contentions of Sh. Meattle as given in his statement on oath. Assessing Officer further observed that copies of correspondence purported to have been made with these three companies regarding payment of commission to these companies were filed but there was no reasonable basis for payment of these commissions.

The additions made towards payment of commission to above three companies was confirmed by Ld. CIT(A) and ITAT. ITAT bench observed that in the light of provisions of section 33 of the Evidence Act, statement of Shri M.K.Meatlle recorded earlier in the course of assessment proceedings stands as the assessee did not cross examine him despite been provided an opportunity to do so and hence the evidence of Mr. M.K.Meatlle was complete and can be read in and thus the problem lied at the hands of the assessee who had not availed of the opportunity given to it and having not availed of this opportunity was unnecessarily trying to blame the revenue and that the onus of the proof that commission paid was genuine was on the assessee. Merely because payment was made by cheque may persuade the authorities to hold the payment be genuine but in this case the situation is totally reverse as parties to whom the payment made by cheque alleged to have been made has his own story to tell. The evidences placed by the assessee did not demonstrate the nature of services rendered by the three companies and accordingly the assessee has failed to demonstrate the services rendered and thus failed to discharge the onus and accordingly the ITAT dismissed the appeal of the assessee.

Further the AO concluded that he is of considered view that the assessee has deliberately made a wrong claim of expenditure by way of bogus commission with an intention of concealing the actual income and levied penalty @120% of the tax sought to be d and levied the penalties.

Whether the AO was erred in initiating the penalty proceedings for the disallowance of expenditure which was confirmed by the ITAT on the basis of the statements of two persons for which no opportunity was given to the assessee to cross examine the parties.

On appeal, CIT(A) observed that nowhere in the assessment order the AO has recorded his satisfaction for initiation of penalty proceedings u/s. 271(1)(c). and further observed that AO has primarily and substantially relied upon the finding of the ITAT and no new facts have been placed on record justifying that the assessee company has concealed the income or furnished inaccurate particulars of income. Ld. CIT(A) further observed that on going through the penalty order and replies furnished by the company, it is found that explanation offered by the company was not found to be malafide or false, but the same could not be substantiated on account of lack of opportunity to cross examine the persons whose ex-party statements have been used for making the disallowance. Ld. CIT(A) further observed that in the set aside proceedings Mr. Meattle could not be produced for cross examination and the AO himself in the order has admitted that the issue of cross examination of Mr. Meattle has come to dead end. Ld. Commissioner of Income Tax (A) further observed that the addition has been made on the exparte statement of Mr. Meattle and Mr. A.K. Jhunjhunwala recorded by the AO in the course of assessment proceedings and / or other proceedings. Ld. CIT(A) of Income Tax (A) further observed that as the explanations furnished by the assessee are bonafide and therefore merely because disallowance has been made and confirmed by ITAT no penalty is leviable. Ld. CIT(A) noted that penalty proceedings are separate proceedings and AO should have allowed cross examination of both the persons which have been denied due to time baring matter when the set aside order was passed, in the interest of justice such opportunity should have been allowed. The whole assessment / reassessment is based upon the statement of two persons mentioned above and no opportunity was allowed in the penalty proceedings to cross examine them. It was further observed that the statement of Mr. Meattle and Mr. A.K. Jhunjhunwala are altogether contradictory and The notice sent to Mr. Meattle and Mr. A.K. Jhunjhunwala to appear for cross examination has returned unserved. The examination of Mr. Jhunjhunwala on 27.2.1996 denied by the company was not adequate enough because he is not connected with the companies of Mr. Meattle or the assessee company and therefore the assessee company is apparently correct in saying that without cross examination of Mr. Meattle no purpose would have been served by simply cross examining Mr. A.K. Jhunjhunwala. Ld. CIT(A) held that the penalty levied without allowing opportunity to the company for cross examination of both the persons are liable to be cancelled.

Further CIT(A) relied upon the decision of the Delhi High Court in the case of Sona Electric Company and observed that penalty levied on the basis of bald statement rendered behind the back of the assessee and without providing any effective opportunity for cross examination are not legally sustainable. Ld. CIT(A) further noted that it is trite law that no addition / adverse inference against the assessee can drawn on the basis of statement of any third party unless an opportunity of cross examination has been granted to him. CIT(A) deleted the levy of penalty for the three years.

Revenue on appeal before ITAT,

Whether the ITAT was correct in law in proceedings in the appeal filed by the assessee in the absence of Mr. Meattle having served or made available for cross examination of the assessee and whether the ITAT was correct in law in placing reliance of section 33 of the Indian Evidence Act while denying the opportunity to the assessee to cross examine Mr. Meattle.

ITAT bench agree with the Ld. CIT(A) observation that penalty proceedings is separate proceedings and AO should have allowed cross examination of both the persons which has been denied due to time baring matter when the set aside order was passed on 25.3.1996. Thus, the whole assessment / reassessment is based upon the statement of two persons mentioned above and no opportunity was allowed in the penalty proceedings to cross examine them. Thus, we agree with the observation of the Ld. CIT(A) that penalty levied without allowing opportunity to the company for cross examination of both the persons are liable to be cancelled.

ITAT observed that CIT(A) has given a finding that the paper book filed by the assessee contain the detailed correspondence entered into by the company regarding the payment of commission. We further find that payment of commission is supported the bank statement of the company and the payments have been made by the account payee cheques/drafts and duly admitted by the recipients and stamp received have also been filed alongwith necessary documents evidencing of payment of commission.

Revenue contended that penalty is leviable on the basis of two statements given by Sh. Meattle and Mr. Jhunjhunwala. It is apparent that in the penalty proceedings assessee has duly sought opportunity to cross examine those two persons, the same was not provided by the Assessing Officer. Under the circumstances, in our considered opinion, conduct of the assessee is not contumacious enough to warrant the levy of penalty u/s. 271(1)(c).

ITAT observed that against the above confirmation by the ITAT in this case in quantum proceedings the Hon’ble Jurisdictional High Court has admitted the appeal. Thus, we find that on the touch stone of the above aforesaid decision in this case also the penalty is not leviable, as the issue is debtable. In this regard, we also find support from the Hon’ble Apex Court decision in the case of CIT vs. Reliance Petro Products Ltd held that the law laid down in the Dilip Sheroff case 291 ITR 519 (SC) as to the meaning of word ‘concealment’ and ‘inaccurate’ continues to be a good law because what was overruled in the Dharmender Textile case was only that part in Dilip Sheroff case where it was held that mensrea was a essential requirement of penalty u/s 271(1)(c). The Hon’ble Apex Court also observed that if the contention of the revenue is accepted then in case of every return where the claim is not accepted by the Assessing Officer for any reason, the assessee will invite the penalty u/s 271(1)(c). This is clearly not the intendment of legislature.