Penalty cannot be imposed under section 271 on debatable issue

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH “ H” New Delhi

BEFORE SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER

AND

SHRI C.M. GARG, JUDICIAL MEMBER

ITA Nos. 567, 568 & 569/Del/2006

A.Y.rs. 1981-82, 1982-83 & 1983-84

Dy. Commissioner of Income Tax,

Cir. 15(1), Room No. 412, CR Building,

I.P. Estate, New Delhi

(Appellants)

Vs.

M/s Roger Enterprises (P) Ltd.,

Flat No. L, 1st floor, C-3, Kailash

Colony, New Delhi

(PAN: AAA CR 0234J)

 (Respondents)

Assessee by: Sh. Ajay Vohra, Rohit Jain,

Advocates and Ashwani Seta, CA,

Deepashree Rao, CAs

Department by: D r. B.R.R. Kumar, Sr. D.R.

ORDER

PER SHAMIM YAHYA: AM

These three appeals are preferred by the Revenue against a common order of Ld. Commissioner of Income Tax (A)-XVIII, New Delhi dated 22.11.2005 whereby he cancelled the penalties of ` 18,32,996/-,` 35,00,189/- and ` 9,16,213/- imposed by the Assessing Officer u/s. 271(1)(C) for A.Y.rs. 1981-82, 1982-83 & 1983-84 respectively.

2. The relevant facts of the case giving rise to these appeals are as follows. The assessee is a private limited company which filed its return of income for A.Y. 1981-82, 82-83 and 83-84 on 30.6.1981, 30.6.1982 and 10.8.1983 respectively. On the basis of the said returns, assessments were originally completed by the Assessing Officer u/s. 143(3). The assessments so completed, however, were subsequently reopened for all these three years on the basis of information received by him that the commission claimed to have been paid by the assessee company to three companies, viz., M/s Excavators India Pvt. Ltd., M/s Triveni International Products Pvt. Ltd. and M/s Bahari & Company Pvt. Ltd. in the said years was bogus an the amounts paid to the said companies by cheques towards commission had been actually received back by the assessee company in cash.

3. The statement of Mr. M.K. Meattle, Managing Director of the above three companies was recorded u/s. 131 on 8.3.1990 and in his statement Mr. M.K. Meattle informed the Assessing Officer 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.

3.1 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 Assessing Officer 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.

3.2 The additions made towards payment of commission to above three companies was confirmed by Ld. Commissioner of Income Tax (A). Assessee filed an appeal before the ITAT on the issue of disallowance of payment of commission to above three parties and the ITAT vide order dated 24.12.93 the assessment were set aside with the directions to afford reasonable opportunity to the assessee to cross examine the persons on whose statements the additions were made. In the set aside proceedings the additions were again confirmed by the Assessing Officer. The additions of this commission was confirmed by the Ld. Commissioner of Income Tax (A). The ITAT vide common order for assessment years 1981-82, 82-83 & 83-84 dismissed the appeal of the assessee, after elaborately discussing the sequence of the events and facts in the body of the order. Subsequent to the above ITAT order penalty proceedings were initiated.

The AO. observed that the issue of cross examining the two witnesses of the case and that no opportunity was provided for cross examining has been rejected by ITAT and the assessee had also categorically refused to cross examine Shri AK. Jhunjhunwala on 27.02.1996 stating that he was stranger to the transaction. The Hon'ble ITAT discussed the entire contents of the statement of Mr. M.K. Meatlle and Shri AK. Jhunjhunwala and held that both the witnesses were witnesses of transaction and were witnesses of fact and rejected the plea of the assessee that Shri Jhunjhunwala was stranger to the transaction. The Hon'ble ITAT held 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.

The A.O. further in the penalty proceedings concluded that there is no doubt that the assessee company deliberately not cross examined the witness despite been provided opportunity to do so on one pretext or the other and the Hon'ble ITAT conclusively held that by no stretch of imagination can it be said that the authorities below have not given proper opportunity to the assessee to prove his case and therefore the Assessing Officer after examine all the facts and records took a similar view and do not agree with the assessee that it was not provided an opportunity to cross examine the witnesses.

The Assessing Officer further observed that the assessee had filed Paper Books containing papers claimed to be the correspondence with three companies as evidence of services rendered by these companies and genuineness of the payments. However the role of the three companies in the work does not get substantiated and in the correspondence with the principals of the clients there is no mention about any role of the three companies who have claimed as sub agent for liaison work and the correspondence has been put in between the clients/principals for justifying the role of payment of 75-80% of the commission received by it. The companies have highly qualified and experienced personnel but the correspondence do not show any evidence and the assessee company ever tried to find out about the genuineness of the claim which proves that the correspondence between M/s. Roger Enterprises Pvt. Ltd. and all the three companies were not genuine.

Thus the Assessing Officer concluded that this corroborates the claim of Shri Meattle that he had

signed the papers purportedly claimed as correspondence without actually undertaking any work for the assessee and therefore papers filed by the assessee cannot be relied upon. The AO has stated that the assessee company has given parawise reply claiming the commission was genuine not withstanding the statement given by Shri Meattle and Shri Jhunjhunwala which did not substantiate the same and has not agreed with the contentions of the assessee.

The Assessing Officer confirmed that the assessee vide his letter dated 29.12.2003 has asked for allowing opportunity to cross examine both Shri Meattle and Shri Jhunjhunwala and the same request was reiterated vide letter dt. 21.01.2004 but such plea at this stage of proceedings appear to be deliberate attempts of the assessee to delay the proceedings.

Thus the AO finally 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 as under:-

4. Before the Ld. Commissioner of Income Tax (A) assessee made elaborate submissions. Considering the above Ld. Commissioner of Income Tax (A) observed that nowhere in the assessment order the Assessing Officer has recorded his satisfaction for initiation of penalty proceedings u/s. 271(1)(c). Ld. Commissioner of Income Tax (A) further observed that Assessing Officer 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. Commissioner of Income Tax (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. Commissioner of Income Tax (A) further observed that in the set aside proceedings Mr. Meattle could not be produced for cross examination and the Assessing Officer 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 Assessing Officer in the course of assessment proceedings and / or other proceedings. Ld. Commissioner 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. Commissioner of Income Tax (A) further noted that during the course of penalty proceedings assessee company requested the Assessing Officer to cross examine Sh. Meattle and Mr. Jhunjhunwala whose statement was relied upon by the Assessing Officer in disallowing the commission paid by the company. Ld. Commissioner of Income Tax (A) noted that penalty proceedings are separate proceedings and Assessing Officer 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 on 25.3.1996. Ld. Commissioner of Income Tax (A) opined that 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 answers to the questions put in separately have been answered in a casual way without confirming the entire facts and therefore such statement without cross examination has no meaning in the eyes of law. Ld. Commissioner of Income Tax (A) further observed that in the set aside proceedings, the Assessing Officer could not produce Mr. Meattle for cross examination by the assessee. The notice sent to Mr. Meattle and Mr. A.K. Jhunjhunwala to appear for cross examination has returned unserved.