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Dy. Commissioner of Income Tax,Circle-7(1), 622, Aayakar Bhavan, M K Road, Mumbai-400020.Vs. Shri Dhanji Gala,303, Palai Complex, Bhandarkar Road, Matunga (C Railway), Mumbai-400019.
August, 14th 2014
                     ,                   ""         
     IN THE INCOME TAX APPELLATE TRIBUNAL "D" BENCH, MUMBAI

      BEFORE S/SHRI B.R.BASKARAN (AM) AND SANJAY GARG, (JM)
       .. ,                                    ,      

                    ./I.T.A. No.2617/Mum/2010
                  (   / Assessment Year : 2006-07)

 Dy. Commissioner of Income Tax,   /         Shri Dhanji Gala,
 Circle-7(1),                      Vs.       303, Palai Complex,
 622, Aayakar Bhavan, M K Road,              Bhandarkar Road,
 Mumbai-400020.                              Matunga (C Railway),
                                             Mumbai-400019.
       ( /Appellant)                ..       (    / Respondent)

               ./I.T.A. No.2753 and 2754/Mum/2010
                  (   / Assessment Years : 2006-07)

 Shri Dhanji Gala,                 /         Dy. Commissioner of Income Tax,
 303, Palai Complex,               Vs.       CC -46, Aayakar Bhavan, M K Road,
 Bhandarkar Road,                            Mumbai-400020.
 Matunga (C Railway),
 Mumbai-400019.
       ( /Appellant)                ..       (    / Respondent)




         . /   . /PAN/GIR No. : AABPG2169H

            / Revenue by                 :   Shri Durga Dutt
              /Assessee            by :      Shri Nishit Gandhi


             / Date of Hearing
                                                 : 16.6.2014
            /Date of Pronouncement : 13.8.2014


                                 / O R D E R

Per B.R.BASKARAN, Accountant Member:


      The cross appeals relating to the assessment year 2006-07 and the appeal

filed by the assessee for assessment year 2007-08 are directed against the

orders passed by Ld CIT(A)-38, Mumbai. All these appeals relate to the penalty
                                                                I.T.A. No.2617/Mum/2010
                                        2             I.T.A. No.2753 and 2754/Mum/2010



levied by the AO u/s 271(1)(c) of the Income Tax Act, 1961 (the Act) in both

the years.   All these appeals were heard together and hence they are being

disposed of by this common order, for the sake of convenience.


2.     In assessment year 2006-07, the AO levied minimum amount of penalty

on the following additions:-

      (a) Interest disallowed          -              Rs.48,53,168/-
      (b) Loan receipt assessed u/s 68 of the Act     Rs.25,00,000/-


In assessment year 2007-08, the AO had disallowed the interest claimed on the

above said loan of Rs.25.00 lakhs. The AO had disallowed the said claim and

hence he levied penalty on the said interest disallowance.


2.1   The Ld CIT(A) deleted penalty levied on the interest disallowance of

Rs.48.53 lakhs made in AY 2006-07 and confirmed the penalty levied in respect

of loan amount of Rs.25.00 lakhs assessed u/s 68 in AY 2006-07.                In the

assessment year 2007-08, the Ld CIT(A) confirmed penalty levied on interest

disallowance made in respect of the above said loan amount of Rs.25.00 lakhs.

The revenue has filed appeal against the relief granted by Ld CIT(A) in AY 2006-

07 and the assessee has filed appeals for AY 2006-07 and 2007-08 challenging

the orders passed by Ld CIT(A) in confirming the penalty.


3.    We shall first take up the appeal filed by both the parties for AY 2006-07.

The facts relating to the case are stated in brief. The assessee is a builder,

developer and financier.       The return of income filed by the assessee for

assessment year 2006-07 was originally processed u/s 143(1)(a) of the Act.

Subsequently, the AO re-opened the assessment by issuing notice u/s 148 of the

Act on 21.4.2008 and completed the assessment by disallowing part of interest
                                                                  I.T.A. No.2617/Mum/2010
                                          3             I.T.A. No.2753 and 2754/Mum/2010



claim and also assessing the loan amount of Rs.25.00 lakhs u/s 68 of the Act.

The assessee had received the above said loan from a lady named Smt. Latika

Dhamne. Subsequently, the AO levied penalty on the above said additions. The

Ld CIT(A) deleted the penalty levied on the amount of interest disallowance and

confirmed the penalty levied on the amount assessed u/s 68 of the Act.


4.    The revenue is in appeal in respect of the penalty levied on the interest

disallowance.     The facts relating to the said claim are stated in brief.         The

assessee had paid interest of Rs.59,47,369/- and received interest income of

Rs.7,12,763/- and accordingly claimed net interest expenditure of Rs.51,36,342/-

as deduction. The AO noticed that the assessee had borrowed loans to the tune

of Rs.6,48,45,678/- and has used only Rs.1,09,42,016/- in his business named

M/s Dhanji Developers.        Hence the AO took the view that the interest

expenditure is allowable only to the extent of Rs.10,94,201/- (10% of

Rs.1,09,42,016/-) and accordingly disallowed a sum of Rs.48,53,168/- out of the

gross interest claim of Rs.59,47,369/-. The AO levied penalty on the above said

disallowance and the same was deleted by the Ld CIT(A).






4.1   Before us, the ld D.R placed strong reliance on the order passed by ld

CIT(A). However, the Ld A.R submitted that the assessee had agreed for the

disallowance of part of interest claim during the course of assessment

proceedings, but the same would not lead to levy of penalty automatically. He

submitted that the assessee had used the borrowed funds for the purpose of

making business investments. He invited our attention to page 3 of the paper

book and submitted that

                (a) the assessee has borrowed funds to the tune of Rs.6.48 crores.
                                                                  I.T.A. No.2617/Mum/2010
                                        4               I.T.A. No.2753 and 2754/Mum/2010



             (b) Out of the same, he has invested a sum of Rs.3.25 crores as his
             capital in the proprietary and partnership concerns.

             (c) Further he has invested a sum of Rs.20.20 lakhs in a private
             limited company named M/s Pramanik Clothing P Ltd, wherein he is
             a director, and has also advanced a sum of Rs.1.00 crore to that
             company. He submitted that the assessee is receiving salary from
             the above said concern.


Accordingly, the Ld A.R submitted that the assessee has used major portion of

borrowed funds for business purposes, wherein he is directly interested.             He

submitted that the advances made to the family members and other relatives are

in the nature of current account transactions having commercial expediency. He

submitted that the investments made out of commercial expediency would not

disentitle the assessee to deduction. In this regard, the ld A.R placed reliance on

the following case law:-

      (a) CIT Vs. Reliance Communications Infrastructure Ltd
                  (2013) (260 CTR (Bom) 159).
      (b) CIT Vs. Shrishti Securities P Ltd
                  (2010)(321 ITR 498)(Bom)


Accordingly he submitted that there is no case for disallowing a part of interest

expenditure, yet the assessee accepted the said disallowance.              He further

submitted that the AO has made adhoc disallowance without invoking any of the

provisions of the Act. Accordingly, he submitted that the AO has not brought out

any case to show that the assessee has concealed any particulars of income in

respect of this disallowance. He further submitted that, since the assessee had

claimed interest expenditure on bonafide belief, the AO was not justified in

levying penalty on the amount of interest disallowed.
                                                                  I.T.A. No.2617/Mum/2010
                                         5              I.T.A. No.2753 and 2754/Mum/2010



4.2   We have heard rival contentions on this issue and also perused the record.

We notice that the Ld CIT(A) has dwelt upon this issue in a detailed manner and

hence, for the sake of convenience, we extract below the relevant observations

made by Ld CIT(A) in para 3.14 of his order as under :


       "3.14.   I have carefully considered the facts and submissions. It is a
      settled judicial proposition that assessment proceedings and penalty
      proceedings are independent of each other and an addition does not
      result into levy of penalty u/s. 271(1)(c) automatically. This is so for the
      reason that in the course of penalty proceedings, the assessee can offer
      an explanation to prove its bonafides. Thereafter, the AO has to examine
      the explanation offered by the assessee and he can levy penalty u/s.
      271(1)(c) only if such explanation is found to be false or if he is of the
      opinion that such explanation is not bonafide and all the facts relating to
      the same and material to the computation of its total income had not
      been disclosed by the assessee. The above provisions necessarily require
      the AO to apply his mind afresh in the course of penalty proceedings and
      thus, he cannot levy the penalty u/s. 271(1)(c) solely on the basis of
      statement given by the assessee in the course of assessment proceedings.
      With regard to the disallowance of interest amounting to Rs.48,53,168/-,
      it is evident that details of loans borrowed and loans and advances given
      to various concerns and persons were reflected in the Profit & Loss
      account and the balance sheet. Further details and break up of interest
      paid and received were furnished during the course of assessment
      proceedings. A substantial part of interest bearing funds was utilised in
      the associated concerns, proprietary concerns and also by giving loans to
      relative and friends without........................... appellant had not used
      borrowed       funds   exclusively    for     the       purpose   of  business.
      Therefore, the disallowance had been made by the AO at Rs. 48,53,168/-
      and the addition so made was accepted by the appellant. However, there
      was no falsity with regard to the amounts of interest expenses claimed
      and interest received. Thus, factual details submitted with regard to the
      interest paid and received were true. It was also seen that some of the
      accounts of the parties to whom interest free advances were given were
      in the nature of running accounts and in some other cases of the
      associated concerns to whom advances were given or wherein investment
      were made, those concerns had offered income for taxation. The purpose
      of giving these loans and advances to these concerns and
      persons could be argued on ground of commercial expediency. Thus, from
      the point of view of commercial expediency, the appellant's claim for
      allowance of interest could not be totally ruled out in view of the Apex
      court judgement in the case of SA Builders reported in 288 ITR 1. The
      appellant's claim that full fact were available in the balance sheet and the
      appellant had offered explanation which cannot be considered as malafide
      also carries some weight. It is also seen that during the earlier years
                                                                I.T.A. No.2617/Mum/2010
                                        6             I.T.A. No.2753 and 2754/Mum/2010



       under the similar facts, perhaps, no disallowance has been made by the
       AO on account of interest for the reasons best known to him. Thus, the
       issue of disallowance of interest was definitely debatable as it could be
       argued out as a case of commercial expediency. Therefore, considering
       the fact that the bonafide of the appellant could not be doubted and the
       issue of disallowable was debatable, the levy of penalty u/s 271(1)(c) in
       respect of disallowance of Rs. 48,53,168/- was not justified. The AR's
       reliance on the various court judgments was acceptable. "


4.3    For the reasons discussed infra, we are inclined to agree with the view

expressed by ld CIT(A) on this issue. First of all, the assessee has furnished all

the details relating to the interest claim. Secondly, the assessee has mainly used

the borrowed funds for making investments in proprietary concerns, partnership

concerns and the private limited companies, wherein he is substantially

interested.    We have already noticed that the AO has worked out the

disallowance by considering the investments made in one of the concerns only.

However, as per the details of investments narrated by Ld A.R, the assessee has

made investments in more than one concern, which fact was ignored by the AO

while working out the disallowance. In respect of advances given to relatives,

the submission of the assessee is that they are in the nature of current account

transactions involving both payment and receipt of money and further it is the

claim of the assessee that there is commercial expediency in making those

advances. As observed by Ld CIT(A), it is a well settled proposition that the

additions made during assessment proceedings would not automatically give rise

to penalty proceedings.   The AO has to examine the issue afresh during the

course of penalty proceedings and in that regard, the findings given in the

assessment proceedings can be taken as guidance. The observations made by

the ld CIT(A) and the discussions made by us above would show that the

assessee did not hide any detail relating to the interest claim. Further all the
                                                               I.T.A. No.2617/Mum/2010
                                         7           I.T.A. No.2753 and 2754/Mum/2010



investments cannot be considered as diversion of interest bearing funds for

giving interest free advances. Accordingly, we are of the view that the ld CIT(A)

was justified in deleting the penalty levied on the interest disallowance and

accordingly confirm his order on this issue.


5.    The next issue relates to the penalty levied on the cash credit assessed

u/s 68 of the Act.     During the course of assessment proceedings, the AO

examined the loan creditors.     In that process, the AO examined Smt Latika

Dhamne from whom a sum of Rs.25.00 lakhs was received by the assessee. In

the statement recorded from her, she categorically denied having knowledge of

extending any loan to the assessee. She also stated that she does not have

financial capacity to extend a sum of Rs.25.00 lakhs as loan. During the course

of assessment proceeding, the assessee offered the above said sum of Rs.25.00

lakhs as his income.    Accordingly the above said sum of Rs.25.00 lakhs was

assessed and the interest claimed thereon amounting to Rs.1,54,167/- was

disallowed in AY 2006-07. The Ld CIT(A) also confirmed the penalty relating to

this addition on the ground that the loan taken Mrs. Latika Dhamne was totally

bogus; the assessee seems to have used her name to show loan and the

assessee has failed to substantiate explanation and prove the bonafides.


5.1   The ld A.R submitted that the assessee had arranged the impugned loan

through brokers. He submitted that the loan was taken from Smt Latika Dhamne

through Account payee cheque and it was also repaid by way of Account payee

cheque.   He submitted that the assessee has filed copy of loan confirmation

obtained from her during the course of assessment proceedings. When the loan

creditor was asked to be produced, the assessee approached the brokers, who
                                                                I.T.A. No.2617/Mum/2010
                                        8             I.T.A. No.2753 and 2754/Mum/2010






had arranged the loan from her to find out her new address and to establish

contact with her. Since they did not co-operate on this matter, the assessee was

constrained to offer the same as his income. The Ld A.R further submitted that

the loan creditor has given statement before the AO to suit her needs. Though

she is having PAN number, yet she said she is not aware of the same. Hence

her statement is conflicting with the facts and hence the same was not reliable.

Further, the statement taken from her was not confronted with the assessee.

The Ld A.R further submitted that the penalty is not exigible in such kind of

circumstances and in this regard, he placed reliance on the following case law:-

       (a) CIT Vs. M/s Bhimji Bhanjee & Co. (1984)(146 ITR 145)(Bom)
       (b) Shree Nirmal Commercial Ltd Vs. CIT (2009)(308 ITR 406)(Bom)
       (c) CIT Vs.Mrs. Baljeet Jolly (2003)(263 ITR 239)(Del)


5.2   On the contrary, the ld D.R submitted that the assessee has failed to prove

that the explanations furnished by him was bonafide one. Accordingly he placed

strong reliance on the order passed by Ld CIT(A) on this issue.


6.    We have heard the rival contentions on this issue and carefully perused the

record. We notice that the AO has levied penalty on the reasoning that the

assessee has furnished inaccurate particulars of income by showing bogus loans

to the tune of Rs.25.00 lakhs. The Ld CIT(A) has also confirmed the view taken

by the AO. We have already noticed that the additions made during the course

of assessment proceedings will not automatically give rise to penalty and hence

during the course of penalty proceedings, the AO has to examine the matter

afresh.   Of course, the AO is entitled to take the observations made in the

assessment order as guidance.
                                                                I.T.A. No.2617/Mum/2010
                                        9             I.T.A. No.2753 and 2754/Mum/2010



6.1    In the instant case, the submission of the assessee is that the loan from

Smt. Latika Dhamne was arranged through the brokers and the same was

received by way of Account payee cheque.        It is also the submission of the

assessee that the loan was also repaid by way of Account payee cheque. During

the course of assessment proceedings, the assessee has also furnished

confirmation letter obtained from the creditor, wherein the Permanent Account

Number of the lender was also given. It was also submitted that the lender is

assessed to income tax. However, in the statement taken, Smt. Latika Dhamne

has denied knowledge about the assessee and was also unaware of the loan

transactions. According to AO, she does not have any known source of income.

Hence the AO has proposed to assess the loan as income of the assessee.

According to the assessee, the loan was arranged through brokers and hence he

does not have direct contact with the lender. According to the assessee, the

lender is assessed to tax and the details relating thereto was given to the AO. It

appears that the AO did not cross verify the said claim put forth by the assessee.

Further, it is also the claim of the assessee that he was not given opportunity to

cross examine the creditor.     During the course of assessment proceedings,

according to the assessee, he tried to establish contact through the brokers, who

arranged the loan, but he could not get proper response from them.             Under

these difficult circumstances, the assessee has agreed to the assessment of loan

amount as his income. The Ld A.R also submitted that the statement given by

the lender is contrary to the facts available on record and further reiterated the

contentions that the assessee was not given opportunity to cross examine the

creditor. Thus, it is seen that the assessee has explained the circumstances,

which compelled him to agree to assessment of the loan amount as his income.
                                                                  I.T.A. No.2617/Mum/2010
                                         10             I.T.A. No.2753 and 2754/Mum/2010



It is pertinent to note that the explanations given by the assessee has not been

found to be fault during the course of penalty proceedings.


6.2      The ld A.R has placed reliance on the decision rendered by Hon'ble

jurisdictional High Court in the case of Shree Nirmal Commercial Ltd (supra). In

the above said case, the addition was made u/s 68 of the Act since the lender

has categorically denied giving of loans to the assessee. The assessee could not

produce the brokers through whom he arranged loans and even lost upto the

tribunal in the quantum proceedings.          The Hon'ble High Court deleted the

penalty by following the decision rendered by Bombay High Court in the case of

CIT Vs. Bhimji Bhanjee & Co. (supra). In the instant case, we notice that the AO

has placed reliance on the statement taken from the lender. However, the case

of the assessee is that he received the loan by way of account payee cheque

through the brokers and also repaid the loan through account payee cheque.

Hence, it is quite a possibility that the lender may not be aware of the assessee.

In the instant case, it is not clear as to whether the AO did make enquiries about

the bank account maintained by the lender; about the loan transactions carried

out through Account payee cheques and also about the income tax returns filed

by her. If the AO had conducted enquiries about the same, further truth might

have come on the fore. We have noticed that the Ld A.R also placed reliance on

the decision rendered by Hon'ble Delhi High Court in the case of Mrs. Baljeet

Jolly (supra).   In the said case, the tribunal had noticed that the loan was taken

by way of bank drafts and they were also en-cashed through banking channels.

Based on this facts, the Hon'ble Delhi High Court held that the penalty u/s

271(1)(c) could not be sustained merely on the reasoning that the assessee did
                                                                 I.T.A. No.2617/Mum/2010
                                        11             I.T.A. No.2753 and 2754/Mum/2010



not challenge the assessment of loan as his income. In the instant case also, the

contention of the assessee is that the loan transactions were carried out through

banking channels and the said contention was not proved to be wrong. Under

these set of facts, we are of the view that there is no reason to suspect the

bonafides of the assessee merely on the fact that the assessee has agreed for

assessment of loan amount.


6.3   In view of the foregoing discussions, we are of the view that the penalty

u/s 271(1)(c) is not levy-able merely on the reasoning that the assessee has

agreed for assessment of the loan amount as his income. The assessee has

furnished reasons as to why he accepted for the assessment of the loan amount

as his income.     Though the assessment has been made on the basis of

statement given by the lender, yet in our view, the same cannot be taken as a

strong ground for levying penalty. In our view, the decision rendered by the

Hon'ble jurisdictional High Court in the case of Shree Nirmal Commercial Ltd

(supra) and the decision rendered by the Hon'ble Delhi High Court in the case of

Mrs. Baljeet Jolly (supra) come to the support of the assessee. Accordingly, we

set aside the order of ld CIT(A) on this issue and direct the assessing officer to

delete the penalty levied on the loan amount. Since we have directed to delete

the penalty levied on the principal amount of loan, the penalty levied on the

interest disallowed is also liable to be deleted. We order accordingly.


7.    We shall now take up the appeal filed by the assessee for the AY 2007-08.

In this case, the AO disallowed the interest claimed by the assessee on the loan

taken from Smt. Latika Dhamne. In the immediately preceding year, we have

deleted the penalty levied on identical circumstances for the detailed reasons
                                                               I.T.A. No.2617/Mum/2010
                                       12            I.T.A. No.2753 and 2754/Mum/2010



discussed supra. Following the same reasoning, we set aside the order of Ld

CIT(A) and direct the AO to delete the penalty thereon.


8.   In the result, the appeal filed by the revenue and both the appeals filed by

the assessee are allowed.


      The above order was pronounced in the open court on 13th Aug, 2014.

                                    13 th Aug, 2014    

           Sd                                                         sd

(  /SANJAY GARG)                               ( ..  / B.R. BASKARAN)
     / JUDICIAL MEMBER                            / ACCOUNTANT MEMBER


  Mumbai: 13 Aug,2014.
            th




. ../ SRL , Sr. PS


        /Copy of the Order forwarded to :
1.  / The Appellant
2.  / The Respondent.
3.     () / The CIT(A)- concerned
4.      / CIT concerned
5.      ,     ,                   /
     DR, ITAT, Mumbai concerned
6.     / Guard file.
                                                             / BY ORDER,
             True copy
                                                     (Asstt. Registrar)
                                       ,  /ITAT, Mumbai

 
 
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