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Mulla Associates 102, Saquib, Turner Road, Bandra (W), Mumbai-400 050 Vs. Asst. CIT-19(3), 3rd Floor, Piramal Chambers, Mumbai
September, 26th 2014

      . . ,        ,                                                                 

                     ./I.T.A. No. 6026/Mum/2011
                    (   / Assessment Year: 2005-06)
Mulla Associates                                    Asst. CIT-19(3),
102, Saquib, Turner Road,                           3rd Floor, Piramal Chambers,
Bandra (W), Mumbai-400 050                 Vs.      Mumbai
     . /  . /PAN/GIR No. AABFM 7784 J
         ( /Appellant)                        :            (     / Respondent)

         / Appellant by                      :     Shri N. R. Agrawal

           /Respondent by                    :     Shri Anurag Srivastava

                          /                  :     05.08.2014
                    Date of Hearing
                                             :     25.09.2014
           Date of Pronouncement
                                    / O R D E R
Per Sanjay Arora, A. M.:
      This is an Appeal by the Assessee directed against the Order by the Commissioner
of Income Tax (Appeals)-30, Mumbai (`CIT(A)' for short) dated 25.07.2011, confirming
the levy of penalty u/s. 271(1)(c) of the Income Tax Act, 1961 (`the Act' hereinafter) for
the assessment year (A.Y.) 2005-06 vide order dated 29.03.2010.

2.    It would be relevant to recount the background facts of the case. The assessee is a
firm of Advocates working as Labour Law Consultants. It was observed during the
course of assessment proceedings to have received Rs.45,44,952/- (i.e., at net of TDS of
Rs.2,99,548/-) from Britannia Industries Limited during the relevant previous year, i.e.,
financial year 2004-05. Further, the assessee, following the cash method of accounting,
                                                         ITA No. 6026/Mum/2011 (A.Y. 2005-06)
                                                                  Mulla Associates vs. Asst. CIT

had paid Rs.37 lacs to three parties, as under, claiming the same from its total profits for
the year:
     i) Grand Foundry Ltd.          Rs.22 lacs
     ii) Suleman Bharucha           Rs.7.50 lacs
     iii) Yasmin Bharucha           Rs.7.50 lacs
It was explained that the receipt was for the project of the closure of the payee company's
manufacturing unit at Sewri (also called as Reay Road Unit), Mumbai, which had 800
workmen on its rolls. The same involved convincing the workers; handling court cases;
negotiating with trade unions; finalizing the settlement of VRS, etc. The project was
undertaken jointly with the three payees afore-referred, and which explains the payment
to them. Further, the payments were not on profit sharing basis, but toward specific
services rendered by them, each contributing to the project, so that there was no question
of a joint venture (JV) or of an association of persons (AOP). The payment for Rs.37 lacs
(which was thus in the nature of professional fees and/or commission) was disallowed in
view of the same being not proved in terms of the services rendered by the three payees
afore-referred, being unevidenced and, in any case, non-deduction of tax at source, so
that section 40(a)(ia) stood attracted. On the same footing was the payment of Rs.5 lacs
to one, Mrs. Darshanna Bhatt, claimed in respect of a receipt, from Deepak Fertilizers &
Petrochemicals Ltd., at a gross amount of Rs.8,46,059/-. The disallowance, being thus at
a total of Rs.42 lacs, stood confirmed by the Tribunal (in ITA No. 6383/Mum(B)/2008
dated 07.05.2010). It found that the nature of the receipt had not been established. It is
only, where so, that the nature of the payment/s, stated to be toward undertaking work in
relation to the project/s, for which the remuneration had been received, could be
confirmed. The penalty proceedings u/s.271(1)(c), initiated at the completion of the
assessment on 28.12.2007, were accordingly proceeded with.

3.      Before us, the assessee's case was in terms of having included the entire receipt as
its' income in its accounts (under the account head `professional fee'/PB pgs.11-34). The
payments to Grand Foundry Ltd. and Bharuchas, as also to Mrs. Darshanna Bhatt, stood
confirmed by them. Non-deduction of tax at source, leading to a disallowance
                                                        ITA No. 6026/Mum/2011 (A.Y. 2005-06)
                                                                 Mulla Associates vs. Asst. CIT

u/s.40(a)(ia), could not be a ground for levy of penalty, as explained by the tribunal in
Dy. CIT vs. Roop Singh Bagga (in ITA No.44/Ind/2013 dated 31.05.2013). Furthermore,
the assessee had deposited tax at source subsequently, i.e., during the period relevant to
A.Y. 2010-11, and had, accordingly, claimed deduction in terms of section 40(a)(ia).
       The ld. Departmental Representative (DR), on the other hand, relied on the orders
by the authorities below as well as that by the tribunal in the quantum proceedings.

4.     We have heard the parties, and perused the material on record, giving our careful
consideration to the matter.
       The issue, as we discern, is as to if the assessee has a plausible explanation with
regard to its claim of Rs.42 lacs on account of payment to four persons. Where so,
clearly, no penalty on account of concealment and/or furnishing inaccurate particulars of
income u/s.271(1)(c) could be levied, while, where not so, the provision of Explanation
(1B) would stand attracted. The onus to rebut the statutory presumption of Explanation
(1A) and Explanation (1B), which puts the burden of substantiating its case on the
assessee, failing which it would be deemed to have concealed and/or furnished
inaccurate, particulars of income. Case law in the matter is legion, and for which we may
rely on a host of decisions by the apex court, viz. CIT v. Atul Mohan Bindal [2009] 317
ITR 1 (SC); Union of India v. Dharmendra Textile Processors [2008] 306 ITR 277 (SC);
Guljag Industries v. CTO [2007] 293 ITR 584 (SC); K.P. Madhusudhanan vs. CIT [2001]
251 ITR 99 (SC); B.A. Balasubramaniam and Bros v. CIT [1999] 236 ITR 977 (SC);
Addl. CIT vs. Jeevan Lal Shah [1994] 205 ITR 244 (SC); CIT vs. K. R. Sadayappan
[1990] 185 ITR 49 (SC); and CIT vs. Mussadilal Ram Bharose [1987] 165 ITR 14 (SC),
besides by the hon'ble high courts, viz., CIT vs. Mohd. Mohtram Farooqui [2003] 259
ITR 132 (Raj); CIT vs. Sree Krishna Trading Co. [2002] 253 ITR 645 (Ker); Shiv Kumar
Tak vs. CIT [2001] 251 ITR 373 (Raj); CIT vs. Vidyagauri Natverlal [1999] 238 ITR 91
(Guj), to name some. The law, in our humble view, would hold even where the
disallowance leading to the variation between the assessed and returned incomes is u/s.
40(a)(ia), being independent of the provision where-under the same (disallowance) is
effected. That is, the question of levy or otherwise of penalty would have to be
                                                          ITA No. 6026/Mum/2011 (A.Y. 2005-06)
                                                                   Mulla Associates vs. Asst. CIT

necessarily examined w.r.t. the assessee's case for the claim of expenditure in view of
non-obstante clause of s.40(a)(ia), as indeed would be the case for any other provision.
       There is, to begin with, no question of the assessee having not claimed the
impugned sum for the relevant year. The assessee has debited the said payments in its'
accounts (under a nominal account `professional fees'/PB pgs.11-33), which gets thus
reflected in its profit and loss account for the year, maintained on cash basis, at a net of
Rs.90.64 lacs (PB pgs.6-8), i.e., as against the gross receipt of Rs.133.46 lacs. The said
accounting treatment, which is in any case not determinative of the matter, enables the
assessee to plead its case of the impugned sum (Rs.42 lacs) either as an expense or for its
exclusion by way of overriding title, and which, as we shall presently see, it indeed does,
or at least attempts to. We shall, accordingly, examine the assessee's case from both the
stand points, the two claims being complementary or pari materia, at least in-so-far as the
penalty proceedings are concerned in-as-much as they both lead to a reduction in its
income chargeable to tax for the relevant year by the impugned sum.
       Qua the claim for expenses, there is no iota of evidence on record to exhibit the
services having been rendered by the different payees, and toward which the payments
have ostensibly been made. Rather, there is in fact no delineation at any stage of the
proceedings, either as to quantum or penalty, of the work undertaken or to be undertaken
by the different payees in the execution of the project. On the contrary, by all available
accounts, the receipt by the assessee firm is for a project to be undertaken as a JV, i.e., by
the assessee as the driving force, along with the other payees. The assessee's case is thus
contradictory and inconsistent with its own stand, based on the material on record (refer
para 2 above). It is on account of this that the Assessing Officer (A.O.) states of the
assessee having not claimed this sum as expenditure. The statement by him that, even so
considering, the amount would stand to be disallowed on account of non-deduction of tax
at source in view of section 40(a)(ia), is made in the alternative. The same cannot be
considered as an argument in favour of the assessee having made a claim for expenditure,
which on facts stands proved and/or established, which would amount to turning the
A.O.'s observation/argument on its head, much less of the assessee having thus proved
                                                          ITA No. 6026/Mum/2011 (A.Y. 2005-06)
                                                                   Mulla Associates vs. Asst. CIT

the expenditure in terms of section 37(1), so that the only detriment to its allowability is
the non-deduction of tax at source. The assessee's claim, made before us, that the only
reason for the disallowance, or its sustenance, is invocation or applicability of section
40(a)(ia) is without basis in facts.
       Qua the claim for diversion by overriding title. This claim stands made by the
assessee, as far as appears to us, vide its letter dated 08.10.2010 to the ld. CIT(A) (PB
pgs. 27-28); the assessee's written submissions vide letter dated 23.03.2010, mention of
which we find in the penalty order, being not on record. Though an explanation, in terms
of Explanation 1 to section 271(1)(c), can only be that furnished before the A.O., who
decides on that basis (and after subjecting it to such verification as he in his wisdom may
deem fit) the question of levy of penalty in the facts and circumstances of the case. We,
still, giving the assessee the benefit of doubt, consider the same as an explanation by the
assessee toward and in substantiation of its case. The basis of the assessee's claim, as we
gather, is the fact that the parties had agreed to share the legal fees arising to it, as their
share in the profit of the JV. The A.O. rejected the assessee's case on merits for two
reasons. Firstly, in that case the income was of the AOP consisting of the assessee and the
three payees as its members, which is clearly not the case; the entire payment having
been made to the assessee-firm and there being no separate maintenance of accounts of
the AOP. Further, the shares in the receipt having been fixed, there was no scope for
shared control and losses, referring to the decision by the hon'ble apex court in Faguni
Chand Gulati vs. Uppal dated 07.08.2008. Two, the assessee had, though thus considered
only a part of the legal fee, i.e., Rs.11,44,500/- and Rs.3,46,059/- as its income (PB
pgs.35, 36), it had claimed TDS on the entire sum received by it, i.e., at Rs.3,42,419/-, on
payments to it by Britannia Industries Limited and Deepak Fertilisers & Petrochemicals
Ltd. (at a gross of Rs.56.905 lacs). The payments were made to it as a firm, and the
subsequent payments by it to the payees were only allocations made by way of self-made
mutual arrangements (refer para 6 of the tribunal's order supra). We go a step further.
Even assuming that the payments were not made with a view to reduce the tax incidence,
as the tribunal seems to imply, the question is: Are they in the nature of the allocation or
                                                          ITA No. 6026/Mum/2011 (A.Y. 2005-06)
                                                                   Mulla Associates vs. Asst. CIT

distribution of profit or by way of diversion by overriding title? In our view, the same
cannot, by any stretch of imagination, be considered as diversion by overriding title. It is
at best a mutual arrangement by which the parties agreed to share the receipt, for
whatever consideration/s, arising to the assessee on account of project work, in an agreed
manner. Every single document we have came across in relation to the said payments
viz., the assessee's books of account, being principally the ledger account of
`professional fees'; the summary of payments (PB pgs. 35-36); the communications dated
15.03.2004 and 22.03.2004 by Grand Foundry Ltd. to the assessee (PB pgs. 37-39, 40);
and the confirmation by each of the four payees (PB pgs. 41, 44, 51, 56), refer to the said
amounts as share of profit on the JV project, i.e., the project/s undertaken jointly. The
payment is accordingly only an application of income, and there is no case of any
diversion by overriding title. The assessee's claim in this regard is thus not only wholly
unsubstantiated, but de hors and contrary to the material on record. Can the assessee
claim to have furnished a substantiation which in fact contradicts the material adduced
by him? Continuing further, it cannot be lost sight of that the assessee has failed to exhibit
the true nature of the transaction/s which, going by its version, is inextricably linked with
its contracts with the payee companies, i.e., Britannia Industries Limited and Deepak
Fertilizers & Petrochemicals Ltd., and which are conspicuous by their absence, a fact
sought to be emphasized by the tribunal. Further, the payment, or nearly the whole of it,
stands received by the assessee in the months of April and May, 2004 (from Britannia
Industries Limited at Rs.42.50 lacs and Rs.5.585 lacs respectively) and in May and July,
2004 (from Deepak Fertilizers & Petrochemicals Ltd. at Rs. 2 lacs and Rs.5.70 lacs
respectively). The payments to its partners, however, are made only toward the end of the
year, i.e., in February and March, 2005 (PB pgs. 35-36), and which is not understandable
if the share (of profit) was, as stated, already fixed and, further, with reference to the
gross fees received by the assessee. If their share was released after the completion of
their work, it is a case of sub contract of a part of the work, in which case they would
only raise a bill on the assessee for the same ­ nothing more and nothing less. Or at least
confirm so, while even their confirmations, which are by way of confirming the payment
                                                         ITA No. 6026/Mum/2011 (A.Y. 2005-06)
                                                                  Mulla Associates vs. Asst. CIT

statement on the assessee's letter head, state of the payments being made and received as
share of profit in the joint venture project. There is no material on record, except for self
assertions, that would link the impugned payments to the receipt from the two payee
companies. It is this complete lack of clarity in the matter that was sought to be
emphasized by the tribunal vide its order in the quantum proceedings.
       Even so, we could be prepared to extend the benefit of doubt to the assessee, so
that though liable to be taxed in its hands, the assessee had reasonable reason/s to
consider it as not so; the genuineness of the payments having presumably been not
doubted. However, even qua this parameter we are unable to consider the assessee's case
as falling within the realm of a reasonable explanation. The assessee admittedly is the
main driver of the project. It has not specified the expenditure incurred and claimed by it
on the relevant project, so that for all we know it may well have returned a loss thereon,
i.e., particularly considering that it discloses only a part of the remuneration received as
its income, i.e., at Rs.14.905 lacs (for both the payee companies). This is in fact quizzical
in-as-much as though stated to be the main driver of the project, and for which reason it
would also therefore undertake the bulk, if not the whole of the expenditure on the
project, the assessee retains only a fraction (a little over 25%) of the total receipt of
Rs.56.905 lacs. Two, we observe that the payees have claimed expenditure against the
payments to them, returning only a part thereof to tax, contradicting the claim of the
payments to them as being their share of profit (PB pgs. 45-49, 52-54). Also relevant in
this regard is the huge build-up of cash with the assessee during the year; the assessee
having withdrawn the legal fees received by it, for no ostensible reason, banking the same
in February and March, 2005 for payment to the JV partners (refer para 3 of the
assessment order). The said build-up (to the tune of Rs.50 lacs) which remains
unexplained, as well as the other incidences referred to above, directly impinge on the
genuineness of the impugned payments. Finally, the assessee has claimed the impugned
sum as expenditure u/s. 37(1) r/w s. 40(a)(ia) by depositing TDS thereon ­ ostensibly as
commission, for A.Y. 2010-11, thereby debunking its claims, both qua share of profit and
diversion by overriding title. We have already found it to have no case qua claim for
                                                       ITA No. 6026/Mum/2011 (A.Y. 2005-06)
                                                                Mulla Associates vs. Asst. CIT

expenditure, while it, by doing so, even retrieves back the tax paid by it for the current
year. As such, whichever way one may look at it, the assessee has no case. The
`acceptance' of its' claim for A.Y. 2010-11 by the Revenue, as contended before us,
would be of no consequence. The reason is simple. A return processed u/s.143(1) cannot
be regarded as an acceptance of the assessee's return (or the claims preferred thereby);
the said provision, w.e.f. 01.06.1999, does not even entitle the Revenue to make any
prima facie adjustment to an assessee's return. Reference in this regard may be made to
the decision by the apex court in Asst. CIT vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd.
[2007] 291 ITR 500 (SC).

5.    In view of the foregoing, we find the levy of penalty in the instant case u/s.
271(1)(c) of the Act as sustainable in law. We decide accordingly.

6.    In the result, the assessee's appeal is dismissed.
               Order pronounced in the open court on September 25, 2014
            Sd/-                                       Sd/-
       (I. P. Bansal)                              (Sanjay Arora)
         / Judicial Member                           / Accountant Member
 Mumbai;  Dated : 25.09.2014
. ../Roshani, Sr. PS
         /Copy of the Order forwarded to :
1.  / The Appellant
2.  / The Respondent
3.     () / The CIT(A)
4.      / CIT - concerned
5.                ,     ,   / DR, ITAT, Mumbai
6.     / Guard File
                                                   / BY ORDER,

                                            /  (Dy./Asstt. Registrar)
                                          ,   / ITAT, Mumbai
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