Ruchiraj Shares and Stock Brokers Vs. Assessee - Court Judgment

D. Karunakara Rao, Am:

1. This appeal filed by the assessee on 22.3.2012 is against the order of the CIT (A)-8, Mumbai dated 10.1.2012 for the assessment year 2005-06.

2. In this appeal, assessee raised the only effective ground which read as under:

"1. The Ld CIT (A) erred in confirming the penalty levied u/s 272(1)(c) of Rs. 17,39,973/- by the ITO-4(2)(1), Mumbai on the ground of furnishing of inaccurate particulars of income. The said CIT (A) erred in not considering the fact that the claim for R and D expenditure was bona fide one and with supporting evidences. The Ld CIT (A) erred in not considering the fact that merely rejection of a claim for expenditure does not result into any concealment of income as held by the Hon'ble Supreme Court in the case of CIT vs. Reliance Petro Products Pvt. Ltd. 322 ITR 158 (SC)."

3. Briefly stated the relevant facts of the case are that the assessee is engaged in the business of investment and trading of shares and filed the return declaring the total income of Rs. 9,44,070/-. During the scrutiny proceedings u/s 143(3) of the Act, AO made addition of Rs. 47,55,000/- which was claimed by the assessee as allowable expenditure under the Research and Development (R and D) charges account. Relevant facts of this addition are given in para 4 of the assessment order. Assessee claimed these amounts in the books as amounts paid to M/s Premium Investment (Rs. 5 lacs) and Swiss Consultancy (Rs. 42.04 lacs) for equity research done for assessee on various scrips. Considering the fact that the assessee failed to discharge the initial onus by not furnishing the proof of payment, copy of the bills and the details of services rendered, AO held that the assessee failed to furnish the basic details in support of the claim. AO also observed that the details furnished by the assessee are found to be incomplete and not credible. Assessee could not file the details relating to research done by the said parties for the assessee. AO also found that the purchase and sale details required concilable and assessee could reconcile the same. AO made specific inquiries from the assessee for want of primary evidences in support of the claim. The AO relied on the letters dated 31.10.2007, 14.11.2007 and order sheet entries dated 20.11.2007; 27.11.2007 and 3.12.2007. In spite of the repeated opportunities granted to the assessee, assessee could not submit the original bills, copies of the research reports and reconcile the discrepancies. At the request of the assessee, AO issued letter to the M/s Swill Consultancy for want of details of the services rendered and the evidences thereof. AO noticed that Swill Consultancy has not submitted basic information and also noticed various discrepancies in the sundry debtors account and details are available in para 4.9 of the assessment order. AO also noticed that the information supplied by this Swill Consultancy is of routine information in nature which is commonly available in the New Papers and the same cannot be categorized as research reports. In view of the above, AO held that the expenditure is not allowable one as assessee failed to establish that the said claim o9f the expenditure is incurred for the purpose of business of the assessee. Thus, AO made addition of Rs. 42,04,000/- paid to Swiss Consultancy and Rs. 5,51,000/- paid to Premium Investment and the details are as follows:

"Addition with regard to Swiss Consultancy of Rs. 42,04,000/-

4.13. In view of all the above discussion and after considering the fact and details available on record, it is concluded that, the assessee has failed to establish that the amount of Rs. 42,04,000/-, debited by the assessee to the Profit and Loss Account, as Research and Development expenses, has been incurred for the purpose of assessee business, hence, Rs. 42,04,000/- is disallowed and added to the total income of the assessee. Penalty proceedings u/s 271(1)(c) is initiated separately for furnishing inaccurate particulars and concealment of income.

Addition with regard to Premium Investment of Rs. 5,51,000/-

5.3. In spite of repeated opportunities, the assessee neither submitted the details of the research made by M/s. Premium Investment, the copy of such research report, nor the details of utilization of such research information. Even the basic details, ie for which equity the research was made, has not been submitted by the assessee. The deduction is available to the assessee in respect of expenses incurred for the purpose of the business of the assessee. In this respect, it is duty of the assessee to prove the genuineness of expenses. However, in this case the assessee has failed to prove that the above expenses were incurred for the purpose of the business. Considering the above fact that the amount of Rs. 5,51,000/- has been disallowed and added to the total income of the assessee. Penalty proceedings u/s 271(1)(c) is initiated separately for furnishing inaccurate particulars and concealment of income."

4. The addition made by the AO was subsequently confirmed by the CIT (A) and the ITAT vide ITA No.4012/Mum/2009 (AY: 2005-06) dated 28.1.2011. Para 11 of the Tribunal's order is relevant in this regard.

5. On perusal of the details placed before the Tribunal, vide the order cited supra, Tribunal came to the conclusion that the reports submitted by the parties are hardly any reports of research and the Tribunal reproduced the said relevant para 11 to demonstrate that the said reports are merely day-to-day information which is easily available in news papers like Economic Times or from internet. The relevant extracts reads as follows:

"The above report clearly shows that it is a day-to-day information which is easily available from daily newspapers like Economic Times or from internet. This can hardly be called research report. Further, we find that the assessee has shown the outstanding amount of M/s. supreme Communication at Rs. 39,84,130/- whereas in the balance sheet of M/s. Supreme Communication amount outstanding against the assessee is Rs. 21,02,400/- and no effort was made by the Ld Counsel of the assessee to explain this discrepancy. This further shows that only the accommodation bills have been obtained by the assessee. In this background, we find that the order passed by the Ld CIT (A) is very reasonable containing all the reasons and, therefore, we confirm the same."

6. Considering the discrepancy with regard to the party's accounts qua the assessee's books of account, the Tribunal came to the conclusion that these transactions with the M/s Swill Consultancy and M/s. Premium Investment were merely case of accommodation bills and sustained the addition made by the AO. Meanwhile, the Assessing Officer levied the penalty u/s 271(1)(c) of the Act vide his order dated 25.3.2011 in respect of the above addition of Rs. 47,55,000/-. Para 4.1 and 5 of the penalty order read as under:

"4.1. The Ld CIT (A) has confirmed the addition of Rs. 47,55,000/- vide order No.IT/CIT(A)IV/Cir4/227/2007-08 dated 15.5.2009.

The Ld CIT (A) had given various opportunities to the assessee to establish that the expenses on Research and Development were genuine expenses. However, addition was confirmed for the following reasons:

.....

e) In the books of Swiss Consultancy the amount shown against the assessee is Rs. 21,02,400/- whereas in the books of the assessee it is Rs. 39,84,130/-. f) Details of payments to Swiss Consultancy shows that no payments were made in relevant year but in the subsequent year.

g) The work done by these concerns for the assessee was not research but something that could be done at normal reading of newspapers. h) The long delay in payments to these concerns strengthen the view that it is a case of bogus payments to reduce tax liability.

5. Comments on reply filed by assessee in response to notice u/s 271(1)© r.w.s. 274 of the Act filed on 21.3.2011:

The assessee has merely said that the disallowances are on account of the fact that the assessee could not establish that the amounts were expended for business purposes.

The reply of the assessee is no acceptable as only business expenses can be claimed and even the Ld CIT(A) has concern that it is a case of bogus payments to reduce tax liability."

6.1. Thus, Assessing Officer levied penalty of Rs. 17,39,973/-. Aggrieved with the above order of the penalty, assessee filed an appeal before the CIT(A).

7. During the proceedings before the first appellate authority, on the penalty issue, CIT (A) considered the explanation of the assessee and held that the assessee reduced his income by an amount of Rs. 47,55,000/-. In the process, CIT (A) relied on the Apex Court judgment in the case of Union of India vs. Dharmendra Textile Processors [2008] 306 ITR 277 for the proposition of 'strict liability' as well as 'mens rea' and concluded as under:

"2.4. In the facts of the case it is seen that the appellant has not voluntarily offered the disallowance of Rs. 47,55,000/- for taxation, and has offered an explanation which is both false and non bana fide one and it is hit directly to Explanation 1 to section 271(1)(c). Hence, I am of the considered view that the appellant has concealed / furnished inaccurate particulars of income and had submitted an explanation which was both false and a non-bana fide one. Hence, the minimum penalty levied u/s 271(1)(c) of 100% of the tax sought to be evaded ie Rs. 17,39,973/- isd upheld. Hence, this ground of appeal is dismissed."

8. With the background of the above, assessee filed the present appeal before the Tribunal. Assessee also filed a paper book and the facts sheet. Paper book contains copy of the order of the Tribunal, annual reports and certain correspondence between the AO and the assessee, copies of the bills, bank statements and also copies of certain decisions.

9. During the proceedings before us, Ld Counsel made various submissions and the gist of the same as provided by him in the written note is as under:

"i) The CIT (A) and the AO erred in not considering the fact that penalty proceedings are independent of assessment proceedings. ii) The appellant has established the claim by furnishing all the particulars of claim made of Research Fees such as bills, statement of brokerage income, vide letters.

iii) The appellant deducted TDS and service tax on the said fees and payment to both the entities were by cheque only.

iv) M/s. Swiss Consultancy had explained the facts aide a letter during the assessment proceedings and submitted copies of bills, debit notes, ledger a/c of appellant and their return of income filed.

The AO neither gave any opportunity to the appellant to reconcile the discrepancy in the closing balance nor the copy of the ledger a/c filed by the party.

v) The AO erred in deriving a notional amount of brokerage income as on day trading the rate of brokerage is much lesser than on delivery as determined by the Bombay Stock Exchange.

Further, earning of lesser income in comparison to expenditure cannot be the reason of disallowance.

vi) It is submitted that merely because of disallowance of expenses does not tantamount to concealment of income or furnishing inaccurate particulars of income particularly when the appellant has substantiated the claim by furnishing all the particulars and details.

vii) the appellant relied upon following decisions:

1. Dhirajlal Maganlal shah vs. ITO 125 ITD 313 (Ahd) (TM) (Page 65-69)

2. Equest India (P) Ltd. vs. ITO 41 SOT 225 (Mum) (Page 62 to 64)

3. CIT vs. Reliance Petro Products Pvt. Ltd. 322 ITR 158 (SC) (Page 52 - 53)

4. ACIT vs. TRB Exports (P) Ltd. 45 SOT 22 (URO) (Page 74-75)

5. IDBI Ltd. vs. DCIT 42 SOT 325 (Mum) (Page 54-56)

6. Hindalco Industries Ltd. vs. ACIT 41 SOT 254 (Mum) (Page 52-61)

7. Pfizer Pharmaceuticals (India) (P) Ltd. vs. DCIT 135 TTJ 337 (Page 70- 73)"

10. On the other hand, Ld DR mentioned that the assessee failed to evidence the claim with regard to the Research and Development payments made to Swiss Consultancy and M/s. Premium Investments and the assessee's books suffer from discrepancies with regard to Swiss Consultancy. The said discrepancies are not reconciled even till date. Bringing our attention to the letter filed by the assessee addressed to the AO dated 27.11.2012, Ld DR mentioned that this letter is written after the Tribunal's order on quantum additions and also after impugned order dated 10.1.2012. It is self-serving letter which should be ignored. Ld DR further brought our attention to the order of the Tribunal in general and para 11 in particular and stated that it is finding of the fact of the Tribunal that the parties merely accommodated the assessee's claim of transactions, therefore, assessee from the beginning was having an intention to reduce the income to the department and therefore, it is a fit case for the penalty u/s 271(1)(c) of the Act. Hence, the order of the CIT (A) should not be interfered.

11. We have heard both the parties and perused the orders of the Revenue Authorities and the paper book filed before us. The case of the assessee is that when the assessee furnished the details and the research reports in evidence of rendering of services. The identity of the parties namely Swiss Consultancy and M/s. Premium Investments are not in doubt. The payments made to them are not held by AO as non genuine. Assessing Officer failed to give opportunity for reconciling the discrepancies. On such facts, as per the assessee, it is not a fit case for levy of penalty. Regarding the decisions relied upon by the assessee; it is worth mentioning that they are distinguishable on facts.

12. On the other hand, the case of the Revenue is that the assessee was failed reasonably in evidencing the genuineness of the payments and also evidencing the rendering of the services to the assessee. The reports copies furnished in this regard are mere routine data from the news papers and therefore, they do not amount of R and D services. The books of account are not in tune with the book entries of the parties. With so much of discrepancies still left to be reconciled by the Assessee, the genuineness of the parties and the transactions is rightly found as sham transactions. Further, the Tribunal's finding is that it is a case of issuing of accommodation bills by the Swiss Consultancy and M/s. Premium Investments. With these facts, this is a fit case for levy of penalty.

13. We have examined the divergent view of the parties in dispute with assistance of the papers filed before us. There is no dispute on the issue that the penalty proceedings are independent in nature qua the penalty proceedings. However, the facts established by the Tribunal shall have the bearing on the penalty proceedings more so when the assessee is no forthcoming with the details of the services rendered by the impugned parties to the assessee during the year. Why the assessee paid to the Swiss Consultancy and M/s. Premium Investments and what are the business or professional or research services rendered by them to become entitled for the impugned payments. In our view, the assessee is under the obligation to explain. For the said failure only, the Tribunal confirmed the additions in quantum proceedings. It is the finding of fact that the transaction in question constitutes 'sham transaction'. In effect, the above details supports the allegation of the AO that the assessee has deflated the income by debiting the impugned claims. Further, the discrepancies between the sundry debtors' account of the assessee qua the Swiss Consultancy are beyond the reconciliation. Assessee's request for one more opportunity at this point of time ie November, 2012 cannot be seen as a genuine attempt for reconciliation in view of the principle of limitations. The services rendered by the parties have not been evidenced with corroborative evidences to demonstrate the requirement of impugned payments to the parties. Considering the overall factual matrix of the case ie discrepancies in the books of account, absence of reliable research reports, lack of original bills, the facts brought in by the Tribunal it is a case of issue of accommodation bills etc, we are of the opinion that the penalty confirmed by the CIT (A) does not call for any interference. Accordingly, grounds raised by the assessee are dismissed.

14. In the result, the appeal of the assessee is dismissed.