Jrd Stock Brokers (P) Ltd v. Mr. Justice S. Ravindra Bhat (Open Court

$~2 *IN THE HIGH COURT OF DELHI AT NEW DELHI Decided on : 04.03.2015 +ITA 134/2014, C.M. APPL.5666/2014 JRD STOCK BROKERS (P) LTD. ……Appellant Through: Sh. R.P. Garg, Advocate. Versus COMMISSIONER OF INCOME TAX-II……Respondent Through: Sh. Kamal Sawhney, Sr. Standing Counselwith Sh. Sanjay Kumar, Jr. Standing Counsel. CORAM:HON'BLE MR. JUSTICE S. RAVINDRA BHATHON'BLE MR. JUSTICE R.K. GAUBA MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT) % 1.In this appeal, the assessee claims to be aggrieved by an order of theIncome Tax Appellate Tribunal (ITAT) dated 18.07.2008 in IT(SS) A.No.236/Del/2006. The question of law urged is: “Whether in the circumstances of the case, the penalty underSection 158BFA(2) of the Income Tax Act, 1961 could be leviedin respect of income which was not undisclosed income but wasdetermined on the basis of estimation on the application ofWeight Formula on gross credits in various bank statementsconsidered as turnover?” 2.The brief facts are that a search operation was carried on 24.11.2000in the office of the appellant assessee and the residence of its Directors. Thebooks of accounts, documents and other materials were seized. The assessee,when called upon to file the return, filed a NIL return for the relevant blockperiod, on 11.10.2002. The Assessing Officer (AO) completed assessmentunder Section 158BC(c) at `8,90,36,597/- which comprised of inter aliaundisclosed provisional income of `1,57,15,409/- arrived at by adopting aflat rate of 1.5% on the aggregate of all credit entries in the bank accountstatements of the assessee. Other than this amount, the AO also added sumsof money on the basis of unexplained cash deposits and negative balances;the Commissioner of Income Tax (Appeals) [hereafter referred to as“CIT(A)] directed the cancellation of the sums added on account of negativebalances. However, the CIT(A) rejected the assessee’s contentions withrespect to addition of `1,57,15,409/-. The assessee had, in the originalreturns, declared the amounts to be derived on account of share tradingtransactions. The assessee’s contentions were rejected because the AO andthe CIT(A) found that in the statement recorded under Section 132(4) of theIncome Tax Act, 1961 (hereafter referred to as “the Act”), the assessee hadadmitted that the said sum of `1,04,76,94,004/- was actually not entirelybased on share transactions but was also based on accommodation entries.The assessee had stated in the returns that the commission received on theshare transactions ranged between 0.25% and 0.5%. The CIT(A), however,found that there was material suggestive of receipt of commission of upto1% even on the share transactions. In these circumstances, the estimatedincome added back by the AO on the basis of his assessment of the trueincome (on the business activity of providing accommodation entries which the assessee was engaged in) was to the extent of 1.5% of the total turnoverindicated. 3.The ITAT, in the appeal preferred by the assessee, upheld thesubstantivedecisionsoftheAOandtheCIT(A)[inIT(SS)ANo.54/Del/2004 dated 30.11.2004]. However, the ITAT directed rejection ofthe 1.5% turnover of commission attributed by the AO – and upheld by theCIT(A) in the following terms: “10.As far as application of rate of 1.5% to the turnover wasconcerned, the learned CIT(A) referred to seized documents –pages 6 to 8 of Annexure A-40 and pages 1 to 16 of Annexure A-2which showed that commission of 1% to 1.25% was chargedwhereas the same was shown between 0.05% to 0.1% in theaccommodation bills as per books of accounts. The balancecommission was settled outside the books of accounts andreceived in cash. After considering facts and circumstances of thecase, the learned CIT(A) observed that the AO in this case aftergivingdueconsiderationtoassessee’ssubmissionsandinformation available as per seized record and gathered duringthe course of search, was justified in applying rate of 1.5% tocompute commission earned by the assessee in the block period.Accordingly, addition of Rs.1,57,15,409/- was upheld. XXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXX 18.We now face the question as to what should bereasonable rate of commission in this case having regard tomaterial available on record. The assessee did not dispute thatquantum of turnover for providing the accommodation entries tovarious clients during the year as computed by the AO atRs.1,04,76,94,004/- is not correct. The commission stated to havebeen charged and admitted by the assessee ranged from .25% to.5%. The rate as evident from the seized material which has beenreferred to by the lower authorities, does reflect that the assesseehad charged a rate as high as 1%. As against this, the revenue authorities have applied @ 1.5% to the entire turnoverirrespective of the nature of entries whether long term, short termgain etc. It is also note worthy that the gross rate of commissioncharged by the assessee can also not be said to be profit exigibleto tax. The credit for the expenses incurred in running thebusiness is also required to be considered while estimating theincome from business of providing accommodation entries. Thetotal turnover also includes some genuine transactions carriedon by the assessee on which rate of commission was admittedlymuch lower ranging between 0.25% to 0.50%. Therefore, havingregard to the entire gamut of facts, circumstances and materialwhich is available on record, there does not appear to bejustifiable reasons to estimate the commission/brokerage of theassessee by applying rate of 1.5% of the total turnover. In ourview it would be in the fitness of the things that the incomeearned by the assessee by way of commission/brokerage on theturnover including accommodation entries provided to its clientsis computed @ .6% on the total turnover of Rs.1,04,76,94,004/-on which there is no dispute. We accordingly direct the AO tocompute income on count of commission/brokerage.” 4.The AO had, in the meanwhile initiated penalty proceedings underSection 158BFA(2) of the Act which culminated in the order dated29.06.2005. The AO directed payment of `15,34,375/-. The assessee’sappeal to the CIT(A) was not successful. In the meanwhile, it is worthmentioning that the assessee had not appealed against the ITAT’s orderfinally determining the income @ 0.6% of `1,04,76,94,004/-. Therefore, thematter became final. In these circumstances, when the ITAT wasapproached in the present round of issue of penalty, it rejected the assessee’scontentions. 5.Learned counsel for the assessee urges that the ITAT fell into error. Itwas submitted that the trigger for a penal action under Section 158BFA(2) isif in the course of a search, some material is found. Placing emphasis on 4.The AO had, in the meanwhile initiated penalty proceedings underSection 158BFA(2) of the Act which culminated in the order dated29.06.2005. The AO directed payment of `15,34,375/-. The assessee’sappeal to the CIT(A) was not successful. In the meanwhile, it is worthmentioning that the assessee had not appealed against the ITAT’s orderfinally determining the income @ 0.6% of `1,04,76,94,004/-. Therefore, thematter became final. In these circumstances, when the ITAT wasapproached in the present round of issue of penalty, it rejected the assessee’scontentions. 5.Learned counsel for the assessee urges that the ITAT fell into error. Itwas submitted that the trigger for a penal action under Section 158BFA(2) isif in the course of a search, some material is found. Placing emphasis on Section 158BB, especially, the phrase, “undisclosed income found”, learnedcounsel submitted that the pre-condition for imposition of penalty underSection 158BFA(2) is that the “undisclosed income” determined by the AOis necessarily linked with the undisclosed income found – which in turn isbased on some material. Arguing that in the present instance, the assesseehad concededly declared a sum of `1,04,76,94,004/- in the books ofaccounts, learned counsel highlighted that in the circumstances, the penaltycould not have been imposed. It was argued in this context that any incomedetermined in the course of block assessment proceedings must necessarilyrelate to that adjudicated upon and must be based on objective materialfound. In other words, it cannot be based on an estimation or a voluntary actof the assessee such as surrender. To say so, learned counsel relied upon twojudgments of the Rajasthan High Court, i.e. CIT v. Satyendra Kumar Dosi2009 (222) CTR 258 (Raj) and CIT v. Dr. Giriraj Agarwal Giri 2013 (33)Taxman 536 (Jaipur). Learned counsel also relied upon the judgment of aDivision Bench of this Court in CIT v. Harkaran Das Ved Pal 2009 (177)Taxman 398 (Del). In Satyendra Kumar Dosi (supra), the Rajasthan HighCourt held that Section 158BFA(2) textually empowers the AO to levypenalty on the undisclosed income determined by him but that the powerdoes not extend to imposing penalty in the cases excluded in the firstproviso. Thereafter, the Court observed as follows: 11.The contention raised by the learned counsel on thestrength of the provisions of Sections 273B and 158BFA(3) isalso devoid of any merit. Of course, as per the provision ofSection 273B no penalty shall be imposable on the persons or theassessee as the case may be, on their failure referred to in thesaid provisions if he proves that there was reasonable cause for the said failure. But then, the said provision in no manner leadsto the presumption that in respect of the cases other than coveredby Section 273B for any failure or violation imposition of thepenalty is automatic. Each provision of penalty has to beconstrued independently keeping in view the language employedtherein. XXXXXX XXXXXX XXXXXX 11.The contention raised by the learned counsel on thestrength of the provisions of Sections 273B and 158BFA(3) isalso devoid of any merit. Of course, as per the provision ofSection 273B no penalty shall be imposable on the persons or theassessee as the case may be, on their failure referred to in thesaid provisions if he proves that there was reasonable cause for the said failure. But then, the said provision in no manner leadsto the presumption that in respect of the cases other than coveredby Section 273B for any failure or violation imposition of thepenalty is automatic. Each provision of penalty has to beconstrued independently keeping in view the language employedtherein. XXXXXX XXXXXX XXXXXX 13.Moreover, in the instant case, after due examination ofthe facts and the material on record, the CIT(A) and learnedTribunal have concurrently found that the difference of theundisclosed income assessed and the undisclosed income shownin the return does not relate to the block period as such. TheTribunal has arrived at the finding that the assessees hadclaimed to give reduction of amounts calculated on reasonablebasis on account of their opening capital as on 1st April, 1995from the unaccounted money-lending business prior to blockperiod out of the undisclosed income determined in their hands.The learned Tribunal has rightly held that the addition is resultof estimation of the opening capital involved prior to the blockperiod and in the block assessments while computing theundisclosed income for the block period, capital possessed by theassessees prior to the block period as revealed from the ledgerand the material seized during the search could not be treated asundisclosed income of the first assessment year in the blockperiod. Thus, in view of the concurrent finding of fact arrived atby the two appellate authorities, as aforesaid, in our consideredopinion, no substantial question of law arises for considerationof this Court in these appeals. In the result, the appeals fail, the same are hereby dismissed. Noorder as to costs.” 6.The same High Court later in Giriraj (supra) echoed the same view asfollows: “9................................A fact or allegation based on estimation,cannot be said to be correct only, it can be incorrect also. Therefore, in the facts and circumstances of the case, penaltywas wrongly imposed by the Assessing Officer. In thesecircumstances, we find that the judgment of the hon'ble apexcourt, referred to by the learned counsel for the appellant, is notapplicable, in the facts and circumstances of the present case.” 7.Harkaran (supra) was a case that concerned itself with whether onfacts the assessee had, during the course of the proceedings after the surveyunder Section 132 of the Act surrendered the amounts which were ultimatelybrought to tax. The Court relied upon various rulings to say that theproceedings under Chapter XIV-B were special in nature and ratherconstituted a complete code and that in the circumstances, the surrender ofamounts would not ipso facto lead to the inference that the amounts weredetermined by the AO pursuant to material seized in the course of search. 8.Section 158BFA(2) reads as follows: “[Levy of interest and penalty in certain cases. 158BFA. (1) XXXXXXXXXXXX (2) The Assessing Officer or the Commissioner (Appeals) in thecourse of any proceedings under this Chapter, may direct that aperson shall pay by way of penalty a sum which shall not be lessthan the amount of tax leviable but which shall not exceed threetimes the amount of tax so leviable in respect of the undisclosedincome determined by the Assessing Officer under clause (c)of section 158BC : Provided that no order imposing penalty shall be made in respectof a person if— (i) such person has furnished a return under clause (a) of section158BC; (ii) the tax payable on the basis of such return has been paid or,if the assets seized consist of money, the assessee offers themoney so seized to be adjusted against the tax payable; “[Levy of interest and penalty in certain cases. 158BFA. (1) XXXXXXXXXXXX (2) The Assessing Officer or the Commissioner (Appeals) in thecourse of any proceedings under this Chapter, may direct that aperson shall pay by way of penalty a sum which shall not be lessthan the amount of tax leviable but which shall not exceed threetimes the amount of tax so leviable in respect of the undisclosedincome determined by the Assessing Officer under clause (c)of section 158BC : Provided that no order imposing penalty shall be made in respectof a person if— (i) such person has furnished a return under clause (a) of section158BC; (ii) the tax payable on the basis of such return has been paid or,if the assets seized consist of money, the assessee offers themoney so seized to be adjusted against the tax payable; (iii) evidence of tax paid is furnished along with the return; and (iv) an appeal is not filed against the assessment of that part ofincome which is shown in the return : Provided further that the provisions of the preceding provisoshall not apply where the undisclosed income determined by theAssessing Officer is in excess of the income shown in the returnand in such cases the penalty shall be imposed on that portion ofundisclosed income determined which is in excess of the amountof undisclosed income shown in the return.” 9.The plain terms of the provision – which Harkaran (supra)emphasised occur in a separate part of the Income Tax Act. Chapter XIV-Bentitled “Special procedure for assessment of search cases” nowhereindicates that an estimation of income tax logically based upon inferencedrawn in the case of block assessment procedure is per se excludable fromthe ambit of the penal provision. The plain text of the enactment says thatthe AO has the discretion to levy penalty, “which shall not be less than theamount of tax leviable but which shall not exceed three times the amount oftax so leviable in respect of the undisclosed income determined by theAssessing Officer under clause (c) of section 158BC”. In the presentinstance, there is no doubt at all that the AO did determine the undisclosedincome; that it was based upon estimation or an inference is a matter ofdetail. The plain text of the enactment admits no room for doubt that allmanners of determination of income, per se might call for action at thediscretion of the AO. As to whether the AO has properly exercised discretion in a particular matter or otherwise can certainly be subject tofurther scrutiny. The plain text of enactment, however, does not admit of theinterpretation which was favoured by the two Rajasthan High Courtjudgments cited by the assessee. The assessee’s argument that there was nofresh material since the entire amount was disclosed earlier and that amounthas not been varied, in our opinion, is not accurate. The sum of`1,04,76,94,004/- was claimed in entirety (originally) to have been derivedfrom share business. However, it did not exclusively stem from the sharebusiness and in fact the assessee admitted, in the course of searchproceedings under Section 132(4) of the Act, that the said amount alsoincluded sums forming part of the turnover on account of providingaccommodation entries. Now, that radically changed the complexion of thenature of declaration made and certainly formed the basis for materialsdiscovered during the course of proceedings. Furthermore, having regard tothis admission, the AO, most importantly, was entitled to determine: havingregard to the nature of commission originally declared, whether that was inline with the new activity disclosed. It is a matter of record – noted by theCIT(A) in the quantum proceedings that the commission ranged upto 1%.Having regard to the conspectus of circumstances, therefore, the AOdetermined the commission to be 1.5% on the said total turnover; the ITATdecreased it. Nonetheless, the important fact is that the determination in thecourse of block assessment order was based upon a material discovered, i.e.in the form of statement made by the assessee under Section 132(4) of theAct; that radically changed the character of the income originally declared.Consequently, the estimation directed by the ITAT was accepted by theassessee. 10.In view of the above circumstances, this Court is of the opinion thatthe question of law urged has to be answered against the assessee and infavour of the Revenue. The appeal is consequently dismissed along with thepending application. MARCH 04, 2015 S. RAVINDRA BHAT(JUDGE)R.K. GAUBA(JUDGE)