LALIT T BHATIA, MUMBAI V. JCIT RG 8(1), MUMBAI

ITA 5896/MUM/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 100665 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 10 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-08-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 05-05-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 27-09-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ASGHAR ZAIN
• Assessee Lawyers: N H GAJRIA
• Keywords: Deemed dividend; Ignorance of law

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, MUMBAI . , , BEFORE SHRI D. MANMOHAN , VP AND SHRI SANJAY ARORA, AM ./ I.T.A. NO. 5896/MUM/2012 ( / ASSESSMENT YEAR: 2006 - 07 ) LALIT T. BHATIA 84, STAR APARTMENT, S. V. ROAD, BORIVALI (W), MUMBAI - 400 092 / VS. JT. CIT, RANGE 8(1), MUMBAI ./ ./ PAN/GIR NO. AACPB 9798 E ( / APPELLANT ) : ( / RESPONDENT ) / APPELLANT BY : SHRI N. H. GAJRIA / RESPONDENT BY : SHRI ASGHAR ZAIN / DATE OF HEARING : 05.05.2015 / DATE OF PRONOUNCEMENT : 05 .08.2015 / O R D E R PER SANJAY ARORA, A. M.: THIS IS AN A PPEAL BY THE ASSESSEE AGITATING THE CONFIRMATION OF THE LEVY OF PENALTY U/S.271(1)(C) OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) BY THE ASSESSING OFFICER (A.O.) FOR THE ASSESSMENT YEAR (A.Y.) 2 006 - 07 VIDE ORDER DATED 19.03.2012 AT THE MINIMUM RATE OF 100% OF THE TAX SOUGHT TO BE EVADED , BY THE COMMISSIONER OF INCOME TAX (APPEALS) - 16 , MUMBAI (CIT(A) FOR SHORT) VIDE HIS ORDER DATED 20.07.2012. 2 ITA NO. 5896/MUM/2012 (A.Y. 2006 - 07) LALIT T. BHATIA VS. JT. CIT 2. 1 THE FACTS OF THE CASE ARE THAT THE ASSESSEE, AN INDIVIDUAL, WAS DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS FOUND TO HAVE WITHDRAWN ` .10 LACS FROM A COMPANY, GALLANT FREIGHT AND TRAVEL S PRIVATE LIMITED ( GFTPL OR THE COMPANY HEREINAFTER ) , IN WHICH HE WAS A DIRECTOR, HOLDING 37% SHARES. THE COMPA NY HAD ACCUMULATED PROFITS EXCEEDING THE SAID AMOUNT, SO THAT THE PROVISION OF SECTION 2(22)(E) STOOD ATTRACTED. THE ASSESSEE, ON BEING SHOW CAUSED IN THE MATTER, EXPLAINED THAT THE COMPANY REQUIRED LIQUIDITY AND , THEREFORE , AS PER ITS USUAL PRACTICE, MADE INVESTMENT IN A M UTUAL F UND, THOUGH IN HIS NAME IN - AS - MUCH AS THE SAME COULD NOT , FOR TECHNICAL REASONS, BE MADE IN THE NAME OF THE COMPANY. THE SAME DID NOT FIND FAVOUR WITH THE REVENUE , AND THE ENTIRE AMOUNT, W HICH THOUGH STOOD RETURNED BACK TO THE COMP ANY WITHIN A MONTH, CAME TO BE ADDED AS INCOME BY WAY OF DEEMED DIVIDEND U/S.2(22)(E) OF THE ACT. THE MATTER CARRIED TO THE T RIBUNAL, WHICH FOUND THAT THE ASSESSEE HAD BEEN AS UNABLE TO SUBSTANTIATE HIS CLAIM OF THE INVESTMENT HAVING BEEN ACTUALLY SOUGHT T O BE MADE IN THE NAME, OR AS A N INVESTMENT , OF THE COMPANY. THE SUSTENANCE OF THE ADVANCE WAS AGAIN NOT A CRITERION FOR THE ATTRACTION OF THE SAID PROVISION, SO THAT THE FACT THAT IT STOOD RETURNED SUBSEQUENTLY, OR WAS NOT OUTSTANDING AS AT THE YEAR - END, W AS OF LITTLE CONSEQUENCE. THE ADDITION WAS UPHELD IN PRINCIP L E , RELYING ON THE DECISION S IN THE CASE OF TARULATA SHYAM VS. CIT [1977] 108 ITR 345 (SC) AND P. SARADA V. CIT [1998] 229 I T R 444 (SC), ALSO REPRODUCING FROM THE LATTER ( ITA NO. 1663/MUM/2011 DAT ED 13.02.2015/COPY ON RECORD) . THE TRIBUNAL, HOWEVER, RESTRICTED THE ADDITION TO THE NET ADVANCE TO THE ASSESSEE IN - AS - MUCH AS THE ASSESSEE HAD A CREDIT BALANCE IN HIS ACCOUNT WITH THE COMPANY AT ` .3,78,535/ - AS AT THE DATE OF THE ADVANCE, I.E., 21.06.2005 . 2 . 2 IN PENALTY PROCEEDINGS, INITIATED AT THE TIME OF ASSESSMENT, THE ASSESSEE REITERATED H IS STAND, EMPHASIZING ON THE REPAYMENT OF THE LOAN/ADVANCE WITHIN A SHORT PERIOD OF TIME , BY LIQUIDATING THE INVESTMENT IN THE M UTUAL F UND , TOWARD HIS BONA FIDES (REFER: COPY OF ASSESSEES ACCOUNT IN GFTPL, ANALYSIS OF BANK STATEMENT/COPY 3 ITA NO. 5896/MUM/2012 (A.Y. 2006 - 07) LALIT T. BHATIA VS. JT. CIT ON RECORD) . THE SAME, HOWEVER, DID NOT FIND FAVOUR WITH THE REVENUE IN - AS - MUCH AS A WILLFUL DEFAULT OR M E N S R E A WAS NOT AN INGREDIENT FOR THE LEVY OF PENALTY U/S. 271(1)(C), WHICH WAS LEVIED , AS WELL AS CONFIRMED , RELYING ON THE DECISION S IN THE CASE OF UNION OF INDIA V. DHARMENDRA TEXTILE PROCESSORS [ 2008] 306 ITR 277 (SC) AND CIT VS. NATHULAL AGARWALA & SONS [1985] 153 ITR 292 (PAT)(FB). PER THE LAT T ER DECISION , IT STOOD CLARIFI ED THAT IT IS NOT THAT THE MOMENT AN UNACCEPTABLE OR FANTASTIC EXPLANATION IS OFFERED BY THE ASSESSEE THAT THE PRESUMPTION CAST BY EXPLANATION 1 TO THE PROVISION STANDS REBUTTED . AGGRIEVED, THE ASSESSEE IS IN SECOND APPEAL. 3 . WE HAVE HEARD THE PARTIES, AND PERUSED THE MATERIAL ON RECORD. 3.1 OUR FIRST OBSERVATION IN THE MATTER IS THAT THE ADDITION HAVING BEEN RESTRICTED BY THE TRIBUNAL TO ` .6.21 LACS, PENALTY ON THE BALANCE ADDITION OF ` .3.79 LACS WOULD NOT SURVIVE. 3.2 ON MERITS, T HE ASSESSEE EXPLAIN S THAT THE INVESTMENT WAS TO BE MADE ON THE COMPAN YS BEHALF, THOUGH CAME TO BE MADE IN HIS NAME FOR TECHNICAL REASONS. THE SAME COULD NOT THOUGH BE SUBSTANTIATED, WHICH LED TO THE CONFIRMATION OF THE ADDITION IN - AS - MUCH AS ALL THE INGREDIENTS OF THE DEEMI NG PROVISION OF SECTION 2(22)(E) STOOD SATISFIED. THE EXPLANATION IN FACT HAS SEVERAL INFIRMITIES. EVEN CONSIDERING THAT THE INVESTMENT IN A M UTUAL F UND (MF) COULD NOT BE MADE IN THE COMPANYS NAME, IT WOULD ONLY BE AWARE OF THE SAME; IT BEING ITS USUAL P RACTICE TO PARK FUND S IN LIQUID INSTRUMENTS. THEN, AGAIN, THE INVESTMENT COULD BE MADE IN THE ASSESSEES NAME, WH O WOULD HOLD THE SAME IN A FIDUCIARY CAPACITY AS ITS DIRECTOR. THERE IS NO RESOLUTION BY THE B OARD OF DI RECTORS TO SUPPORT THE SAID CONTENTION. FURTHER, THE DEBIT IN THE BOOKS OF ACCOUNT OF THE COMPANY WOULD I N SUCH A CASE BE TO THE INVESTMENT ACCOUNT, AND NOT TO THE PERSONAL ACCOUNT OF THE ASSESSEE. THAT IS, THE VERY FACT OF THE INVESTMENT BEING IN THE NAME OF THE ASSESSEE, WHO DOES NOT DECLAR E HI S CAPACITY (AS REGARDS THE INVESTMENT) AS A DIRECTOR /TRUSTEE OF THE COMPANY AND , FURTHER , DEBITING THE SAME IN ITS 4 ITA NO. 5896/MUM/2012 (A.Y. 2006 - 07) LALIT T. BHATIA VS. JT. CIT ACCOUNTS WHI CH ARE PRESUMABLY AUDITED, TO THE ASSESSEES ACCOUNT, DISPROVES THE EXPLANATION. IN FACT, THE ASSESSEE S STAT ING IN THE APPE LLATE PROCEEDINGS THAT HE REVERSED THE TRANSACTION AS SOON AS HE REALIZE D H IS MISTAKE, ITSELF B E LIES HIS EARLIER EXPLANATION. IF THE FUNDS WERE RELEASED TO THE ASSESSEES BANK ACCOUNT FOR INVESTMENT ON BEHALF OF THE COMPANY , WHAT , WE WONDER , IS THE MISTAK E COMMITTED ? THE INVESTMENT BEING UNABLE TO BE H E LD IN THE COMPANYS NAME, FOR SOME UNSTATED TECHNICAL REASON / S, COULD A LWAYS BE H E LD BY A DIRECTOR FOR AND ON BEHALF OF THE COMPANY, WHO WOULD IN THAT CASE BE LIABLE TO RETURN THE SALE PROCEEDS OF THE INVES TMENT, AND NOT THE ONLY AMOUNT ADVANCE D , AS IN THE PRESENT CASE, ESTABLISHING IT TO BE A TRANSACTION OF LOAN OR ADVANCE. WE MAY TOWARD THIS ADVERT TO PARALLEL PROVISIONS UNDER THE COMPANIES ACT, 1956 . SECTION 187 - C RELATES TO THE DECLARATION /S BY A PERSON NOT HOLDING BENEFICIAL INTEREST IN ANY SHARE , WHILE SECTIONS 153B AND 187B ARE WIT H REGARD TO THE DECLARATION IN RESPECT OF SHARES IN A COMPANY HELD IN TRUST. 3.3 WE MAY NEXT EXAMINE THE ASSESSEES MODIFIED - IN - AS - MUCH AS WE OBSERVE IT TO HAVE UNDERGO NE A QUALIT ATIVE CHANGE OVER TIME, EXPLANATION , I.E., T HAT THE INVESTMENT, THOUGH MADE BY HIM BY DRAWING ON THE FUNDS, REPRESENTING THE PROFITS OF THE COMPANY , WERE NOT INTENDED TO BE SO DIVERTED, WHICH OCCURRED ON ACCOUNT OF A BONA FIDE MISTAKE, ONLY TO B E RETURN ED AS SOON AS THE SAID MISTAKE WAS REALIZED, BY LIQUIDATING THE INVESTMENT IN MF AND REPAYING THE LOAN/ADVANCE . IN THIS REGARD, THE LENGTH OF THE TIME AFTER WHICH THE ASSESSEE MAY (OR MAY NOT) REALIZE THE MISTAKE WOULD NOT BE RELEVANT, BEING NOT IN HIS HANDS AND , TWO, EQUALLY IMPORTANTLY , THE DEFAULT HAVING BEEN ALREADY COMMITTED AND THE PROVISION TRIGGERED . WHAT IS RELEVANT THOUGH IS THE REM EDIAL ACTION TAKEN BY THE ASSESSEE, AND WHICH IN THE PRESENT CASE IS TO PROMPTLY RETURN THE ADVANCE BY E N C A SHING THE INVESTMENT . THE EXPLANATION, WHICH IS BORNE OUT BY THE FACTS, THOUGH APPEALING AT FIRST BLUSH, WOULD ALSO NOT H E L P THE ASSESSEE. T HIS IS AS , FIRSTLY, IGNORANCE OF LAW IS NO EXCUSE, EVEN AS CLARIFIED BY THE HONBLE JURISDICTIONAL HIGH COURT IN CIT VS. ALKESH K. PATEL [2010] 325 ITR 118 5 ITA NO. 5896/MUM/2012 (A.Y. 2006 - 07) LALIT T. BHATIA VS. JT. CIT (BOM), WHEREIN THE ASSESSEE - RESPONDENT PLEADED SIMILARLY, ADMITTING TO A BONA FIDE MISTAKE IN VIEW OF HIS BEING NOT AWARE OF THE RELEVANT PROVISION OF LAW , BEING , IN FACT , THE PROVISION UNDER REFERENCE, I.E., SECTION 2(22)(E). THE HONBLE COURT DISCOUNTENANCE D THE PLEA OF A BONA FIDE MISTAKE ON ACCOUNT OF BEING UN AWARE OF THE PROVISION OF LAW, WHICH WOULD BE BY ITSELF NOT SUFFICIENT. ALL THE RELEVANT FACTS AND CIRCUMSTANCES OF THE CASE COULD THOUGH BE CONSIDER ED TO AR RIVE AT A FINDING OF FACT WITH REGARD TO A BONA FIDE BELIEF , AND WHICH HAD NOT BEEN EVALUATED BY THE TRIBUNAL . THE MATTER WAS ACCORDINGLY RESTORED BACK TO I T FOR THE PURPOSE, TO DO SO UPON CONSIDERING ALL THE MATERIAL FACTS AND CIRCUMSTANCES . THE MATTER OF BONA FIDE BELIEF , OR A MISTAKE ON ITS BASIS, WOULD THUS HAVE TO BE EXAMINED ON ITS MERITS. THE ASSESSEE IN THE INSTANT CASE HIMSELF ADMITS TO HAVE REALIZED HIS MISTAKE, IMPLYING OF HIS KNOWLEDGE OF HAVING, PERHAPS INADVERTENTLY , VIOLATED THE LAW IN - AS - M UCH AS HE COULD NOT , AS A SUBSTANTIAL SHAREHOLDER , HAVE , EXCEPT BY WAY OF DIVIDEND, DIVERTED THE PROFITS OF A COMPANY IN WHICH PUBLIC IS NOT SUBSTANTIALLY INTERESTED, FOR HIS PERSONAL PURPOSES. THE LEGAL PROVISION , OR THE LAW IN THE MATTER, EVEN AS OBSERVE D BY THE TRIBUNAL IN THE QUANTUM PROCEEDINGS BY RELYING ON SOME CELEBRATED DECISIONS BY THE APEX COURT , BEING ABUNDANTLY CLEAR, WHAT THE ASSESSEE, ON THE SUBSEQUENT KNOWLEDGE, I.E., ASSUMING SO, OUGHT TO HAVE DONE IS TO RETRIEVE THE SIT UATION. THE ASSE SSEES CONDUCT IN RETURNING THE FUNDS, WHICH HE DOES BY LIQUIDATING THE INVESTMENT, WHICH AGAIN PROVES IT TO BE A PERSONAL INVESTMENT , DEFINITELY ESTABLISH ES HIS BONA FIDES . AT THE SAME TIME, HOWEVER, THE PROVISION HAVING BEEN ATTRACTED, WHICH FACT COMES T O HIS KNOWLEDGE WELL BEFORE THE FILING OF HIS RETURN OF INCOME FOR THE YEAR, IT W AS INCUMBENT ON HIM TO INCLUDE THE SAME AS HIS INCOME PER THE RETURN OF INCOME. THE EXPLANATION, IT NEEDS TO BE APPRECIATED, THAT THE ASSESSEE IS REQUIRED TO FURNISH IS TOWARD NOT OFFERING THE SAID SUM AS HIS INCOME IN ACCORDANCE WITH THE LAW, I.E., FOR NOT RETURNING THE INCOME BY WAY OF DEEMED DIVIDEND PER HIS RETURN OF INCOME. THIS IS IN FACT PUZZLING IN - AS - MUCH AS HE ADMITS TO HAVE REALIZED HIS MISTAKE IN APPROPRIATING THE C OMPAN YS FUNDS FOR PERSONAL PURPOSES, THEREBY ATTRACTING SECTION 2(22)(E) , PERHAPS 6 ITA NO. 5896/MUM/2012 (A.Y. 2006 - 07) LALIT T. BHATIA VS. JT. CIT UNINTENTIONALLY. IT MAY BE ARGUED THAT , IF SO RETURNED , THE QUESTION OF PENALTY WOULD NOT ARISE. BUT THEN , THAT IS PRECISELY WHAT WE ARE SAYING, I.E., THAT THE ASSESSEE HAVI NG REALIZED HIS MISTAKE WELL IN TIME , WITH THE DEFAULT U/S. 2(22)(E) THE LAW ON WHICH IS VERY CLEAR, HAVING BEEN COMMITTED, HE OUGHT TO HAVE RETURNED THE SAID INCOME IN - AS - MUCH AS HE HAS NO REASON FOR N OT SO DO ING , PREFERRING INSTEAD NOT TO RETURN HIS IN COME IN THE ADMITTED FACTS OF THE CASE, IN ACCORDANCE WITH LAW. H E COULD HAVE , AT LEAST, WHILE NOT RETURNING THE SAME, NARRATED THE SEQUENCE OF EVENTS LEADING TO THE ATTRACTION O F THE PROVISION OF SECTION 2(22)(E), BESIDES THE SUBSEQUENT EVENTS, PLEADING TO AN INDULGENCE IN NON - INVOKING SECTION 2(22)(E). IT IS THOUGH DOUBTFUL IF THIS WOULD HAVE SERVED THE PURPOSE IN - AS - MUCH AS THE ASSESSEE HIMSELF ADMITS TO HAVE REALIZED HIS MISTAKE, I.E., HAVING BECOME AWARE OF THE POSITION OF LAW, AND WHICH GETS ESTABLI SHED BY HI S IMMEDIATE RETURNING TH E FUNDS BACK TO THE COMPANY. TH E SAME, HOWEVER, WOULD HAVE PROVIDE D S COPE FOR CONSIDERATION OF THE ASSESSEES EXPLANATION, WHICH WE FIND AS ABSENT IN THE INSTANT CASE. IN SHORT, THE ASSESSEE HAS NO EXPLANATION FOR HIS CO NDUCT IN NOT RETURNING THE IMPUGNED INCOME AND, FURTHER, NOT DECLARING THE MATERIAL FACTS PER THE RETURN OF INCOME. THIS, DESPITE BEING AWARE OF THE PROVISION BEING ATTRACTED. WE HAVE, RATHER, AS AFORE - STATED, OBSERVED A SHIFT IN THE ASSESSEES STAND WITH TIME. NO CASE FOR THE NON LEVY OF PENALTY U/S.271(1)(C) IN THE FACTS AND CIRCUMSTANCES OF THE CASE IS MADE OUT. 3.4 W E MAY ALSO ADVERT TO THE CASE LAW RELIED UPON BY THE ASSESSEE, EACH OF WHICH WE HAVE CAREFULLY PERUSED IN ARRIVING AT OUR DECISION, WHICH IS IN FACT CONSISTENT WITH THE DECISION IN ALKESH K. PATEL (SUPRA) . T HE OTHER DECISIONS ARE BY THE TRIBUNAL. WHAT IS BINDING IS THE RATIO OF A DECISION. WE HAVE RENDERED OUR DECISION FOLLOWING THE SETTLED LAW, BOTH AS REGARDS SECTION 2(22)(E) AS WELL AS Q UA SECTION 271(1)(C) , IN THE FACTS AND CIRCUMSTANCES OF THE CASE , UPON ANALYZING THE SAME; RATHER, APPLYING THE BINDING DECISION OF ALKESH K. PATEL (SUPRA). THE SAID DECISION S WOULD THUS NOT OPERATE TO DISTURB OUR DECISION. 7 ITA NO. 5896/MUM/2012 (A.Y. 2006 - 07) LALIT T. BHATIA VS. JT. CIT 3.5 IN VIEW OF THE FOREGOING, WE CONFIRM THE LEVY OF THE PENALTY U/S.271(1)(C) , WHICH IS AT THE MINIMUM SUM, I.E., IN PRINCIPLE. WE HAVE ALREADY STATED THAT THE ASSESSEE HAVING BEEN ALLOWED PART RELIEF BY THE TRIBUNAL, SUSTENANCE OF PENALTY ON THE SAME IS UNTENABLE, SO THAT WE DIRECT ITS DELETION TO THAT EXTENT. WE DECIDE ACCORDINGLY. 4 . IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON AUGUST 05 , 201 5 SD/ - SD/ - (D. MANMOHAN) (SANJAY ARORA) / VICE PRESIDENT / ACCOUNTANT MEMBER MUMBAI ; DATED : 05 . 0 8 .201 5 . . ./ 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 F ILE / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI