By TIOL News Service

ALLAHABAD, APR 05, 2017: THE issue is - Whether factum of bogus gifts given by strangers to the minor children of the partners through cash drafts purchased from same banks, apparently to enable them to give loans to the firm in which parents of such minors were partners, is sufficient ground for invoking penalty u/s 271(1)(c). YES is the verdict.

Facts of the case:

The AO while assessing the return of assessee for the A.Y 1990-91, had made additions of Rs. 2,39,000/- being cash credit entries found standing in the the assessee's books in the names of minor sons of the partners of assessee firm. These were disbelieved to the extent the said minors were held to be in receipt of bogus gifts from complete strangers. Also, the AO made addition on account of another cash credit appearing in the books of account of the assessee by way of loan of Rs. 50,000/- from one Vikash Kumar Poddar. Upon appeal, in the quantum proceedings, the Tribunal confirmed the addition of Rs. 2,89,000/-. It has been stated by Sri Ashish Bansal that in quantum matter the additions so made were affirmed by this Court inasmuch as the asseess's IT Appeal No. 82 of 2006 was dismissed by this court. Occasioned by confirmation of the additions by the Tribunal, the AO thereafter initiated penalty proceedings u/s 271(1)(c). In such facts, the AO invoked Explanation 1 to Section 271(1)(c) and imposed penalty of Rs. 2,00,000/- as against minimum penalty imposable Rs. 1,69,886/-. Since it was a case of no explanation, the penalty was imposed on that basis alone. On appeal, the CIT(A) observed first, in respect of the cash credit of Rs. 2,39,000/- that the parents of the minors (who claimed to have given money to the firm) and who were themselves partners in the firm were examined by the AO in respect of genuineness of the gifts claimed in the accounts of the minors for the purpose of making advances to the firm. They could not give any worthwhile details of the alleged donors and their relationship with the donees. Even in the proceedings before CIT(A), Shri Ravi Shankar Jhunjhunwala, one of the partners (and a parent) who appeared conceded that the donors were not related and that such donors were friends of relatives and that the details of such friends of relatives who had made the gifts as an organized activity of the parents of the minors, who are the partners of the firm. Clearly, according to the CIT(A) receipt of gifts from total strangers was a device to introduce unaccounted money in the names of minor children as well as in their own personal names. On further appeal, the ITAT reduced the penalty from Rs. 2,00,000/- to Rs. 1,69,886/- being the minimum penalty imposable.

On appeal, the HC held that,

++ it is found that the assessee firm had disclosed certain amounts in its account which it claimed to have received from minor children of the partners of the firm. On being questioned as to the source of these funds at the hands of the minors, it was explained that funds to the extent of Rs. 2,39,000/- had been received by the minors by way of gifts received from strangers. Similarly, Rs 50,000/- was credit appearing in the account as a loan from one Vikas Kumar Poddar. However, the assessee could not substantiate the claim of the gifts claimed to have been received by the minors and the same was taken to be unaccounted cash of the firm introduced by disclosing it as unsecured loan. Also, it could not establish the genuineness of the loan standing in the name of Vikas Kumar Poddar. In the penalty proceedings, it is admitted that the assessee did not offer any explanation before the AO. Thus the AO had rightly invoked Explanation 1 to section 271 (1)(c). Upon appeal, the assessee appears to have offered an explanation which was considered and disbelieved by the CIT(A) by observing that "....provisions of Section 68 are squarely applicable as in that case the availability of cash to make the alleged loan has not been established. The contumacious conduct of the appellant introducing the impugned sums as alleged gifts to the minors or cash credit can be seen very clearly...." The burden was on the assessee to furnish such explanation and to lead evidence to establish the truthfullness and correctness of the same. Inasmuch as the assessee did not furnish any explanation at the original stage and the explanation furnished by him, subsequently in appeal was disbelieved in as much as the appeallate authority concluded that the factum of gift given by different persons-all strangers to the minor children of the partners that too all through cash drafts purchased from same banks, apparently to enable them to give loans to the firm in which the parents of such minors were partners, was only a device;

++ the line of reasoning and findings recorded by the CIT(A) cannot be faulted as same is based on evidence found in this case. We have not been shown any material on the basis of which it may be said that the Appellate Authority had drawn the conclusion without any evidence or material on record. The nature of transaction being such that assessee alone could have had knowledge of the special facts claimed by him to have existed. In absence of any evidence to substantiate his claim, the authorities have rightly disbelieved the explanation furnished at the stage of appeal proceedings. The Assessee's counsel has in the end submitted, the assessee could not have been asked to explain the source of the source i.e. the assessee could not have been saddled with liability if the minors who advanced the money to the assessee could not explain the source of their receipts. We are not impressed by this submission either. We cannot loose sight of the fact that the minors in question were children of the partners in the firm and therefore, it had to be the partners who would have both arranged the gifts and also made the decisions to introduce money into the firm in name of the minors. It was therefore for them to have established the genuineness of the transaction as otherwise, in such circumstances, it would be to allow assessee's to place the minors in between themselves and the firm to escape the consequences in law by citing the rule - revenue cannot look into the source of the source. Further, in the facts of the instant case, the question of examining the source of the source may have been an issue in the quantum proceedings in which as has been candidly stated by assessee's counsel, the findings recorded against the assessee have attained finality. In the instant proceedings, the penalty was imposed because the assessee did not offer any explanation to the AO in the first instance and then the penalty was sustained because his explanation furnished before the CIT(A) was rejected. The provision of Explanation 1 to section 271(1)(c) having been thus invoked, no further enquiry was required in the facts of this case.

(See 2017-TIOL-653-HC-ALL-IT)