ITAT AHMEDABAD ‘A’ BENCH Tushti Securities Pvt. Ltd. v. ACIT

Levy of penalty under section 271(1)(c) of IT Act, 1961 for diversion of income

Under Explanation 1 to section 271(1)(c), an assessee would be deemed to have concealed the particulars of his income if, in respect of facts material to the computation of his income, he fails to offer an explanation or offers a false explanation or an explanation which he is not able to substantiate and also fails to prove that his explanation is bona fide.

ITAT AHMEDABAD ‘A’ BENCH

Tushti Securities Pvt. Ltd.

v.

ACIT

ITA No. 998 & 999/Ahd/2007

August 13, 2009

RELEVANT EXTRACTS:

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12. We have carefully considered the rival submissions and the facts of the case. The assessee’s appeals are directed against the penalty sustained by the CIT(A) in respect of the repayment of the brokerage charged from the clients. In our opinion, the penalty was rightly levied. This is a case where it appears to us that Explanation 1 to section 271(1)(c) of the Act has been rightly invoked by the Assessing Officer. Under this Explanation an assessee would be deemed to have concealed the particulars of his income if, in respect of facts material to the computation of his income, he fails to offer an explanation or offers a false explanation or an explanation which he is not able to substantiate and also fails to prove that his explanation was bona fide. We are of the view that the assessee in the present case has offered an explanation which he was not able to substantiate and also failed to prove that the explanation was bona fide. The assessee has also not disclosed all the facts relevant to the explanation and material to the computation of his income. Clause (B) of Explanation 1 is attracted to the case. When called upon to prove the repayment of the brokerage to a few selected clients, fourteen in number, the assessee was under duty to comply with all the queries raised in the questionnaire issued by the AO. Theoretically the assessee has tried to explain the questions raised by the AO. However, the assessee has not been able to furnish the precise addresses of the fourteen parties so that summons could be issued to them to verify the correctness of the claim. For example, some of the addresses are (a) Nitan Raval, Sharda Society, Nr.Sharda Mandir, Paldi, Ahmedabad, (b) Pallavi Soni, Dayabhai Park, Maninagar, Ahmedabad, (c) Vikram Nagar, G/8, Sushmita Flat, Vasna, Ahmedabad, (d) Vandanaben Shah, Dhanlaxmi Society, Maninagar, Ahmedabad etc. No doubt, there are few confirmations which contained slightly more precise addresses. However, that does not take the matter further because the assessee has not been able to meet the queries raised by the AO accurately. It has not been able to give details of how much business each client had with it and what was the number of new clients introduced by them so as to justify return of the brokerage charged from them in part. It was the duty of the assessee to show with exact figures the basis of calculating the amount of brokerage to be returned to the existing clients. In fact the assessee itself stated in its letter dated 17-3-2003 that it was having a somewhat raw system of deciding and accounting such claims and that these claims were decided on ad hoc basis by the director upon the request from the clients. The AO also called upon the assessee to show how much brokerage have been charged from the clients, as it was not clear from the sauda account, but this query also remained un-complied with. Further, in the questionnaire the AO had also stated that the assessee did not apply any “required criteria to return back the brokerage” and the reply of the assessee was that such claims were decided on ad hoc basis by the director upon request from the clients. Even allowing for full play of the principle that it is for the businessman to decide how he will conduct his business, the assessee’s reply is too vague to be considered seriously. The assessee has stated that the brokerage returned not only included incentives but also reimbursement of certain expenses, such as conveyance, tea, coffee etc. and in some cases also included remuneration for helping out in the routine office work. This explanation rings hollow and the assessee made no attempt to furnish the full facts and figures to support his claim. There was no attempt to show why remuneration should be paid for someone who is helping out in the office work, in the guise of return of brokerage when the payment, had it been made, could be legitimately claimed as salary payment. The AO is also right in not accepting the explanation of the assessee in this behalf on the ground that the assessee itself was maintaining separate accounts for traveling, conveyance, tea, coffee etc. and there was no good reason to debit such expenses to the brokerage returned account. In any case, the break-up into conveyance, remuneration, tea, coffee etc. was not given by the assessee. The AO had also made a point that the debits to the sauda brokerage account were in abbreviated forms from which nothing could be made out and the assessee’s answer to the same was that the narrations were entered by the accountant and because of the limitation in the software regarding the number of characters, he had to use abbreviations. Another valid point raised by the AO was that the return of the brokerage has not been credited to the clients’ personal accounts but has been made through final J.V. account (which probably means journal vouchers). If the assessee’s claim is true that it returned part of the brokerage charged from high-value clients as incentive for introducing new clients, one would expect the amounts to be credited first to the personal accounts of the clients after making the necessary calculations in that behalf depending upon the number of new clients introduced, the business given by them, and so and so forth. Thereafter, payments would have been effected or adjustments against the debit for brokerage charged from them would have been made. This would have ensured that the correct amount of brokerage due to them was being returned and would also serve as a kind of control over the entire transactions. But it is very un-usual to debit the payment straight away to the sauda brokerage account. In fact it is not even clear whether the payments were actually made as debited in the sauda brokerage account and it was this aspect that was highlighted by the learned SR.DR when he submitted that the mode of payment of the brokerage itself has not been proved by the assessee. This submission has relevance to the argument advanced on behalf of the assessee that there is no evidence to show that the payments have come back to the assessee. In our opinion, if the payment itself is not proved beyond doubt, then the argument that there is no evidence to show that the amounts have come back to the assessee is of no effect.

14. Having regard to the aforesaid discussion, we are of the view that Explanation 1 to Section 271(1)(c) is applicable to the present case and the AO was right in imposing penalty on the assessee for both the years in respect of the disallowance made under the head “diversion of income in the name of excess brokerage paid back”. We accordingly dismiss the assessee’s appeal for both the years.



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