ASSISTANT COMMISSIONER OF INCOME TAX v. PORRITTS & SPENCER (A) LTD
[Citation -2008-LL-0320]

Citation 2008-LL-0320
Appellant Name ASSISTANT COMMISSIONER OF INCOME TAX
Respondent Name PORRITTS & SPENCER (A) LTD.
Court ITAT
Relevant Act Income-tax
Date of Order 20/03/2008
Assessment Year 1991-92
Judgment View Judgment
Keyword Tags prima facie adjustment • unexplained investment • concealment of income • imposition of penalty • regular assessment • sale consideration • gross total income • colourable device • physical delivery • sale transaction • speculation loss • unexplained cash • foreign exchange • movable property • original return • promissory note • actual delivery • income returned • purchase price • additional tax • business loss • special bench • tax at source • mutual fund • tax effect • mens rea
Bot Summary: Though the units were transferred in the name of assessee and then in the name of bank, but there is no material on record which suggests that physical delivery of the units in question were handed over to the assessee or not, as it seems that the physical possession was with ANZ to secure the sum of Rs. 3.75 crores invested on behalf of assessee against sale of units to the assessee. The Tribunal itself have given a finding in para 20.6 of its order that no doubt transactions were genuine as ANZ Bank confirmed having selling the units to assessee and then buying the same from assessee. The assessee claimed loss because the purchase price paid was more than the sale consideration of the units of UTI. The assessee filed copy of the certificate issued by UTI showing the assessee as registered holder of the units. In the present case, there is a clear finding, by the Tribunal holding that the transaction was genuine as ANZ Bank confirmed having selling the units to the assessee and buying the same from the assessee. Where the assessee discloses all the facts, but draws an inference not acceptable to the AO, it does not mean that the assessee could be subjected to penalty on the addition consequent on his inference, as was held in International Audio Visual in the context of the assessee s claim, that foreign exchange received in conferring dubbing rights of Hindi films should be treated as export for purposes of relief under s. 80HHC. It was a case where the primary facts were disclosed, so that penalty was not found exigible. 1 can be invoked in such a situation where the assessee fails to offer an Explanation; or the explanation offered is found by the AO to be false; or the assessee is unable to substantiate Explanation offered and also failed to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of total income have been disclosed. If the assessee gives an Explanation which is unproved but not disproved, i.e., it is not accepted but circumstances do not lead to the reasonable and positive inference that the assessee s case is false, the Explanation cannot help the Department because there will be no material to show that the amount in question was the income of the assessee.


This appeal by Revenue is directed against orders of learned CIT(A), Faridabad dt. 5th Jan., 2007 in appeal against order levying penalty under s. 271(1)(c) of IT Act, 1961 ( Act ). Revenue challenges order of learned CIT(A) on ground that addition made of Rs. 51,61,875 which was disallowed as speculation loss and which has been confirmed as such by Tribunal should have treated same as concealment of particulars of income for purpose of levy of penalty under s. 271(1)(c). facts of case are as under: assessee purchased 25 lakh units of UTI from M/s ANZ Grindlays Bank (for short hereinafter referred to as ANZ ) vide their letter dt. 21st May, 1990 for consideration of Rs. 3.75 crores. same units were sold to ANZ on 5th July, 1990 which resulted into loss of Rs. 51,61,875 which was claimed by assessee while filing return of income. AO disallowed loss while framing intimation under s. 143(1)(a). loss was disallowed by way of prima facie adjustment which was confirmed by learned CIT(A). matter was carried before Tribunal. Tribunal by its order in ITA No. 8028/Del/1992 dt. 16th Sept., 1998 held that treatment of loss as speculation loss is outside purview of prima facie adjustment permissible under s. 143(3)(a). For this kind of finding, AO would have been required to make verification and hear assessee. Such action would have been possible only in course of regular assessment under s. 143(3) of Act. Accordingly, addition made by way of prima facie adjustment under s. 143(1)(a) was deleted by Tribunal. During regular assessment proceedings under s. 143(3), assessee was required to prove genuineness of loss. assessee vide his letter dt. 18th Feb., 1994 submitted following documents: (a) ANZ letter of 21st May, 1990. (b) Company s letter No. 0457 of 21st May, 1990. (c) Demand Promissory Note of 21st May, 1990. (d) Minutes of meeting of board of directors held on 27th May, 1990. (e) Resolution passed by directors on 5th July, 1990. (f) ANZ letter of 20th July, 1990. It was further submitted that all transactions were made through banking channel and units were transferred in name of assessee. Relevant evidences were also filed. However, AO was not satisfied. In his view, this was only device to reduce tax liability. Therefore, he held that transaction involved was not bona fide transaction but was speculation loss. While holding so, various reasons were recorded by AO in his order. Some of them were that units were purchased on 21st May, 1990 whereas Board passed resolution on 27th May, 1990. No correspondence would be filed by assessee in support of claim. employee of bank was also examined, who stated that bank has not charged any interest on amount of loan sanctioned for purchase of these units. It was further noted by AO that in month of May, there was highest price of units whereas in month of July, there was decline in price of units. Examples for last four years were also quoted in his order. Further by placing reliance on decision of McDowell & Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126: (1985) 154 ITR 148 (SC), AO held that transactions are of speculation in nature which were entered with device for motive to reduce taxability. Accordingly, claim of loss of assessee was negatived. Before CIT(A), same contentions were reiterated. It was further submitted that there was no colourable device, as neither assessee was related to ANZ or with UTI. It was further submitted that units were transferred in name of assessee and heavy dividend of Rs. 45 lakhs was earned by assessee, which have already been offered for taxation. Further reliance was placed in case of M.V. Valliappan vs. CIT (1988) 67 CTR (Mad) 289: (1988) 170 ITR 238 (Mad) and Apollo Tyres Ltd. vs. Dy. CIT (Asst.) (1992) 44 TTJ (Coch) 534: (1992) 43 ITD 464 (Coch). After considering submissions and perusing other material on record, CIT(A) was also of view that this was speculation loss. While doing so, few further reasonings were also recorded by CIT(A) in his order. Some of observations/reasonings are as under: (a) units transferred to appellant were not transferred in name of appellant in register of UTI. (b) It seems that there was clear understanding between appellant n d bank that this transaction was only for period of 60 days and immediately after completion of 60 days, units were returned back to ANZ Grindlays Bank. assessee preferred appeal against order of CIT(A) before Tribunal. Tribunal has held that above loss was speculation loss and not to be adjusted against current year s income. Relevant extract from Tribunal s order is reproduced as under: "After going through these decisions, we find that they are applicable on facts of present case. No doubt transactions were genuine, as ANZ Bank confirmed in having selling units to assessee and then buying same from assessee. Though one entry was passed on 20th July, 1990 but there was entry showing debit balance against assessee on account of purchase and sale of these units. But these transactions cannot be said that they were entered bona fide as clearly emerges from facts of present case that assessee was knowing that prices of units were highest in month of May and lowest in month of July, even then assessee entered into transactions. On one hand, bank say that it has already adjusted amount of interest @ 16 per cent in selling price of units sold to assessee and on other hand, assessee is saying that no interest was paid. These two contradictory stands itself show that there was planning to purchase shares and then sold same after 60 days and this planning was with motive as assessee was knowing that dividend will be declared in month of June and same was declared also. assessee claimed deduction under s. 80M of IT Act. On other hand, assessee was knowing that there will be loss on account of sale in month of July and there was loss of Rs. 51 lakhs and odd which it claimed against its business income. In this way, assessee claimed deduction under s. 80M and then he claimed deduction on account of loss against business income also. This planning, in our considered view, cannot be approved, as then same was clear cut planning to reduce tax effect, which is not permissible in eyes of law. It is also worth noting that no banker will pass entry after 60 days from date of actual transaction, which was entered on 21st May, 1990, as same was entered on 21st July, day when units were sold by assessee to bank. This also clearly proves that there was clear understanding between banker and assessee that units will be sold after 60 days. Though units were transferred in name of assessee and then in name of bank, but there is no material on record which suggests that physical delivery of units in question were handed over to assessee or not, as it seems that physical possession was with ANZ to secure sum of Rs. 3.75 crores invested on behalf of assessee against sale of units to assessee." After receipt of order of Tribunal, AO issued notice to assessee as to why penalty under s. 271(1)(c) be not levied. assessee vide his reply dt. 20th Feb., 2004 contended that assessee neither filed any inaccurate particulars of income nor concealed any particulars of income, as such penalty is not leviable. Against order of Tribunal, assessee has filed further appeal before High Court and decision is awaited. addition is made on basis of particulars furnished by assessee itself and at no stage assessee has withheld any information or furnished inaccurate particulars. Full co-operation and effort has been made to furnish accurate information during course of assessment itself. It was also contended that penalty proceedings are not automatic or only on basis of finding in assessment order. Penalty is attracted only when AO is satisfied that conduct of assessee was not bona fide. Various case laws were cited. AO distinguished case laws relied by assessee. AO concluded as under: "Concealment of income is element result in those cases where there is discrepancy in income returned and income ultimately found, though it may not be invariably so. charge of concealment of income in this case has been found to have been established because explanation furnished by assessee company have been found to be non-substantiated. There is hardly any doubt that at no stage i.e., at assessment stage, CIT(A) level stage and before Tribunal, explanation furnished by assessee were found to be not proved. This not proved stage by itself can bona fide operation of Explanation to s. 271(1)(c) of IT Act, 1961." AO levied penalty with reference to disallowance of loss on sale of units, which was treated as speculation loss. Learned CIT(A), after considering submissions of assessee, held as under: "Loss of sale on units of UTI at Rs. 51,61,875. learned Authorised Representative has pleaded that AO has charged additional tax under s. 143(1)(a) of IT Act and therefore, issue is covered under Expln. 6 of s. 271(1) and, therefore, penalty is not leviable. learned Authorised Representative further pleaded that case is pending before Hon ble High Court and this addition is of disputable nature. I have carefully considered submissions of learned Authorised Representative and tend to agree with him. Expln. 6 of s. 271(1) states that Where any adjustment is made in income or loss declared in return under proviso to cl. (a) of sub-s. (1) of s. 143 and additional tax charged under that section, provisions of this sub-section shall not apply in relation to adjustment so made. In this case order under s. 143(1)(a) was passed on 29th April, 1992 in which adjustment of amount of Rs. 51,61,875 was made and accordingly, additional tax was raised. Therefore, on such amount there is no penalty leviable. As far as other contentions of learned Authorised Representative are concerned, learned Authorised Representative has filed copy of petition under s. 260(A) of IT Act against order dt. 3rd June, 2003 in ITA No. 1711/Del/1997 for asst. yr. 1991-92 passed under s. 254(1) of Act of Tribunal, Delhi-D, New Delhi whereby Tribunal upheld decision of the Tribunal, Delhi-D, New Delhi whereby Tribunal upheld decision of CIT(A), Faridabad not allowing loss of Rs. 51,61,875 on sales of units called US-64 . This document shows that addition is disputable and on disputable issues no penalty is leviable. In nutshell, on entire amount of Rs. 51,61,875 no penalty is called for under s. 271(1)(c)." Revenue is now in further appeal before us. Learned Departmental Representative Shri R.L. Meena submitted that learned CIT(A) erred, in deleting penalty under s. 271(1)(c) of IT Act imposed by AO stating that penalty is not leviable on issue of addition of Rs. 51,61,875 disallowed as speculation loss as same was covered under Expln. 6 of s. 271(1)(c) since adjustment was made under s. 143(1)(a) and additional tax was charged. learned CIT(A) has erred in ignoring fact that addition on account of speculation loss was made by AO under s. 143(3) and penalty under s. 271(1)(c) was imposed in view of this order under s. 143(3) and not in respect of order under s. 143(1)(a). learned CIT(A) erred in ignoring fact that addition made by AO has been held to be speculation loss by Tribunal, which is final fact finding authority. It was submitted that prima facie adjustment has been cancelled by Tribunal. Thus, reliance of learned CIT(A) on Expln. 6 to s. 271(1)(c) is misplaced. Since Tribunal has given finding that loss is speculative in nature, which has attained finality, penalty levied should have been confirmed. Learned counsel for assessee Shri S.K. Aggarwal submitted that originally loss was subject-matter of prima facie adjustment and consequently, levy of additional tax. Thus, matter being subject to levy of additional tax cannot be further subject-matter of penalty under s. 271(1)(c) particularly in view of bar contained in Expln. 6 to s. 271(1)(c). He went on to submit that even if subsequently, prima facie adjustment has been cancelled, there is no finding that loss was bogus or not incurred. Tribunal itself have given finding in para 20.6 of its order that "no doubt transactions were genuine as ANZ Bank confirmed having selling units to assessee and then buying same from assessee". Thus, only ground which survives for making addition is that transaction is speculative in nature. He submitted that transaction is in nature of "dividend stripping transaction". Such nature of transaction were approved as genuine as held by Hon ble Delhi High Court in case of CIT vs. Vikram Aditya & Associates (P) Ltd. (2006) 204 CTR (Del) 238: (2006) 287 ITR 268 (Del). decision of Hon ble Delhi High Court in case of Vikram Aditya & Associates (supra) has once again been followed by Hon ble Delhi High Court in case of CIT vs. Prudent Advisory Services (P) Ltd. (IT Appeal No. 170 of 2007, dt. 28th Feb., 2007). copy of said order is placed on record. Shri Aggarwal further submitted that against order of Hon ble Delhi High Court in case of Prudent Advisory Services (P) Ltd. (supra), appeal was filed before Hon ble Supreme Court. Hon ble Supreme Court by its order dt. 15th Jan., 2008 dismissed special leave petition. Even Special Bench of Tribunal in case of Wallfort Shares & Stock Brokers Ltd. vs. ITO (2005) 96 TTJ (Mumbai)(SB) 673: (2005) 96 ITD 1 (Mumbai)(SB) have upheld validity of such nature of transaction. It was held that loss occurred in such transaction is allowable loss particularly if transaction is prior to amendment of s. 94(7) of Act which is amended w.e.f. 1st April, 2002 i.e., applicable to asst. yr. 2002- 03 onwards. loss occurred in transaction which relates to asst. yr. 1991-92 cannot be disallowed. Thus, dividend stripping transaction has accorded judicial sanction. It is also to be noted that entire loss was not claimed as loss. dividend income earned from acquiring units was offered for taxation and is included in gross total income. It is different fact that ultimately when this assessee itself declared dividend, to that extent assessee was entitled to claim deduction under s. 80M out of such dividend income. However, on date of entering into transaction, assessee was not certain as to whether it will declare dividend or will claim deduction under s. 80M. Shri Aggarwal further submitted that assessee has always disclosed true particulars of its income. All questions raised by AO has been answered and nothing was concealed, it is different fact that based on very same material disclosed by assessee, view of AO or CIT(A) or Tribunal is that transaction is speculative in nature. fact remains that assessee had declared all necessary particulars of his income and has filed true particulars of income. If Tribunal holds view contrary to view of assessee, it do not amount to furnishing inaccurate particulars of income for purpose of levy of penalty under s. 271(1)(c). For this purpose, reliance was placed on following decisions: (1) CIT vs. Nath Bros. Exim International (2007) 208 CTR (Del) 326: (2007) 288 ITR 670 (Del); (2) CIT vs. International Audio Visual (2007) 208 CTR (Del) 328: (2007) 288 ITR 570 (Del); (3) CIT vs. Bacardi Martini India Ltd. (2006) 206 CTR (Del) 250: (2007) 288 ITR 585 (Del); (4) CIT vs. Kuldeep Singh (2007) 208 CTR (All) 390: (2007) 289 ITR 203 (All); (5) Union of India vs. Azadi Bachao Aandolan (2003) 184 CTR (SC) 450: (2003) 263 ITR 706 (SC). He submitted that merely because additions are sustained, it do not amount to automatic levy of penalty. This is more or less settled law. reason for disallowance of loss is that same is ultimately found to be speculative transaction. During assessment as well as penalty proceedings, assessee had drawn attention to fact that units purchased were registered in name of assessee. Dividend was received thereon. Dividend can be received only by registered unit holder. Units cannot be registered in name of assessee but for taking delivery and sending same for registration with UTI. certificates which are at pp. 139 to 142 of paper book reveals name of assessee as holder of unit. UTI has deducted tax at source and proof for same in Form No. 16 are at pp. 132 to 137 of paper book. ANZ Bank have confirmed having giving delivery as well as taking back delivery. This is case of constructive delivery. Since amount payable to ANZ Bank was secured on security of units, same were in possession of ANZ Bank. However, assessee was at all time registered as well as beneficial holder of units of UTI. This proves that assessee has not only offered explanation but which is not found to be untrue or false. assessee has also been able to substantiate his contention and at all time bona fidely believe that he is entitled to loss on sale of units of UTI. Thus, even under Expln. 1 to s. 271(1)(c), penalty under s. 271(1)(c) is not leviable. We have carefully considered relevant facts, arguments advanced and precedents cited. question to be decided is whether penalty under s. 271(1)(c) is leviable where assessee has claimed loss on sale of units of UTI which was disallowed as same was treated as loss arising in speculative transactions. It would be relevant to note that AO while disallowing loss held that: (i) transaction is speculative in nature; (ii) transaction is not genuine and loss is not allowable on basis of principle of Supreme Court in case of McDowell & Co. Ltd. (supra). Learned CIT(A) upheld order of AO and concluded that transaction was speculative in nature. Tribunal also confirmed action of CIT(A) by observing that though transaction is genuine, same is speculative in nature. Therefore, limited question is in view of finding by Tribunal upholding transaction as speculative and disallowing loss, will also attract penalty under s. 271(1)(c) of Act. issue whether loss is allowable or not was held against assessee by Tribunal wherein Tribunal held that transaction is genuine but loss is not allowable as same was speculative transaction. We find that assessee had all time furnished relevant information in respect of loss claimed on sale of units. assessee claimed loss because purchase price paid was more than sale consideration of units of UTI. assessee filed copy of certificate issued by UTI showing assessee as registered holder of units. assessee also received dividend income on units. registration of units in name of assessee is possible only when delivery was received by assessee. transaction in movable property like units can be effected only when such property in form of units are delivered to assessee along with duly signed transfer deed on basis of which UTI acts. This conclusively proves that physical delivery of units was firstly available to assessee. In such situation, it cannot be said that transaction in purchase and sale of units were completed otherwise than by way of actual delivery. Sec. 43(5) defines speculative transaction as under: "Sec. 43(5): speculative transaction means transaction in which contract for purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by actual delivery or transfer of commodity or scrips." From aforesaid definition, it is clear that transaction which is ultimately settled otherwise than by actual delivery or transfer of scrips, can be considered as speculative transaction. In present case, there is not only actual delivery of units but also transfer of units in name of assessee. This fact has been substantiated by assessee not only in assessment proceedings but also in penalty proceedings. It is different fact that Tribunal has held such transaction to be speculative transaction but assessee at all time substantiated its claim that transaction was not speculative transaction. If after disclosing all materials and after substantiating claim based on such material merely because view of AO or appellate authority is different than that of assessee, it cannot be said that assessee has concealed particulars of income or has furnished inaccurate particulars of income for purpose of levy of penalty under s. 271(1)(c) of Act. It is difference in perception of viewing transaction but cannot be branded as "furnished inaccurate particulars of income" for purpose of s. 271(1)(c) of Act. It is settled law that finding arrived at in assessment proceedings is relevant but not conclusive for purpose of levy of penalty under s. 271(1)(c). Such view was held in case of CIT vs. Anwar Ali (1970) 76 ITR 696 (SC). physical custody of units were with ANZ Bank. However, same was in their possession to secure loan obtained against units and because purchase price of units were not paid in full. But fact remains that units were transferred in name of assessee and on which as registered holder it has received dividend also. This dividend is offered for taxation under head "Income from other sources" and assessed as such. dividend received on these units was forming part of gross total income but was eligible for deduction subject to conditions prescribed in s. 80M. On date of for deduction subject to conditions prescribed in s. 80M. On date of transaction or on date of receipt on dividend, it was not certain whether assessee would be entitled to claim deduction under s. 80M in respect of such dividend income or not. It is subsequent action on part of Board to declare dividend to its own shareholders which entitle assessee to claim deduction under s. 80M but that do not prove that transaction on date of purchase and sale were speculative in nature. Special Bench of Tribunal in case of Wallfort Shares & Stock Brokers Ltd. (supra) held that where assessee purchase units of mutual fund and sold them ex-dividend at loss and claimed deduction of such loss as loss, same is allowable as such even though it was known before hand that transaction would result in certain loss. It was also held that such transaction cannot be branded as scheme for tax avoidance and prior to amendment of s. 94(7) by Finance Act, 2001 w.e.f. 1st April, 2002, loss arising which are in nature of dividend stripping transaction is allowable as such in relation to assessment year prior to asst. yr. 2002-03. headnote in case of Vikram Aditya & Associates (P) Ltd. (supra) reads as under: "Held, dismissing appeal, that disallowance of loss under s. 94(7) of Act in respect of such transaction was effective only from asst. yr. 2002-03, while year in question was asst. yr. 2001-02. There was, therefore, gap in law which had been exploited by assessee. legislature had recognized lacuna and taken steps to rectify it. But that did not mean that decision of AO based on law as it was could be said to be erroneous. order of revision was not valid." Reading aforesaid decision, it can be concluded that even if activity in purchase and sale of units is organized activity, which results into some loss to assessee, loss is allowable as such so long as transaction is held to be genuine and effect is given thereto. In present case, there is clear finding, by Tribunal holding that transaction was genuine as ANZ Bank confirmed having selling units to assessee and buying same from assessee. Hon ble Supreme Court in case of Azadi Bachao Aandolan (supra) upheld validity of Treaty Shopping cases . After explaining in detail ratio laid down by Hon ble Supreme Court in case of McDowell & Co. Ltd. (supra) and after elaborately quoting from Indian and English case laws, Hon ble Supreme Court was not convinced that treaty shopping transactions should be viewed otherwise. At p. 763, Hon ble Supreme Court concluded, We are unable to agree with submission that act which is otherwise valid in law can be treated as non est merely on basis of some underlying motive supposedly resulting in some economic detriment or prejudice to national interests, as perceived by respondents . Special Bench of Tribunal in case of Wallfort Shares & Stock Brokers Ltd. (supra), also considered rule laid down in case of McDowell & Co. Ltd. (supra) and it was held that such transactions resulting into loss are not to be viewed otherwise and loss is allowable as such. Where assessee discloses all facts, but draws inference not acceptable to AO, it does not mean that assessee could be subjected to penalty on addition consequent on his inference, as was held in International Audio Visual (supra) in context of assessee s claim, that foreign exchange received in conferring dubbing rights of Hindi films should be treated as export for purposes of relief under s. 80HHC. It was case where primary facts were disclosed, so that penalty was not found exigible. In yet another case, assessee filed revised return claiming loss on basis of finding in appeal for different year. In original return, all necessary facts had been given and matter had also been set right by revised return. There was no concealment of income in such case as held in Bacardi Martini India Ltd. (supra). Where assessee has made claim under s. 80HHC after giving full particulars and basis of its claim, fact that such claim was found to be erroneous could not by itself be treated as justification for penalty. Where assessee has not given any false particulars, all that was required was application of law. It was in this context that High Court in Nath Bros. Exim International (supra) upheld Tribunal s order deleting penalty. In case of Kuldeep Singh (supra), assessee claimed loss on confiscation of smuggled Ganja. value of confiscated good was treated as unexplained investment but loss due to confiscation was not held allowable, In respect of such assessment, penalty was levied under s. 271(1)(c). Hon ble Allahabad High Court dealing with case held as under: "We are, however, not called upon to decide as to whether respondent assessee is entitled to claim deduction of Rs. 6,72,000 being value of confiscated Ganja as business loss or not. fact remains that there has been divergence of opinion regarding allowability of such deduction as business loss. In various sub-clauses of sub-s. (1) of s. 271 penalty can be imposed only when act has been done without reasonable cause. In present case s respondent assessee was claiming deduction of Rs. 6,72,000 being value of confiscated Ganja as business loss, it cannot be said that he did not have any reasonable cause for not filing return or had deliberately concealed particulars of his income. Thus, Tribunal had rightly deleted penalty imposed upon respondent assessee under provisions, referred to above." In present case, it is apparently seen that penalty has been levied with reference to Expln. 1 to s. 271(1)(c). phrase concealed particulars of his income or furnished inaccurate particulars of income are not defined in Act. Explanation 1 envisage situation whereby amount added or disallowed in computing total income is deemed to represent income in respect of which particulars have been concealed. It is, therefore, apt to reproduce Expln. 1 to s. 271(1)(c): "Explanation 1. Where in respect of any facts material to computation of total income of any person under this Act, (A) such person fails to offer Explanation or offers Explanation which is found by AO or CIT(A) or CIT to be false, or (B) such person offers explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all facts relating to same and material to computation of his total income have been disclosed by him, then, amount added or disallowed in computing total income of such person as result thereof shall, for purposes of cl. (c) of this sub-section be deemed to represent income in respect of which particulars have been concealed." Reading aforesaid Explanation, it is clear that Expln. 1 can be invoked in such situation where (i) assessee fails to offer Explanation; or (ii) explanation offered is found by AO to be false; or (iii) assessee is unable to substantiate Explanation offered and also failed to prove that such explanation is bona fide and that all facts relating to same and material to computation of total income have been disclosed. In present case, it is seen that assessee had in fact offered Explanation as to why loss is allowable. same is on basis of purchase and sale transaction of UTI with ANZ Bank. transaction has also been confirmed by ANZ Bank. assessee has substantiated Explanation by producing evidence in form of certificates from UTI revealing name of assessee as unit holder. Thus, assessee has also substantiated that transaction was with delivery and was not settled without actual delivery or registration of scrips. Explanation is not proved to be false by AO. It is finding of Tribunal that transaction is speculative in nature because physical possession was with ANZ Bank. However, view different than that of assessee, which is not acceptable as such cannot be branded as false. There is subtle difference between transaction which could be branded as false and transaction, which is branded as fails to prove . AO has not accepted view of assessee that transaction is not speculative in nature but Explanation is not found to be false. assessee has not only offered Explanation but has also been able to substantiate same. assessee on basis of evidence and material disclosed was at all time under bona fide and genuine belief that transaction is after effecting delivery and not speculative in nature. Thus, under none of criteria as envisaged in Expln. 1 to s. 271(1)(c), assessee can be said to have concealed particulars of income. Hon ble Gujarat High Court in case of National Textiles vs. CIT (2000) 164 CTR (Guj) 209: (2001) 249 ITR 125 (Guj) held as under: "The provision of s. 68 of IT Act, 1961, permitting AO to treat unexplained cash credits as income are enabling provisions for making certain unexplained cash credits as income are enabling provisions for making certain additions where there is failure by assessee to give Explanation or where Explanation is not to satisfaction of AO. However, addition made on this count would not automatically justify imposition of penalty under s. 271(1)(c) of IT Act, 1961 by recourse only to Expln. 1 below s. 271(1)(c). In order to justify levy of penalty, two factors must co-exist, (i) there must be some material or circumstances leading to reasonable conclusion that amount does represent assessee s income. It is not enough for purpose of penalty that amount has been assessed as income, and (ii) circumstances must show that there is animus, i.e., conscious concealment or c t of furnishing of inaccurate particulars on part of assessee. Explanation 1 to s. 271(1)(c) has no bearing on factor No. 1 but has bearing only on factor No. 2. Explanation does not make assessment order conclusive evidence that amount assessed was in fact income of assessee. No penalty can be imposed if facts and circumstances are equally consistent with hypothesis that it does. If assessee gives Explanation which is unproved but not disproved, i.e., it is not accepted but circumstances do not lead to reasonable and positive inference that assessee s case is false, Explanation cannot help Department because there will be no material to show that amount in question was income of assessee. Alternatively, treating Explanation as dealing with both ingredients (i) and (ii) above, where circumstances do not lead to reasonable and positive inference that assessee s Explanation is false, assessee must be held to have proved that there was no mens rea or guilty mind on his part. Even in this view of matter Explanation alone cannot justify levy of penalty. Absence of proof acceptable to Department cannot be equated with fraud or wilful default." In present case, it is seen that though CIT(A) has deleted penalty on ground that Expln. 6 was applicable, it is seen that prima facie adjustment, earlier made were deleted by Tribunal. loss was disallowed in course of regular assessment under s. 143(3). Therefore, learned CIT(A) was in error while cancelling penalty by relying upon Expln. 6 to s. 271(1)(c). However, since we have found that amount disallowed cannot be considered as concealment of particulars of income, under Expln. 1 to s. 271(1)(c), penalty was not leviable. Thus, though on ground other than that decided by learned CIT(A), penalty under s. 271(1)(c) is not attracted. We, therefore, cannot uphold levy of penalty under s. 271(1)(c). In result, appeal is dismissed. *** ASSISTANT COMMISSIONER OF INCOME TAX v. PORRITTS & SPENCER (A) LTD.
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