By TIOL News Service

PUNE, FEB 21, 2017: THE ISSUE IS - Whether an addition u/s 68 can be made solely on the basis of entries in diaries found during survey at the premises of one of the former Director of assessee company, without producing any convincing evidence. NO is the answer.

Facts of the case:

The assessee is a builder and developer. A search action u/s. 132 was carried out at the business premises of the assessee and at residence of its Managing Director. Apart from aforesaid search, survey action u/s. 133A was also carried out at the business premises of erstwhile Director. During which certain loose papers, excel sheets, note books were seized/impounded by the Department from the premises which indicated receipt of unaccounted sale proceeds and its utilization for development of the project by assessee. MD of assessee company in his statement recorded u/s. 132(4) admitted undisclosed income of Rs.11,00,00,000/- for all its group concerns on the basis of material found during search, agreed to pay taxes on the same. Assessee claimed before AO that unaccounted income on the basis of material found in search was admitted from the real estate business, therefore, the same were required to be computed and assessed on project completion method. AO accepted the method of computation of income as proposed by assessee in respect of disclosed transaction appearing in the regular books of account but in respect of unaccounted transaction, AO held that the same was assessable in the year of its taking place. AO, thereafter, computed undisclosed profit from different group concern by bifurcating the receipts and the expenditure found in the seized paper from business premises of assessee for the respective financial years. In respect of unaccounted expenses, AO made disallowance u/s. 40A(3) and u/s. 40(a)(ia) for determining allowable unaccounted expenses against the unaccounted receipts. AO completed assessment for AY 2007-08 and made addition of Rs.65,62,669/- u/s. 69C on account of negative cash balance and Rs.3,70,00,000/- u/s. 68 on account of undisclosed receipts. Against the said assessment order, the assessee did not prefer appeal and accepted the addition. AO initiated penalty proceedings u/s. 271(1)(c). On appeal, CIT(A) partly accepted the appeal of the assessee by the directing AO to give the benefit of telescoping while computing penalty.

On appeal, the ITAT held that,

++ bare perusal of the provisions of section 68 would show that addition u/s. 68 can be made only where any amount is found credited in the books of assessee and the assessee has failed to offer any valid explanation or the explanation furnished by the assessee in the opinion of AO is not satisfactory. In the present case, we find that addition u/s. 68 has been made on the basis of entries in the diaries found during survey at the premises of one of the former Director of the assessee company. There is no evidence on record to show that any transfer of money either through cheque or cash during the year under consideration was recorded in the books of account of the assessee. Under such circumstances we are of the opinion that the addition u/s. 68 is not sustainable. The Punjab and Haryana HC in the case of Smt. Shanta Devi Vs. CIT(A) deleted the addition u/s 68 in the hands of assessee, where cash credit entries were found in the books of account of the partnership firm in which the assessee was partner;

++ since, the addition made u/s. 68 is itself not sustainable there is no question of levy of penalty on such addition. Thus, we are of the considered view that levy of penalty u/s. 271(1)(c) on addition made u/s. 68 is liable to be set aside. The second addition on which penalty has been levied is with respect to Rs.65,62,669/- u/s. 69C. One of the contention of the assessee before the First Appellate Authority was to grant the benefit of telescoping in penalty proceedings in respect of the additions made during assessment. CIT(A) rejecting the contentions of the assessee on merits and accepting the alternate submissions of the assessee granted the benefit of telescoping. Neither the AR nor DR could substantiate the error in the findings of CIT(A) in extending the benefit of telescoping. Thus, we uphold the benefit of telescoping granted by the CIT(A).

(See 2017-TIOL-156-ITAT-PUNE)