loan converted into Donation

Q : When loan are converted into donation can the penalty under section 271(1)(c) of income tax act be levied ?

Where assessee institute having received loan from group companies, converted same into corpus donation, since lender companies were not doing any business and thus were not in a position to give huge amount of loan, addition made by Assessing Officer regarding loan amount as well as penalty order passed on basis of same was to be upheld

IN THE ITAT KOLKATA BENCH ‘A’

KPC Medical College & Hospital

v.

Deputy Commissioner of Income-tax, Kolkata

IT APPEAL NOS. 1832 TO 1835 (KOL.) OF 2014
[ASSESSMENT YEARS 2007-08 TO 2009-10 AND 2011-12]

JUNE  24, 2015

FACTS

■           The assessee was an institute running medical health care educational centre. It was a registered charitable trust under section 12AA.

■           The assessee had filed its return for relevant years declaring loss.

■           A search action under section 132 was carried out in the case of one ‘B’. During the search at his residence, certain cash was found.

■           In his statement recorded under section 132(4), ‘B’ disclosed that the cash belonged to the assessee.

■           Simultaneously a survey under section 133A was carried out on the office premises of the assessee. During the course of survey, it came to the notice of the revenue department that 5 companies had given a loan totalling to Rs. 33.21 crores to ‘KP’ trust, who on the same day had given that loan to the assessee. Later on, these loans were converted into donations and according to the assessee it was a corpus donation.

■           The Assessing Officer opined that the assessee/its group entities were indulging in routing of its funds of suspicious origin via five private companies.

■           Thereupon, DDIT (Inv) examined one of the common directors of these 5 companies namely ‘K’ under section 131. In his statement, he has disclosed the modus operandi of giving these donations to the assessee.

■           During the course of assessment proceedings one ‘U’, Director (Finance) of KPC Group came forward with a disclosure statement. This disclosure was produced before the Assessing Officer.

■           Thereupon a notice under section 153C was issued to the assessee for assessment years 2007-08 to 2009-10 requiring it to furnish the returns of income.

■           The assessee furnished the returns wherein exemption under section 12AA was claimed and the returns were showing losses.

■           When the limitation for making the assessments orders under section 153C was expiring, the assessee in response to certain queries of the Assessing Officer came forward with another disclosure offering the donations for taxation.

■           The Assessing Officer passed assessment orders under section 153C read with section 143(3) in all the three assessment years.

■           He also passed a penalty order under section 271(1)(c).

■           The Commissioner (Appeals) confirmed penalty order.

■           On appeal:

HELD

■           A perusal of sections 158BD and 153C would reveal that where the Assessing Officer of the searched person is satisfied that any money, bullion, jewellery, books of account or other documents, etc., belong to a person other than the person searched, then, such documents or assets shall be handed over to the Assessing Officer of other person and the latter Assessing Officer shall proceed against such other person to assess or reassess his income. However, before handing over these documents and assets, the Assessing Officer of the searched person would record his satisfaction that the assets and documents belong to some other person than the searched person. The Assessing Officer of such other person would acquire jurisdiction to make assessment or reassessment of the other person only when satisfaction was recorded by the Assessing Officer of the searched person exhibiting that documents and assets belonging to other persons so found and it is transmitted to the Assessing Officer of the other person having jurisdiction over such other person. [Para 14]

■           In the present case, the Assessing Officer happens to be the common Assessing Officer of the searched person as well as another person and money, documents, etc., belonging to such other person were found with the searched person. He is seized of the matter. He has recorded the satisfaction. His action is being challenged that he has recorded the satisfaction while taking cases of the assessee i.e., when he took cases of such other persons, whereas he should have recorded satisfaction in the capacity of Assessing Officer of searched person. [Para 15]

■           There is built-in fallacy in the arguments of the assessee. The fallacy became evident if the argument is tested by envisioning to the facts of the present case. There is no dispute that notice under section 153C was issued by the Assessing Officer after recording the satisfaction. The Assessing Officer is the same Assessing Officer who has jurisdiction over the searched person as well as the other person, i.e., the assessee. One can take a situation, the Assessing Officer was examining the file of ‘K’. On perusal of his statement recorded under section 132(4) coupled with the fact of cash found during the course of search and buttressed by the Managing Director (Finance) of the KPC Group of companies, visualized that cash belonged to the assessee, he immediately took a piece of paper and recorded his satisfaction that the money belongs to the assessee, therefore notice under section 153C is to be issued in the case of assessee. The question is, where this paper was placed by him? Whether in the order sheet entries of ‘B’ assessment proceedings; in a separate file or in cupboard available in his room.

■           There is no dispute raised that this satisfaction was not recorded within the stages contemplated by the Supreme Court in the case of CIT v. Calcutta Knitwears [2014] 362 ITR 673/223 Taxman 115 (Mag.)/43 taxmann.com 446. The attempt at the end of assessee is that there should be a straight jacket system, whereby the satisfaction recorded even by the same Assessing Officer then, that should be placed in the file of searched person and if it is placed in some other cupboard in his room by the Assessing Officer then, there cannot be any satisfaction, one fails to appreciate that technical approach at the end of assessee. The law does not require the manner and the procedure of keeping the files.

■           The section only requires that a satisfaction be recorded and it should be during the period propounded by S.C. in Calcutta Knitwears (supra), that has been recorded in the present case. The second scenario can also happen that seized material of KPC group might be kept in a common bundle, wrapped in a cloth where all the files are emanating from search and survey are being placed. If the above satisfaction note was found to be tagged with other file would it be held that no satisfaction was recorded. The reply will be that satisfaction was recorded. [Para 16]

■           In the next limb of argument on this issue, it was contended that there was no cogent material with the Assessing Officer to record satisfaction. There is no dispute that at the time of search cash of Rs. 35,10,400 was found at the premises of ‘B’. [Para 17]

■           In the instant case, the Assessing Officer has the material collected during the course of search exhibiting that money belonging to the assessee was found at the premises of the searched person. Therefore, the material exhibiting the recovery of money along with fact that information about the money and the money was handed over to the Assessing Officer who has jurisdiction over the assessee. A satisfaction was recorded for initiating proceedings under section 153C of the Act. It was recorded as per procedure provided in section, a notice under section 153C was issued upon the assessee. The assessee failed to bring on record any flaw. [Para 19]

■           The next contention of assessee was that there is no evidence with the revenue demonstrating the fact that assessee has concealed the particulars of income. In theory, the plea taken by assessee appears to be tempting but when it is to be tested on hard facts, then, it springs different colours. The copies of the petitions filed by the alleged 5 companies for voluntary winding up are being placed on record. The first appellate authority has reproduced the resolutions passed by these companies as well as their balance sheet exhibiting the funds and various capital assets available with these companies. A perusal of the balance sheet annexed with winding up of petitions in all five companies would indicate that these companies had never conducted any business.

■           Perusal of their statement of affairs do indicate that these companies were enacted on paper. They had never done any business, according to their Memorandum of Association. It is highly improbable that some body would subscribe shares of these companies for Rs. 33 crores. These companies would make donation of entire share capital to the assessee. During the course of hearing the assessee was directed to give the details of common persons who are managing the affairs of KPC Foundation as well as the KPC Medical College & Hospital but no such details were submitted by the assessee.

■           The facts on the record do speak themselves, the alleged argument of the assessee that money was received through account payee cheques. The assessee has filed confirmation from those companies and also produced their directors, therefore, it discharged its onus of proving the identity, genuineness of the transaction and creditworthiness of the donors, on papers, the assessee might have fulfilled the proforma but on reality check, all these companies are apparently bogus. One could appreciate the contention of the counsel that some donation was flowing to the assessee from a very renouned Medical College or a big industrial house. The unknown private limited companies not doing any business, do not have asset of more than Rs. 1 lakh, all of a sudden gave a donation of Rs. 33 crores is quite unbelievable. These are the hard facts flowing from the accounts of 5 companies. They do not require corroborative support from the statement of ‘K’. [Para 24]

■           One can test on different analogy also. Explanation -1 appended to section 271(1)(c), create a deeming fiction, which postulates two situations; (a) where in respect of any facts, material to the computation of total income under the provisions of the Act, the assessee fails to offer an explanation or the explanation offered by the assessee is found to be false by the Assessing Officer, & (b) where in respect of any fact material to the computation of total income under the provision of the Act, the assessee is not able to substantiate the explanation and failed to prove that such explanation is bona fide and the assessee has disclosed all the facts relating to the same and material to the computation of the total income. It is pertinent to mention that in the resolution passed by these companies it was resolved that though the money is being given to foundation but it will be forwarded to the assessee. For this reason the assessee was asked to show the list of management who are managing the affairs of foundation as well as the KPC Medical College & Hospital, because the common manager must have knowledge of these factual issues. A sum of Rs. 33 crores is not a small amount. The assessee must have complete knowledge about the nature and the source.

■           A brazen attempt was being made by the assessee in introducing its dubious money in this clandestine manner via some 5 private limited companies; in a layering manner and then tried to justify the stand with the help of alleged proforma documents. The alleged disclosure petition moved by the assessee during the course of assessment proceedings also indicate that ‘R’ as trustee of the KPC Medical College & Hospital was aware about the statements of various persons and the documentary evidence collected by the revenue against the assessee. Had the assessee not disclosed income, the Assessing Officer would have specifically controverted the assessee with this material. [Para 25]

■           At the cost of repetition one would like to observe that the other most important features of section 271(1)(c) is deeming provisions regarding concealment of income. The section not only covered the situation in which the assessee has concealed the income or furnished inaccurate particulars, in certain situation, even without there being anything to indicate so, statutory deeming fiction for concealment of income comes into play. This deeming fiction, by way of Explanation 1 to section 271(1)(c) postulates two situations; (a) first whether in respect of any facts material to the computation of the total income under the provisions of the Act, the assessee fails to offer an explanation or the explanation offered by the assessee is found to be false by the Assessing Officer or Commissioner (Appeals); and, (b) where in respect of any fact, material to the computation of total income under the provisions of the Act, the assessee is not able to substantiate the explanation and the assessee fails, to prove that such explanation is bona fide and that the assessee had disclosed all the facts relating to the same and material to the computation of the total income.

■           Under first situation, the deeming fiction would come to play if the assessee failed to give any explanation with respect to any fact material to the computation of total income or by action of the Assessing Officer or the Commissioner (Appeals) by giving a categorical finding to the effect that explanation given by the assessee is false. In the second situation, the deeming fiction would come to play by the failure of the assessee to substantiate his explanation in respect of any fact material to the computation of total income and in addition to this the assessee is not able to prove that such explanation was given bona fide and all the facts relating to the same and material to the computation of the total income have been disclosed by the assessee. These two situations provided in Explanation 1 appended to section 271(1)(c) makes it clear that that when this deeming fiction comes into play in the above two situations then the related addition or disallowance in computing the total income of the assessee for the purpose of section 271(1)(c) would be deemed to be representing the income in respect of which inaccurate particulars have been furnished.

■           On examination of the facts, it is found that firstly, there is no explanation at the end of assessee, why it has not disclosed these donations in the original return(s)? There is no bona fide in the alleged explanation of the assessee that it had received the money through account payee cheque and, therefore, harbored a belief that donations are genuine. This explanation is wholly for the sake of explanation. The assessee failed to spell out specific facts and circumstances or reason which operated in the minds of its managing director, finance while preparing the return and treating these donations as genuine.

■           Looking to the facts of these five donors, no prudentman would, however, harbor a belief that such companies can give donation. It is pertinent to note that it cannot be a co-incidence or a chance that five companies managed by a common director, having assets of less than Rs.1 lakh, not done any business but would give donations of Rs.33 crores. These circumstances in itself suggest a well designed scheme at the behest of the assessee, because it is the assessee who is ultimately getting the benefit. Therefore, there was no explanation at the end of assessee for not showing these donations as its income in the original return(s) or in the return(s) filed in response to notice under section 153C. The Commissioner has rightly confirmed the penalty upon the assessee. [Para 26]

■           In the next fold of submissions, for the assessee has contended that Commissioner (Appeals) has issued directions to the Assessing Officer for exploring to make addition of these unexplained donations under section 115BBC. Section 115BBC provides that if an assessee being educational institution, hospital, or any trust or institution referred to in section 11 receives unanimous donation and fail to produce evidence exhibiting the maintenance of record of the identity including name and address of the donor then, such unanimous donation will be taxed according to the procedure provided in sub-section (1) of section 115BBC. [Para 27]

■           The assessee while pointing out, what aspects the Commissioner could take in an appeal, drew attention towards section 251.

■           A perusal of section 251 would indicate that powers of the Commissioner while dealing with penalty appeal are restricted to the penalty proceedings only. He may confirm or cancel the imposition of penalty. He may enhance or reduce the penalty. He cannot give direction to the Assessing Officer for exploring the additions in an assessment. Thus, direction given by the Commissioner are contrary to the provisions of law and, therefore, this finding of the Commissioner (Appeals) is quashed. The penalty imposed by the Assessing Officer in the cases of assessee is confirmed. The appeals are thus treated as partly allowed. [Para 28]