Per G.D. Agarwal, A.M. - These two appeals by the assessee are directed against the orders of CIT(A), Central-V, Mumbai.

ITA No. 695/Mum./2001 - penalty under section 271D.

2. By way of this appeal, the assessee has challenged the levy of penalty of Rs. 43,05,000 under section 271D of the Income-tax Act. The assessee has also raised an additional ground reading as under :-

"The CIT(A) ought to have held that the penalty order passed by the Deputy Commissioner under section 271D barred by limitation period as prescribed in section 275 of the Income-tax Act, 1961."

3. The facts of the case are that the assessee is a private limited company which is deriving income from manufacturing of plastic tapes, rigid tape lace, strips, safety belts, etc. There was search at the residence of Shri Niranjan J. Shah in May, 1992, in which certain loose papers and computer floppies were found and seized. According to the department, the print out of the computer floppies was the account in the name of Straptex. This account contained some transactions by cheque and some by cash. The transactions by cheque were found recorded in the assessee’s books of account, while the cash transactions were not found recorded in the assessee’s books of account. Shri Niranjan Shah had offered income of Rs. 5 crores in the statement recorded at the time of search. The above income surrendered at the time of search included the undisclosed investment of Rs. 40 lakhs in the assessee-company. However, Shri Niranjan Shah retracted the above statement. Copy of his letter of retraction is placed at page 44 of the assessee’s paper book. Thereafter, again, the statement of Shri Niranjan Shah was recorded under section 131 in which he has stated that no cash transaction between him and Straptex (India) P. Ltd. (the assessee) had actually taken place. He had mentioned these figures in the account of the assessee to impress his associates and to take undue advantage at a later stage. However, the Assessing Officer, relying upon his statement recorded at the time of the search, held that the cash transaction as mentioned in the print out taken from the computer floppy actually took place between Shri Niranjan Shah and the assessee. While taking the above view, the Assessing Officer, also held that there is a presumption under section 132(4A) about the correctness of any books of account/document found at the time of search. The Assessing Officer also opined that the cash transactions were in violation of section 269SS/269T. Therefore, the assessee was liable for penalty under sections 271D and 271E. He levied penalty of Rs. 43,05,000 under section 271D and Rs. 8,77,350 under section 271E. The CIT(A) sustained the levy of these penalties. Hence these appeals by the assessee.

4. At the time of hearing before us, the ld. counsel for the assessee argued at length. His arguments were two-fold :—

A.That the levy of penalty was barred by limitation. The Assessing Officer, vide notice dated 21-2-1994, sought the explanation of the assessee about the violation of section 269SS. Thus, the penalty proceedings for violation of section 269SS were initiated on 21-2-1994. As per section 275(1)(c), the penalty proceedings have to be completed before the expiry of the financial year in which action for imposition of penalty has been initiated or six months from the end of the month in which action for imposition of penalty is initiated, whichever is later. He pointed out that the action for imposition of penalty was initiated on 21-2-1994. The said financial year ended on 31-3-1994. Six months from the end of the month in which action for imposition of penalty was initiated also ended on 31-8-1994. The penalty has been levied on 28-9-1994 which is after the period of limitation.

B.He stated that the penalty under section 271D can be levied when there is violation of section 269SS. Section 269SS provides that no person shall take or accept from any other person any loan or deposit otherwise than by an account-payee cheque or account-payee bank draft. It is for the Revenue to prove that the assessee has taken any loan or deposit from any other person. Penalty cannot be levied on the presumption of taking of loan by the assessee. The factum of the loan taken by the assessee has to be proved beyond doubt. He contended that the Assessing Officer has relied upon the following evidences to support the Revenue’s case that the assessee borrowed money in cash from Shri Niranjan Shah :-

(i)Statement of Shri Niranjan Shah given at the time of search.

(ii)Print-out of computer floppy found from the residence of Shri Niranjan Shah.

He contended that the reliance by the Assessing Officer on both the above evidences is misplaced for the following reasons :

(a)That Shri Niranjan Shah himself has retracted the statement vide declaration before the Notary dated 23-9-1994. After the above declaration, his statement was again recorded under section 131 of the Income-tax Act (which is also reproduced by the Assessing Officer in the assessment order of the assessee) in which he has clearly denied any cash transactions with the assessee. He has also explained why he has mentioned these cash transactions in the account of the assessee. The Assessing Officer was not at all justified in relying upon the earlier statement ignoring the subsequent retraction and the subsequent statement. Moreover, the statement of Shri Niranjan Shah was recorded behind the back of the assessee and it cannot be used against the assessee unless the assessee is allowed to cross-examine Shri Shah. It is an admitted fact that the assessee was never allowed to cross-examine Shri Shah and, therefore, his statement cannot be utilised against the assessee.

(b)That the print-out of the computer floppy may be used against the person from whom it was found but it cannot be used against any third party like the assessee. The presumption under section 132(4A) can be applied against the person from whom the books of account or the documents were found and not against any third party. In support of this contention, he relied upon the following decisions :—

(1)CBI v. V.C. Shukla 3 SCC 410 (SC).

(2)Prarthana Construction (P.) Ltd. v. Dy. CIT [2001] 118 Taxman 112 (Ahd.-Trib.).

(3)Unique Organizers & Developers (P.) Ltd. v. Dy. CIT [2001] 118 Taxman 147 (Ahd.-Trib.).

(c)That the print-out of the computer floppy is not the books of account maintained in the regular course of business. It cannot be relied upon especially against a third person in the absence of any corroborative evidence. There was no corroborative evidence that the assessee borrowed any cash from Shri Niranjan Shah. The assessee is a private limited company. Had any money been borrowed by it, the same would have been entered in the assessee’s books of account. Moreover, had the assessee borrowed any money in cash, some evidence in the form of acknowledgement, promissory note or hundi ought to have been found from Shri Niranjan Shah. In support of the above contention, he relied upon the decision of Tribunal, Calcutta Bench, in the case of T.S. Venkatesan v. Asstt. CIT [2000] 74 ITD 298 (Cal.).

(d)That the provision for levy of penalty under section 271D is a very harsh provision because the penalty levied is 100% of the money borrowed in cash. Therefore, the provision should be interpreted very strictly.

(e)That section 269SS was inserted by the Finance Act, 1984. The scope and effect of section 269SS was explained in the circular No. 387 dated 6-7-1984. In the above circular, it is mentioned that unaccounted cash found in the course of search is often explained by the taxpayer as representing loans taken from various persons. With a view to countering this device, section 269SS has been inserted in the Income-tax Act debarring persons from taking or accepting loans or deposits otherwise than by account-payee cheques or account-payee bank draft. He stated that there was no search at the premises of the assessee and no unexplained cash was found from the assessee. The Assessing Officer presumed that the assessee borrowed the money in cash and levied penalty therefor. This was not purpose of introduction of section 269SS. In view of the above, he contended that the levy of penalty under section 271D was not called for and is liable to be quashed.

5. The ld. Departmental Representative, on the other hand, submitted that the penalty was validly levied within the period of limitation. He contended that the letter dated 21-2-1994 was only for enquiry during the assessment proceedings. No penalty proceedings were initiated by the above letter. The penalty proceedings were for the first time initiated in the assessment order dated 21-3-1994. He pointed out that at page 8 of the assessment order the Assessing Officer has recorded that "I initiate penalty under sections 271D and 271E". Thus, the penalty proceedings were initiated by the assessment order dated 21-3-1994 and not by the enquiry letter dated 21-2-1994. According to him, the penalties were levied on 28-9-1994 which was within six months from the end of the month in which the penalty proceedings were initiated. Therefore, the penalties were levied within the period of limitation as provided by section 275(1)(c).

5.1 Coming to the merits of the penalty levied under section 271D, the ld. Departmental Representative heavily relied upon the orders of the authorities below. He submitted that the search at the premises of Shri Niranjan Shah was in May 1992 and vide his statement dated 30-5-1992 he had offered income of Rs. 5 crores which included cash advance of Rs. 40 lakhs to the assessee-company. The above statement was retracted by a declaration dated 23-9-1994. Thus, the retraction of the statement given at the time of search was made only after more than two years. This clearly shows that the retraction is an afterthought and the statement given at the time of search was the correct one. Moreover, the retraction was not by way of an affidavit but only a declaration on a plain paper. No credence would be given to such retraction. The retraction was a self-serving document and, therefore, cannot be relied upon as an evidence. In support of this contention, he relied upon the decision in the case of Cit v. Durga Prasad More [1971] 82 ITR 540 (SC). He further contended that copy of the statement of Shri Niranjan Shah was given to the assessee- company. The assessee furnished the reply which was considered by the Assessing Officer. There is nothing on the record of the department to suggest that the assessee requested for cross-examination of Shri Niranjan Shah. Since the assessee never requested for cross-examination of Shri Niranjan Shah, the question of allowing the same did not arise. The print-out taken from the floppy found from Shri Niranjan Shah gives various transactions which are by cheque/D.D. Those transactions by cheque/D.D. were found recorded in the books of account. Therefore, it has to be presumed that the other transactions noted in the floppy in cash were also entered into by the assessee. In support of above contention, he relied upon the following decisions of Hon’ble Kerala High Court :—

(1)CIT v. K. Mahim [1995] 213 ITR 820¹ (Ker.)

(2)CED v. Smt. Sarala Nair [1997] 223 ITR 313 (Ker.)

He further submitted that the various case laws relied upon by the ld. counsel for the assessee are not applicable to the facts under appeal before the Tribunal. The decision of Hon’ble Apex Court in the case of V.C. Shukla (supra) was under the Prevention of Corruption Act. Thus, the accused were facing criminal charges and in that context Their Lordships of the Apex Court examined the applicability of section 34 of the Evidence Act. That Evidence Act is not applicable to proceedings under the Income-tax Act. Therefore, the above decision of Hon’ble Apex Court in the case of V.C. Shukla (supra) would not be applicable to the present case. In support of his contention, he relied upon the following decisions :

(1)CIT v. East Coast Commercial Co. Ltd. [1967] 63 ITR 449 (SC)

(2)Mriganka Mohan Sur v. Commissioner Of Income-Tax, West Bengal-Iv. [1979] 120 ITR 529 (Cal.)

The ld. Departmental Representative concluded his arguments, stating that the CIT(A) rightly confirmed the penalty levied under section 271D. The same should be sustained.

6. We have carefully considered the arguments of both sides and perused the material placed before us. The first issue to be disposed of is whether the penalty was levied within the time permissible under section 275 of the Income-tax. The relevant portion of the above section, which is applicable to the issue under appeal before us reads as under :

"275(1). No order imposing a penalty under this Chapter shall be passed—

(a)******

(b)******

(c)in any other case, after the expiry of the financial year in which the proceedings, in the course of which action for the imposition of penalty has been initiated, are completed, or six months from the end of the month in which action for imposition of penalty is initiated, whichever period expires later."

For applying the above provisions of section 275(1)(c), it has to be examined when the penalty proceedings were initiated. The claim of the assessee is that the penalty proceedings were initiated by letter dated 21-2-1994, while the claim of the Revenue is that the penalty proceedings were initiated as per assessment order dated 21-3-1994. The Assessing Officer wrote letter dated 21-2-1994 during the course of assessment proceedings for assessment year 1991-92. In the said letter, he informed the assessee about the computer floppy found from Shri Niranjan Shah and the statement given by him. In the above context, the Assessing Officer asked the assessee to explain "If such cash receipts were in the nature of deposit/loan, then why the provisions of section 269SS should not be invoked in your case." The ld. counsel for the assessee has vehemently contended that the above explanation sought from the assessee amounts to initiation of penalty proceedings, while the ld. Departmental Representative stated that the above explanation was sought only as a part of the assessment proceedings and it does not amount to initiation of penalty proceedings. We agree with the contention of ld. Departmental Representative. Before initiating penalty proceedings, the Assessing Officer has to satisfy himself that the assessee has received loan/deposit in violation of section 269SS. The information sought for by the Assessing Officer was for satisfying himself whether there was acceptance of loan/deposit in violation of section 269SS. Therefore, in our opinion, the penalty proceedings were not initiated by letter dated 21-2-1994. After considering the assessee’s explanation, the Assessing Officer in the assessment order at page 8 recorded the following finding :

"However by accepting cash loan/deposit and repaying a part of the same in cash the company had clearly violated provisions of sections 269SS and 269T for which I initiate penalty under sections 271D and 271E respectively."

Thus, penalty proceedings were initiated in assessment order dated 21-3-1994. Six months from the end of March 1994 would expire on 30-9-1994. Penalty under consideration had been levied on 28-9-1994 i.e. before the bar of limitation as provided under section 275(1)(c). We accordingly hold that the penalty levied by the Assessing Officer under section 271D was not barred by limitation.

7. Coming to the merits of the penalty levied, the main basis for levy of the penalty is the computer floppy found from the residence of Shri Niranjan J. Shah. The print-out of the above computer floppy showed several transactions between Shri Shah and the assessee-company. The above transactions included some transactions by cheque and some by cash. The assessee had admitted the transactions by cheque but had denied the transactions which were in cash. The department, in support of its contention, has heavily relied upon the presumption provided under section 132(4A) of the Income-tax Act, while the assessee disputed the applicability of section 132(4A) to the present proceedings on the following grounds :

(i)that the presumption under section 132(4A) is limited only to the proceedings under section 132(5) and not in respect of other proceedings;

(ii)that the presumption under section 132(4A) is only against the person from whom the documents was found and not against third parties;

(iii)that the presumption under section 132(4A) is not conclusive and cannot be applied in the absence of corroborative evidence.

Let us examine the rival contentions regarding the scope and application of section 132(4A).

(i) Whether section 132(4A) is applicable only for the limited purpose of section 132(5) and not for the assessment/penalty proceedings - Section 132(4A) raises certain presumptions and provides that where any books of account or other documents are found in the possession or control of any person in the course of a search, it may be presumed that such books of account or documents belong to such person and their contents are true. From a reading of section 132(4A), we do not find any justification to support the contention of the ld. counsel for the assessee that the presumption under section 132(4A) is valid only for the purpose of section 132(4A). Section 132(5) is amended by the Finance Act, 1995, to provide that order under section 132(5) is required to be passed only in respect of search initiated before 1-7-1995. Therefore, section 132(5) has been made inoperative in respect of search initiated after 1-7-1995. However, no such restriction has been provided in section 132(4A). The presumption under section 132(4A) continues to be applicable even in respect of search after 1-7-1995. This clearly proves that the contention of the ld. counsel for the assessee that the presumption under section 132(4A) is intended by the Legislature to be made applicable to order under section 132(5) only is untenable.

(ii) Whether presumption under section 132(4A) is only against the person from whom the document is found and not against third party - As per section 132(4A), where any books of account or document is found in the possession and control of any person in the course of search, it is presumed that they belong to such person. Thus, clearly, the presumption is in respect of the person from whom they were found. The use of the words "to such person" in the said section mean the person from whom the books of account or documents were found. Clause (ii) of section 132(4A) provides that the contents of such books of account or documents are true. In our opinion, this presumption can also be applied only against the person from whose possession the books of account or the documents were found. Therefore, so far as the case of Mr. Niranjan J. Shah is concerned, the Revenue authorities may presume that the books of account or documents found from his possession are correct. However, while utilising those documents in the case of any other person (i.e. the person other than Mr. Niranjan J. Shah), there cannot be any presumption about the correctness of such books or documents. The Hon’ble Apex Court has considered this matter in the case of V.C. Shukla (supra). In that case, certain diaries, small note book and various loose papers were found and seized from the premises of Mr. S.K. Jain of New Delhi. In those diaries/loose papers, the names of V.C. Shukla and L.K. Advani were found recorded. The CBI chargesheeted those persons, namely, Shri Shukla and Shri Advani under the Prevention of Corruption Act, 1988. The Hon’ble Apex Court held that the entries in those diaries/loose papers cannot be used against Shri Advani or Shri Shukla but can be used against Shri Jain and may be proved as admission by him. The ld. Departmental Representative had contended that the above decision of Hon’ble Apex Court was not applicable to Income-tax proceedings because the above decision was based upon the interpretation of section 34 of the Evidence Act, 1872. He contended that Evidence Act is not applicable to Income-tax proceedings. However, we are unable to accept the above contention of the ld. Departmental Representative in view of the decision of Hon’ble Apex Court in the case of Chuharmal v. CIT [1988] 172 ITR 250¹. In that case, Their Lordships held as under :

". . . dismissing the petition and affirming the decision of the High Court, (i) that what was meant by saying that the Evidence Act did not applying to proceedings under the Income-tax Act, 1961, was that the rigour of the rules of evidence contained in the Evidence Act was not applicable; but that did not mean that when the taxing authorities were desirous of invoking the principles of the Evidence Act in proceedings before them, they were prevented from doing so."

We find that similar view was taken by the Tribunal, Ahmedabad Bench ‘C’, in the case of Prarthana Construction (P.) Ltd. (supra) wherein it was held : "The presumption under the provisions of section 132(4A) would in any case not be applicable to a third party from whose possession such papers and documents have not been found by the Revenue". In view of above, we have no hesitation to hold that the presumption under section 132(4A) is applicable only against the person from whose possession books of account or other documents were found and not against any other person.

(iii) Whether the presumption under section 132(4A) is conclusive - In our opinion, the presumption under section 132(4A) is a rebuttable presumption and not a conclusive one. Certainly, the burden to rebut the presumption is upon the person against whom the presumption is applicable. While taking the above view, we derive support from the decision of Hon’ble Kerala High Court in the case of ITO v. T. Abdul Majeed [1988] 169 ITR 440², wherein at page 444, Their Lordships held as under :-

"It is true that section 132(4A) of the Act enables the court to presume the truth of the contents of such books. However, it is a presumption which can be rebutted. Moreover, the presumption envisaged therein is only a factual presumption. It is in the discretion of the court, depending upon other factors, to decide whether the presumption must be drawn. The expression used in the sub-section is "may be presumed" as is used in section 114 of the Evidence Act, 1872. It is not a mandate that whenever the books of account are seized, the court shall necessarily draw the presumption, irrespective of any other factors which may dissuade the court from doing so."

Similar view was expressed by Their Lordships of Rajasthan High Court in the case of Commissioner Of Income-Tax v. S.M.S Investment Corporation P. Ltd. [1994] 207 ITR 364 where it was held that the presumption under section 132(4A) is rebuttable. In view of above, we hold that the presumption under section 132(4A) is only a rebuttable presumption and not a conclusive one. The ld. Departmental Representative has relied upon various decisions. However, all of them are on altogether different facts. The dispute before the Hon’ble Kerala High Court in the case of K. Mahim (supra) and Smt. Sarala Nair (supra) was whether the purchase of property was benami or not, while the issue in the case under appeal before us is altogether different. Similarly, the facts in the case of Durga Prasad More (supra) are altogether different. There also, the dispute was whether the house property purchased in the name of assessee’s wife belonged to her or to the assessee. In view of above, we hold that the various decisions relied upon by the ld. Departmental Representative will not be applicable to the case under appeal before us.

8. Let us examine the facts of this case in the light of our above findings. There was search at the premises of Shri Niranjan Shah, in which a computer floppy was found. On the basis of the contents of the above floppy, the Revenue held that the assessee had borrowed the money in cash which was denied by the assessee. In support of its contention, the Revenue has relied upon section 132(4A). We have already held above that the presumption under section 132(4A) is applicable only against the person from whose possession the document was found and not against any person. We have also held that the presumption under section 132(4A) is only a rebuttable presumption and not a conclusive one. The assessee, in its statement before the Assessing Officer, has denied having borrowed any money from Shri Niranjan Shah in cash. The Assessing Officer, to support the contents of the floppy, has relied upon the statement of Shri Niranjan Shah given at the time of search. However, we find that the Assessing Officer again examined him under section 131 wherein he had denied having advanced any cash to the assessee. The Assessing Officer has reproduced the said statement at page 3 of the assessment order and it would be useful to reproduce the same herein as under :-

"Q.I am showing you account with account head "12A (Rs. A/c.)". Kindly explain the entries therein?

A.This is the account headed "12A Rs. (A/c.)" is of M/s. Straptex India Pvt. Ltd. The figures are in full. In this account as regards the debit and credit by cheque/D.D. are accounted. As regards the cash amount which are debited/credited they have actually never taken place. These are the figures I have inflated to impress my associates and keeping in view to take an undue-advantage of my persons at a later stage. Here the N.J. means myself (Niranjan J. Shah); M.R. Shah indicates Munjal R. Shah; N.R. Shah is Nikhil R. Shah; S.J. Shah is my mother Sushila J. Shah; Aditi is the proprietory concern of Shri Munjal R. Shah; Satish is Satish Mody; Vipul means Vipul R. Shah; R.E. is Reomil Exports; N. Mody should be Nanabhai Mody.

Q.From the above statement it appears that this account shows that payments made to/for Straptex India Pvt. Ltd. are entered in debit side and receipts from Straptex India Pvt. Ltd. are credited. Most of the entries in this account are from banking channel which confirm the correctness of the account. Then on what basis and what evidence, you are simply stating that cash payment has not taken place?

A.As I stated before I wanted to impress my associates, my friends and wanted to have undue advantage from my associates at a later stage i.e. after a lapse of some more time, I can always tell them that so much amount I have given for this company and I was sure that after a lapse of sometime nobody will argue or dispute with me and since I was the only person who was maintaining the account, this account would have been accepted not to the full extent but to the certain extent by them so I could have made money with this trick."

Thus, Shri Shah himself had denied having advanced any money in cash to the assessee. He has also explained the reasons why he has made cash entries in the name of the assessee. It is also not in dispute that the assessee was never given any opportunity to cross examine Shri Shah. It is a settled law that the statement of any person cannot be utilised against the other person unless the other person is given an opportunity to cross examine the witness. In the case before us, not only Shri Shah was not allowed to be cross examined by the assessee but Shri Shah himself in the subsequent statement before the Assessing Officer had denied whatever was stated at the time of search. Further, Shri Shah in a declaration dated 23-9-1994 before the Notary Public has retracted his statement given at the time of search. In view of above, in our opinion, the statement of Mr. Shah given at the time of search cannot be utilised as an evidence against the assessee. No other corroborative evidence in support of cash borrowing by the assessee is brought on record by the Revenue. No promissory note, hundi, etc., signed by the assessee was found from Mr. Shah, which may prove cash borrowing by the assessee-company. On the other hand, Mr. Trivedi, the ld. counsel for the assessee, has pointed out that the assessee is a private limited company and if any money had been borrowed in cash, it would have certainly been recorded in the assessee’s books of account. The company cannot utilise the money unless it is recorded in the books of account. In view of the totality of the above facts, we hold that on the basis of the computer floppy found from Shri Niranjan Shah, it cannot be held that the assessee borrowed the money in cash. Therefore, the levy of penalty under section 271D for violation of section 269SS cannot be sustained and accordingly the same is cancelled.

ITA No. 694/Bom./2001 - penalty under section 271E.

9. Both the parties relied upon their submissions with regard to penalty under section 271D except Mr. Trivedi pointing out that the department has levied the penalty on the ground that the assessee made the repayment of loans in cash to Shri Niranjan Shah. He pointed out that section 269T as it stood at the relevant time, prohibited the repayment of deposits. It is by the Finance Bill 2002 that the word ‘loans’ is inserted in section 269T. Therefore, the levy of penalty under section 271E for the year under consideration for alleged violation of section 269T for the repayment of loan is not sustainable. However, while deciding the assessee’s appeal in regard to penalty under section 271D, we have held that on the basis of the contents of computer floppy, it cannot be said that the assessee borrowed the money. For the same reasons, we hold that it cannot be presumed that the assessee made the repayment in cash. In view of our above finding, we hereby cancel the penalty levied under section 271E.

10. In the result, both the appeals by the assessee are allowed.

274/312