Section 270A Penalty Falls Apart: ITAT Chennai Quashes Penalties Against Enrica Enterprises Pvt. Ltd. for Defective Notice and Failure to Establish Misreporting
1. Background and Business Context
Enrica Enterprises Pvt. Ltd. operates in the manufacture and sale of Indian Made Foreign Liquor (IMFL) and functions as a significant supplier to M/s. Tamilnadu State Marketing Corporation Ltd. (TASMAC). The company's affairs came under intense scrutiny when the Income Tax Department carried out a search and seizure operation under Section 132 of the Income Tax Act, 1961 on 06.12.2018. The search resulted in the recovery of unaccounted cash amounting to Rs.55,27,70,000/- from the residential premises of Shri M. Kothandarami Reddy and six other individuals who represented themselves as associates of the company, stating that they had held the cash for and on behalf of the assessee.
The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) eventually took up two connected appeals, ITA Nos. 1166 & 1167/Chny/2023, arising from penalties levied under Section 270A of the Income Tax Act, 1961 for Assessment Years 2017-18 and 2018-19. Since the underlying facts and legal issues were common to both years, the appeals were disposed of through a consolidated order dated 06.03.2024.
2. What the Search Unearthed and What the Director Admitted
During the search, a sworn statement was recorded under Section 132(4) from Shri S.D. Rami Reddy, the working Director of the assessee company. In response to Questions 17 and 18 of that statement, the Director explained the mechanism through which unaccounted cash had been generated and admitted additional income of Rs.113.99 crores for the period spanning 01.04.2014 to 06.12.2018, which encompassed the seized cash of Rs.55.27 crores.
The Director's explanation, as recorded in the sworn statement, was as follows:
"Q.17. While answering to Q.6, in your sworn statement recorded under section 132(4) dated 9.12.2018, while asking the modus operandi of generating unaccounted cash, you have stated that you will raise bogus bills for which you pay them through banking channels and receive cash from them. Please go through your statement and clarify about generation of unaccounted cash.
Ans. Sir, we have not raised any bogus bills from our suppliers of gift articles to generate unaccounted cash. However, we received back one third of the invoice value on an average in the form of cash from our gift article suppliers. Since this amounts to inflation of the expenditure in our books of account, we undertake to withdraw of claim towards expenditure in the respective years.
Q:18. Please furnish the quantity of cash generated invoice-wise and party-wise with details of suppliers?
Ans. Sir I don't have the invoice-wise and party-wise details of cash generated. However, I am hereby submitting year-wise details of cash generated on this account as under –"
The Director provided year-wise figures totalling Rs.113.99 crores, covering financial years 2014-15 through 2018-19, with amounts of Rs.16.39 crores, Rs.23.62 crores, Rs.15.79 crores, Rs.25.73 crores, and Rs.32.46 crores respectively. Critically, no independent corroborative material supporting the sworn statement was discovered during the search itself.
3. Assessment Proceedings: Income Accepted Without Further Addition
Following the search, proceedings were initiated under Section 153A of the Income Tax Act, 1961. In response to notices issued under Section 153A, the assessee filed returns of income on 19.02.2021, declaring total income of Rs.2,55,35,485/- for AY 2017-18 and Rs.34,55,46,473/- for AY 2018-19. These figures incorporated the additional income offered towards the estimated disallowance of marketing expenditure on account of gift articles.
During the assessment proceedings, the Assessing Officer (AO) also conducted independent enquiries by contacting the suppliers of gift articles. While all of them confirmed having supplied articles to the assessee, some of them additionally acknowledged returning cash to the assessee on occasion.
The AO completed assessments under Section 143(3) read with Section 153A on 26.07.2021, accepting the income as returned by the assessee. The AO's recorded observation at this stage was significant:
"After going through the circumstances in entirety. The income offered by the assessee, including the estimated disallowance of portion of marketing expenses, is found to be in order and accepted."
No independent additions were made beyond what the assessee had voluntarily offered. The AO's satisfaction was confined to accepting the returned income as adequate and appropriate.