COMMISSIONER OF INCOME-TAX VS BOMBAY PIPE TRADERS
1997 P T D 1328
[213 I T R 282]
[Bombay High Court (India)]
Before V.A. Mohta and G.D. Patil, JJ
COMMISSIONER OF INCOME-TAX
Versus
BOMBAY PIPE TRADERS
Income Tax Reference No. 182 of 1978, decided on 06/01/1992.
Income-tax---
----Penalty---Concealment of income ---I.T.O. making additions in respect of inflations in purchases and difference in cash credits---Explanation of assessee on those items alone considered and rejected---Imposition of penalty ---AAC cancelling penalty on ground that inflations and difference in cash credits due to bona fide mistake in totalling and not posting cash book entries in ledger ---AAC and Tribunal finding no fraud or gross or wilful neglect on part of assessee---Order of penalty quashed on merits after considering entire material on record---Tribunal not considering Explanation for first time---Justified---Indian Income Tax Act, 1961, S. 271(1)(c), Expln.
The Explanation to section 271(1)(c) of the Income Tax Act, 1961, contains nothing but a rule of evidence pertaining to the onus of proof. Before the insertion of the Explanation to section 271(1)(c) by the Finance Act, 1964, the onus to prove that the assessee had furnished inaccurate particulars or had concealed the income was on the Revenue in every case. Difficulties were experienced in proving concealment even in apparently genuine cases. To get over that practical problem, the Explanation was added as a result of which, where the total income returned by an assessee was less than 80 per cent. of the total income assessed, the onus was on him to prove that the failure to file the correct income was not due to fraud or any gross or wilful neglect on his part. The Explanation thus raises a presumption which is rebut table and not conclusive. Moreover, the Explanation does not come into play merely because the returned income is less than 80 per cent of the assessed income. It applies only after recalculation of the assessed income by reducing it by the expenditure incurred bona fide by the assessee for the purposes of earning any income included in the total income, which has been disallowed as deduction by the Income-tax Officer. In the absence of appropriate data supplied by the assessee about the bona fide expenditure, though disallowed in the assessment proceedings, neither the income contemplated by the Explanation can be arrived at nor penalty, in accordance with law, can be imposed. In the absence of notice to the assessee about the Income-tax Officer's intention to rely upon the Explanation, the assessee cannot be expected to adduce that material.
The Income-tax Officer made additions to the income of the assessee on account of defects in the books of account of the assessee and also made additions in respect of inflations of purchases and difference in cash credits. The Income-tax Officer initiated penalty proceedings under section 271(1)(c) and not satisfied with the explanation of the assessee imposed penalty on it. On appeal, the Appellate Assistant Commissioner cancelled the penalty on the ground that the inflations and the difference in the cash credits were due to a bona fide mistake in totalling and not posting the cash book entries in the ledger. The Appellate Assistant Commissioner further held that the Income-tax Officer by making a gross profit addition of Rs.16,990 had applied the provisions of section 145 of the Income-tax Act, and hence the separate four additions were not warranted and that it was open to the assessee to challenge the additions in the penalty proceedings. The Appellate Assistant Commissioner also took note of the appellate assessment order confirming the rejection of accounts and application of rate of profit on that basis but without recording a finding that the assessee had, in fact, attempted to cancel the particulars of income or deliberately furnished inaccurate particulars. In the view of the Appellate Assistant Commissioner, the defects pointed out by the Income-tax Officer in penalty proceedings exist in several cases and those defects could not be said to be either due to fraud or gross or wilful neglect. The Tribunal affirmed the order of the Appellate Assistant Commissioner. On a reference:
Held, that the penalty was not imposed relying on the Explanation to section 271(1)(c) of the Act. Show-cause notice was issued to the assessee in the penalty proceedings on four specific items and the Explanation of the assessee on those items alone was considered and rejected on the merits. The two appellate authorities---the Appellate Assistant Commissioner anti the Tribunal---recorded findings of fact on those four items to the effect that they were neither the result of fraud nor gross or wilful neglect on the part of the assessee. Thus, the order of penalty was quashed on the merits after considering the entire material on record. Upon those findings of fact the onus of proof contemplated by the Explanation had only a theoretical value. Moreover, in the absence of any exercise having been undertaken in finding out the income as per the Explanation, the Explanation could not have been applied for the first time before the Tribunal. On the facts of this case, the Tribunal was right in not considering the Explanation for the first time though theoretically, in an appropriate case, the Explanation might be pressed into service for the first time at the appellate stage.
CIT v. G.L. Textiles 1977 109 ITR 37 (All.); CIT v. Hari Ram Sri Ram (1987) 167 ITR 578 (All.); CIT (Addl.) v. Muhammad Shafi Muhammad Nabi (1991) 192 ITR 102 (AlL) and CIT v. Mussadilal Ram Bharose (1987) 165 ITR 14 (SC) ref.
P.N. Chandurkar for the Commissioner.
L.S. Dewani for the Assessee.
JUDGMENT
V.A. MOHTA, J.---In this reference under section 256(1) of the Income Tax Act, 1961 "the I.T. Act", at the instance of the Commissioner of Income-tax of Vidarbha and Marathwada, Nagpur, the following question needs to be answered:
"Whether, on the facts and in the circumstances of the case, for levy of penalty, the Explanation to section 271(1)(c) can be relied upon before the Tribunal when the Explanation is neither invoked at the time of levy of penalty nor before the Appellate Assistant Commissioner?"
The assessee, Messrs Bombay Pipe Traders, Nagpur returned an income of Rs.54,44,7 for the assessment year 1971-72. The income-tax officer made additions to the tune of Rs.16,993 on account of defects in the account books. He also made the following four additions on specific grounds:
| | Rs. |
| (i) Inflation of purchases | 2,000 |
| (ii) Inflation of purchases and deflation to sales | 1,037 |
| (iii) Inflation to expenses under railway freight | 2,034 |
| (iv) Unexplained cash credits | 2,280 |
Specifically in respect of the above four additions; namely, of Rs.2,000, Rs.1,037, Rs.2,034 and Rs.2,280, the Income-tax officer initiated penalty proceedings under section 271(1)(c) of the Income-tax Act. Not satisfied with the explanation offered by the assessee, a penalty of Rs.10,000 was imposed. The Appellate Assistant Commissioner, in an appeal filed by the assessee, cancelled the penalty holding that the inflations and difference in the cash credits were due to a bona fide mistake in totalling and not posting the cash book entries in the ledger. The Appellate Assistant Commissioner further held that the Income-tax Officer by making a gross profit addition of Rs.16,990 had applied to provisions of section 145 of the Income-tax Act, and hence the separate four additions were not warranted and that it is open to the assessee to challenge the additions in the penalty proceedings. The Appellate Assistant Commissioner also took note of the appellate assessment order confirming the rejection of accounts and application of rate of profit on that basis but without recording a finding that the assessee had, in fact, attempted to conceal the particulars of income or deliberately furnished inaccurate particulars. In the view of the Appellate Assistant Commissioner, the defects pointed out by the Income-tax officer in penalty proceedings exist in several cases and those defects could not be said to be either due to fraud or gross or wilful neglect. The said order of the Appellate Assistant Commissioner was maintained by the Tribunal by giving a reasoned order dealing with each of the defects.
?
For the first time, the Departmental Representative attempted to justify the penalty on the basis of the Explanation to section 271(1)(c). The Tribunal held that under the circumstances this would amount to making out a new case which could not be permitted. Section 271(1)(c) alongwith the Explanation, as it existed at the material period, read thus:
"271. Failure to furnish returns come with notices concealment of income, etc.---(1) If the Income-tax Officer or the Appellate Assistant Commissioner in the course of any proceedings under this Act, is satisfied that any person---
(c) has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty,---...
(iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than 20 per cent but which shall not exceed one and a half times the amount of the tax, .if any, which would have been avoided if the income as returned by such person had been accepted as the correct income.
Explanation. ---Where the total income returned by any person is less than 80 per cent, of the total income hereinafter in this Explanation referred to as the correct income as assessed tinder section 143 or section 144 or section 147 (reduced by the expenditure incurred bona fide by him for the purpose of making or earning any income included in the total income but which has been disallowed as a deduction), such person shall, unless he proves that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part, be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income for the purposes of clause (c) of this subsection. "
Now, the Explanation contains nothing but a rule of evidence pertaining to the onus of proof. Before the insertion of the Explanation to section 271(1)(c) by the Finance Act, 1964, the onus to prove that the assessee had furnished inaccurate particulars or had concealed the income, was on the Revenue in every case. Difficulties were experienced in proving concealment even in apparently genuine cases. To get over that practical problem, the Explanation was added as a result of which, where the total income returned by an assessee was less than 80 per cent of the total income assessed, the onus was on him to prove that the failure to file the correct income was not due to fraud or any gross or wilful neglect on his part. The Explanation thus raises a presumption, which is rebuttable and not conclusive. Moreover, the Explanation does not come into play merely because the returned income is less than 80 per cent of the assessed income. It applies only after recalculation of the assessed income by reducing it by the expenditure incurred bona fide by the assessee for the purposes of earning any income included in the total income, which has been disallowed as deduction by the Income-tax Officer. In the absence of appropriate data supplied by the assessee about the bona fide expenditure, though disallowed in the assessment proceedings, neither the income contemplated by the Explanation can be arrived at nor penalty, in accordance with law, can be imposed. In the absence of notice to the assessee about the Income-tax Officer's. intention to rely upon the Explanation, the assessee cannot be expected to adduce that material.
In the instant case, the admitted position is that the penalty was neither sought to be imposed nor actually imposed, relying on the Explanation. Show-cause notice was issued to the assessee in the penalty proceedings on four specific items and the explanation of the assessee on those items alone was considered and rejected on the merits. The two appellate authorities---the Appellate Assistant Commissioner and the Tribunal---recorded findings of the fact on those four items to the effect that they were neither the result of fraud nor gross or wilful neglect on the part of the assessee. Thus, the order of penalty was quashed on the merits after considering the entire material on record. Upon those findings of fact the onus of proof contemplated by the Explanation had only a theoretical value. Moreover, in the absence of any exercise having been undertaken in finding out the income as per the Explanation, the Explanation could not have been applied for the first time before the Tribunal.
Under the circumstances, we see no defect whatsoever in the approach adopted by the Tribunal to the question of penalty in this case. In the facts and circumstances of this case, the Tribunal was right in not considering the Explanation for the first time, though theoretically, in an appropriate case, the Explanation may be pressed into service for the first time at the appellate stage.
In this connection, following three decisions of the Allahabad High Court, rendered in somewhat similar circumstances, may be noticed:
(1) CIT v. G.L. Textiles (1977) 109 ITR 37;
(2) CIT v. Hari Ram Sri Ram (1987) 167 ITR 578; and
(3) Addl. CIT v. Muhammad Shafi Muhammad Nabi (1991) 192 ITR 102.
We may at this stage also notice the following observations of the Supreme Court made in the context of section 271(1)(c) in the case of CIT v. Mussadilal Ram Bharose (1987) 165 ITR 14:
"If in an appropriate case, the Tribunal or the fact-finding body was satisfied by the evidence on the record and inference drawn from the record that the assessee was not guilty-of fraud or any gross or wilful neglect and if the Revenue had not adduced any further evidence, then, in such a case, the assessee cannot come within the mischief of the section and suffer the imposition of penalty. That is the effect of the provision. "
Our attention was drawn by the Department's learned counsel to some decisions laying down a proposition that the Explanation is merely a rule of evidence and, therefore, the penalty order based on the Explanation does not get vitiated merely because it does not specifically refer to the Explanation. Since that principle of law is well-settled and is not disputed before us, it is unnecessary to refer to those cases. In the instant case, the Tribunal has not rejected the submission based on the Explanation for that reason.
To conclude, we answer the question in the negative and against the Revenue. No order as to costs.
M.B.A./1173/FC???????? ?????????????????????????????????????????????????????????? Order accordingly.