COMMISSIONER OF INCOME-TAX VS ADAM KHAN, 1998 PTD-MADRAS-HIGH-COURT-INDIA 3404 (1996)

(a) Income-tax---

----Penalty---Concealment of income---Search operations showing undisclosed loans ---Assessee agreeing for addition to income on condition that penalty was not levied---Tribunal finding that income was computed on basis of estimate---Tribunal justified in cancelling penalty---Indian Income Tax Act, 1961, S.271(1)(c).

(b) Income-tax---

----Reference---Penalty---Concealment of income---Finding regarding concealment is a finding of fact---Quantum of proof to arrive at such a finding cannot be considered by High Court---Indian Income Tax Act, 1961, Ss.256 & 271(1)(c).

When once the Tribunal comes to the conclusion that the failure to return the correct income did not arise from any fraud or gross or wilful negligence on the part of the assessee, the quantum of proof necessary to come to that conclusion cannot be considered by the High Court on a reference.

The assessee was an individual doing money-lending business. One A had given him a general power of attorney. There was a search in the premises of the assessee on July 27, 1970. Various premises standing in the name of the assessee as well as .A were seized. On August 3, 1970. the assessee filed a return admitting an income of Rs.10,000. The Income-tax Officer examined some of the debtors. The Income-tax Officer considering all these seized materials and other evidence came to the conclusion that the assessee was charging exorbitant interest on the moneys advanced by him. He also found that most of the bonds were executed by the debtors for double the amount of the loan actually advanced. He arrived at a peak credit of the loan at Rs.1,27,385 and estimated the interest income at 50 per cent. of the peak credit at Rs.63,693. The assessment was, thus, made on a total income of Rs.63,693 under section 144 of the Income Tax Act, 1961 as a best judgment assessment since the assessee did not comply with various notices issued by the Income-tax Officer. Penalty was imposed but it was cancelled by the Tribunal because it found that: (a) the assessee was not served with the assessment order; (b) the assessment order did not separately estimate the interest income earned by the assessee and interest income earned on the premises standing in the name of A; (c) the assessee had agreed for inclusion of the interest; income from the premises taken in the name of A on condition that no penalty proceedings were initiated against him; (d) it was not clear how the peak credit of Rs.1,27,385 was calculated; (e) the conditional admission was not sufficient to establish concealment of income; (t) the interest income computed was based on estimate; and (g) the addition to the assessment was not adequate to prove concealment. On a reference:

Held, that since the Court could not go into the question of sufficiency or otherwise of the materialson which the Tribunal based its conclusion, there was no infirmity in the order passed by the Tribunal in holding that the initial burden placed upon the assessee was discharged. The Tribunal was justified in cancelling the penalty.

S.V. Subramaniam for the Commissioner

Nemo for the Assessee

JUDGMENT

THANIKKACHALAM, J.---As per the directions of this Court in T.C.P. No.28 of 1978, the Tribunal referred the following question for the opinion of this Court under section 256(2) of the Income Tax Act, 1961:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding and had valid materials to hold that the assessee had not concealed the particulars of his income or had not furnished inaccurate particulars thereof for the assessment year 1970-71 within the meaning of section 271(1)(c)?"

The assessment year involved in this tax case is 1970-71. The assessee is an individual doing money-leading business. One Shri Abdul Gafoor Khan had executed a general power of attorney to the assessee. There was a search in the premises of the assessee on July 27, 1970. Various premises standing in the name of the assessee as well as Abdul Gafoor Khan were seized. On October 3, 1970, the assessee filed a return admitting an income of Rs.10,000. The Income-tax Officer examined some of the debtors and elicited that the assessee was charging exorbitant interest ranging from 72 per cent. to 120 per cent. The assessee was also given an opportunity to cross-examine the debtors. The Income-tax Officer considering all these seized materials and other evidence came to the conclusion. that the assessee was charging exorbitant interest on the moneys advanced by him. He also found that most of the bondwere executed by the debtors for double the amount of the loan actually advanced. He arrived at a peak credit of the loan at Rs.1,27,385 and estimated the interest income at 50 per cent of the peak credit at Rs.63,693. The assessment was, thus, made on a total income of Rs.63,693 under section 144 as a best judgment assessment since the assessee did not comply with various notices issued by the Income-tax Officer. During the course of the assessment proceedings, the assessee sent a letter to the Income-tax Officer, dated January 7, 1972. In the said letter, the assessee has stated that without prejudice to his rights he made the following proposals regarding settlement:

"(1) I agree to the income of Abdul Gafoor Khan being clubbed in my hands;'

(2) The income may be spread over for the assessment years 1964-65 to 1971-72 after estimating the interest between 25 per cent. to 36 per cent. on the original amount lent;

(3 ) I will be allowed to pay the taxes in instalments;

(4) No penalty and prosecution proceedings should be initiated against, me;

(5) It is also requested that wherever, evidence has been adduced for credits the same may be allowed; and

(6) I may also add that there are bad debts which may be taken into consideration before fixing the income."

The Income-tax Officer had also initiated penalty proceedings and referred the matter to the Inspecting Assistant Commissioner for adjudication. On September 11, 1974, the assessee sent a letter to the Inspecting Assistant Commissioner stating among other things that the assessment order had not been served on the assessee. The Inspecting Assistant Commissioner found that on March 29, 1973, the Inspector of Income-tax had served the assessment order on one Shri A. Jani Khan. The Inspecting Assistant Commissioner seems to have thought that it is proper service on the assessee. Even the penalty notice served on the said Shri A. Jani Khan was responded to by the assessee. The Inspecting Assistant Commissioner then informed the assessee that the case was finally posted to hearing on September 27, 1974. But none appeared. Hence, the penalty order was made ex pane. The Inspecting Assistant Commissioner on the facts and the circumstances disclosed during the assessment proceedings and with the help of the Explanation to section 271(1)(c) of the Income Tax Act, 1961, found that assessee guilty of concealment.

Accordingly, he levied a minimum penalty of Rs.53,793 equal to the income concealed.

Aggrieved, the assessee filed an appeal before the Appellate Tribunal. The Appellate Tribunal on considering the fact and circumstances arising in this case came to the conclusion that the assessee dislodged the initial burden placed upon him and the Department failed to discharge the ultimate burden placed upon it. Accordingly, the Tribunal held that there is no concealment on the part of the assessee, as per the provisions contained in section 271(1)(c) of the Act.

Before us, learned senior standing counsel appearing for the Department submitted as under:

Search was conducted in the premises of the assessee on July 27 1970. A return was filed on August 3, 1970, disclosing an income Rs.10,000. The assessee approached the Central Board of Direct Taxes as against the summary order made by the Income-tax Officer under section 132 of the Act. After hearing the assessee, the Central Board of Direct Taxes passed an order under section 132 (11) on January 20, 1972, dismissing the petition filed by the assessee and confirming the order passed by the Income tax Officer, dated October 16, 1970. According to learned senior standing counsel appearing for the Department, in spite of the fact that a search operation was conducted on July 27, 1970, the assessee did not come forward to file a return on the materials available on record. The assessee filed his return on August 3, 1970, admitting an income of Rs.10,000 without disclosing the basis for such admission. The assessee filed his return only after the search was conducted and after the materials were seized. The assessee did not voluntarily file any return. According to learned senior standing counsel there was no material on record for the Tribunal to come to the conclusion that the explanation offered by the assessee in the light of the facts and circumstances arising in this case is sufficient to warrant the conclusion that the assessee is not guilty of fraud or gross or wilful negligence in furnishing the particulars in the return. The assessee did not cooperate with the Department in the matter of ascertaining the true income of the assessee. The assessee remained ex parte before the Income-tax Officer and before the Inspecting Assistant Commissioner. According to learned senior standing counsel the assessee failed to establish the initial burden placed upon him as contemplated in Explanation to section 271(1)(c) of the Act. It was, therefore, submitted that the order passed by the Tribunal in cancelling the penalty levied under section 271(1)(c) is without any basis and, therefore, the order passed by the Tribunal is not sustainable.

We have heard learned senior standing counsel appearing for the Department and perused the records carefully. One Shri Abdul Gafoor Khan executed a general power of attorney in favour of the assessee herein. Pronotes in the name of Abdul Gafoor Khan were seized from the locker, which was under the possession of the assessee. The assess4- agreed for the assessment of the income belonging to the said Sri Abdul Gafoor Khan. However, the assessee, also wrote a letter to the Income-tax Officer, dated January 7, 1972, stating that without prejudice to his rights he is agreeable for the addition of the income of Abdul Gafoor Khan in his hands provided the Department spread over the income for the assessment year 1964-65 to 1971-72 estimating the interest between 25 per cent. to 36 per cent allowing the assessee to pay the taxes in instalments, no penalty and proceedings should be initiated, evidences adduced for credits, should be accepted and the credits should be allowed and the bad debts should also be taken into consideration.

The Income-tax Officer on the basis of the materials seized, worked out the peak credit of the loan at Rs.1,27,385 and estimated interest income at 50 per cent. of the peak credit at Rs.63,693 and thus made the assessment on a total income of Rs.63,693 under section 144 of the Act. The assessee was not present in the assessment proceedings.

Income-tax Officer initiated penalty proceedings and referred the matter to the Inspecting Assistant Commissioner. The assessee also wrote a letter, dated September 11, 1974. to the Inspecting Assistant Commissioner stating among other things that the assessment order was not served on him. The Inspecting Assistant Commissioner has noticed that the assessment order was served on one Shri A. Jani Khan. According to the Inspecting Assistant Commissioner, this service is better service. The Inspecting Assistant Commissioner pointed out that the penalty notice was served on the said Sri A. lani Khan and itwas responded by the assessee.

In the meanwhile, the assessee has also approached the Central Board of Direct Taxes for settlement as against the summary order passed under section 132(5)k of the Act. After hearing the assessee the Central Board of Direct Taxes passed the order on January 20, 1972, under section 132(11) of the Act confirming the order passed by the Income-tax Officer on October 16, 1970. The assessee has failed to appear before the Inspecting Assistant Commissioner. The Inspecting Assistant Commissioner imposed a penalty of Rs.53,693 under section 271(1)(c) of the Act, since according to the Inspecting Assistant Commissioner, the assessee concealed the income .

On appeal, the Tribunal noted down the following farts:

.

(a) the assessee was not served with the assessment order;.

(b)The assessment order does not separately estimate -the interest income earned by the assessee and interest income earned on the premises standing in the name of Abdul Gafoor Khan;

(c) The assessee had agreed for inclusion of the interest income from the premises taken in the name of Sri Abdul Gafoor Khan on condition that no penalty proceedings were initiated against him;

(d) Since the penalty proceedings have been initiated the conditional admission made cannot be relied on to establish the penalty proceedings that the interest earning on the premises taken in the name of Sri Abdul Gafoor Khan represents the concealed income of the assessee;

(e) It is not clear how the peak credit was worked out to Rs.1,27,385 when admittedly bonds have been taken from the debtors for double or triple the amount lent. Even the correctness of the peak credits taken is open to doubt;

(f) The interest income computed is ultimately based on estimate;

(g) Addition to assessment may be justified. But that is not adequate to prove the concealment; and

(h) In the present case, the explanation given by the assessee read in the light and circumstances of the case is sufficient to warrant the conclusion that the assessee is not guilty of fraud or gross or wilful negligence in furnishing the return."

Considering these circumstances, the Tribunal came to the conclusion that the assessee has not concealed any income or furnished inaccurate particulars warranting penalty under section 271(1)(c) of the Act.

According to learned senior standing counsel, the Tribunal was not correct in holding that the assessee discharged the Initial burden placed upon him. Learned senior standing counsel also pointed out that there is no sufficient material on record for the Tribunal to come to the conclusion that the initial burden placed upon the assessee was discharged. The circumstances under which the Tribunal came to the conclusion that the appellant is not guilty of fraud or gross or wilful negligence in furnishing the particulars are enumerated in the order passed by the Tribunal. Therefore, it cannot be said that absolutely there is no material on record for the Tribunal to come to the conclusion that the initial burden placed upon the assessee was discharged. The sufficiency or otherwise of the material found in the record for the Tribunal to come to the above said conclusion is not the concern of this Court while disposing of the tax case on reference. When once the Tribunal comes to the conclusion that the failure to return the correct income did not arise from any fraud or gross or wilful negligence on the part of the assessee, the quantum of proof necessary to come to that conclusion is not within the approach of this Court, while considering whether the Tribunal has got sufficient materials to hold that there is no concealment on the part of assessee. Since we cannot go into the question of sufficiency or otherwise of the materials on which the Tribunal based its conclusion, we find that there is no infirmity in the order passed by the Tribunal, in holding that the initial burden placed upon the assessee was discharged. In view of the foregoing reasons, we consider that there is no infirmity in the order passed by the Tribunal in cancelling the penalty levied under section 271(1)(c) of the Act. In that view of the matter, we answer the question referred to us in' the affirmative and against the Department.

M.B.A./1610/FCOrder accordingly.