COMMISSIONER OF INCOME-TAX VS SANTHOSH TEXTILES
1999 P T D 2717
[228 I T R 221]
[Kerala High Court (India)]
Before V. Y. Kamat and P. A. Mohammed, JJ
COMMISSIONER OF INCOME-TAX
Versus
SANTHOSH TEXTILES
Income-tax Reference No.230 of 1988, decided on 24/06/1996.
Income-tax---
----Penalty---Concealment of income---Burden of proof---Tribunal on facts holding mistakes in accounts were inadvertent and cancelling penalty---Order of Tribunal justified---Indian Income Tax Act, 1961, S.271(1)(c).
For the assessment year 1974-75, the assessee filed a return showing an income of Rs.80,780. On December 7, 1974, the Income-tax Officer, while examining the accounts, noticed in the ledger, an item of sale of Rs.70,642 which took place on January 1, 1974, which was not included in the total struck in regard to the accounts. The books were impugned and the assessee was asked to' submit an explanation. The assessee sought an adjournment to enable the examination of the books of account. This was on December 16, 1974. On December 19, 1974, the assessee explained that the accountant, one S, who was looking after not only the accounts of the firm, but also representing them before the Income-tax Officer, had suddenly left for Bombay. In support reliance was placed on the letter, dated December 15, 1974, addressed by the said accountant to the managing partner, by post. On the scrutiny of accounts, 44 entries relating to excess debits and credits were found. The assessee filed a revised return showing a total income ofRs. 1,13,589, accompanied by a balance-sheet and profit and loss account. Assessment was made on a total income of Rs.1,14,290. Subsequently, a penalty of Rs.75,000 was levied under section 271(1)(c) of the Act by the Inspecting Assistant Commissioner for concealment of income by the assessee, against which the assessee appealed to the Appellate Tribunal. Before the Tribunal, the assessee contended that this was a case of bona fide omissions in totalling the sales ledger. The Tribunal, considering the facts, held it probable that the total of the transactions up to the end of December, 1973, had been made out and through inadvertence, the entry of January 1, 1974, came to be made and adding the same, the total was struck at Rs.8,33,454.70. On the basis of the material on record, the Tribunal observed that there had been no concealment of income, but certain omissions had taken place, which went undetected till the Income-tax Officer noticed one such omission on examination of accounts. The Tribunal also found no reason to doubt the veracity of the statement in-the letter of the accountant especially since it was filed before the Income-tax Officer immediately on receipt, which was within a week of the queries made by the Income-tax Officer. The Tribunal also observed that the prosecution against the partners of the assessee in respect of this concealment had ended in a discharge and took note of the observations of the Magistrate. The Tribunal, therefore, cancelled the penalty. On a reference:
Held; that if the fact-finding body comes to the conclusion that the assessee has discharged the onus under section 271(4)(c) of the Act, no question of law arises. Several factors were taken into consideration by the Tribunal, fortified with the situation that the criminal Court had to record an order of discharge with pertinent observations, that the circumstances highly probabilised the contention of the assessee that the mistake crept in the account, would be a bona fide one. The order of the Tribunal was justified.
CIT v. Anwar Ali (1970) 76 ITR 696 (SC); CIT v. Haji P. Mohammed (1981) 132 ITR 623 (Ker.) and CIT v. Jeevan Lal Shah (1994) 205 ITR 244 (SC) ref.
P.K.R. Menon and N.R.K. Nair for the Commissioner.
C. Kochunni Nair, M A. Firoze and Dale P. Kurian for the Assessee
JUDGMENT
V. V. KAMAT, J.---We will answer the following two questions
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal is right in cancelling the penalty imposed under section 271(1)(c) of the Income Tax Act, 1961?
(2) Whether, on the facts and in the circumstances of the case, the assessee discharged its burden of proof?"
The Tribunal was directed to refer the questions by this Court in pursuance of its order, dated March 4, 1988, in Original Petition No. 1303 of 1984.
The assessment year is 1974-75 in regard to which the assessee Santhosh Textiles, Cannanore, filed a return on September 30, 1974 the total income of Rs.80,780 was shown therein. On December -7, 1974, the Income-tax Officer while examining the accounts, noticed at page 154 of the ledger an item of sale of Rs.70,642 which took place on January 1, 1974; and was not included in the total struck in regard to the accounts.
This initiated the proceedings requiring the assessee to submit an explanation and for the purpose the books of account were impounded. The assessee sought for an adjournment to enable the examination of the books of account. This was on December 16, 1974. On December 19, 1974, the explanation was submitted by the assessee that the accountant, one Sri Sahadevan, who was looking after not only the accounts, but also representing them before the Income-tax Officer, had suddenly left for Bombay. In support reliance was placed on the letter, dated December 15, 1974, addressed by the said accountant to Sri Sukumaran, the managing partner, by post.
In the scrutiny of accounts which were given to the auditors as stated above, it was found, hat entries relating to excess credits and debits related to 44 items and this resulted in the filing of a revised return on March 19, 1975. This revised return was accompanied by a profit and loss account as well as balance-sheet. The material showed total income of Rs.1,13,589. On the basis of the material, the Income-tax Officer completed the assessment of March 31; 1975, in regard to the total income of Rs.1,14,290. The order shows that simultaneously penalty proceedings were initiated by referring the matter to the Inspecting Assistant Commissioner.
Before the Inspecting Assistant Commissioner the assessee filed a detailed explanation, dated August 24, 1976, supported by an affidavit from the managing partner, Sri C.K. Sukumaran. It was submitted before the Inspecting Assistant Commissioner by a plea that the firm had not committed any fraud, nor was there any gross or wilful neglect in furnishing the return. On the merits it was submitted that the books of account were written by Sri Sahadevan, the accountant, and that there was implicit faith in him. It was also placed on record that no sooner the mistake came to light as found by the Income-tax Officer the matter was entrusted to the chartered accountant and the books of account came to be examined. It was also submitted that the accountant, Sri Sahadevan, left for Bombay.
The Inspecting Assistant Commissioner by order, dated August 31, 1976, considered the question as to whether the mistake arose due to the inadvertence of the accountant, Sahadevan, as he was having some eye trouble and additionally that the partners were unaware of these mistakes. The learned Commissioner has considered this aspect, firstly observing that it would be impossible that the partners of the assessee-firm would not have known that the real profits were much more than those shown originally in the return; secondly, that the entry, dated January 1, 1974, relating to sales amounting to Rs.70,642 could not be understood on the basis of the claim of oversight and inadvertence because of corrections as regards as many as 44 items in the cash book and ledger in regard thereto; thirdly, that the profits would have to be understood as available to the firm, when it is not the case that the accountant had defalcated the profit in any other manner; fourthly, that the partners would have to be understood to have been aware of the existence of the unaccounted cash balance especially when the accountant had not defalcated as is the case definitely made out; and lastly---fifthly; that the very nature of 44 entries found would show that there was an attempt to reduce the tax liability and manipulations were only for the benefit of the firm and the partners, and they were detected by the Income-tax Officer. The learned Commissioner had thereafter proceeded to consider the question that the penalty proceedings are in the nature of quasi-criminal proceedings and would have to be looked at on the basis of the preponderance of probabilities as a result thereof. It is really unnecessary to dwell upon the manner in which the Commissioner has approached the question of proof or the standard of proof: It is necessary to emphasise that when the learned Commissioner considered the mistake, while dealing with the submission of the assessee's representative to the effect that the firm promptly filed the revised return, surrendered the accounts and subsequently paid the taxes, being matters required to be considered while fixing the quantum of the penalty, has observed that these mitigating circumstances would certainly go in favour of the assessee in the determination of the quantum. The circumstances were taken into consideration by the Commissioner to levy a penalty of Rs.75,000.
The Income-tax Appellate Tribunal considered the rival submissions. It was submitted before the Tribunal that the present case was a case of bona fide omission in totalling in the sales ledger. Referring to page No. 154 in the ledger it was submitted that after the entries for December 1973, comes the entry on January 1, 1974, relating to Invoices Nos.731 to 739 and the total was struck at Rs.8,33,454.70. It was submitted that this total was for the month of December, 1973, only and it would be seen from the said total that the entry, dated January 1, 1974, was also recorded which resulted in the mistake in totalling. It was also further submitted that the material would not show conscious concealment. In regard to this submission, it was pointed out before the Tribunal that just as there were entries of excess debits, there were also entries of excess credits. This was with reference to the details placed before the Tribunal in the nature of a paper book for a submission that an inference that there was any deliberate manipulation could not be understood from the material on record. Thereafter, reliance was placed on the letter, dated December 15, 1974. This was the letter of the accountant, Sri Sahadevan, to the assessee. It was submitted that for the first time the Income-tax Officer on December 7, 1974, examined the accounts and found a difference in the total by non inclusion of the amount of Rs.70,641. It was submitted that promptly the assessee entrusted the matter to the auditors and the accountant in a perturbed state of mind left the place. All these factors were placed before the Tribunal for consideration by relying upon the decisions of the Andhra Pradesh and Patna High Courts, to place on record on the basis of preponderance of probabilities that there was neither gross or willful neglect not fraud on the part of the assessee, but the situation was an omission under the circumstances on record.
At the other end, with regard to the questions to be answered, the Department submitted that when a revised return was put in by the assessee, it would have to be considered as an admission of 'concealment of income. The submission was sought to be supported on the basis of the decisions of the Punjab and Haryana High Court and of this Court that where a revised return was field after enquiries were commenced by the Income-tax Officer, the revised return could not be understood to be a voluntary one under the provisions of section 139(5) of the Act. It was also further submitted that the revised return was not filed before the detection of the entry by the Income-tax Officer. This situation would not take the case, of the assessee outside the provisions of section 271(1)(c) of the Act.
The Tribunal has considered the situation on the merits in paragraph 10 of its order. The Tribunal has relied on certain factual positions emerging from the material on record. The Tribunal has visualised a situation of probability that the total of the transactions up to the end of December, 1973, had been made out and in regard thereto, surely through inadvertence the entry of January 1, 1974, came to be made and adding the same, the total was truck at Rs.8,33,454.70. The Tribunal has recorded as a factual position that there are no other omissions in the said ledger. Precisely, the Tribunal has taken care to observe:
"We have looked into the list of various other discrepancies which were detected in the course of audit and there are excess as well as short totallings in various accounts. They are usually in round figures. If the idea was to conceal income, there could not be under-tallying of expenses in round figures. Totalling errors do exist."
The Tribunal has also been careful to observe from the material on record that when the Income-tax Officer pointed out the mistake, apparently Sahadevan the accountant was also present on December 7, 1974. While considering the contents of the letter, dated December 15, 1974, the Tribunal has observed that the accountant was in a distressed state of mind and spoke of sufferings, ailments, etc., earlier also.
On the basis of the material on record, the Tribunal observed that there has been no scheme of concealment of income, but certain omissions had taken place, which went undetected till the Income-tax Officer noticed one such omission on examination of the accounts.
A further aspect was taken up by the Tribunal for consideration with regard to the promptness of the assessee. The Tribunal observed in regard thereto that by the letter, dated March 18, 1975, the assessee intimated to the Income-tax Officer, relating to the revised return of income, placing on record that in the absence of day-to-day stock register, the stock particulars could not be examined and that stock was taken according to the original books. The Tribunal then refers to the situation that on the detection of various mistakes the balance-sheet figures were recast. It was also submitted that prior to the detection of the omission by the Income-tax Officer, the partners were not aware of the discrepancies in the books of account, and it is a matter of inference in regard thereto only. The Tribunal has found that certain mistakes had occurred as a result of oversight or inadvertence and the situation could not lead to the imposition of penalty.
On facts, taking into consideration the material on record, the Tribunal has found that this is a case where matters had been left by the assessee to the accountant who also, perhaps because he could not explain the discrepancies, left the station immediately on the omission being discovered. Precisely and specifically, the Tribunal found no reason to doubt the veracity of the statement in the letter of the accountant especially since it was filed before the Income-tax Officer immediately on receipt, which was within a week of the queries made by the Income-tax Officer.
Additionally, apart from the material on record, the Tribunal has also found reinforcement in its decision from certain situations in regard to the present assessee. In paragraph 12 of the order, the Tribunal has made a reference to the prosecution proceedings of Criminal Case No.144 of 1979 disposed of by the judgment of the criminal Court, dated August 20, 1981. This was the prosecution against the two partners of the firm, C.K. Sukumaran, the managing partner, and C.K. Krishnan, the second partner. The result of the prosecution, as is available from the discussion in regard thereto by the Tribunal, shows that Sukumaran expired and the prosecution abated in regard thereto. Krishnan came to be discharged and in the course of the observations in the judgment of the learned Magistrate, it is observed that the circumstances highly probabilised the defence contention that the mistake crept in the account was a bona fide one. The Tribunal found such a conclusion with regard to the proceedings of the criminal Court helpful in the process of reaching conclusions on facts.
The above discussion, which we have carried out in greater detail, would show that no question of burden of proof or standard of proof in regard thereto would occur on the factual matrix and consideration thereof by the authorities. The material on record has placed certain situations in support of the prayer that this is a result of the situation of inadvertence. The Tribunal has in detail considered the material to reach the conclusion that the situation is of inadvertence. From the very judgment of the Tribunal it would be amply clear that the Tribunal had material before it, it has considered the said material and has reached the conclusion that the situation is one of inadvertence. Learned senior standing counsel for taxes strenuously tried his best to take us into the question of burden of proof requiring us to bear in mind that certain situations lead to inevitable consequences.
In the first place reliance was placed on the decision of this Court in CIT v. Haji P. Muhammad (1981) 132 ITR 623, in support of the submission that certain consequence follows wanting the fact of filing of the revised return. We have carefully gone through the factual matrix leading to the observations in the decision placed before us. The facts show that accounts were not maintained and the defect on being noticed by the Income -tax Officer, on information in his possession, a revised return came to be filed. We are afraid that this would not be the rule and the situation resulting in the filing of revised return will have to be examined on the basis of facts and circumstances in regard thereto and no proposition can be appreciated as an inescapable conclusion, especially on the factual situations that are placed on record before us.
Learned senior tax counsel placed reliance on the decision of the Supreme Court in CIT v. Jevan Lal Shah (1994) 205 ITR 244. We have gone through the said decision very carefully. The decision relates to the change of law in view of the Finance Act, 1964, and its effect on the burden of proof shifting to the assessee raising a presumption of concealment, ruling that unless the assessee discharges the burden of proof, with regard to the failure to return the correct income as not being the product of fraud or gross or wilful neglect, the burden shall always continue to remain on the assessee positively to prove the situation in regard thereto. The burden is no doubt rebuttable and by reason of the Explanation, which has come on the statute by the Finance Act, 1964, if the assessee fails to establish the presumption will become a finding keeping open to the authority to levy penalty in regard thereto.
More or less settled position earlier thereto in the decision in CIT v. Anwar Ali (1970) 76 ITR 696 (SC), is replaced by the Explanation, with a view to make the task of the Revenue in such matters less difficult. Not only the word "deliberately" was omitted in section 271(1)(c) of the Income Tax Act, 1961, the Explanation introduced a presumption of law, which is no doubt rebuttable. It has to be on material relevant and cogent and it is for the fact finding body to judge the relevancy and the sufficiency of the material. If such a fact finding body, bearing the aforesaid particulars in mind, comes to the conclusion that the assessee had discharged the onus, it becomes a conclusion of fact, no question of law arises. We have already paraphrased the findings of fact arrived at by the Tribunal. Several factors have been taken into consideration by the Tribunal, fortified with the situation that the criminal Court had to record, an order of discharge with pertinent observations that the circumstances highly probabilised the contention of the assessee that the mistake crept in the account would be a bona fide one.
In our judgment, several aspects taken into consideration by the Tribunal, deal with the situation of the assessee in regard to pleaded inadvertence, spelt out a question of factual situations.
Additionally, even the two questions could not be stated to be any way connecting them to a question of law. As already declared by the apex Court, discharge of burden is essentially a factual situation. We agree with the decision recorded by the Tribunal.
For the above reasons, both the questions are answered in the affirmative, against the Revenue and in favour of the assessee.
A copy of this judgment under the seal of the Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal. Chochin Bench, as required by law.
M.B.A./3036/FCReference answered