COMMISSIONER OF INCOME-TAX VS V. GOPAL
1999 PTD 137
[225 I T R 63]
[Madras High Court (India)]
Before K.A. Thanikkachalam and S.M. Sidickk, JJ
COMMISSIONER OF INCOME-TAX
Versus
V. GOPAL
Tax Case Petitions Nos.324 to 328 of 1996, decided on 21/01/1997.
Income-tax---
-Reference---Penalty---Concealment of income---Assessee doing tailoring business---Search of business premises of assessee---Relevant order books impounded by Department---Department finding suppression of tailoring charges---Assessment made by estimating tailoring charges on guesswork-- No opportunity given to assessee to reconcile omission of receipts ---Assessee pointing out mistakes in list of omissions which on examination found correct---Uncollected stitching charges relating to years in question as well as to earlier years---No deliberate suppression of tailoring charges---Levy of penalty not valid---No question of law arose for reference---Indian Income Tax Act, 1961, S.271(1)(c).
The assessee carried on tailoring business. For the assessment years 1980-81, 1981-82 and 1982-83, the original assessments were completed on the assessee. The Department conducted search proceedings under section 132 of the Income Tax Act, 1961, on the premises of the assessee and order books and collection chittai were seized which revealed large scale suppression of tailoring charges. The Assessing Officer initiated reassessment proceedings under section 147(a) of the Income Tax Act, 1961, against the assessee to bring to tax the escaped income from tailoring charges. In the course of the reassessment proceedings, the Assessing Officer initiated penalty proceedings under section 271(1)(c) for all the years and levied penalties on the assessee. The Commissioner (Appeals) found that there was deliberate suppression of tailoring receipts and confirmed the order of penalty of the Assessing Officer. The Tribunal, after calling for a remand report from the Assessing Officer, reversed the order of the Commissioner (Appeals) on the grounds that since the order books were impounded by the Department, the assessments were made by estimating the tailoring charges on, guesswork, that no opportunity was given to the assessee to reconcile the omission of receipts, that in the list of omissions the assessee was able to point out many mistakes which, on examination, were found to be correct, that it was only to purchase peace with the Department that certain items of income were shown in the revised returns filed by the assessee, that the major portion of the additions were deleted by the Commissioner (Appeals), that some stitching charges were unable to be collected by the assessee for various reasons and the alleged suppressed stitching charges related not only to the relevant assessment years but also to earlier years, that there was no mens rea in not disclosing the alleged tailoring charges which, according to the assessee, were not received by him and that, therefore, there was no deliberate suppression of tailoring charges so as to warrant initiation of penalty proceedings under section 271(1)(c) of the Act. On an application under section 256(2) to refer a question of law:
Held, dismissing the application, that the Tribunal was correct in cancelling the penalty levied on the assessee and no question of law arose for reference.
CIT v. Adamkhan (1997) 223 ITR 264 (Mad.); CIT v. Ashoka Marketing Ltd. (1976) 103 ITR 543 (SC); CIT v. Daulatram Rawatmull (1964) 53 ITR 574 (SC); CIT v. Jain (S.P.) (1973) 87 ITR 370 (SC.); CIT v. Khoday Eswarsa & Sons (1972) 83 ITR 369 (SC); CIT v. Ponnuswamy Naidu (V) (1995) 214 ITR 185 (Mad.); Newton Chikli Collieries Ltd. v. CIT (1962) 44 ITR 495 (SC) and Venugopal Chettiar (H.V.) v. CIT (1985) 153 ITR 376 (Mad.) ref.
C.V. Rajan for Petitioner.
T.C.A. Ramanujam assisted by R. Srinivasan and T.C.A. Sangeetha for Respondent.
JUDGMENT
K. A. THANIKKACHALAM, J.---In these tax case petitions, the Department requests this Court to direct the Tribunal to refer the following common question of law, for the assessment years 1980-81, 1981-82 and 1982-83, for the opinion of this Court, under section 256(2) of the Income Tax Act, 1961 (hereinafter referred to as the "Act") ?
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in law in cancelling the penalty levied under section 271(1)(c) of the Income Tax Act, 1961?"
The assessee is an individual, carrying on tailoring business. For the assessment year 1980-81, he filed his return of income, admitting a total income of Rs.20, 873 and the original assessment under section 143(3) of the Act was completed on a total income of Rs.26,170. For the assessment year 1981-82, the returned income was Rs.29,550 and the original assessment under section 143(3) was made on a total income of Rs.31,590. On October 5, 1992, the Department conducted search proceeding under section 132 of the Act in the premises of the assessee. In the course of the proceedings, incriminating documents including the order books and collection chittai were seized and they revealed large scale suppression of tailoring receipts. Reassessment proceedings were taken for the assessment years 1980-81 and 1981-82 under section 147(a) of the Act by issuing notice under section 148 to bring to tax. the escaped income in respect of suppression of receipts from tailoring business and other investments. In response to the notices, the assessee filed returns of income showing a total income of Rs.48,810 including a sum of Rs.27,644 admitted as income from other sources for the assessment year 1980-81 and a total income of Rs.60,570 including Rs.27,676 admitted as "income from other sources" for the assessment year 1981-82. The assessments were completed for the assessment years 1980-81 and 1981-82 on a total income of Rs.1,84,960 and Rs.2,34,140, respectively.
In the reassessments, additions were made not only in respect of various investments including investments in the names of his family members. For the assessment year 1982-83, the assessee filed a return disclosing a total income of Rs.32,170 and the regular assessment was completed on a total income of Rs.5,06,290. As a result of the appellate orders, the total income for the three assessment years involved herein were reduced as under:
Assessment year Income determined in the appeals
| | (Rs. ) |
| 1980-81 | 1,20,480 |
| 1981-82 | 1,64,210 |
| 1982-83 | 2,80,850 |
In the course of the reassessment proceedings, the Assessing Officer initiated penalty proceeding under section 271(1)(c) of the Act for all the three assessment years. Considering the relief allowed by the Commissioner (Appeals) and the Tribunal and after affording an opportunity of being heard to the assessee, the Assessing Officer levied under section 271(1)(c) of the Act penalties for these three assessment years.
Against the penalty orders, the assessee filed appeals to the Commissioner of Income-tax (Appeals). The Commissioner (Appeals) held that there was clear suppression of tailoring receipts and the assessee had deliberately concealed income and the income declared in the original returns were not correct. The Commissioner was also of the view that the suppressed receipts appeared in the form of unexplained investment and, therefore, the additions sustained were asset-oriented additions. Accordingly, he held that the penalty was exigible only in respect of suppression in the tailoring charges as appearing in the form of unexplained investments. The Commissioner (Appeals) thus confirmed the penalty levied under section 271(1)(c) and sustained the penalties for the three assessment years as under:
Assessment year Pennalty as per the appellate order
| | (Rs.) |
| 1980-81 | 57,375 |
| 1981-82 | 76,837 |
| 1982-83 | 1,19,942 |
As against the order passed by the Commissioner of Income-tax, both the Department as well as the assessee preferred appeals before the Tribunal. The Tribunal called for a remand report from the Assessing Officer. On considering the remand report and the facts on record, the Tribunal held that the Commissioner of Income-tax was not justified in sustaining the minimum penalty for the assessment years under consideration and that, therefore, the penalty sustained by him was not warranted in law. Accordingly, the Tribunal reversed the order of the Commissioner of Income-tax in levying penalty and allowed the appeals filed by the assessee and dismissed the appeals filed by the Department.
Learned standing counsel appearing for the Department submitted that the question raised for reference is a pure question of law and, therefore, a statement should be called for from the Tribunal. There was concealment of income with regard to the stitching charges as can be seen from the differences between the original return filed and the revised return filed by the assessee. The Tribunal overlooked the fact that but for the search proceedings conducted by the Department, the suppression of tailoring receipts would not have come to light. The assessee had systematically and deliberately understated his income from tailoring business by not recording the same in the account books. The fact that the Commissioner of Income-tax 3n the Appeals sustained the penalty, would go to show that there is clear concealment of income by the assessee in the present case. In the remand report submitted by the Assistant Commissioner, the assessee was not exonerated from the charge of suppression of the tailoring receipts. There is variation between the income returned and the income finally determined. It was only due to suppression of tailoring receipts. The seized materials brought to light that there was systematic suppression of tailoring receipts in various years. But for the search operation, the omission to account for the tailoring receipts could not have been detected. The assessee himself had admitted the omitted collection would be Rs.40,383 as against Rs.50,000 estimated by the Assessing Officer in the appeal before the Commissioner of Income-tax (Appeals). In the quantum proceedings, the Commissioner of Income-tax (Appeals) categorically held mat there was suppression of tailoring receipts and addition was made thereon. It cannot be said that the estimate was made with regard to the suppressed tailoring receipts without materials. Inasmuch as a question of law does arise out of the order of the Tribunal, a statement may be called for from the Tribunal.
On the other hand, Mr. T.C.A. Ramanujam assisted by R. Srinivasan and T.C.A. Sangeetha, learned counsel appearing for the assessee, submitted that whatever happened prior to the calling of the remand report by the Tribunal would be of no relevance. The remand report clearly shows that the tailoring receipts related to earlier years and the entire receipts do not relate to the assessment years under consideration. The omission to mention the entire tailoring receipts was due to several facts, which were enumerated in the remand report. The finding of the Tribunal that there was no concealment is on the basis of a question of fact, which was not challenged by the Department. Inasmuch as the account books were seized and impounded in the criminal Court, the assessee was not having an opportunity to explain the alleged suppression in the quantum appeal. That would not lead to the conclusion that the suppression was found out only during the search operation. Even during the search operation the assessee voluntarily surrendered the books to the Department. The Department estimated the stitching charges of the articles found in the business premises as well as in the residence which were lying without being delivered since there was no demand by the customers due to various reasons. When there was no stitching charges, that was not recorded in the book. The reason for the same was explained in a detailed letter, dated April 26, 1995, sent by the assessee. The reasons that are made good for making an addition would not be good for levying penalty. For levying penalty under section 271(l)(c) of the Act, the Department must prove that the assessee had deliberately concealed the income. The explanation offered by the assessee would go to show that there was no mens rea in the matter of non-disclosure of the stitching charges, which could not be recovered in the nature of business done by the assessee. Under such circumstances only after considering all these facts, the Tribunal came to the conclusion that no penalty is leviable under section 271(1)(c) of the Act. In order to support his contentions, learned counsel appearing for the assessee relied upon the following decisions:
(1)CIT v. V. Ponnuswamy Naidu (1995) 214 ITR 185 (Mad.);
(2)CIT v. S.P. Jain (1973) 87 ITR 370 (SC.);
(3)CIT v. Khoday Eswarsa & Sons (1972) 83 ITR 369 (SC.);
(4)CIT v. Ashoka Marketing Ltd. (1976) 103 ITR 543 (SC.);
(5)H.V. Venugopal Chettiar v. CIT (1985) 153 ITR 376 (Mad.);
(6)CIT v. Adamkhan (1997) 223 ITR 264 (Mad.);
(7)Newton Chikli Collieries Ltd. v. CIT (1962) 44 ITR 495 (SC.);
(8) CIT v. Daulatram Rawatmull (1964) 53 ITR 574 (SC.)
We have heard both learned standing counsel appearing for the Department as well as learned counsel appearing for the assessee. For the assessment years 1980-81 to 1982-83, the Tribunal cancelled the minimum penalties levied under section 271(1)(c) of the Act. The assessee is doing tailoring business. According to the Department, there was suppression of tailoring charges, which were not recorded in the, Books of account. During search operations under section 132 of the Act, it came to light that the assessee deliberately failed to disclose the tailoring charges for the assessment years under consideration. The investment made in the name of third parties would also reveal that the said investment would have been made out of the suppressed income. But for the search operation, it would not have been possible for the Department to find out the suppression of income by the assessee. According to the assessee, the books were seized from the business premises and taken over to the residence of the assessee and it is from the residence of the assessee, the Department found out that there were certain old materials, which after stitching, were not delivered to the customers. The Department was under the impression that the tailoring charges collected for such materials were not disclosed. According to the assessee, due to various reasons, as stated in the remand report, stitching charges were unable so be collected by the assessee and such uncollected amount would relate not only to the assessment years under consideration, but also to the earlier years. Hence, it was submitted that there was no suppression of tailoring charges as alleged by the Department. In so far as investments made in the name of third parties were concerned, the additions were deleted. The suppression is only with regard to tailoring charges said to have been collected by the assessee the customers, which were in fact, not collected. Therefore, whatever happened prior to the calling of the remand report would be of no assistance in the matter of deciding whether any penalty is leviable in the case of the assessee under section 271(1)(c) of the Act.
Since all the relevant order books were not available, only the collection chittai was available. Therefore, the assessment was made by estimating the tailoring charges on a guess work according to the Tribunal. The assessee sent a letter dated April 26, 1995, giving an explanation in detail as to how there was no suppression in his case. Since the assessee made a complaint before the Tribunal that the assessee was not given an opportunity to explain his case before the authorities below, due to the fact that books were impounded and pending in criminal proceedings, the Tribunal called for a remand report. The Assistant Commissioner in his remand report points out that in the absence of other books, the missing number of orders received and the period during which such orders received were adopted hypothetically at the time of assessment proceedings to estimate the assessee's income from tailoring receipts. Account books relating to the accounting year 1979-80, for the assessment year 1980-81 were in the custody of the criminal Court. No opportunity was given to the assessee to reconcile the omission of receipts pointed out. The Tribunal pointed out that in the list of omissions supplied, the assessee was able to find out mistakes as many as 39 for the assessment year 1980-81; 72 for the assessment year 1981-82 and 217 for the assessment year 1982-83, and on examination, they are found to be correct. The assessee has offered the following explanation regarding the balance of omission of numbers in the collection chittai. They are as under:
(1) Certain customers at times never turned up to take delivery of the finished articles for no reasons.
(2)At times, when cards issued were lost, customers never turned up at all.
(3) When cloth material to be stitched is spoiled, customers rejected the materials and delivery has not been effected.
(4) In the case of "V.I. P." customers free service has been rendered and delivery has been effected without delivery cards.
(5) At times orders booked axe used to be cancelled for various reasons like change of materials, wrong measurements taken, etc., and fresh orders are booked entirely in different order numbers.
A spot inspection was effected by deputing an inspector in order to verify the assessee's statement regarding rejection and non-delivery of finished articles. The inspector inspected the business premises and submitted a report. The report is dated April 25, 1995. In the said report, it is stated as under:
"As directed by the Assistant Commissioner of Income-tax, I visited the business premises of Shri v. Gopal, G. Tex., Alagarkoil Road, Madurai to verify the veracity of the assessee's claim of unclaimed orders for stitching of clothes.
In the stitching section of the business premises, I found clothes in hangers and gunny bags relating to the orders of the earlier years, which have not been claimed by persons who have given orders for stitching.
It is not traceable to find out which unclaimed stitched cloth relates to which earlier year."
The abovesaid report would go to show that clothes found in hangers and- gunny bags pertaining to the orders booked in the earlier years remained unclaimed by customers, who placed the orders. But it was difficult to correlate which items related to which particular year. The assessee, in his covering letter, dated January 26, 1986, sent alongwith the revised return, has mentioned that it was only with a view to purchase peace with the Department, certain items of income were shown in the revised return. Another letter, dated December 23, 1987, would also reveal the detailed explanation offered by the assessee. In the assessment year 1980-81, major portions of the additions were deleted both by the Commissioner of Income- tax (Appeals) and the Tribunal. That was also the position with regard to the assessment years 1981-82 and 1982-83. It was pointed out that the Tribunal held that the investments standing in the names of relatives of the assessee should not be included in the hands of the assessee. Even according to the Commissioner of Income-tax (Appeals), he is restricting the quantum of penalty with reference to the suppressed income from tailoring charges worked out by the assessee without adequate materials and documents. Thus the suppression was with regard to tailoring charges on which penalty was said to be levied. The reason for not stating the estimated income in tailoring business was explained by the assessee convincingly as stated above. It was also recognised that the kind of business in which the assessee is engaged would incur losses of that nature as stated in his explanation. Therefore, the Tribunal on considering the fact, came to the conclusion that there is no warrant to hold that the assessee suppressed the tailoring charges so as to warrant initiation of proceedings under section 271(1)(c) of the Act. It was pointed out that there was no mens rea in not disclosing the alleged tailoring charges, which were said to be not received by the assessee according to his explanation. On the basis of these indefinite facts, we are also of the opinion that the application of the provisions under section 271(1)(c) of the Act is not possible. We have also gone through the various decisions cited by learned counsel appearing for the assessee in order to support his contention that no penalty is leviable under section 271(1)(c) of the Act. Thus, in view of the fact that the penalty levied under section 271(1)(c) of the Act was cancelled by the Tribunal on the basis of appraisal of facts, we consider that no referable question of law arises out of the order of the Tribunal so as to warrant calling for a statement from the Tribunal. It is also significant to note that the Department is not questioning the finding given by the Tribunal on the basis of facts. Under such circumstances, we are unable to call for the statement from the Tribunal.
In result, these tax case petitions are dismissed. No costs
M.B.A./1655/FCPetitions dismissed