COMMISSIONER OF INCOME-TAX VS KAILASH CROCKERY HOUSE, 2000 PTD-PATNA-HIGH-COURT-INDIA 2263 (1998)

(a) Income-tax--

----Penalty---Concealment of income---Addition to income on ground that gross profit rate was too low---Tribunal finding that assessee had are explanation for it and that he had not concealed any income---Penalty could not be levied---Indian Income Tax Act, 1961, S.271(1)(c).

- Section 271(1)(c) of the Income Tax Act, 1961, can be applied only if the Assessing Officer is satisfied that the assessee has concealed the particulars of his income or furnished inaccurate particulars of such income:

Held, that, in the instant case, the Tribunal found that the charge of the Assessing Officer was that the assessee had furnished inaccurate particulars. This was because he had found the gross profit rate to be low. This had led him to make a trading addition. The addition had been sustained by the Tribunal but it did not follow that the books of account which the assessee produced gave out inaccurate particulars of total income. The assessee had, no doubt, given an explanation in which he refuted the charge that he had given any inaccurate particulars. According to him, it was the trading necessity as well as prevailing conditions of the market which were accountable for the decline in the gross profit rate. It was not the case of the Revenue that any purchase or sales were omitted in the books. The addition had followed on the basis 'of the estimate. Those facts could not lead to a finding that the assessee had given inaccurate particulars of income. This was a finding of fact. In view of that finding section 271(1)(c) was not applicable and penalty could not be levied. The question whether the case of the assessee was covered by the Explanation to section 271 read with the proviso did not arise and, therefore, the question referred, namely, whether the cancellation of penalty was justified did not The reference was incompetent.

(b) Income tax---

----Reference---Penalty---Finding that there had been no concealment of income---Finding of fart----Reference of question whether explanation 1(b) to S.271(1)(c) was applicable and whether cancellation of penalty was justified---Reference incompetent---Indian Income Tax Act,-1961. Ss.256 & 271(1)(c),

CIT v. Jhaverbhai Biharilal & Co. (1992) 1 BUR 377 (Pat.); CIT v. Mussadilal Ram Bharose (1987) 165 ITR 14 (SC); CIT v. Nathulal Agarwala & Sons (1985) 153 ITR 292 (Pat.) and CIT v. Sidheshwar P.D. Singh (Dr.) 1992 196 ITR 740 (Pat.) ref.

K. K. Vidyarthi and K. K. Jhunjhunwala for the Commissioner.

Binod Poddar, Biren Poddar and Anubha Rawat Chowdhary for the Assessee.

JUDGMENT

SACHCHIDANAND JHA, J.---The Tribunal has referred the following question for opinion of this Court under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"):

"Whether after insertion of Explanation 1(B) of section 271(1)(c) of the Income Tax Act, 1961, which was applicable for the impugned assessment year, the Tribunal was justified in cancelling the entire penalty under section 271(1)(c) of the Income Tax Act, 1961, even when it had sustained some trading addition in rejecting the assessee's explanation in quantum appeal?"

The assessee derives income from crockery business. For the assessment year 1979-80, to which this reference relates, it submitted a return showing turnover of Rs.4,37,285 and gross profit at 10.5 per cent. The Assessing Officer found that the income shown was not correct. He estimated the sale and gross profit at Rs.5,12,500 and at 15 per cent. respectively. In view of the discrepancy between the income returned and the income assessed, he initiated penalty proceedings under section 271(l)(c) of the Act and, ultimately, imposed penalty of Rs.11,290. The Appellate Assistant Commissioner confirmed the order. The Tribunal, however, cancelled the penalty holding that there was no finding of concealment of income by the' assessing/appellate authorities. It held that although the addition of income had been sustained by the Tribunal, it could not follow that the books of account which the assessee had produced contained inaccurate particulars of total income. However, on an application for making a reference of the question as to whether it had correctly deleted the penalty the Tribunal referred the above-noted question for opinion to. this Court.

Mr. K. K. Vidyarthi, learned counsel for the Revenue, contended that the Tribunal has committed an error in cancelling the order of penalty on the basis of the decisions in CIT v. Nathulal Agarwala & Sons (1.985) 153 ITR 292 (Pat.) (FB) and CIT. v. Mussadilal Ram Bharose (1987) 165 ITR 14, (SC) which had been rendered in view of the Explanation as it stood prior to the 1976 amendment. He submitted that a definite finding to the effect that the particulars of income were inaccurate had been recorded by both the Assessing Officer and the Appellate Assistant Commissioner.

In order to appreciate the nature and effect of the 1976 amendment in the Explanation to section 271(1)(c), which is the sheet-anchor of the Department's case, it would be apt to very briefly notice the history of the provision regarding imposition of penalty. Section 271 of the Act provides for imposition of penalty in cases, inter alia, of concealment of income or furnishing of inaccurate particulars of such income. Clause (c) of section 271(1), with which we are concerned in this case, initially made the assessee liable to imposition of penalty for concealing the particulars of his income or deliberately furnishing inaccurate particulars. The word "deliberately" was omitted in 1964 and an Explanation was inserted. The Explanation laid down that where the total income returned by any person was less than 80 per cent. of the total income as assessed under section 143 or section 144 or section 147 (reduced by the expenditure incurred bona fide by him), such person shall; unless he proves that the failure to return the correct income did not arise from any fraud or any gross or willful 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)". A new Explanation was substituted by the Taxation Laws (Amendment) Act, 1975, with effect from April 1, 1976. Since during the relevant period it is this Explanation which was in force it would be appropriate to quote the same so far as relevant, as hereunder:

"Explanation 1.---Where in respect of any fact material to the computation, of the total income of any person under this Act---

(B) such person offers an explanation which he is not able to substantiate,

then, the amount added or disallowed in computing the total income of such person as a result thereof 'shall, for the purposes of clause (c) of this subsection, be deemed to represent the income in respect of which particulars have beers concealed. "

It is relevant to mention here that by the aforesaid amendment a proviso to the Explanation. had also been inserted. Since the Tribunal has relied on the said proviso in coming to the conclusion in favour of the assessee, it would be relevant to quote the same as well as hereunder:

"Provided that nothing contained in this Explanation shall apply to a case referred to .in clause (B) in respect of any amount added or disallowed as a result of the rejection of any explanation offered by such person if such explanation is bona fide and all the facts relating to the same and material to the computation of his total income have been disclosed by him."

By the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, the above proviso was deleted and clause (B) of the Explanation, quoted above, was also suitably amended. The amended clause (B) reads as follows:

"such person offers an explanation which he is not able to substantiate (and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him). "

(words within brackets added by the amendment).

The question referred for opinion, as noted at the outset, is as to whether in view of Explanation I (B) appended to section 271(1)(c) of the Act as applicable during the relevant assessment year, the Tribunal committed an error in cancelling the penalty. The' contention of Mr. Vidyarthi, on behalf of the Revenue is that where the assessee has offered an explanation but fails to substantiate the same he would be deemed to have concealed the amount added or disallowed in computing the total income for. the purpose of clause (c) of section 271(1). Mr Binod Poddar, learned counsel for the assessee, on the other hand, contends that the Tribunal was correct in deleting the penalty on the ground that the explanation furnished by the assessee was bona fide taking the aid of the proviso. He submits that although the decision in the cases of Nathulal Agarwala (1985) 153 ITR 292 (Patna) (FB) and Mussadilal Ram Bharose (1987) 165 ITR 14 (SC) had been rendered in the context of the Explanation as it stood prior to 1976 the principles laid down in those judgments hold good. Furnishing inaccurate particulars of income per se will not warrant imposition of penalty unless it is found to be lacking bona fides. Mr. Poddar submits that, in the present case, it may not be necessary to go into the larger question in view of the finding of fact recorded by the Tribunal on the point of inaccuracy or otherwise of the particulars of income.

It would be appropriate to quote the relevant parts of the appellate order of the Tribunal as hereunder:

"We have perused the order but we have not been able to find any finding of concealment recorded by him ...His charge is that the assessee had furnished inaccurate particulars. This is because he had found the gross profit rate to be low. This had led him to make a trading addition. The addition had been sustained by the Tribunal but it does not follow from those that the books of account which the assessee produced gave out inaccurate particulars of total income. The assessee had, no doubt, given an explanation in which he refuted the charge that he had given any inaccurate particulars. According to him, it was the trading necessity as well as prevailing conditions of market which were accountable for the decline in the gross profit rate. It was not the case of the Revenue that any purchase or sales were found omitted from their being accounted for in the books. The addition has followed on the basis of the estimate. Those facts could not lead to a finding that the 4ssesssee had given inaccurate particulars of income."

In the case of Mussadilal Ram Bharose (1987) 165 ITR 14 (SC), the High Court had rejected the application of the Department seeking reference under section 256(2) of the Act observing that the matter was concluded by findings of fact recorded by the Tribunal. The apex Court observed (page 23):

"It is for the fact-finding body to judge the relevancy and sufficiency of the materials. If such a fact-finding body, bearing the aforesaid principles in mind, comes to the conclusion that the assessee has discharged the onus; it becomes a conclusion of fact. No question of law arises."

In view of the above observation of the apex Court and the finding of fact recorded by the Tribunal quoted above, I have little doubt in my mind that this reference is concluded by findings of fact. In fact, in view of the finding of the Tribunal I am satisfied that the ingredients of clause (c) of section 271(1) of the Act are not made out and, therefore, it is unnecessary to go into the scope of the Explanation and the proviso thereto. Section 271(1)(c) can be applied only if the Assessing Officer is satisfied that the assessee has concealed the particulars of his income or furnished inaccurate particulars of such income. The Tribunal having held that the assessee did not furnish inaccurate particulars of income, the question as to Whether the case of the assessee is covered by the Explanation read with the proviso does not arise and, therefore, the question referred to this Court also does not arise for consideration. I would accordingly reject the reference as incompetent. I may mention that similar view has been taken by this Court in rather similar circumstances in CIT v. Dr. Sidheshwar P.D. Singh (1992) 196 ITR 740 and CIT v. Jhaverbhai Biharilal & Co. (1992) 1,BLJR 377.

Let a copy of this judgment be transmitted to the Income-tax Appellate Tribunal, Patna Bench, as required under section 260 of the Income-tax Act. .

AFTAB ALAM, J.---I agree.

M.B.A./4105/FC???????????????????????????????????????????????????????????????????????????????? Order accordingly.