1995-VIL-387-MAD-DT

Equivalent Citation: [1996] 219 ITR 157

MADRAS HIGH COURT

Date: 03.08.1995

COMMISSIONER OF INCOME-TAX

Vs

S. KRISHNASWAMY AND SONS

BENCH

Judge(s)  : ABDUL HADI., VENKATACHALAM 

JUDGMENT

The judgment of the court was delivered by

ABDUL HADI J.--The common questions referred to this court in these two tax case references, preferred by the Revenue are as follows :

" 1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified and had valid materials in cancelling the penalties levied under section 271(1)(c) for the assessment years 1979-80 and 1980-81 ?

2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified and had valid material in holding that for the default committed by the accountant, penalty under section 271(1)(c) could not be levied ?

3. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified and had valid materials in holding that income assessed under compromise with a view to avoid protracted proceedings could not be the basis for levy of penalty under section 271(1)(c) ? "

In essence, it has to be seen whether the Tribunal is justified in confirming the deletion of penalty, which was levied originally under section 271(1)(c) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), on the ground that the assessee "has concealed the particulars of his income", as found in the first part of the abovesaid section 271(1)(c).

The facts found are as follows : The assessee was doing transport business. The original assessment for the assessment year 1979-80 was completed on a total income of Rs. 81,370 on June 30, 1979. Likewise for the assessment year 1980-81, the assessment was completed on September 30, 1980, on a total income of Rs. 53,610. Subsequently, there was a raid in the premises of assessee in February, 1981. During the course of the search, trip-sheets were seized, which showed suppression of collections from buses, of Rs. 42,334 for the assessment year 1979-80 and Rs. 1,01,787 for the assessment year 1980-81, collections of 33 days in 1979-80 and of 54 days in 1980-81 were fully suppressed. During the course of the discussion, the assessee admitted the suppression, but requested that some amount should be allowed for expenditure incurred on days when there was complete suppression of receipts. The assessee also requested for some allowance for mamools, which were not reflected in the accounts. The assessee, however, could not produce any evidence for the same. An allowance of Rs. 300 per day (as against the claim of the assessee at the rate of Rs. 400 per day) towards revenue expenses on the days when the collections were totally suppressed was given. On the balance of suppressed receipts, 1/3 was allowed towards possible mamool-payments as claimed by the assessee. Thus, the suppressed income was worked out at Rs. 21,624 and Rs. 57,051 for the assessment years 1979-80 and 1980-81, respectively. The assessee, thereafter filed revised returns on the above basis in respect of the said two assessment years. The revised return for the assessment year 1979-80 disclosed an income of Rs. 1,01,400 (as against the above referred to original returned income of Rs. 81,370). The revised return for the assessment year 1980-81 showed the total income of Rs. 1,10,660 (as against the above referred to original returned income of Rs. 53,610). The revised returns were accepted and accordingly revised assessments were made. Thereafter, penalty proceedings were initiated.

In the reply dated July 13, 1983, to the penalty notice, the assessee stated as follows : The assessee extended total co-operation during the assessment proceedings. The managing partner was a patient of maniac depressive psychosis from February, 1978, onwards after the death of his son, Gopal, who was also a partner in the firm. The other partner, Shri Janakiraman, was a doctor by profession and he was fully absorbed in his profession and had no time to look into the accounts of the business. The entire accounts were entrusted to a part-time clerk who was virtually running the show. Only subsequent to the raid the assessee-firm came to know from the accountant that he paid mamools and only the net figure was recorded. Trip-sheets, registers, etc., which were in the office premises, were handed over to the Assistant Director of Inspection. In the circumstances, penalty is not warranted.

But the Inspecting Assistant Commissioner refused to accept the contention of the assessee and levied the minimum penalty of Rs. 13,853 and Rs. 37,309 for the assessment years 1979-80 and 1980-81, respectively, by his two separate orders, both dated July 30, 1983.

On appeal, the first appellate authority agreed with the case put forward by the assessee and cancelled the penalty in both the assessment years. The Tribunal also concurred with the first appellate authority.

The reasoning of the Tribunal may be seen from the following observations of it, in its order dated April 30, 1985 : The Commissioner of Income-tax (Appeals) cancelled the penalty on two grounds, one of them being, if the addition is based on estimate, the provisions of section 271(1)(c) will not be attracted. Regarding the abovesaid ground, in CIT v. E. V. Rajan [1985] 151 ITR 189 (Mad), it has been no doubt held that the view that if the addition to the income returned is based on an estimate, penalty proceedings will not stand attracted appears to be not only inconsistent with section 271(1)(c), but also with the decisions rendered in Cement Distributors Pvt. Ltd. v. CIT [1966] 60 ITR 586 (Mad) ; A. K Bashu Sahib v. CIT [1977] 108 ITR 736 (Mad) ; CIT (Addl.) v. E. Bhoopathy [1978] 113 ITR 188 (Mad) ; Rathnam and Co. v. IAC [1980] 124 ITR 376 (Mad) and CIT v. Mir Mohammed Ali [1981] 128 ITR 215 (Mad). However, Bombay Hardware Syndicate v. CIT [1978] 114 ITR 586 (Mad) has held that mere estimate by itself would not normally constitute material for holding that the income that has been added on the basis of the estimate, is the income that has been concealed and that stricter proof is necessary based on cogent evidence for coming to the conclusion that a certain amount of income had been concealed and hence penalty could be levied. A similar view has also been taken by this court in CIT v. Parukutty Mooppilamma [1984] 149 ITR 133 (Mad) (sic) at page 137 and Addl. CIT v. T. K Perumal swamy [1984] 150 ITR 600 (Mad) at page 607. Where there are such conflicting views of the same High Court, the view which is in favour of the assessee should be followed in view of the decision in CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC). Thus, the Tribunal, in effect, holds that the view, that if the addition to the income returned is based on an estimate, there can be no concealment spoken to in section 271(1)(c), must be applied in favour of the assessee in the present case. Thus, one ground on which the Tribunal has also confirmed the deletion of the penalty is that the addition made to the income returned is based on estimate.

We shall first consider the correctness of the abovesaid reasoning of the Tribunal in the light of the arguments advanced by the rival counsel. The argument of learned counsel for the Revenue is that, first of all, the present case is not one of assessment to tax, based on an estimate made by the assessing authority, since the assessee himself has already filed a revised return in each of the abovesaid two years and only in regard to the allowances claimed by him regarding certain revenue expenditure, the assessing authority did not accept the claim of Rs. 400 per day made by the assessee, but allowed the said claim only up to Rs. 300 per day. Therefore, according to him, all the decisions referred to by the Tribunal, which dealt with penalty in cases where the original assessment of income was on an estimate, are not relevant. Secondly, according to him, even assuming that the present case is also an estimated assessment of income, the Tribunal erred in assuming that there are two views in the matter, one holding that there could be a levy of penalty in a case of estimated income and another holding that there could not be so, and there is no warrant for invoking the principle that the view in, favour of the assessee must be adopted, as found in CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC).

On the other hand, on the above aspect, learned counsel for the assessee argues that the present case is only a case of estimate and that the finding of the Tribunal accordingly is that there was no concealment of income. According to the said learned counsel, taking into account the abovesaid disallowance of the revenue expenditure to the extent of Rs. 100 (Rs. 400 - Rs. 300) per day on an estimate basis, the "total income" arrived at by the assessing authority, should be taken only as income, estimated by the assessing authority. He also relied on certain decisions, dealing with cases of estimated income, where on the facts, the court held that there was no concealment.

We have considered the rival submissions on the above aspect. Taking into account the facts found as well as the legal position, we have necessarily to accept the argument of learned counsel for the Revenue and reject that of learned counsel for the assessee. First of all, it is clear to us that this is not a case of the assessing authority estimating the income. As already mentioned, after the search and seizure of the abovereferred to documents and after the officer found the abovesaid omissions of substantial collections from buses to the extent of Rs. 42,334 in one assessment year and Rs. 1,01,787 in the other assessment year, the assessee came forward to file revised returns, including therein, the abovesaid omissions also. He only claimed certain allowances in relation to the abovereferred to omitted collections. As already seen, to a great extent, the said allowances were given, subject to only one qualification, viz., as against the claim for certain revenue expenditures to the extent of Rs. 400 per day, what was allowed was Rs. 300 per day. In such a situation, it cannot be said that the revised assessment made based on the abovesaid revised return, was on an estimated income.

At any rate, even assuming that the revised assessment was based on an estimate made by the assessing authority, it cannot be said that in such a case, there could be no scope for saying that the assessee has concealed his income, warranting penalty under section 271(1)(c). In our opinion, in this regard, the Tribunal has erred in law in assuming that there are two views in the matter. One, as held in the abovereferred to CIT v. E. V. Rajan [1985] 151 ITR 189 (Mad) ; Cement Distributors Pvt. Ltd. v. CIT [1966] 60 ITR 586 (Mad) ; A. K. Bashu Sahib v. CIT [1977] 108 ITR 736 (Mad) ; CIT (Addl.) Bhoopathy (E.) [1978] 113 ITR 188 (Mad) ; Rathnam and Co. v. IAC [1980] 124 ITR 376 (Mad) and CIT v. Mir Mohamed Ali [1981] 128 ITR 215 (Mad) and another, as held in Bombay Hardware Syndicate v. CIT [1978] 114 ITR 586 (Mad) ; (14 ITR 133 (Mad) (sic) ) and Addl. CIT v. T. K. Perumalswamy [1984] 150 ITR 600 (Mad). As pointed out in CIT v. E. V. Rajan [1985] 151 ITR 189 (Mad) at page 195 itself, the " uniform view " taken by this court is that the "penalty provision has been applied even in cases where assessment is made on the basis of an estimate". In that decision, all the abovereferred to decisions of this court, which took a similar view earlier have also been referred to. Even in a later decision in CIT v. Balakrishna Textiles [1992] 193 ITR 361 (Mad) relied on by learned counsel for the Revenue, the same view has been reiterated. The relevant observation therein is as follows (page 367) :

" Even if the Revenue had assessed the income at a higher estimate than that furnished by the assessees, it cannot be stated as an inflexible rule that, in all cases, estimated income is not liable to penalty, as it is always open to draw an inference of deliberate underestimate on the facts and circumstances and if there was such an underestimate, an inference of concealment can also be drawn. We, therefore, are unable to appreciate the reasoning of the Tribunal that the estimate of the Revenue being higher than that of the assessees, there can be no concealment."

Further, in the abovesaid CIT v. Balakrishna Textiles [1992] 193 ITR 361 (Mad) and Addl. CIT v. Perumalswamy (T. K.) [1984] 150 ITR 600 (Mad) relied on by the Tribunal to hold that the said Addl. CIT v. Perumalswamy (T. K.) [1984] 150 ITR 600 (Mad) held a different view itself was considered and held thus (page 369) :

" In the first of these cases Addl. CIT v. Perumalswamy (T. K.) [1984] 150 ITR 600, the levy of penalty for the assessment year 1963-64 was upheld, differing from the Tribunal, on the ground that, in the disclosure petition, the assessee had admitted that the original return as well as the accounts on which it was based did not disclose the true state of affairs and that would constitute self-confessed, concealment on the part of the assessee in its original return. In relation, however, to the levy of penalty for the assessment year 1964-65, it was found that the assessee had furnished one estimate of income referable to the sale of licences of silk yarn and a different estimate had been arrived at by the Income-tax Officer, but, nevertheless, the assessee had disclosed the true nature of the income as well as the true nature of the transactions from out of which the income was derived and that would negative concealment or failure to disclose income, justifying the deletion of the penalty levied. However, in these cases, the assessees had made it appear that there were no sales at all of the import licences, but they had been utilised by them for purposes of their manufacturing activity and they had also not given their estimate of the income realised as a result of the sale of the licences in the open market either in the original returns, or in the revised returns. We may also point out that in CIT v. Sri Venkateswara Textiles [1985] 153 ITR 687 (Mad) (at pages 694 and 695), the observations in Addl. CIT v. T. K. Perumalswamy [1984] 150 ITR 600 (Mad) (at page 605), with reference to the assessment year 1963-64, had been approved and that clearly indicates that if, on the assessee's own showing, the filing of the original return was an act of concealment of income, it did call for a penalty. In view of that, the decision in Addl. CIT v. T. K. Perumalswamy [1984] 150 ITR 600 (Mad), cannot be pressed into service by the assessees." (emphasis supplied).

Thus, we also find that in CIT (Addl.) v. T K. Perumalswamy [1984] 150 ITR 600 (Mad), in one case (assessment year 1963-64) penalty was upheld, and in another case (assessment year 1964-65) penalty was held to be not leviable. The difference between the two cases was because in the former case, the assessee admitted that the original return did not disclose the true state of affairs, while in the latter case, the assessee himself made only an estimate of his income referable to the sale of licence of silk yarn and a different estimate was arrived at by the Income-tax Officer, but, nevertheless the assessee had disclosed the true nature of the income as well as the true nature of the transactions from out of which the income was derived. Only because of this latter feature of disclosure by the assessee himself, the court held that the said fact would negative concealment. So, it cannot be held, based on that decision, that whenever there is an estimate of income, there is no scope for holding that the assessee has concealed the income. Therefore, if on the assessee's own A showing the filing of the original return was an act of concealment of income, it does call for a penalty. In fact in CIT v. Krishna and Co. [1979] 120 ITR 144 (Mad) also, this court held as follows (page 146) :

In the face of the assessee's own admission that the amount represented its income, there is absolutely no other evidence required to show that the amount represented its income and that it had been concealed from the return. "

No doubt in Sir Shadilal Sugar and General Mills Ltd. v. CIT [1987] 168 ITR 705, the Supreme Court pointed out that the acceptance of additions of income by the assessee, is not acceptance of concealment of income and that there may be a hundred and one reasons for such admission. But, as pointed out in CIT v. Balakrishna Textiles [1992] 193 ITR 361 (Mad) itself,these observations of the Supreme Court have to be understood in the context in which they were made and with reference to the additions made as a result of disallowance, in the case of an assessee, relating to a known source of income. It may also be noted that the case of Sir Shadilal Sugar and General Mills Ltd. v. CIT [1987] 168 ITR 705 (SC) is not one where there was any search or any revised return being filed by the assessee thereafter.

We also find some similar features on facts in CIT v. Balakrishna Textiles [1992] 193 ITR 361 (Mad) similar to the facts in the present case. No doubt in some other respects the facts are also distinguishable. But, we are only following the legal position enunciated there, only reiterating the views earlier held in other judicial pronouncements.

Then, coming back to Bombay Hardware Syndicate v. CIT [1978] 114 ITR 586 (Mad), which was relied on by the Tribunal to hold that it (Bombay Hardware Syndicate v. CIT [1978] 114 ITR 586) held a different view. on the above aspect, we must point out that it is not so. Even the quotation from Bombay Hardware Syndicate v. CIT [1978] 114 ITR 586 (Mad), extracted by the Tribunal only says thus (page 589) :

" The mere estimate made, however well-founded it may be, by itself would not normally constitute material for holding that the income that has been added on the basis of the estimate was the income that has been concealed." (emphasis supplied).

The use of the expression "normally" in the above passage also shows that even in a case of estimate, there is possibility for holding that the assessee has concealed the income. So, Bombay Hardware Syndicate v. CIT [1978] 114 ITR 586 (Mad) does not show any view conflicting with that expressed in CIT v. E. V. Rajan [1985] 151 ITR 189 (Mad) and other decisions referred to earlier. All that Bombay Hardware Syndicate v. CIT [1978] 114 ITR 586 (Mad) says is that the estimate may be for the purpose of assessment and may not be sufficient to hold concealment, for which stricter proof based on cogent evidence is necessary. (With reference to 14 ITR 133 referred to by the Tribunal, we have only to state that no decision starts at page 133). We may also add that Swaika Oil and Produce Co. P. Ltd. v. CIT [1993] 201 ITR 520 (Cal), relied on by learned counsel for the assessee, turned on different facts. In the said case, there was difference between the cost of construction disclosed by the assessee and the cost estimated by the Departmental valuer as well as private valuer and that was held to be not sufficient to hold that there had been con cealment of income. That decision has no application to the present case. Therefore, it is clear that the Tribunal and the first appellate authority committed an error of law, in holding that if the addition is based on estimate, section 271(1)(c) will not be attracted. It must also be noted that the Tribunal itself while narrating the facts observes thus : "During the course of the search, trip-sheets were seized, which showed suppression . . . During the course of the discussion, the assessee admitted the suppression" (emphasis supplied).

The Tribunal, while dealing with the other reasoning of the Commissioner of Income-tax (Appeals) for cancelling the penalty, that for the default committed by the accountant, the assessee-firm cannot be held responsible for the penalty, erred in relying on Ladhuram Laxminarayan v. CIT [1976] 103 ITR 106 (Gauhati) ; CIT v. Dos Brothers [1978] 113 ITR 769 (Gauhati) and CIT v. K. L. Mangal Sain [1977] 107 ITR 598 (All). No doubt, in this regard, the assessee adduced evidence to the effect that the managing partner was suffering from mental illness and that another partner was a doctor and was absorbed in his professional work and that, therefore, the affairs of the firm were looked after by the accountant, who was a part-time clerk. But, we find from the Tribunal's order that there was an argument by the Departmental Representative that the assessee-firm had four partners and if two of the partners were engaged otherwise, the other partners could have looked after the business. Here, it must noted that not only the authorised representative of the assessee before the Tribunal did not seem to have refuted this argument of the Departmental Representative, but the Tribunal also has not found that there were no other partners other than the abovereferred two, viz., the managing partner and the doctor partner. On the other hand, the Tribunal only sought to rely on Ladhuram Laxminarayan v. CIT [1976] 103 ITR 106 (Gauhati). In our opinion, that decision will have no application to the present case. In the said case, the Tribunal held that penalty was leviable since the partners knew that the claim for interest was not genuine. Only in that context, the Gauhati High Court held that the knowledge of some of the partners regarding the above fact could not be imputed to the partnership-firm as a whole. In our opinion, the said decision will have no application to the present case, where the contention was that there were two other partners also, who could have looked into the affairs of the business and noted the abovesaid alleged accountant's mistake in not recording the abovereferred to substantial collections on several days. Likewise, the Tribunal also erred in relying on CIT v. Das Brothers [1978] 113 ITR 769 (Gauhati), which was only a case of understatement of sales due to clerical error. The present case is not at all a clerical error, but a gross omission to record the substantial collections of income for several days, as stated above. Likewise, CIT v. K. L. Mangal Sain [1977] 107 ITR 598 (All) relied on by the Tribunal also has no application at all to the present facts. No doubt, in the said decision, in the context of the Explanation to section 271(1)(c) placing the burden of proof on the assessee, that there was no fraud or gross or wilful neglect it was held that merely because books were rejected on the ground that they were not maintained regularly, it could not be held that the assessee was guilty of fraud or gross or wilful neglect. In the present case, there may not be any necessity to invoke the said Explanation ; In view of the search made and the seizure effected gross omissions of collections were found out, and, subsequently, the assessee himself has filed revised return accepting the omissions. To the above facts, it is clear that CIT v. K. L. Mangal Sain [1977] 107 ITR 598 (All) has no application.

No doubt, in the present case, the Tribunal says, that the sworn statement recorded from the managing partner, showed that the accountant was looking after the entire business in the matter of maintaining account books, and that the omissions of collections found in the account books were known to him only after the search operation. However, the Tribunal itself records that when the abovesaid accountant was examined, he admitted that he was not in the habit of writing accounts daily since he was not getting trip-sheets daily.

In the present case, strictly speaking the Tribunal has not expressly held that for the default committed by the accountant, penalty under section 271(1)(c) could not be levied. So the abovereferred to second question referred to this court actually does not arise.

The Tribunal, in its order, finally also mentions about one other argument of learned counsel for the assessee before it that in order to avoid protracted proceedings, a compromise was effected between the parties in arriving at the correct income and, therefore, the case did not call for levy of penalty under section 271(1)(c). In this connection, the Tribunal also mentions that the said learned counsel relied on the deci sions in CIT v. Ashoka Marketing Ltd. [1976] 103 ITR 543 (SC) and CIT v. Lallubhai Jogibhai Patel [1983] 139 ITR 1028 (Guj). The Tribunal, with reference to this submission also, did not give its finding and so the third question referred to us also, does not actually arise. We may, however, point out that the abovereferred CIT v. Ashoka Marketing Ltd. [1976] 103 ITR 543 (SC) and, CIT v. Jogibhai Patel [1983] 139 ITR 1028 (Guj) also have no application to the present facts. In CIT v. Ashoka Marketing Ltd. [1976] 103 ITR 543 (SC), the assessee submitted to assessment, in its hands, of profits of another company, on the basis of a compromise, and the Tribunal found that there was no concealment and the Supreme Court held that there arose no question of law, on the abovesaid finding of fact arrived at by the Tribunal, holding that there was no concealment. The relevant observation of the Supreme Court is as follows (page 547) :

" Whether or not an assessee has concealed its income is a question to be decided on the facts of a case, and in the present case the decision is based on the respondent's (assessees) agreement with D. J. C. (i.e., the abovereferred to other company) which the Tribunal accepted as true. That being so, no question of law really arises. . . . "

In the said case, it must be noted that the agreement or compromise was not with the Department, but with some other company and when such an agreement was accepted by the Tribunal as true, it was found that no question of law arose. In CIT v. Lallubhai jogibhai Patel [1983] 139 ITR 1028 (Guj), the assessee only acquiesced in the treatment of an amount as his income, presumably on account of his inability to prove his source or to avoid protracted litigation. But, in the present case, the assessee filed the revised return, not on account of his inability to prove the source of any income or to avoid protracted litigation. On the other hand, search was made and documents were seized and substantial omissions of collections were found and that is why the assessee filed a revised return. Thus, both the abovesaid decisions have no relevance to the present facts.

However, we may also point out that in Addl. CIT v. P. Nammalvar Naidu and Sons [1979] 116 ITR 863 (Mad), while referring to a settlement arrived at between the assessee and the Commissioner, and the assessee's claim that no penalty can be levied under section 271, this court has observed that this claim amounts to pleading of estoppel against a statute and such estoppel cannot be pressed into service against the terms of the statute.

The net result is, in view of what is stated in paragraphs 16-A and 17 (see pages 167 and 168) above, the second and third questions referred to us do not actually arise, and, the first question referred to us, which is all comprehensive, is answered in the negative and in favour of the Revenue. No costs.

 

 

 

DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that VATinfoline Multimedia is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.