2005-VIL-383-GUJ-DT

Equivalent Citation: [2006] 282 ITR 321, 200 CTR 265, 149 TAXMANN 4

GUJARAT HIGH COURT

Date: 12.07.2005

DAHOD SAHAKARI KHARID VECHAN SANGH LTD.

Vs

COMMISSIONER OF INCOME-TAX.

BENCH

Judge(s)  : D. A. MEHTA., MS. H. N. DEVANI.

JUDGMENT

The judgment of the court was delivered by

D.A. Mehta J.-The Income-tax Appellate Tribunal, Ahmedabad Bench "B", has referred the following two questions out of six questions proposed by the assessee-applicant under section 256(1) of the Income-tax Act, 1961 ("the Act"):

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in upholding the penalty under section 271(1)(c)?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that it was necessary for the assessee to file cross-objection in spite of fully succeeding in appeal and, therefore, it cannot challenge the finding by the Commissioner of Income-tax (Appeals) of the assessee being guilty of concealment of income and/or furnishing inaccurate particulars?"

The assessment year is 1984-85 and the accounting period is the year commencing on July 1, 1982, and ended on June 30, 1983. The assessee, a co-operative society, filed return of income on July 27, 1984, showing total income of Rs. 1,37,724. In the course of assessment proceedings, the Assessing Officer called upon the assessee to explain why payment of insurance premium was not reflected in the accounts; this query was raised because, as recorded by the Assessing Officer, in earlier years, the assessee was paying such insurance premium having subscribed to the Group Gratuity Insurance Scheme for the employees of the assessee-society. The assessee's explanation was that, considering the amount of premium which the assessee was required to pay and the corresponding benefit, it was found by the assessee that the scheme was not beneficial to the assessee and, therefore, the assessee withdrew from the scheme and payment of premium was discontinued. That on such discontinuance and withdrawal from the scheme, an amount of Rs. 68,332 was received from the insurance company, being the total premium paid in earlier years.

The Assessing Officer, therefore, held that the amount of premium paid in earlier years was treated and allowed as a trading liability and subsequent receipt of Rs. 68,332 was liable to be treated as profits under section 41(1) of the Act; and as the assessee had failed to return the said amount as income called upon the assessee to explain, why the same should not be brought to tax. The assessee explained that the sum received from the insurance company was credited to the gratuity fund account which was going to be utilized for the purpose of paying gratuity. The assessee's explanation was rejected and the amount brought to tax under section 41(1) of the Act. While doing so, the Assessing Officer also took note of the fact that a sum of Rs. 55,796 was paid as bonus and gratuity to the employees and deduction thereof claimed on actual payment basis. The Assessing Officer has further observed that the assessee could not be allowed benefit on due basis. The Assessing Officer also issued direction to issue penalty notice under section 274 read with section 271(1)(c) of the Act for inaccurate particulars of income.

The assessee challenged the addition of Rs. 68,332 before the Commissioner (Appeals) along with the other items of disallowances and additions. However, before the Commissioner (Appeals), it was pointed out that the appeal had only been preferred to safeguard the assessee's interest as regards levy of penalty for concealment. It was submitted that, as the amount received from the insurance company had been taken to the balance-sheet directly, it had remained to be considered as taxable income of the assessee while filing the return of income. That there was no mala fide intention on the part of the assessee in excluding the amount as no single individual was personally going to be benefited by such an exercise. The representative of the assessee admitted before the Commissioner (Appeals) that the assessee was agreeable to the addition provided no concealment penalty was levied. The Commissioner (Appeals) dismissed the appeal by order dated October 31, 1988.

In the meantime, the Assessing Officer issued notice dated December 11, 1986, calling upon the assessee to show cause why penalty should not be imposed. The assessee replied on December 24, 1986, and it was stated that the amount received from the insurance company had been taken to reserve fund and there was no mens rea or mala fide intention. That the amount was mistakenly not added while computing the income; the assessee being a co-operative society, it could not have mala fide intention of "defrauding Government revenue". It was further submitted that the tax due had been paid up with interest and hence, a request was made to drop the penalty proceedings.

The Assessing Officer, after recording the submissions made in the reply to the show-cause notice, observed in the penalty order that the contentions raised by the assessee were not acceptable "inasmuch as the assessee has virtually not advanced any reason in respect of addition made under section 41(1)". In paragraph No. 5 of the penalty order, the same observations which were made in the assessment order have been reiterated. While doing so, the Assessing Officer has observed, "the assessee cannot now also claim this sum of Rs. 68,332 as a deduction on due basis". He, therefore, after rejecting the explanation tendered by the assessee, levied a penalty of Rs. 30,770 vide order dated March 10, 1987.

The assessee carried the matter in appeal before the Commissioner (Appeals) who cancelled the penalty and observed as under while doing so: "I have considered the submissions. In this case, practically it cannot be denied that the assessee had concealed the particulars of his income, furnished inaccurate particulars of his income for the year under consideration, however, I would agree with the representative of the assessee to hold that this is not a fit case for levy of penalty for concealment as no individual member of the co-operative society would be personally interested in knowingly concealing the income or furnishing inaccurate particulars. The relevant portion of section 271(1)(c) is reproduced to highlight the view that it is not necessarily in all cases of concealment where an assessee has concealed the particulars of his income, the penalty under this section is leviable, the section reads 'If the (Assessing) Officer or the (Deputy Commissioner (Appeals) or the Commissioner (Appeals)), in the course of any proceedings under this Act, is satisfied that any person - has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty ...' To my mind, if the intention of the Legislature was to penalize every case where concealment of particulars of income have been noted by the Assessing Officer, the words used would have been 'he shall direct that such person shall pay by way of penalty ... rather than the usage of the words 'he may direct'. Keeping in view the nature of business of the registered co-operative society and the circumstances which lead to the inclusion of this income in the total income of the year under consideration, I would consider that this is not a fit case where the assessee should be directed to pay the concealment penalty. On the facts and circumstances, the Income-tax Officer is directed to delete the penalty levied under section 271(1)(c) of Rs. 30,770."

The Revenue carried the matter in appeal before the Tribunal and the following ground was raised before the Tribunal:

"On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) erred in deleting the penalty levied under section 271(1)(c) of the Income-tax Act?" During the course of hearing, on behalf of the Revenue, a contention was raised that the Commissioner (Appeals) had contravened the provisions of rule 46A of the Income-tax Rules, 1962 ("the Rules"), and was unnecessarily influenced by new evidence in the form of affidavit placed before the Commissioner (Appeals). That no notice of the same was given to the Assessing Officer and as the Department was not represented before the Commissioner (Appeals), it had resulted in prejudice to the Department. Further submissions were made on behalf of the appellant regarding merits of the addition in question.

The Tribunal, after recording the submissions made on behalf of the assessee, allowed the departmental appeal and while doing so, observed as under:

"On consideration of the rival submissions and the material to which our attention was drawn, we find that the Commissioner of Income-tax (Appeals) has wrongly cancelled the penalty. The Assessing Officer had found as a matter of fact that the explanation offered during the assessment proceedings that the receipt was credited to gratuity fund account to be utilized for the payment of gratuity was incorrect since the assessee itself had made separate claim in the profit and loss account for deduction of gratuity on the basis of actual payment. This finding given by the Assessing Officer remains uncontroverted and, therefore, clearly the penalty is exigible. In fact, the Commissioner of Income-tax (Appeals) has also given a categorical finding that the assessee was guilty of concealing the particulars of income and/or furnishing inaccurate particulars of income. This finding also remains unchallenged since the assessee has not filed cross-objection."

The Tribunal further observed that the explanation before the Commissioner (Appeals) and the Assessing Officer was altogether different. That the contention raised on the basis of violation of rule 46A of the Rules was acceptable and the affidavit which had been admitted in evidence by the Commissioner (Appeals) had to be ignored in view of violation of principle of natural justice embodied in rule 46A of the Rules. Therefore, the Commissioner (Appeals) was in error in granting relief on the basis of the said affidavit.

The Tribunal, thus, did not take into consideration the affidavit of the general manager filed by the assessee before the Commissioner (Appeals), and on the other hand, accepted the other finding recorded by the Commissioner (Appeals) to hold against the assessee and allow the departmental appeal. It is this order which is under challenge.

Mr. Manish Shah, learned counsel appearing on behalf of the applicant-assessee, submitted that the Tribunal had committed an error in coming to the conclusion that the explanation tendered by the assessee before the Assessing Officer and the Commissioner (Appeals) was different. In fact, the assessee had offered only one explanation, and that was, that the assessee had no mala fide intention or mens rea in not showing the sum received from the insurance company in the return of income. That the affidavit of the general manager which was filed before the Commissioner (Appeals) was only elaborating on this basic defence. Therefore, even if the said affidavit was ignored, no case was made out for levying penalty. Referring to the reply filed by the assessee in response to the show-cause notice in penalty proceedings, it was submitted that the assessee-society consistently stated that it being a co-operative society, it could not have any mala fide intention. The Tribunal had omitted to appreciate this submission. That merely because the assessee had agreed to addition or accepted the addition made under section 41(1) of the Act, from that it did not follow that the assessee was liable to be visited with penalty. He has placed reliance on the following decisions:

(1) In K.C. Builders v. Asst. CIT [2004] 265 ITR 562 (SC);

(2) National Textiles v. CIT [2001] 249 ITR 125 (Guj); and

(3) CIT v. Susai Kalyanamandapam P. Ltd. [2004] 271 ITR 138 (Mad).

In relation to the observation of the Tribunal that the finding of the Commissioner of Income-tax (Appeals) to the effect that the assessee was guilty of concealing particulars of income and/or furnishing inaccurate particulars of income remained unchallenged in the absence of any cross-objection filed by the assessee, Mr. Shah submitted that the Tribunal has failed to take into consideration rule 27 of the Income-tax (Appellate Tribunal) Rules, 1963 ("the Tribunal Rules"). That as per rule 27 of the Tribunal Rules, a respondent is entitled to support the order appealed against on any of the grounds decided against the respondent, even though the respondent may not have appealed against such an order. He, therefore, urged that the assessee was entitled to support the order of the Commissioner (Appeals) by challenging the aforesaid finding.

Alternatively, it was submitted that, if on the facts, it was necessary to consider the affidavit of the general manager, the Tribunal ought to have remanded the matter back to the Commissioner (Appeals) for giving an opportunity to the Assessing Officer. The Tribunal could not have ignored the said evidence altogether. That even rule 46A required granting of an opportunity to the Assessing Officer. He, therefore, urged that, as per proposed question No. 4, the assessee had specifically challenged: as to whether the Tribunal ought to have given opportunity to the Assessing Officer under rule 46A of the Rules before admitting the affidavit of the general manager of the assessee. That in paragraph No. 7 of the statement of case, the Tribunal itself having observed that the said proposed question was merely a different facet of question No. 1 and the same may be regarded as covered in question No. 1, this court ought to answer the said question by directing the Tribunal to restore the matter to the file of the Commissioner (Appeals). But, in no case, the penalty should be confirmed merely because the Commissioner (Appeals) had committed a technical lapse.

It is necessary to record that the reference was called out on July 11, 2005, and is being heard since yesterday. That after the reference had proceeded for about 2 1/2 hours even today, Mr. K. M. Parikh, learned standing counsel for the Revenue, appeared and prayed for time after completion of the submissions on behalf of the applicant-assessee. The court has not found it fit to grant the request considering the fact that the matter is being heard since yesterday. On being called upon to address the court, learned counsel expressed his inability in the absence of the necessary paper-book as well as preparation for the same. After the judgment was half-way through, learned counsel requested the court that he was ready to proceed with his arguments. The right to address the court is not unfettered and cannot be permitted to be exercised at the sweet-will and convenience of an advocate. The court has a right, nay, a duty to regulate its proceedings and the court cannot function so as to cause inconvenience to other advocates to accommodate one advocate. The court has not permitted learned counsel in these circumstances.

Taking up the second issue first, the Tribunal has committed an error in law in holding that the assessee having not filed cross-objection against the findings adverse to the assessee in the order of the Commissioner (Appeals), the said findings had become final and remained unchallenged. The Tribunal apparently lost sight of the fact that the assessee had succeeded before the Commissioner (Appeals). The appeal had been allowed and the penalty levied by the Assessing Officer deleted in entirety. In fact, there was no occasion for the assessee to feel aggrieved and, hence, it was not necessary for the assessee to prefer an appeal. The position in law is well-settled that a cross-objection, for all intents and purposes, would amount to an appeal and the cross-objector would have the same rights which an appellant has before the Tribunal.

Section 253 of the Act provides for appeal to the Tribunal. Under subsection (1), an assessee is granted right to file an appeal; under sub-section (2), the Commissioner is granted a right to file an appeal by issuing necessary direction to the Assessing Officer; sub-section (3) prescribes the period of limitation within which an appeal could be preferred. Section 253(4) of the Act lays down that either the Assessing Officer or the assessee, on receipt of notice that an appeal against the order of the Commissioner (Appeals) has been preferred under sub-section (1) or sub-section (2) by the other party, may, notwithstanding that no appeal had been filed against such an order or any part thereof, within 30 days of the notice, file a memorandum of cross-objections verified in the prescribed manner and such memorandum shall be disposed of by the Tribunal as if it were an appeal presented within the period of limitation prescribed under sub-section (3). Therefore, on a plain reading of the provision, it transpires that a party has been granted an option or a discretion to file cross-objection.

In case a party having succeeded before the Commissioner (Appeals) opts not to file cross-objection even when an appeal has been preferred by the other party, from that it is not possible to infer that the said party has accepted the order or the part thereof which was against the respondent. The Tribunal has, in the present case, unfortunately drawn such an inference which is not supported by the plain language employed by the provision.

If the inference drawn by the Tribunal is accepted as a correct proposition, it would render rule 27 of the Tribunal Rules redundant and nugatory. It is not possible to interpret the provision in such a manner. Any interpretation placed on a provision has to be in harmony with the other provisions under the Act or the connected Rules and an interpretation which makes other connected provisions otiose has to be avoided. Rule 27 of the Tribunal Rules is clear and unambiguous. The right granted to the respondent by the said rule cannot be taken away by the Tribunal by referring to the provisions of section 253(4) of the Act. The Tribunal was, therefore, in error in holding that the finding recorded by the Commissioner (Appeals) remained unchallenged since the assessee had not filed cross-objections.

Accordingly, the second question (proposed question No. 3) is answered in the negative, i.e., in favour of the assessee and against the Revenue.

Coming to the principal issue as to whether the assessee was liable to penalty under section 271(1)(c) of the Act, in the facts and circumstances of the case, it is necessary to take note of certain undisputed facts. The assessee had passed necessary entries in its books of account as regards the sum received from the insurance company, and the same was duly reflected in the balance-sheet. Copy of staff gratuity fund account is available on record (annexure "J"). The sum having been received from the insurance company was through the normal banking channel and hence, there is no situation where any suspicion can arise qua genuineness of the transaction. The only ground on which the addition has been made and sustained is applicability of section 41(1) of the Act.

The said provision, namely, section 41(1) of the Act, requires that where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently during any previous year, the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation, the amount obtained or the value of benefit accruing, shall be deemed to be profits and gains of business or profession and accordingly, chargeable to income-tax as the income of that previous year. In the present case, the premium paid to the insurance company towards gratuity liability was allowed as a deduction from year to year in past assessments of the assessee. During the accounting year relevant to the assessment year in question, the assessee received a sum of Rs. 68,332 from the insurance company on withdrawing from the Group Insurance Scheme. Therefore, in the past, there was expenditure incurred by the assessee which was allowed as a deduction, and subsequently, the assessee has obtained an amount in cash in respect of such expenditure; thus, the amount obtained is to be deemed to be profits and gains of the business of the assessee. Therefore, the receipt from the insurance company has been brought to tax under a deeming provision.

The assessee has all throughout contended that, instead of routing the said receipt through profit and loss account, the same was directly credited to gratuity fund account and because of this bona fide mistake, while preparing the return of income, the amount received from the insurance company was not included in the total income. This explanation tendered by the assessee has not been found to be incorrect or false in any manner whatsoever. In these circumstances, the question requires to be resolved.

The legal position as enunciated by this court and by the apex court is as under:

In the case of National Textiles v. CIT [2001] 249 ITR 125 (Guj), this court stated,

"In order to justify the levy of penalty, two factors must co-exist, (i) there must be some material or circumstances leading to the reasonable conclusion that the amount does represent the assessee's income. It is not enough for the purpose of penalty that the amount has been assessed as income and (ii) the circumstances must show that there was animus, i.e., conscious concealment or act of furnishing of inaccurate particulars on the part of the assessee. The Explanation has no bearing on factor No. 1 but it has a bearing only on factor No. 2. The Explanation does not make the assessment order conclusive evidence that the amount assessed was in fact the income of the assessee. No penalty can be imposed if the facts and circumstances are equally consistent with the hypothesis that the amount does not represent concealed income as with the hypothesis that it does. If the assessee gives an explanation which is unproved but not disproved, i.e., it is not accepted but circumstances do not lead to the reasonable and positive inference that the assessee's case is false, the Explanation cannot help the Department because there will be no material to show that the amount in question is the income of the assessee.

Alternatively treating the Explanation as dealing with both the ingredients (i) and (ii) above, where the circumstances do not lead to the reasonable and positive inference that the assessee's explanation is false, the assessee must be held to have proved that there was no mens rea or guilty mind on his part. Even in this view of the matter, the Explanation alone cannot justify levy of penalty. Absence of proof acceptable to the Department cannot be equated with fraud or wilful default."

In the case of K.C. Builders v. Asst. CIT [2004] 265 ITR 562, the apex court stated:

"One of the amendments made to the above-mentioned provisions is the omission of the word 'deliberately' from the expression 'deliberately furnished inaccurate particulars of such income'. It is implicit in the word 'concealed' that there has been a deliberate act on the part of the assessee. The meaning of the word 'concealment' as found in Shorter Oxford English Dictionary, third edition, Volume I, is as follows:

'In law, the intentional suppression of truth or fact known, to the injury or prejudice of another.'

The word 'concealment' inherently carried with it the element of mens rea. Therefore, the mere fact that some figure or some particulars have been disclosed by itself, even if it takes out the case from the purview of non-disclosure, it cannot by itself take out the case from the purview of furnishing inaccurate particulars. Mere omission from the return of an item of receipt does neither amount to concealment nor deliberate furnishing of inaccurate particulars of income unless and until there is some evidence to show or some circumstances found from which it can be gathered that the omission was attributable to an intention or desire on the part of the assessee to hide or conceal the income so as to avoid the imposition of tax thereon. In order that a penalty under section 271(1)(iii) may be imposed, it has to be proved that the assessee has consciously made the concealment or furnished inaccurate particulars of his income."

Applying the aforesaid principles to the facts of the case, it is apparent that the assessee's contention that it had no mala fide intention or mens rea has not been found to be untrue by any of the authorities. The finding by the Tribunal in this context that the assessee had made separate claim in the profit and loss account for deduction of gratuity on the basis of actual payment to non-suit the assessee as regards the explanation offered is based on a misconception of facts and law. It was never the assessee's case that, out of the amount received from the insurance company, such amount was actually paid out and claimed as a deduction. In fact, this becomes clear when one reads the assessment order and the penalty order wherein the Assessing Officer has stated that the assessee cannot claim the sum of Rs. 68,332 as a deduction on due basis. The assessee has never claimed any deduction qua this amount. The deduction claimed is qua a separate amount, and that too, on actual payment basis. There is no claim for deduction on due basis. The entire premise, therefore, is incorrect.

Once there is absence of mens rea, mere omission from the return of income of an item of receipt neither amounts to concealment, nor deliberate furnishing of inaccurate particulars of income, as laid down by the apex court, unless and until there is some evidence or some circumstances to show that the omission was attributable to an intention or desire on the part of the assessee to conceal the income so as to avoid imposition of tax thereon. In the present case, the assessee is a co-operative society managed through a governing board and as stated by the society, there is no personal interest involved. The omission has occurred not with an intention but due to oversight. As held by this court, absence of proof acceptable to the Department cannot be equated with fraud or wilful default. The circumstances must show that there was a conscious act of concealment or furnishing of inaccurate particulars on the part of the assessee. There is nothing on record to show that any particular individual has any personal interest in committing the act of omission of showing the amount received from the insurance company as income of the assessee, a co-operative society. In fact, the entries in the books of account reflect that the assessee had credited the said sum to the fund account directly and the said entry appeared in the balance-sheet without going through the profit and loss account.

Therefore, the finding recorded by the Tribunal that penalty was exigible is not correct in the facts and circumstances of the case as well as in the light of the settled legal position. The Tribunal has while partially upholding the observations of the Commissioner (Appeals), failed to take into consideration the finding recorded to the effect that this was not a fit case for levy of penalty for concealment as no individual member of the cooperative society would be personally interested in knowingly concealing the income or furnishing inaccurate particulars.

Question No. 1, therefore, requires to be answered in the negative i.e., in favour of the assessee and against the Revenue.

The reference stands disposed of accordingly. There shall be no order as to costs.

 

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