1988-VIL-58-ITAT-DEL

Equivalent Citation: ITD 028, 349, TTJ 031, 550,

Income Tax Appellate Tribunal DELHI

Date: 06.07.1988

INCOME-TAX OFFICER.

Vs

R. BGM MODI & BROS. (P.) LTD.

BENCH

Member(s)  : CH. G. KRISHNAMURTHY., V. P. ELHENCE.

JUDGMENT

Per Ch. G. Krishnamurthy, President - All these four appeals filed by the Income-tax Officer, Con. Cir. XXVI, New Delhi are against the orders of the Commissioner (A)-IX, New Delhi, by which he cancelled the penalties imposed by the Income-tax Officer u/ss. 273(a) and 271(1)(c) in relation to the assessment years 1977-78 and 1978-79.

2. The assessee-company was deriving income apart from dividends, by acting as consultant to a firm called M/s Synfibre Sales Corporation, referred to hereinafter as 'firm' for the sake of convenience. The firm was the sole selling agent of M/s Modipon Ltd. The assessee-company advises the firm as to how it should organize its business. The firm receives sole selling agency commission from M/s Modipon Ltd. Out of that commission the firm has to give 10 per cent of its net profits subject to a minimum of Rs. 60,000 per annum to the assessee-company. This was the arrangement arrived at under an agreement entered into between the assessee-company and the firm on18th September, 1968. It is necessary to refer to the relevant clauses of the agreement having a bearing on the payment of remuneration:

"10. In consideration of the services to be rendered by the Consultants hereunder, the Corporation shall pay to the Consultants a remuneration equal to 10 per cent of the net profits of the Corporation :

Provided, however, that the minimum remuneration payable shall not be less than Rs. 60,000 per annum which minimum payment shall if required by the Consultants, be paid in equal monthly installments.

Explanation : For the purpose of this agreement the term 'net profits' shall be the profits of the Corporation ascertained after provision for depreciation at the rate prescribed under the Income-tax Act, 1961 or any statutory modification or re-enactment thereof for the time being in force, but the tax payable by the Corporation on its income or assets shall not be deducted for the purpose of computing such net profits.

11. (a) Subject to the provisions of the foregoing clause relating to payment by monthly installments, the Corporation shall pay the remuneration prescribed hereunder to the consultants within 30 days of obtaining of the Auditor's Report and/or certificates on the accounts of the relevant financial year or within 7 months from the end of such financial year of the Corporation, whichever is the earlier.

16. Notwithstanding anything herein contained, if the Consultants fail to perform their obligation hereunder to assist the Corporation in disposing of the entire production of Modipon Ltd., then, in such event, the Consultants shall be liable to forefeet any remuneration they may have earned during any part of the relevant accounting year."

Another point worthy of note, which has the greatest relevance on the issue before us was the previous year of the firm as well as of the assessee-company. The previous year of the firm was the year ended 31st of August. The previous year of the assessee-company is the year ended 30th of April. Thus the consultancy commission, which became due to the assessee-company from the firm, on the basis of its accounts closing on 31st of August, would become the income of the assessee-company in the year ending on 30th April next following, i.e., for the year 31st August, 1975 of the firm's books, the commission due by it to the assessee-company would be assessable in the assessment year 1977-78. Similarly for the year ended 31st of August, 1976 the commission income would become assessable in the hands of the assessee-company in the assessment year 1978-79. The assessee-company was following, up to the assessment year 1976-77, mercantile system of accounting.

3. For the year ended31st August, 1976and for the next year ending on31st August, 1976the commission due to the assessee by the firm, was not accounted for by the assessee-company in its accounts. This was stated to be due to certain reasons. No doubt the reasons were advanced, which were adjudicated upon by the Tribunal, in an elaborate manner as to whether the events had any bearing on the accrual of the income or the right to the accrual of the income in the hands of the assessee-company and a decision also was reached against the assessee on this issue. For not disclosing this income, which accrued to the assessee-company, proceedings for levy of penalty for concealment of income were initiated and eventually penalties were imposed. These penalties were cancelled on appeal by the Commissioner (A), who held that the cumulative effect of these events went to show that the assessee-company had a very bona fide reason to believe that it would not be able to receive the commission in toto form the firm and that since all the material facts for non-declaration of this income were fully disclosed and since the inclusion of the same income in the assessment of the assessee-company was upheld not for non-disclosure of any material fact but by interpreting those events in a different manner, which implied a change of opinion, the assessee could not be said to be guilty of any concealment of income within the meaning of section 271(1)(c) of the Income-tax Act and the Explanations added thereto. It was aggrieved by these orders of the Commissioner (A), that the present appeals were filed by the revenue.

4. Now let us look at the events. A dispute arose between the partners of the firm as to its working, as a result of which some partners of the firm filed a suit (bearing no. 851 of 1975) in the High Court of Bombay. On3-9-1975a motion was moved before the High court for the appointment of a Receiver. TheBombayappointed a Receiver on28-11-1975to take possession of the assets and properties of the firm but the power to carry on the business was not conferred on the Receiver. The partners were also restrained from carrying on the business. A situation of stalemate in the conduct of the business of the firm had arisen. Two of the partners of the firm Shri Yogender Kumar Modi and Shri Satish Kumar Modi wrote letter to Modipon Ltd.29-11-1975informing it, inter alia, that the appointment of the Court Receiver and the inductions granted by the court rendered the working of the firm impossible. On receipt of this letter M/s Modipon Ltd. took the extreme step of terminating the sole selling agency of the firm with immediate effect, i.e., on and from1st December, 1975.

5. On account of this peculiar situation and virtual stoppage of business, the firm did not pay the commission due to the assessee company for the years ended31st August, 1975and31st August, 1976relevant for these two assessment years under appeal. On17-8-1976the assessee-company wrote to the firm complaining that it did not receive the commission and demanded the payment forthwith along with interest. The letters are of considerable importance and are reproduced below : "We regret to point out that we have not received the commission by way of consultancy remuneration from the firm for the firm's accounting year endedAugust 31, 1975as provided in the agreement dated18-9-1968. As you know in terms of clause 10 of the agreement between this company and the Corporation a remuneration between this company and the Corporation a remuneration between this company and the Corporation a remuneration equal to 10 per cent of the net profits of the Corporation subject to a minimum of Rs. 60,000 per annum should have been paid by now by the Firm to this Company. Indeed non-payment of commission makes you liable to interest at 9 per cent per annum also. This also has not been received. On several occasion in the past we have personally contacted you to communicate us the net profits of the firm for the year endedAugust 31, 1975and to arrange payment of the commission in terms of the agreement. We are sorry to note that there is no response at all and we are therefore left with no alternative but to write this letter. As you know the company is required to finalise its accounts for the year endedApril 30, 1976file estimated of advance tax beforeJune 15, 1976and pay the advance tax on that basis on June 15, September 15 andDecember 15, 1976. For want of the details from you we have been unable to comply with any of the above requirements. We would therefore request you to kindly treat this matter urgent and make some payment at least. It would also be pointed out that even out of the last year's commission certain amount has not yet been paid which has put us in great difficulty. This may also be remitted without delay." In reply to this letter Sri Satish Kumar Modi, partner of the firm, replied to the assessee-company on21-8-1976, inter alia, as follows :

"I would like to clarify that the accounts of the firm for the year endedAugust 31, 1975have been prepared on provisional basis. The accounts cannot be finalised for various reasons which are beyond the control of the firm. In the absence of the finalised accounts it is not possible for us to communicate to you the amount of commission. Again it may be pointed out that on the very question of payment of commission to your company there are difference of opinion between the partners. Some of the partners feel that in the circumstances and facts provisions of clause 16 are attracted and therefore no commission is payable to your company by the firm. As however, I am not authorised by all the partner to make any commission on this question. I refrain from writing further in the matter. We would write to you again when the accounts are finalised and the partners finally decide the issue. However, I have no hesitation to say that I am doubtful that the firm will ever be in a position to pay the commission. "

6. Thereafter another significant event worth noting was took place in the accounts of the firm. On 9-9-1976 the accounts of the firm were finalised by its auditors and a sum of Rs. 2,94,263.47 was debited by them in the profit and loss account as and by way of Consultant's remuneration at 1 per cent of profit before income-tax provision. The entire profits of the firm were worked out to Rs. 20.28 lacs. Based upon these accounts, the firm filed its return of income for the assessment year 1976-77 on15-9-1976.

7. What happened in the arena of the assessee-company was that on 30-9-1976 a meeting of the Board of Directors took place, which was also attended to by Shri Satish Kumar Modi, who happened to be the partner of the firm and in this meeting the following resolution was passed : "The Chairman informed the Board that for the year ended on 30-4-1976, profit before provision for taxation is Rs. 47,519.97. On this profit a tax provision of Rs. 2,400 has been made taking into account that for acting as consultant for the period from1-9-1974to31-8-1975to the firm of M/s Synfibre Sales Corpn. as per Agreement dated18th September, 1968, the company had to receive a remuneration at the rate of 10 per cent of the net profits of the firm subject to minimum of Rs. 60,000. Even this minimum remuneration has not been received what to say of 10 per cent. Amount of the net profits of the firm has not been informed by the said firm. It is understood that there are differences, disagreements and disputes in the affairs of the firm, and the question of payment of commission and interest to the company is also in dispute. Since taxation of income should be in accordance with the capacity to pay the tax, it is considered futile to take into account any income which may never be received. Under the circumstances, it has been decided that income from this firm will be declared and accounted for as and when if received."

On26-11-1976the Receiver appointed by the High Court wrote to M/s Modipon Ltd. demanding the payment of the commission due to firm. On2-11-1977M/s Modipon Ltd. replied stating that nothing was payable by them to the firm and that they had in turn claimed damages from the firm.

8. Sometime thereafter the differences amongst the partners of the firm were compromised and as a result an order was passed by the High Court of Bombay on10-11-1978whereby the partners withdrew the suit filed and the Court Receiver was discharged. He was directed to hand over all the assets, documents and keys to the partners. On24-5-1979the firm wrote a letter to the assessee-company informing them as follows : "We have credited a sum of Rs. 2,94,235.47 (Rs. two lacs ninety four thousand two hundred thirty five and paise 47 only) in your account on account of consultants remuneration for the period1-9-1974to31-8-1975."

Thereafter the assessee-company credited the said commission to its accounts and disclosed it for the accounting period ending on30-4-1980corresponding to the assessment year 1981-82. In other words, what was not disclosed in the assessment years 1977-78 and 1978-79 was disclosed in the assessment year 1981-82 and was assessed to tax. As we have mentioned earlier, the question now is whether the sequence of events mentioned above and the opinion held by the assessee-company as a result of which it did not disclose commission in its accounts, amounted to concealment of income within the meaning of section 271(1)(c) of the Income-Tax Act. The Income-tax officer held against the assessee mainly on the ground that when the firm debited this sum of commission in its accounts, which were duly audited and finalised by 15-9-1976, two weeks before the accounts of the assessee-company were audited and finalised there was no reason why the assessee-company should not have taken credit for the commission unless it was with the intention of avoiding payment of income-tax, particularly when one of the partners of the firm Shri Satish Kumar Modi was also a director of the assessee-company and who was present both at the time of finalisation of the firm's accounts and also when the Board of Directors of the assessee company held their meeting, took the decision not to give credit for the commission. The assessee-company claimed before the Income-tax Officer that the consultant's remuneration was accounted for by it in its books of account as and when it was received and since the commission was not received this year, the same could not be accounted for in its books, this was not accepted by the Income-tax Officer as a proper, valid and genuine explanation. The assessee-company pleaded that unless the net profits of the firm were ascertained and communicated to the assessee-company, it was not possible to account for the remuneration; that the company was not aware whether the firm had debited the amounted of remuneration to its profit and loss account; that the serious disputes which arose between the partners of the firm led to the eventual stoppage of business and cancellation of the agreement between the firm and M/s Modipon Ltd. and under these extraordinary circumstances, the assessee-company could not visualize any possibility of receipt of remuneration from the firm. As soon as things improved, disputes got settled, intimation was received from the firm, the assessee-company accounted for the commission in its accounts and disclosed it in that year. There was thus no non-disclosure of the commission nor of any relevant facts. The Income-tax Officer, however, held that the accounts of the assessee-company showed that in the past the commission was being accounted for on accrual basis and it was only in this year that it sought to disclose it on cash basis. The Income-tax Officer further held in his order as under : "The assessee-companies submission that it was not within their knowledge that the firm had debited such remuneration in its accounts is not borne out by facts, since Shri Satish Kumar Modi, a Director of the company and also a partner in the firm, signed the final accounts of a firm on 15-9-1976 and was also present in the Board meeting held on 30-9-1976. The Board of di rectors of the company is alleged to have taken a decision in this meeting held on30-9-1976that such remuneration may not be accounted for in the year under consideration. The fact that the accounts of the firm for the year under consideration were finalised by the auditors on 15-9-1976 together with the fact that at least Shri Satish Kumar Modi a partner in M/s Synfibre Sales Corporation and also one of the Directors in the assessee-company signed the accounts of the firm and was also present in the Board's meeting, clearly prove that the assessee's contention is patently false and contrary to facts and cannot be accepted as true."

The Income-tax Officer also relied upon another circumstance, namely, that when the addition of this sum made by the Income-Tax Officer was deleted on appeal by the Commissioner (A), the department filed a further appeal before the Tribunal, in which the Tribunal holding that the commission accrued to the assessee in the accounting year itself who should have shown in its accounts as its income and that the non-disclosure was not proper, reversed the order of the Commissioner (A), which showed that the assessee's contention was not acceptable and which amounted to concealment of income. The tribunal in coming to this conclusion observed that the auditors of the firm finalised the accounts of the firm; that Shri Satish Kumar Modi, one of the directors of the assessee-company knew about this fact and in the probability of human conduct that the directors of the assessee-company did not know as to what was the commission payable to it by the firm. The Income-tax Officer sought to derive strength and support for his view from these observations. Eventually he held that the assessee was guilty of the charge of concealment of income and of furnishing inaccurate particulars thereof and therefore levied penalties. There was also some interest receivable from the firm, which was also not accounted for and which also was treated as part of the concealment of income. For similar reasons penalties were also imposed under section 273(b) of the Income-tax Act.

9. Aggrieved by the imposition of these penalties, the assessee filed appeals before the Commissioner (A). The Commissioner (A) held on a review of the facts including the order of the Tribunal confirming the disputed additions, that the assessee entertained a bona fide belief that the consultancy remuneration did not accrue to the assessee-company during the respective years owing to disputes between the partners and the resultant court proceedings. The fact that the additions were confirmed by the Tribunal was held not to mean that the assessee-company did not hold this view bonafidely. The Commissioner (A) further held that the assessee without withholding any material fact disclosed all the relevant facts and in the face of this full disclosure of material facts, the assessee could not be said to be guilty of concealment of income merely on the ground that the Income-tax Officer did not agree with the view of the assessee-company. In this view of the matter, he cancelled the penalties. The department is in appeal against that order of the Commissioner (A).

10. We have heard at length the learned Departmental Representative Shri O. S. Bajpai and Shri Ajay Vohra for the assessee and perused the documents placed before us in the form of paper book, to those papers to which our attention was drawn. The Departmental Representative submitted that there were three important dates, one was the date when the return was filed for the assessment year 1977-78 i.e. 16-7-1977; the second important date was 15-9-1976 when the accounts of the firm were finalised showing a debit of the commission in question to the profit and loss account to its account and the third important date was said to be 30-9-1976 when the accounts of the assessee-company were finalised. Laying stress upon these three dates and drawing support from the conclusions reached by the Tribunal in the quantum appeal sustaining these additions, the learned Departmental Representative emphasised that the assessee-company deliberately and with a view to defeat the provisions of the Income-tax Act sought the subterfuge of the change in the method of accounting system. It could not have bona-fide belief that it would not be able to realize the income from the firm. It knew that in the books of the firm the commission due to the assessee-company was provided. This meant that the assessee-company knew even the quantum of income. There is therefore no reason why it should not take credit for it in its accounts. The plea put up that it was not able to realize the income was said to be only a facade. Laying emphasis on the observations made by the Tribunal in its order, in particular and on the entirety of the order in general, he submitted that the conclusion reached by the Tribunal was that there was a conscious omission on the part of the assessee-company to disclose this income. Such a conscious omission of disclosure of income after it knew that it had accrued to it, amounted to concealment of income within the meaning of section 271(1)(c) of the Income-tax Act. The question of assessee disclosing full facts thereby seeking refuge under that full disclosure was argued, did not help the assessee. The conclusion reached by the Tribunal was accepted by the assessee, which leads one to the conclusion that the assessee had acquired the right to receive the income and wanted to play with the revenue by postponing the inclusion of that income in its accounts only by way of a design. The fact that the income was disclosed in the year in which it received the income, namely, assessment year 1981-82 does not alter the position that the assessee had not concealed the income in the relevant year. This becomes very clear when we consider the provisions of section 271 under which penalties were imposed for non-payment of proper advance tax. There the assessee-company knew that income had accrued to it and yet did not take into consideration thereby knowing it to be untrue, a false estimate was made. Coming back to the significance of the dates, the learned Departmental Representative submitted that by 15-9-1976, the accounts of the firm were finalised and the factum of the finalisation of the accounts by making a provision for the commission due to the assessee-firm was known to the important partner, namely, Shri Satish Kumar Modi, who happened to be an important director of the assessee also. When a partner with such knowledge sits in the Boards' meeting of the assessee-company on 30-9-1976, he must be deemed to have had the knowledge of what happened in the case of the firm and that knowledge must be presumed to have been conveyed to the other directors and still when all the directors put together passed a resolution that it would be still difficult to receive the income from the firm, it only meant a device to postpone the payment of income-tax. This is more so when the assessee is adopting mercantile system of accounting. The argument of the assessee-company that it changed the method of accounting in respect of this sum from mercantile to cash having been rejected by the Tribunal, cannot any more be offered as a ground to observe itself of the charge of concealment of income. So proceeded the argument of the learned Departmental Representative.

11. The learned Chartered Accountant for the assessee, on the other hand, strongly refuted these inferences and submitted that what amounts to concealment of income under the Income-tax Act was the non-disclosure of facts of a particular item of income or when inaccurate particulars were furnished. The charged of the Department was not that inaccurate particulars were furnished by the assessee-company. All the relevant facts were furnished. Then the assessee's representative submitted that on those facts it honestly believed that it would not be able to realize the income. This belief was supported by the Board's resolution and the statement made before the Income-tax Officer at the time of filing of the return. The assessee-company did not withhold any information. The resolution passed by the Board of Directors cannot therefore be said to be a camouflage or a ruse to avoid payment of income-tax. The belief held by the Board of Directors of the assessee-company in these circumstances cannot but be held to be genuine. If assessee holds a genuine and bonafide belief in regard to the chances of realising am income and states before the Income-tax Officer that it would show that particular income only on receipt basis but not on accrual basis and gives reasons for its conclusion, how can it be said to be concealment of income, the learned Chartered Accountant asked. He then submitted that whatever may be the conclusion reached by the Tribunal in the quantum appeal, that would become necessary only for the purpose of finding out whether a right to receive the income had accrued or not. If the right to receive the income had accrued, the income had to be shown notwithstanding that it did not receive the income, inasmuch as, the assessee-company was following mercantile system of accounting. The conclusion reached by the Tribunal was only to this effect. That does not affect the conclusion to be reached in penalty proceedings whether the belief held by the assessee was bona fide or not. A bona fide belief held by the assessee can be found to be erroneous in law but if the belief is held bona fide, that belief would absolve the assessee of the charge of concealment of income. He further submitted that the Commissioner of Income-Tax waived interest payable u/s 215 for the assessment year 1978-79 and the Inspecting Asstt. Commissioner did so for the assessment year 1977-78, both of them relying upon Board of Directors' resolution holding that the assessee held this belief bona fide. Independent departmental authorities had thus considered these circumstances and arrived at a conclusion that the assessee-company held a bona fide belief in regard to the chances of realisation of this income from the firm. The Commissioner (A) in this very case also held that the assessee company did hold this belief bonafidely. The Income-tax Appellate Tribunal did not decide upon the question of bonafides. The assessee particularly furnished all the particulars. It cannot therefore be said that the assessee was guilty of concealment of income and the levy of penalty was highly unjust and the Commissioner (A) had rightly deleted it. In support of the various propositions urged before us the learned Chartered Accountant for the assessee relied upon a decision of the Supreme Court in CIT v. Mussadilal Ram Bharose [1987] 165 ITR 14 and on a decision of the Calcutta High Court in the case of Burmah-Shell Oil Storage & Distributing Co. of India Ltd. v. ITO [1978] 112 ITR 592 and on a decision given by the Tribunal, Ahmedabad Bench in ITO v. Dilipkumar Manharlal & Co. [1987] 22 ITD 344 and also a decision of the Punjab and Haryana High Court in CIT v. Anand Water Meter Mfg. Co. [1979] 117 ITR 866 and a decision of the Madras High Court in CIT v. Jayashankar Traders [1983] 144 ITR 208. As the alternative, he submitted that the issue of the notice suffered from infirmity because it did not specify which of the Explanations would apply. In other words, the charge that the assessee had to meet was not specified. The Chandigarh Bench of the Tribunal held that in such circumstances no penalty should be imposed. Relying upon that view, he submitted that in this case also since the charge was not specified, the levy of penalty was improper. He then submitted that for the assessment year 1978-79, the Income-tax Officer should have obtained the approval of the Inspecting Asstt. Commissioner and that there was nothing on record to show that the approval of the Inspecting Asstt. Commissioner was obtained and therefore in any case the penalty levied for the assessment year 1978-79 was invalid. Dealing with the penalties imposed u/s 273(a), the learned Chartered Accountant submitted that the assessee-company had a reasonable cause for the deferment of commission income. Therefore penalties were not impossible at all and they were rightly cancelled by the Commissioner (A). When interest leviable u/s 215 was waived holding that the assessee had a reasonable cause and when conditions for the levy of penalty u/s 273 and for the levy of interest u/s 215 were same a fortiori, the penalty u/s 273 also should have been cancelled and that was what the Commissioner (A) did and therefore no exception could be taken to his order. Lastly he submitted that the assessee had always been accounting for the remuneration only after the receipt of advice from the firm and in support of it, he filed details at page 45 of the paper book. Based upon this information, he submitted that even though the assessee-company was adopting the mercantile system of accounting, since it was accounting for the commission only on receipt of advice, the assessee-company not having received any advice inspite of reminders, was justified in not taking credit for the commission although it was debited in the books of the firm. The debiting of the commission in the books of the firm may be for its accounting and tax purposes but that would not give the assessee a right to receive that commission unless the advice was received from the firm.

12. The Departmental Representative in reply submitted that there was no law to deter the income which had already accrued and that the assessee-company could not take shelter under non-receipt of advice for not showing income, which had already accrued to it. The income accrued to the assessee-company after the firm had debited the commission in its accounts as due to the assessee-company. It was wrong to suggest that two opinions were available in this case as to the accrual of the income or to holding the belief bona fide. He also submitted that it was incorrect to state that the Tribunal had not adjudicated upon the point as to whether the assessee-company held the belief bona fide or not. Merely because the interest had been waived u/s 215, it did not mean that the department had accepted the position that the assessee had established a bona fide belief. Rule 40 of the Income-tax Rules provided for the mitigation of interest. If that rule was invoked and interest was waived, it did not imply that there was no offence committed. On the contrary it implied that the offence was committed and that a lenient view was taken in respect of that offence. If the commission had been shown as income, the assessee-company would have to pay more tax and by not paying this tax, the assessee-company had had the advantage of user of the Government's money without interest, which under the income-tax parlance was described as concealment of income. The Departmental Representative then submitted that this was only a device adopted to reduce the tax liability. The dictum laid down by the Supreme Court in D. M. Manasvi v. CIT [1972] 86 ITR 557 was clearly attracted. It is always a question of fact as to whether the onus of proving that the assessee was discharged or not. In this case, the onus of proving that the assessee had not concealed any income had not been discharged. Legal arguments cannot be a substitute for factual findings like Inspecting Asstt. Commissioner did not grant permission, etc., etc. He further submitted that this was the first time that this point was raised and as it needed investigation, he would not be in a position to readily answer it but in any case he submitted that the assessee could not be permitted without raising a cross-objection, to raise this particular point. He wound up the department's case by submitting that the Explanations added to section 271(1)(c) were not separate and independent charges of offences for the assumption of the jurisdiction to levy penalty. They were explanations to explain what amounted to concealment of income. Therefore non-specification of the explanation under which penalty was sought to be imposed, could not be validly raised as a ground for getting the penalty cancelled. The Explanation does not create an offence as it only explains an offence.

13. Now it is our task, which of the two arguments advanced before us at considerable length and with great pains and emphasis on both sides, was proper and sustainable. It is now a well settled law that penalty proceedings and assessment proceedings are distinct and independent proceedings, inasmuch as, the assessment proceedings are tax proceedings whereas the penalty proceedings are quasi-criminal proceedings in their very nature. It is also settled law that a decision given in an assessment proceedings though relevant cannot bind the authority, who decides the penalty proceedings nor can the levy of penalty be an automatic concomitant of the assessment. Though it is permissible to rely upon the findings reached in assessment, or reassessment proceedings as relevant material and prima facie evidence, those findings by themselves cannot lead to the automatic conclusion that the assessee was guilty of concealment of income on account of those additions. Where on the facts found in the assessment or reassessment, concealment is patent, there is no reason why the Income-tax Officer cannot rely on that finding in the penalty proceedings and call upon the assessee as to why in view of that, penalty should not be levied. In the penalty proceedings the authorities are expected to consider afresh all the materials available including those available at the assessment stage or those adduced later, the consideration of all of which should lead to a conclusion that the assessee is guilty of conscious concealment - see CIT v. Raja Mohd. Amir Ahmad Khan [1975] 100 ITR 433 (All.). But penalty cannot be imposed solely on the basis of the findings arrived at during assessment proceedings unless there is abundant evidence justifying the penalty. These are the basic settled principles with the help of which we have now to find out whether the assessee in this case had concealed its income.

14. The expression 'conceal' has been judicially noticed in several cases by the High Courts and the Supreme Court. In its plain meaning, the word 'conceal' means to hide, to keep secret. The phrase 'concealed the particulars of his income' would therefore involve a knowledge on the part of the assessee of income which though real is not shown. Concealment might arise even of the statement as to the income is a guarded one as for example, some enquiry has to be made to ascertain the correct income. Concealment of income arises in various ways and in various forms of manipulation of either entries in the accounts or non-disclosure of items of sources and of income earned by the assessee in the previous year and not shown, claim for false deductions, suppression of sales. However, additions made or estimates made on mere suspicion that there is something wrong with the book entries or their incompleteness, inadvertent omissions, debatable additions or disallowances, cash credits or investment not accepted as genuine may not by themselves justify a penalty. These are the guiding principles which also we have got to bear in mind before we approach this problem. If the assessee had knowledge of accrual of income and without any proper reason he had not disclosed it, then that would be concealment of income. If the inclusion of a sum is debatable and full facts were disclosed and assessee claims on the basis of those facts that the particular sum was not taxable, even if the Income-tax Officer subsequently holds that the sum was taxable, in our opinion, the assessee could not be said to have concealed the particulars of income. That was the reason why while tightening the law on the subject with a view to provide for honest differences of opinion on full disclosure of facts, an Explanation was added by the Taxation Laws Amendment Act, 1975 with effect from 1-4-1976, which states :

"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."

This provision which finds a place in section 271 is a reliable safeguard built into the system of levy of penalty for concealment of income where bona fide explanations offered were rejected and additions were made to income. This provisions therefore lays down that the explanation offered though rejected must be bonafides and all the facts relating to the same and material to the computation of the total income are disclosed. This provision therefore lends support to the view that it is possible for an income-tax authority to add an amount or disallow an expenditure by rejecting the explanation of feed for the purpose of assessment but when it comes to the levy of penalty, that authority must consider whether the explanation, which was offered was bonafides made though rejected and whether all the facts relating to the addition of the income or disallowance of the facts relating to the made though rejected and whether all the facts relating to the addition of the income or disallowances of the expenditure were disclosed. The area of dispute in the use before us as we analysed, fell with in the four corners of this area. It is not doubt true that the sum in question was added by there Income-tax Officer as income occurred to the assessee mainly on three grounds (a) that the firm had made a provision for the commission in its books, (b) that under the mercantile system of accounting the assessee acquired a right to receive that income, and (c) that the assessee had knowledge of such accrual of income. This view in a very elaborate discussion was also upheld by the Income-tax Appellate Tribunal. We have now just seen that mere holding of an addition made in the assessment proceedings would not ipso facto lead to the conclusion that there was concealment of income and for the purpose of levy of penalty the entire material is again to be appraised to find out whether the exception provided for in the proviso to the Explanation is applicable or not. Unless safeguards provided for in this is proviso do not apply, penalty perhaps may not be imposed treating those additions as concealment of income. If or understanding of the law is correct, then we have got to examine the evidence solely to find out whether all the facts relating to the particular addition were disclosed. In this exercise of finding out the intention, the question whether the assessee acquired the right to receive the income or not has to be given a back seat. Even if the right to receive the income accused as we have mentioned a short while ago, if the assessee honestly believed that there was some chance or likelihood of not to receiving it, whether non-disclosure of this income by mention in gate all this particular fact of the chance of receiving the income amounted to concealment of income. As we see this is the crux of the matter.

15. Now going back to the order of the Tribunal where the entire facts were thoroughly reproduced and discussed, one will find that the assessee had at no time withheld the fact from the department which may have been material to the computation of its total income. The accounting year of the firm closed on31-8-1975. The accounting year of the assessee ended on30-4-1975. According to the previous year of the assessee-company, the income fails for assessment in the assessment year 1977-78. On3-9-1975under a notice of motion in Suit No. 851 of 1975, the Bombay High Court appointed an interim receiver restraining the other partners of the firm from carrying on the business. The Receiver was to take possession of all the assets and liabilities of the firm. On28-11-1975this appointment was made absolute. On 29-11-1975, i.e., from next day, the firm writes to Modipon Ltd. intimating it that its business had come to a standstill by reason of the appointment of a Court Receiver and injunctions granted by the High Court. Soon thereafter on1-12-1975M/s Modipon Ltd. terminated the agreement with immediate effect. These are the facts which were in the knowledge of the assessee-company also and there can be no dispute about it, i.e., even by the accounting year of the assessee-company had come to a close, the business of the firm had come to a stand still and its agency also was terminated. Naturally this would create a situation of panic in the minds of the assessee-company as to the capacity of the firm to make payment due to the assessee-company. It was on account of this fear that on17-8-1976the assessee wrote a letter to the firm to pay the commission due to it for the year ending on31-8-1975with immediate effect. In reply thereto the firm on21-8-1976stated that (a) its accounts were not finalised and therefore it was not possible to communicate the amount of commissions, and (b) it was doubtful whether the firm would be able to meet its commitments. It is no doubt try that this letter was written by one of the partners of the firm would be able to meet its commitments. It is no doubt true that this letters written by one of the partners of the firm albeit he is a responsible man and the assessee-company is entitled to rely upon that letter and it has got both civil and criminal consequence. One of the pints made in this letter was that some of the partners of the firm held that clause 16 of the agreement entered into between the firm and the assessee-company would be attracted. We have already extracted above the relevant clause of the agreement entered into on18-9-1968. Clause 16 of that agreement provided that if the consultants failed to perform their obligation to assist the Corporation in disposing the entire production of Modipon Ltd., the consultants, i.e., the assessee-company would forfeit its remuneration which they may have earned. Though this letter is a very guarded one, it did convey to the assessee-company the intentions of the firm and the probable agitation that could ensue. That letter also assured that the assess-company would be informed about the commission, etc., after the accounts were finalised. The last sentence that letter was very important in so far as assessee-company is concerned because there the partner clearly stated that he had no hesitation to say that the firm might not be in a position to pay the commission. After the receipt of such a letter from a responsible partner of the firm what should be the attitude of the assessee-company and what action it would take having regard to the exigencies of business and other relevant considerations. This letter was therefore discussed in the Board of Directors' meeting go the assessee-company on30-9-1976and a decision was reached that it would account for the commission in the circumstance only on the receipt of the commission and not otherwise. The entire circumstance that led to this decision were mentioned clearly in the resolution and eventually it was decided that the income from that firm would be declared and accounted for as and when and if received. It was pursuant to this resolution that the assessee-company had not disclosed this commission. The question is whether the belief held by the assessee-company that it would not receive the commission the circumstance was a belief held bona fide and whether all the facts relating thereto were or were not disclosed to the department. It is common ground and indeed it is seen from the order of the Inspecting Asstt. Commissioner, Income-tax Officer and the Tribunal that all these facts were mentioned to all the assessing officers at every level and it is not the charge of the Revenue that the assessee had withheld any of these facts from it. It is also not the case of the Revenue that these were not the material facts and some more facts necessary and they were not disclosed; indeed there was no reference to any such material facts. We are therefore to conclude that all the material facts were fully disclosed to the department, e.g., it is seen from the paper book that all these facts were submitted to the Inspecting Asstt. Commissioner in writing on18-1-1980vide copy enclosed in the paper book at pages 23 and 32 and again on4-2-1980vide pages 33 and 36 of the paper book. In the meantime Shri. K. K. Modi, the Chairman of the assessee-company was also examined. He also testified to these facts, whose deposition was even to us vide pages 43 and 45 of the paper book. The directors' export was available and furnished. The annual accounts and the Auditors' report contained these facts. Now once the full disclosure of these material facts were mentioned, the next question is whether assessee held this belief bona fide or it is only subterfuge. We have gone through the order of the Tribunal very carefully. Nowhere it mentioned that the belief held by it assessee was not bona fide. The learned Department Representative laid greatest stress on the last sentence of para 21.3 vide page 19 of the order of the Tribunal where the Tribunal held :

"Omission to show the income from commission on this ground does not appear to us to be justified."

We do not think having regard to the context in which these observations were made by the learned Members, that they were adjustifying upon the bonafides of the assessee in holding this belief. After referring to the letter of the firm dated 21-3-1986 the Bench held that having regard to the high asset backing and very comfortable liquidity position of the assessee-company that it was not proper to hold that the firm repudiated its liability to the assessee or entertained any such intention and therefore the omission to show the income on that ground was to justified. As we have mentioned above this observation has to be read in the context of the facts in which this was made, it may be that the asset backing of the assessee-company and its comfortable liquidity position and events acknowledgement of the liability might show that it would be possible or the assessee-company to recover the money from the firm by instituting legal proceedings but those facts do not show that the belief held by the assessee that it would not be able to realise the money and therefore would show the income not in this year on accrual basis but in the year of receipt was not a bonafides belief. Eventually it is the letter of21-8-1976that was to be interrupted as to whether the firm had communicated to the assessee any threat. In our opinion a careful reading of that letter couched though in a diplomatic language did contain threats and possible changes that the firm might like to lay against the assessee-company in regard to this payment of commission. First it said that there were disputes and difference of opinion Then it said it would invoke clause 16 of the agreement. Finally it said that there was no hesitation of the firm not being able to make the payment. These things are enough for the assessee-company, for that matter for any Board of Directors, to go cautiously in this matter. It is only recklessness, if these threats are not taken due notice of. By the help of the assets the assessee company might be able to realise the money by going to a Court of law. Would it in those circumstances be proper and legitimate of any businessman to take the view as to wait for the receipt or immediately launch proceedings for the recovery and in any case take credit for the income. We think it is prudent on the part of any businessman in these circumstances appraise the situation and to take a decision to postpone the receipt rather than to take the steps of going to a Court of law. The cautious approach adopted by the Board of Directors cannot be said to be male fide.

16. Now on26-11-76the Court Receiver wrote a letter to M/s. Modipon Ltd. to pay the dues of the firm which was duly rejected. As if this is not enough a notice was received by the firm from Modipon Ltd.2-11-1977claiming a compensation of Rs. 24.91 lacs. Though this claim was made after the resolution of the Board of directors on30-9-1976resolving to account for this income only when received, this letter does justify the apprehensions entertained by the Board of Directors at the time when it made the resolution. What we mean to say is that the subsequent events justified the conclusion reached by the Board of Directors and that is also an additional factor or to say that the belief held by the Board of Directors was bona fide. As soon as the differences were composed, disputes settle, the firm intimated the assessee-company about the commission and soon thereafter it accounted for the entire commission and disclosed for assessment and was duly assessed. This shows that the assessee-company had not failed in accounting for the income but instead of accounting for this income in these two years accounted for it in 1981-82 assessment below, by doing this, it paid a little more tax than it would have paid had the income been disclosed in the years under appeal.

17. In this context we may also refer to very salient point made by the learned Chartered Accountant that even though the assessee-company had been adopting mercantile system of accounting and was disclosing commission from the firm only on receipt of advice though not on receipt of money even though in some years it accounted for the commission after receipt of money. The system that was being followed by the assessee-company in the past was therefore to account for this commission only on receipt of advice. This was accepted for this commission only on receipt advice. This was accepted position. If that was so when the firm had specifically wrote to the assessee that its accounts were not finalised and it would not be able to let it know the commission due to it, how can the assess-company make a provision for it in its accounts. It is therefore justified in those circumstances to take a decision to show for this commission only after receipt of intimation. It has been brought to our notice that the accounts of the accounts of the firm were only audited provisionally and not finally and the adjustment made for the payment commission to the assessee-company was only provisional and not final although it transpired that the provisional provision tallied with the actual provision made subsequently. A provisional provision made in the accounts of the firm cannot be relief upon for the purpose of making provision in the accounts of the assessee-company; in any case for penalty purpose.

18. We also find merit in the argument of the assessee that when interest was waived u/s 215 holding that the assessee had a reasonable cause for not disclosing this commission meaning there by at least impliedly that the assessee entertained a bona fides belief about the non-receipt of commission, there was no justification to hold otherwise when it comes to levy of penalty under section 271(1)(c) or under section 273.

19. We may also refer to a decision of the Supreme Court in the case of Cement Marketing Co. of India Ltd. v. Asstt. CST [1980] 124 ITR 15. Though, this relates to a penalty imposed under the Central Sales-tax Act, 1956, the principle laid down here appear to us to be of universal application, i.e., in income-tax proceedings also. Here in this case the Supreme Court held :

"A return cannot be 'false' unless there is an element of deliberations in it. It is possible that even where the incorrectness of there turn is claimed to be due to want of care on the part of the assessee and there is no reasonable explanation forthcoming from the assessee for such want of care, the court may, in a given case, infer deliberation and the return may be likable to be branded as a false return. But where the assessee does not include a particular item in the table turnover under a bona fides belief that he is not liable so to include it, it would not be right to condemn the return as a 'false' return inviting imposition of penalty. Held, accordingly, that where he assessee did not include in its return o turnover the amount of freight included in the price of sugar in the bona fide belief that it was not liable to be included in the taxable turnover, the assessee could not be said to have filed a 'false' return and penalty could not be imposed on the assessee under s. 43 of the M. P. General Sales Tax Act, 1958, and s. 9(2) of the Central Sales-Tax Act, 1956."

In these case of the assessee did not include freight in its turnover on the grounds that according to its interpretation of the word "sale price", it did not include freight. The Supreme Court said that this belief could not be said to be a frivolous contention taken up merely for the purpose of avoiding liability to pay tax. The Supreme Court further held that in view of its debatable nature, it cannot be said to be male fide or unreasonable. We think that the explanation offered by the assessee-company and on the facts obtaining in his use for not including the commission cannot be said to be a furious our unreasonable and therefore bona fide. We are therefore unable to agree with the submissions made by the learned Departments Representative.

20. For these reasons, we are of the opinion that the Commissioner (A) justified in reaching the conclusion that the assessee held a bona fide belief and the non-disclosure of the income from commission did not amount to concealment of income as all the facts were fully disclosed and there was therefore no justification for the imposition of penalties either under section 271(1)(c) or under action 273(a) of the Income-tax Act, 1961. We therefore uphold his orders and dismiss these appeals.

 

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