Vildirect: IncomeTax-caselaws-1989-VIL-81-ITAT-AHM

1989-VIL-81-ITAT-AHM

Income Tax Appellate Tribunal AHMEDABAD

ITA No. 2180/Ahd.1988

Date: 19.10.1989

SHRI KHEDUT SAHAKARI KHAND UDYOG MANDALI LTD.

INCOME-TAX OFFICER

I.J. Desai for the Appellant
V.S. Shah for the Respondent

BENCH

K.R. DIXIT, JUDICIAL MEMBER AND B.M. KOTHARI ACCOUNTANT MEMBER

JUDGMENT

B.M. KOTHARI A.M.:- The assessee has preferred this appeal against the order passed by the Commissioner (Appeals) confirming the levy of penalty of Rs. 6,50,000 under section 271 (1) (c) of the Income-tax Act, 1961.

2. The brief facts related to the aforesaid appeal are as under :

The appellant is a co operative society engaged in the business of manufacturing and selling sugar after procuring sugarcane grown by its members. It is a producers Society and established mainly in order to ensure that its members who are producers of sugarcane get the maximum of price for the sugar cane grown by them. The assessee submitted return of income showing total loss of Rs. 1,73,87,540 excluding unabsorbed depreciation of Rs. 1,15,93,620. The assessment for assessment year 1980-81 has been completed on 27th August, 1983 in which the business loss was assessed by the ITO for aforesaid year at Rs. 1,58,66,401. In addition to this unabsorbed depreciation pertaining to the year under consideration which was also eligible for being set off in subsequent years was determined by the ITO at Rs. 1,15,87,621. Thus the total amount of business of loss and unabsorbed depreciation pertaining to the year under consideration had been determined At Rs. 2,74,54,022 by the ITO. The assessee is also entitled to carry forward of past unabsorbed business loss, unabsorbed depreciation and development rebate for various years as per details mentioned in the assessment order for the year under consideration which is reproduced here under :

*Assessment year*	*Business loss*	*Deprn.*	*Dev. Rebate*	*Total*
1973-74	-	-	33,16,145	33,16,145
1976-77	-	Rs. 6,96,853	-	696853
1978-79	-	Rs. 67,83,671	-	6783671
1979-80	4,41,059	Rs. 1,40,62,064	-	1,45,03,123

2.2 During the year under consideration the assessee has debited in the trading account the sum of Rs. 9,64,46,340 as purchase price of 7,42,717 matric tonnes of sugarcane, including 7,36,057 matic tonnes sugarcane purchased by the assessee from its share holders. The assessee has claimed .purchase price at the rate of Rs. 137 per M.T. which was sanctioned by the managing Committee vide resolution No. 3 passed on the meeting of managing Committee of the said society. At the end of the relevant accounting year, the assessee debited an amount of Rs. 12,88,165 calculated at the rate of Rs. 1.75. per MT. in the account of the members are credited the said amount to Reserve fund called "share holders Dividend fund" and the assessee has paid dividend to the shareholders from this fund at the rate or 12 per cent the aforesaid amount of Rs. 12,88,165 was added by the ITO in the total income of the assessee, while completing the assessment and he also issued notice under section 274 r/w section 271 (1) (c) for furnishing inaccurate particulars of income in respect of the aforesaid sum of Rs. 12,88,165. The assessee did not prefer any appeal challenging the aforesaid addition made by the ITO in the assessment order for aforesaid year. the ITO imposed penalty under section 271 (1) (c) amounting to Rs. 6,50,000 by holding that the assessee had deliberately furnished in accurate particulars of income and claimed wrong deduction as expenditure in respect of aforesaid of Rs. 12,88,165 transferred to "Shareholders Dividend Fund Account". The Commissioner (Appeals) confirmed the aforesaid penalty imposed upon the appellant. The present appeal has been preferred against the aforesaid penalty confirmed by the Commissioner (Appeals) :

3. The learned counsel for the assessee contended that the aforesaid sum of Rs. 12,88,165 was merely transferred from one liability account to another liability account. The liability payable to members on account of price payable to them of sugarcane purchased was debited by the aforesaid sum of Rs. 12,88,165 and credited the said amount to Shareholders Dividend Fund Account. In view of such transfer of liability from one account to another the addition made by the learned ITO is apparently incorrect and invalid. The assessee did not prefer any appeal against the said addition merely because there are huge losses and it would have been futile to incur further legal expenses for pursuing the aforesaid invalidity of the said addition of Rs. 12,88,165 he contended that purchase price payable to the members for supply of sugarcane grown by them by was sanctioned by the managing Committee at the rate or Rs. 137 per mt. He also invited our attention to wards resolution dated 25th November 1979 passed by the managing Committee of the aforesaid society in which it was decided that last year the assessee had distributed 10 per cent dividend per share and this year they intend to distribute dividend at the rate of 12 per cent. In order to pay such dividend at the rate of 12 per cent it was further decided that dividend contribution at the rate of Rs. 1.75 per M.T. be collected from the Members who had supplied sugarcane to the assessee for such Shareholders Dividend fund and accordingly the amount of Rs. 12,88,165 was debited in the account of Members against the amount payable to them for sugarcane supplied by them and the same amount was credited in the "Shareholders Dividend Account Fund". This recommendation of the Managing Committee was approved in the General Meeting of the Society held on 30th December1979. He further contended that in the immediately preceding year, similar addition at Rs. 11,93,246 was made by the ITO and that too was not contested by the assessee in the preceding year. However no penalty proceedings were initiated in the preceding year under similar facts and circumstances.

3.2. The learned counsel further contended that the assessee did not conceal any facts whatsoever and the disputed item of addition was duly disclosed in the audited balance sheet submitted by the assessee itself along with the return of income. He invited our attention towards printed balance sheet of the society at page 23 in which the aforesaid amount of Rs. 12,88,165 has been separately shown under the head proposed allocation of Member’s contribution from sugarcane price for payment, of dividend. It was further contended that by making the aforesaid entry of Rs. 12,88,165 the assessee did not derive any gain whatsoever in the matter relating to Income-tax liability as there are huge losses of earlier years as well as assessed losses pertaining to the year under consideration. It was further submitted that some of the past losses of earlier years could not be set off because 8 years period of limitation has already expired. In view of such facts it was contended by the learned counsel that there could be no guilty intention on the part of the assessee while making the aforesaid entry and no loss has been caused to the Revenue by making the aforesaid entry to enable the Society to make payment of dividend to the Members. It was further contended that normally dividends can be paid only out of profits Since the assessee Society did not derive any profits for a long period of time, such a novel method was adopted by the assessee only with a view to get some amount for distribution by way of dividend to its Members. In fact, what was paid by way of dividend to its Members out of the aforesaid dividend fund was the amount payable to members themselves in the form of price for sugarcane purchased from them. The guilty intention to evade payment for any income tax is apparently absent in the present case, as the assessee was not at all liable to pay any income tax in view of the huge amount of assessed losses. The learned counsel further invited our attention to wards the facts proviso to Explanation 1 to section 271 (1) (c) which provides that nothing contained in section 271 (1) (c) will apply to a case referred to the clause (b) of Explanation 1 in respect of any amount added or disallowed as a result of he 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 its total income have been disclosed by him. It was contended that the assessee’s case is clearly covered by the aforesaid proviso which supports that no penalty could be validly imposed under the fact and circumstances of the assessee’s case. The learned counsel also invited our attention to wards Explanation 4 to section 271 (1) (c) by resort to which the ITO has imposed the aforesaid penalty of Rs. 6,50,000. He contended that Explanation 4 (a) can be applied only in case where there is a positive income assessed and cannot be applied where the assessee has been made at a loss figure. He relied upon the decision of ITAT Ahmedabad Bench in the case of PATEL SABAR PVT LTD. v. ITO (1986) 26 TTJ (Ahd) 89 and also relied upon the decision of ITAT Chandigarh Bench in the case of SUDHA PHARMACEUTICALS PVT LTD. (1983) 17 TTJ (Chd) 518. He contended that the decision of ITAT Chandigarh bench is directly applicable in the case of the assessee In that case it was held by the tribunal that no penalty is leviable under section 271 (1) (c) if no tax is payable by the assessee The Tribunal has considered the effect of Explanation 4 of section 271 (c) in the aforesaid case. The learned counsel also placed upon the judgment of Hon'ble Madhya Pradesh High Court in the case of Commissioner v. JAORA OIL MILL (1981) 129 ITR 423 (MP) in which it was held that the word "income" as defined under section 2 (24) of the Income-tax Act, 1961 even if the same is considered in its broadest connotation, it refers to monetary return coming in and is conceptually contradictory to loss. Section 4 of the Act taxes income and not loss. It was further held that the contention that a loss can be used to set off the income in a particular year and can be carried forward under certain circumstances to the following assessment years will not by any logic convert it into an income. In view of the aforesaid facts and circumstances, it was contented by the learned counsel for the assessee that penalty imposed by the ITO be cancelled.

4. The learned Departmental representative contended that the very fact that the assessee has accepted the aforesaid addition of Rs. 12,88,165 and has not preferred any appeal amounts to an admission that the said amount represents real income of the assessee. It is therefore, a clear case where the assessee has deliberately furnished in accurate particulars of income. The purchase price accounted for that the rate of Rs. 137 per M.T. was clearly inflated by the assessee by a sum of Rs. 1.75 per M.T. which was subsequently transferred to the Share holders Dividend Fund Account. This amount ought to have been shown by the assessee as an income either by reducing purchase price of sugercane or by distinctly showing the same as an item of an income in the P & L Account. It was further contended that the penalty has been imposed by the ITO after carefully considering the assessee's detailed reply dated 8th November 1983, as is evident from the discussion in the penalty order passed by the ITO. The learned Departmental Representative also read the relevant paras of the order passed by the ITO imposing the penalty and also took us through the relevant para of the order passed the Commissioner (Appeals) in which the aforesaid penalty has been confirmed by him. He submitted that since the charge of filing in correct particulars of income in respect of addition of Rs. 12,88,165 stands established the clear language of section 271 (1) (c) should be given full effect and penalty imposed by the appellant should be sustained. He further contended that the ITO has computed the amount of penalty amounting to Rs. 6,50,00 treating the amount of aforesaid addition of Rs. 12,88,165 as the total concealed income as per Explanation 4 to section 271 (1) (c). He argued that in view of Explanation 4 the penalty under section 271 (1) (c) can be levied even when there is an assessed loss. It is not necessary that for invoking the Explanation 4 to section 271 (1) (c), there should be a positive figure of income assessed. In this connection, he invited our attention towards Commentary of Income-tax Law by Chaturvedi at page 4943 in which the scope and purpose of inserting Explanation 4 to section 271 (1) (c) has been explained as under:

"This portion of definition has application to cases where the amount of income in respect to which the particulars have been concealed or in accurate particulars have been furnished exceeds the total income assessed. In such cases the base for quantum would be the tax that would have been chargeable on the income concealed, etc, had such income been the total income and not on the laser amount actually assessed as total income." The learned Departmental Representative supported the order, passed by the Commissioner (Appeals) confirming the levy of penalty amounting to Rs. 6,50,000 imposed by the ITO and also relied upon the reasons given by the ITO in the said penalty order passed by him.

5. We have heard the learned representatives of both sides and have also gone through the order passed by the learned Commissioner (Appeals) and the ITO. We have also carefully gone through the other relevant papers submitted in the paper book to which our attention was drawn. A perusal of the assessment order clearly reveals that even after making an addition of the aforesaid disputed sum of Rs. 12,88,165 the business loss for the year under consideration was assessed at Rs. 1,58,66,401. In addition to this the unabsorbed amount of depreciation pertaining to the year under appeal was also further eligible to be carried forward and set off against profits of subsequent years to the extent of Rs. 1,15,87,621. Thus the total amount of assessed loss including unabsorbed depreciation pertaining to the year under consideration amounted to Rs. 2,74,54,022. In Addition to aforesaid huge amount of assessed business loss and assessed amount of unabsorbed depreciation pertaining to the year under appeal, huge amount of past years business loss, unabsorbed depreciation and unabsorbed development rebate are still available with the assessee to be carried forward against the profit of subsequent years. A statement at Bar was made by the learned counsel that the assessee consistently suffered huge losses in all the subsequent years till the latest completed year and the assessed business loss, etc. have not been set off despite the expiry of 8 years period of limitation for carry forward of the assessed losses, The provisions of section 271 (1) (c) can be invoked in any case only where the assessee conceals its income liable to tax. The word conceal means to hide or to keep secret.

The very word conceal implies the existence of a guilty intention to evade tax In the present case, the assessee had suffered huge losses in several years and also suffered heavy losses in the year under appeal. The total amount of assessed business loss, assessed amount of unabsorbed depreciation and development rebate for the year under consideration as well as for earlier years as per assessment order passed by the ITO for the year under consideration is Rs. 5,27,53,814. In view of these it is amazing to presume that the assessee would have been gained by deliberately making any such false claim of excess purchase price amounting to Rs. 12,88,165 The motive of any tax evasion or any attempt to defraud the Revenue is apparently absent in the present case as there are no prospects in the near future of any profits beyond the huge amount of assessed loss of more than five crores as per the assessment order for the year under consideration. The statement made by the learned counsel during the course of hearing that the assessee society continued to incur heavy losses in all the subsequent years further proves the absence of any guilty intention on the part of the assessee to defraud Revenue while making the aforesaid entry of Rs. 12,88,165 The said entry was made in accordance with the Resolutions passed by the Managing Committee of the society which were subsequently confirmed by the General Meeting of the society. Such entries were made by the society in a bona fide manner only with a view to find out away to pay dividend to its Members despite constant huge losses suffered by the society The aforesaid entry made by the assessee society was separately and distinctly shown in the audited balance sheet annexed with the return of income submitted by the assessee. The department has not discovered the said item by any process of detailed scrutiny or investigation. Similar addition had also been made in the preceding years and no appeal was also filed by the assessee. They did not even initiate penalty proceedings in the preceding year, when similar addition was made. The facts relating to the year under appeal are exactly similar as in the preceding year. The Explanation 4 to section 271 (1) (C) deals only with cases of positive income and does not specifically provide for levy of any penalty in case of assessed loss. The word income use in Explanation to section 271 (1) (C) cannot be held to include loss It will be worthwhile to make a useful reference to the decision of ITAT, Chandigarh Bench in the case of ITO v. SUDHA PHARMACEUTICALS PVT LTD. (1983) 17 TTJ (Chd) (supra). The Tribunal in the aforesaid case had relied upon the judgments of Hon'ble Madras High Court in the case of ADDL Commissioner v. MURUGAN TIMBER DEPOT (1978) 113 ITR 99 (Mad) and Commissioner v. JAORA OIL MILL (1981) 129 ITR 423 (MP) (supra) in which it was held that where the finally determined figure by the ITO is assessed loss and there being no tax as such payable by the assessee, no penalty was leviable under section 271 (1) (c) The Tribunal in para 8 of the aforesaid decision has held as under:

"After very careful consideration of the rival submissions, we have come to the conclusion that we cannot interfere in the order of the Commissioner by which he cancelled the penalty. The reason for this are as under:

The legislature, apparently, has taken note of the difference between the total income and the total income assessed. This becomes very clear from a very close reading of the provisions of section 271 (1) (c) read with other provisions of Explanation 4 ibid Explanation 4 clarified the expression of the amount of tax sought to be evaded used in cl. (iii) lays down the basis of quantification of penalty attracted by the provisions of section 271 (1) (c) of the Act, that is where an assessee has concealed the particulars of such income. The clause points out that in addition to any tax payable by the assessee, the ITO may direct that the assessee shall pay be way of penalty a sum which shall not be less than, but which shall not exceed twice, the amount of tax sought to be evaded by reason of concealment of particulars of his income or furnishing of inaccurate particulars of such income. The Honble Supreme Court in the case of Commissioner v. VEGETABLE PRODUCTS LTD. Mentioned supra, succinctly points out the difference between the tax payable and the tax assessed. This judgment was delivered on 28th January 1973. Thereafter, clause (iii) referred to supra, came as a substitute for the original clause by the Taxation laws (Amendment) Act, 1975 with effect from 1st April 1976. The Hon'ble Court has pointed out that the tax payable is an amount for which a demand notice is issued under section 156 of the Income-tax Act 1961. When we see the case of the assessee in this context, we find that total income assessed was a loss of Rs. 2,08,193 to be carried forward. Even if it is conceded that total income can be a negative figure, we cannot concede to the proposition that income assessed can be a negative figure. The question of assessment will arise only when it is a positive figure and then tax will become payable there on. Only in such circumstances there will be an amount for which a demand notice can be issued under section 156 of the Income-tax Act, 1961, Therefore taking into consideration the ratio decidendi of the two judgments cited by the learned counsel for the assessee and even the provisions of Explanation 4 which has been inserted and has not been considered by the above two judgments, we are of the considered opinion that the law laid down by the Hon'ble High Court in the said case is applicable to the facts of the case of the assessee Therefore, the learned Commissioner (Appeals) was fully justified in cancelling the penalty."

5.2. In view of the aforesaid discussions and in view of the fact that the assessee had suffered heavy losses in past years, in the year under consideration and in all the subsequent years, we are satisfied that the assessee had no guilty intention in furnishing any inaccurate particulars of income or for concealing its income as there were no prospect so any taxable profits in future years and therefore, we are of the considered opinion that no penalty could be validly imposed under section 271 (1) (c) under the aforesaid facts and circumstances of the assessee’s case.

6. In the result, the penalty imposed under section 271 (1) (c) is cancelled and the assessees appeal is allowed.

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