Vildirect: IncomeTax-caselaws-1989-VIL-89-ITAT-BLR

1989-VIL-89-ITAT-BLR

Equivalent Citation: ITD 030, 480,

Income Tax Appellate Tribunal BANGALORE

Date: 16.03.1989

MANDLI HANUMANTHAPPA SETTY.

FIRST INCOME-TAX OFFICER.

BENCH

Member(s) : A. V. BALASUBRAMANYAM., R. N. PURI.

JUDGMENT

Per Shri R.N. Puri, Accountant Member -- In this appeal filed by the assessee, imposition of penalty of Rs. 1,75,120 under the provisions of section 271(1)(c) of the Income-tax Act, 1961 in respect of the assessment year 1977-78 has been challenged.

2. The assessee is a HUF. It had filed a return of income for the assessment year 1977-78 on 29-9-1977 declaring a net loss of Rs. 12,272. In this return, it had shown income derived from the business of commission agency for cotton and its share of profit or share of loss from certain partnership firms. The accounting period relevant to the assessment year under consideration viz., 1977-78, was the year ended 22-10-1976. A search had been conducted by the Income-tax Department at the premises of the assessee on 16-7-1976. During the course of this search, certain account books in respect of business which had not been disclosed to the department, were seized. Some of such account books pertained to the assessment year under consideration. From the scrutiny of the account books for the year under consideration, which had been seized during the course of the search, it was found that the assessee had done trading in ground-nut seeds and oil. The various entries made in the seized accounts had shown that the assessee had suffered a loss of Rs. 1,09,011 in the trading transactions in ground-nut seeds and oil. The ITO also noticed that there were certain entries in the cash book in code letters which showed availability of funds. It has been pointed out by the ITO that these entries were noted under the Kannada letter "SHI" and English letter "T". The peak amount of the various entries made under the Kannada letter "SHI" and English letter "T" came to Rs. 4,73,363 its on 2-6-1976. The transactions noted in these seized accounts had not found place in the books of account produced by the assessee for income-tax purposes. The assessee was provided by the ITO with various opportunities to explain the nature of the transactions recorded in the seized books of account. The assessee failed to furnish any explanation in respect thereof and the assessee gave evasive replies. The assessee filed a reply before the ITO on 3-3-1980 stating :

"Here again I may mention, that I was not present at the time of search. I returned to Kottur only at 12 in the night after the search operations were completed. I used to be away from Kottur on business tour and in my absence the clerks used to manage all the business in which one or the other member of the family was interested. The clerks used to maintain some sort of notes of all their doings in my absence. The notings under various dates appears to be such notes. The notes on various dates including on 14-6-1976, are not cash book entries or prepared from any other record. They appear to be the cumulative record of all the transactions - (first part : sales etc., and second part : cash balances of all the business). It is also not clear at what time of the day it is prepared. At any rate Rs. 4,13,206 on 14-6-1976 is neither the cash balance nor show the availability of funds. Since the transactions of all the business are mixed up it is not possible to clearly show the break-up of Rs. 4,13,206 at this length of time. This is only a total of all transactions over a period as the figure is a progressive one. This is not my investment."

Since no satisfactory explanation was furnished by the assessee, the ITO came to the conclusion that the peak amount of Rs. 4,73,363 appearing in the cash book under the code names of "SHI" and "T" on various dates was to be added as the income of the assessee. The ITO accepted the contention of the assessee that the loss of Rs. 1,00,911 incurred in the various trading transactions in ground-nut seeds and oil as entered in the seized books should be allowed. In his draft order of assessment, the ITO hence proposed an addition of Rs. 3,72,452 (the peak amount of Rs. 4,73,363 as reduced by Rs. 1,00,911) to be made.

3. The IAC, after hearing the assessee, gave the following direction under sec. 144B(4) :

". . . After discussion, the assessee's representative agreed that a round sum of Rs. 3 lakhs may be assessed as the unexplained credits in the hands of the assessee. This is with a view to avoid any long drawn litigations which may not be of benefit to either side. Shri M.D. Srinivasa Rao has also assured that the tax liability arising out of this assessment would be paid off expeditiously. In such circumstances, the ITO is directed to assess a sum of Rs. 3 lakhs only as income from undisclosed sources. The draft assessment order may be modified accordingly and the assessment completed."

Thereupon, the ITO completed the assessment, making an addition of Rs. 3 lakhs as directed by the IAC. It is in respect of this addition that the impugned penalty of Rs. 1,75,120 for concealment of income under section 271(1)(c) had been levied by the ITO by his order dated 14-2-1983.

4. Being aggrieved by the imposition of penalty by the ITO, the assessee went up in appeal before the CIT(A). The CIT(A) confirmed the levy of penalty. The assessee has now come up in further appeal before us. The contention of the assessee is that in the facts of the case, it could not be said that the assessee had concealed the particulars of its income or furnished inaccurate particulars of such income and, hence, it was not justified to impose penalty under sec. 271(1)(c).

5. The departmental representative, on the other hand, opposed the contention of the assessee. According to the departmental representative, it was a fit case for the levy of the penalty and the imposition of penalty was absolutely justified. The departmental representative also contended that in the event, the Tribunal was not inclined to accept the contention of the department that there had been concealment of income under the main provisions of sec. 271(1)(c) itself, at least this was a case where under Explanation 1 to sec. 271(1)(c), the amount added was required to be deemed to represent the income in respect of which particulars had been concealed.

6. Shri G. Sarangan, the learned authorised representative of the assessee, pointed out that since Explanation 1 to sec. 271(1)(c) had not been invoked by the ITO, neither had it been taken into consideration by the CIT(A), it was not at this stage open to the Tribunal to examine the applicability of the Explanation to the facts of the case. On this behalf, the learned authorised representative of the assessee relied on the decision of the Karnataka High Court in the case of Mysore Metal Industries v. CIT [IT Reference Case Nos. 32 and 33 of 1980, dated 12-8-1988].

7. First of all, we will see whether there is any merit in the objection of the assessee that the applicability of the Explanation cannot be examined at this stage. In the case decided by the Karnataka High Court, on which the authorised representative of the assessee has relied, the applicability of Explanation had not been examined up to the stage of the Tribunal. The High Court hence did not consider it possible to go into the question whether the Explanation became applicable to the facts of that case. The High Court observed as under :

"Neither the IAC nor the Tribunal have applied the Explanation referred to by Sri Srinivasan and examined the case from that angle. The explanation raises two presumptions (i) that the assessed income is the correct income of the assessee, and (ii) that, incorrect return filed by him is either due to fraud or gross or wilful negligence. But this is a rebuttable presumption shifting the burden of proof to the assessee. Of course, we would have certainly considered the applicability of the Explanation and examined the case, had it not been for the fact such a consideration will involve drawing inference on a critical appreciation of the evidence of factual material on record. Negligence and fraud are two concepts which have to be applied to facts of each case and factual inference drawn. As none of the authorities have dealt with the matter from that angle, and the last fact finding authority not having applied its mind to the aspect to draw inference of facts by applying the said Explanation we cannot answer the question referred to us on that basis. In fact, it was to be a case of pure question of law we would have ourselves applied the said explanation, but the same involves drawing conclusions of fact on which inference of law has to be based. When the conclusions of fact reached by the Tribunal are based on conjectures, surmises and suspicions, we have no choice except to find such conclusions as vitiated. The presumption under the explanation not having been raised to examine the facts and consequently whether such presumption is rebutted not having been considered in any of the proceedings from which this reference arises, we find it difficult to examine for the first time on such mixed questions of law and facts."

8. From the above, it is apparent that the High Court did not examine the applicability of the Explanation, because the relevant facts for deciding whether the Explanation came into play or not, were not on record. But we find that in the present case, the relevant facts for examining the applicability of the Explanation are on record. Hence, the decision of the Karnataka High Court on which the assessee has relied on will be of no help to the assessee. The Explanation relevant in the proceedings before the Karnataka High Court was worded differently from the Explanation which is relevant to the present proceedings. The Explanation considered by the Karnataka High Court was as under :

"Explanation - Where the total income returned by any person is less than eighty per cent of the total income (hereinafter in this Explanation referred to as the correct income) as assessed under section 143 or section 144 or section 147 (reduced by the expenditure incurred bona fide by him for the purpose of making or earning any income included in the total income but which has been disallowed as a deduction), such person shall, unless he proves that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part, be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income for the purposes of clause (c) of this sub-section."

The above Explanation thus raised a presumption of concealment, but that was a rebuttable presumption. If the assessee proved that the under-statement of income was not on account of any fraud or any gross or wilful neglect on his part, the assessee was not to be regarded as to have concealed income. Since applicability of the Explanation had not been examined up to the stage of the Tribunal, the necessary data for deciding the issue whether, within the terms of the Explanation, the assessee was to be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income for the purposes of clause (c) of section 271(1), was not on the record of reference. It was in view of this that the High Court refused to go into the question whether Explanation became applicable to the facts of the case or not. The Explanation which had been taken into account by the Karnataka High Court was substituted by a different. Explanation with effect from 1-4-1976. It is this new Explanation which came on the statute with effect from 1-4-1976, that is material for the proceedings at hand. This Explanation 1 is as under :

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

(A) such person fails to offer an explanation or offers an explanation which is found by the Income-tax Officer or the Appellate Assistant Commissioner to be false, or

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

then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed :

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."

9. We find that all the relevant facts for deciding whether this Explanation will be applicable to the facts of the present case or not, are on record. This Explanation provides that where in respect of any facts material to the computation of the total income, the assessee fails to offer an explanation or offers an explanation which is found to be false or which he is not able to substantiate, he should be deemed to have concealed the particulars of that amount which is consequently added or disallowed in the assessment, provided that if the explanation offered by the assessee is bona fide and all the material facts are disclosed, his mere inability to substantiate his explanation would not bring into operation the legal presumption of concealment embodied in the Explanation. This is a case, where the assessee had not offered any explanation for the various entries which had appeared in the books of account seized at the time of the search. As already stated above, even in spite of the repeated opportunities offered by the ITO, the assessee had not come forward with any explanation. It is apparent from the direction given by the IAC under section 144B that the authorised representative of the assessee had surrendered the amount for addition. Hence, when it is a case of no explanation having been offered, the proviso to the Explanation does not become applicable in the case of the assessee. Only if the explanation offered by the assessee is bona fide and all the material facts are disclosed, his mere inability to substantiate his explanation would not bring into operation the legal presumption of concealment. Hence, in the present case, no further facts, to establish whether the proviso became applicable or not, are necessary. It is a case where the assessee had altogether failed to offer an explanation which had led to the addition being made and the proviso does not at all become applicable. In case, the assessee had offered an explanation which he was not able to substantiate, then further facts would have become necessary as to whether the explanation of the assessee was bona fide and whether the assessee had disclosed all the facts relating to same, in order to find out whether the proviso became applicable. In the case under consideration, since the assessee had not furnished any explanation at all, the question of applicability of the proviso does not arise at all. It is thus obvious that no facts other than the ones which are already on record are needed to be gone into in deciding about the applicability of the Explanation. In the case decided by the Karnataka High Court, on which the assessee had relied, the Karnataka High Court had refused to examine the issue of the applicability of the Explanation because of the fact that relevant data to decide the issue was not on the records of reference. It is clear from this observation extracted above, that if the necessary data had been on record, they would certainly have examined the issue of the applicability of the Explanation ; since in that case it would have been a pure question of law. In the present case, since all the relevant facts for deciding the issue of the applicability of Explanation are on record, in our view, the question of the applicability of the Explanation has to be gone into. Moreover, the Tribunal is a fact finding authority. From that angle also, the Tribunal cannot decline to go into the question of the applicability of the Explanation. We will draw attention to the decision of the Punjab & Haryana High Court in the case of CIT v. Rajeshwar Singh [1986] 162 ITR 173/26 Taxman 439. The High Court had observed as under :

"Though the Income-tax Officer did not invoke the Explanation to section 271(1)(c) of the Income-tax Act, 1961, for levying penalty for concealment of income and the Appellate Assistant Commissioner also did not refer to the Explanation when he deleted the penalty, the Revenue for the first time before the Tribunal can invoke the Explanation to seek reversal of the Appellate Assistant Commissioner's order deleting the penalty and the Tribunal cannot rule out of consideration a plea of presumption based on the Explanation when the income returned is less than 80 per cent of the income assessed."

10. Because of the foregoing discussion, we reject the contention of the authorised representative of the assessee that the question of applicability of the Explanation having not been examined by the assessing officer, we could not go into that question at this stage.

11. According to us, it is a clear case of concealment of income within the meaning of Explanation 1 to section 271(1)(c). The assessee had failed to furnish any explanation with regard to the entries made in the duplicate books of account which had been seized at the time of the search. The assessee had agreed to an addition of Rs. 3 lakhs being made. The case of the assessee definitely comes within the clutches of Explanation 1 to section 271(1)(c). This Explanation creates a legal fiction that the assessee will be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income within the meaning of clause (c) of section 271(1). The Explanation removes the burden, which under the main provisions of sec. 271(1)(c) lay on the department to prove affirmatively that the disputed amount or receipt was the income of the assessee and its particulars were concealed or inaccurately furnished. The satisfaction reached in the course of the assessment proceedings is, in penalty proceedings, governed by the Explanation, automatically replaced by a presumption that the amount added was the income of the assessee in respect of which the assessee either concealed the particulars or furnished inaccurate particulars. It is then not necessary for the revenue to say affirmatively by producing material that the disputed receipt or amount was the income of the assessee of which he concealed the particulars or furnished inaccurate particulars. In a case governed by the Explanation, the decision of the Supreme Court in the case of CIT v. Anwar Ali [1970] 76 ITR 696 that the burden is on the department to establish that the receipt of amount in dispute constitutes the income of the assessee and that the assessee has concealed the particulars or furnished inaccurate particulars thereof is not applicable. In the present case, the Explanation is squarely applicable. The assessee had not furnished any explanation in respect of entries in its duplicate books of account. It is not a case where the assessee had furnished a bona fide explanation, but he was not in a position to substantiate it. It is a case where the assessee had failed to furnish any explanation whatsoever, and the assessee had surrendered the amount for addition. It is, hence, held by us that under Explanation 1 to section 271(1)(c), the assessee was to be deemed to have concealed its income.

12. Now we will examine the question whether, even under the main provisions of sec. 271(1)(c), the assessee could be considered to have concealed the particulars of its income or furnished inaccurate particulars of its income. It was vehemently urged by the authorised representative of the assessee that no charge of concealment could be levelled against the assessee. It was pointed out by him that just because a certain sum had been assessed in the hands of the assessee, it would not be justified for the department to levy penalty for concealment of income. It was stated that until and unless the department establishes that the circumstances of the case lead to a positive conclusion that the amount added had represented assessee's income, it would not be justified to levy penalty. The authorised representative of the assessee drew our attention to the Tribunal's decision in the case of R.V. Anegundi v. ITO [IT Appeal No. 395 (Bang.) of 1975-76 dated 2-1-1976] for the assessment year 1973-74. In that case, the assessee had invested Rs. 20,000 in the purchase of a shop. The investment was not shown in the books. Ultimately the assessee surrendered the amount for addition on account of the inability to prove the source of the investment. It was held by the Tribunal that in the facts of the case, penalty for concealment of income was not sustainable.

13. We have considered the matter. We have also taken into account the various cases on which the assessee has relied. We are of the view that in the facts of the present case, it could be said that the assessee had concealed its income and had made itself liable to imposition of penalty under the main provisions of section 271(1)(c). At the time of the search at the premises of the assessee, it was found that the assessee had indulged in certain transactions which had not been recorded in its books of account produced before the Department. It was found that the assessee had indulged in trading in oil seeds and oil cake. This fact had not been disclosed by the assessee in its return of income. The assessee had made entries in its secret books under code words. All these facts clearly establish that the assessee had concealed income. The assessee had failed to furnish explanation with regard to the entries made under code words in his secret books of account. The assessee had given evasive replies. The assessee had stated that all these entries were made by his clerks and he was not in a position to explain as to what exactly these entries were about. It is inconceivable that the assessee was not in the know of the transactions entered into in his secret books of account. The assessee had surrendered a sum of Rs. 3 lakhs to be added in his income. Under these circumstances, when the amount was surrendered by the assessee, we fail to understand as to what burden was required to be discharged by the Department for proving that the amount added was, in fact, the income of the assessee and which income he had concealed. We will draw attention to the decision of the Delhi High Court in the case of Durga Timber Works v. CIT [1971] 79 ITR 63. In that case, there were certain cash credits in the books of the assessee in the accounting period relevant to assessment year 1960-61. When the assessee was asked to adduce evidence to establish these cash credits, it admitted that the amount may be treated as its concealed income and included in its total income. The amount was added by the ITO and penalty for concealment of income under sec. 271(1)(c) was imposed. The High Court confirmed the levy of penalty. The High Court observed that if, even after the assessee had admitted that the amount be treated as its concealed income, the department was still required to prove by independent evidence that the assessee had concealed its income, it would amount to laying an impossible burden of proof on the department and making the provisions for imposition of penalty wholly unworkable.

14. From all these facts, it becomes abundantly clear that the assessee had concealed its income and had made itself liable to the imposition of penalty under sec. 271(1)(c). We are, hence, of the view that even under the main provisions of section 271(1)(c), this was a case where the assessee had concealed particulars of its income or given inaccurate particulars of its income. We hence, sustain the penalty imposed by the ITO.

15. The appeal of the assessee is dismissed.

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