1990-VIL-98-ITAT-HYD

Equivalent Citation: ITD 033, 650, TTJ 036, 300,

Income Tax Appellate Tribunal HYDERABAD

Date: 17.01.1990

V. RAMACHANDRA RAO.

Vs

INCOME TAX OFFICER.

BENCH

Member(s)  : T. V. RAJAGOPALA RAO., G. SANTHANAM.

JUDGMENT

This is an appeal by the assessee against levy of penalty under s. 271(1)(c) of the IT Act, 1961.

2. The following credits were added to the income of the assessee for assessment year 1980-81 and the same were confirmed by the Tribunal.

on the basis of the assessment, proceedings under s. 271(1)(c) were initiated and a penalty of Rs. 40,000 was levied which on appeal was confirmed by the CIT(A).

3. Sri M.J. Swamy, learned counsel for the assessee submitted that the credits were all genuine and the mere fact that the assessee, was visited with adverse findings in the quantum proceedings cannot be the basis for levy of penalty. It is no doubt true that the onus is on the assessee to prove the genuineness of the credits. in assessments proceedings. However, penalty proceedings are distinct and different and it is for the revenue to prove that the assessee did not give any explanation or that the explanation given was false or that he assessee did not give any explanation or that the explanation given was false or that the assessee was unable to substantiate the explanation offered by him in respect of the credits. None of the ingredients so necessary for the levy of penalty has been established by the ITO except his reliance on the finding in the quantum proceedings. For one thing, the enquiries were conducted behind the back of the assessee and particularly the IT Inspector's report dt. 15th March, 1983 was never put to the assessee. However, the creditors themselves file either letters or affidavits in the course of the assessment proceedings, Sri K. Ramaiah in his sworn deep affidavit has affirmed the advance made to the assessee and had explained the sources of his income and has also stated that the statement given before the IT Inspector to the effect that he did not make the advance was one made out of fear of tax liability. The ITO called upon the assessee to produce the creditor for examination but the assessee was unable to produce him and, therefore, the ITO drew an adverse inference against the assessee. Now, in this case, the existence of the creditor cannot be denie, because he was himself contacted by the Inspector at the address given he had explained in the affidavit the reason for his denying the advance in his statement made before the Inspector and to the effect he had filed an affidavit. Though the assessee could not produce him for examination, the ITO ought to have summoned him for examination before he drew an adverse inference especially when he has retracted the statement made before the IT Inspector. Even though such a course had not been resorted to in the quantum proceedings, at least in the penalty proceedings he should have done it. This has not been done and, therefore, reliance on the findings in the quantum proceedings cannot be restored to, more so when the assessee has substantiated his version about the creditor by the creditor's own affidavit.

4. As regards Sri B. Harinarayana, Sri.Swamy submitted that the assessee has filed a discharged pro-note. The IT inspector has reported that the creditor owned about 7 cents of dry land and was running a small muller mill. He was also in the habit of taking lands on lease and that he was never in the habit of lending monies to others. All this information the Inspector has collected not form the creditor himself but from the village Munsif who had issued a certificate to the effect. Thus, the Inspector himself had acted on hearsay evidence and the ITO has based his conclusions on such flimsy material. Here also, the identity of the creditor is established. Even taking into account the Inspector's report for whatever it is worth, it is clear that the creditor is owning some dry lands and as cultivating tobacco on the lands taken on lease. The mere fact the assessee was unable to produce the credit could not go against the assessee on the other hand, the assessee had filed a discharged promissory note. The ITO's view was that the signature under date 27th Sept., 1979 appeared to be very fresh and if that is so, he could have as well caused an examination to be made by the Examiner of questionable documents or hand-writing experts etc. Nothing was done, but still the assessee was made to take to odium. He submitted that if not in the assessment proceedings, at least in the penalty proceedings the ITO ought to have taken steps because the burden was on him to prove that the assessee has not substantiated his explanation or that his explanation was false.

5. Sri Swamy further contended that Sri Harinarayana was examined by the ITO, Karimnagar, within whose jurisdiction he was residing and before him he had confirmed the transaction. This fact was also overlooked by the ITO.

6. As far as the credit standing in the name of Sri G. Satyanarayana is concerned, Sri Swamy submitted that he denied having given any advance to the assessee in his statement made before the Inspector. When this was put to the assessee, the assessee produced a cash receipt for the payment of Rs. 16,010 (i.e. loan of Rs. 15,000 + interest) signed by one G. Ramesh on 11th Feb., 1980, and this Ramesh was the creditor's brother's son. Subsequently, an affidavit made by Sri G. Satyanarayana was filed by the assessee. In that affidavit, the creditor had confirmed the transaction and also explained that his denial of the transaction before the IT Inspector was out of fear This affidavit is dt. 14th March, 1984, made before and attested by a Notary Public. However, the ITO felt that the signature in the affidavit was a forged one and on that basis he drew an adverse inference against the assessee in the quantum assessment in his order dt 21st April 1984 without examining the Notary Public or the creditor. Subsequent to the assessment, when the ITO expressed a doubt about the genuineness of the affidavit given by Sri G. Satyanarayana, the assessee filed an affidavit on 18th April, 1985 stating that if there was any difference in the signature, he was not responsible for the same and that it was entirely for Sri G. Satyanarayana to explain that Sri G. Satyanarayana had turned inimical to him and was trying to harm his interest. Further examination of the assessee was made on 12th March, 1987 about the genuineness of the affidavit and the assessee had denied the allegations and had stated that as he was not a hand-writing expert, he could not vouch safe for the signature of G. Satyanarayana found in the affidavit. Even after this flat denial by the assessee in the course of the penalty proceedings, the ITO had not chosen to refer the matter to a hand-writing expert nor to summon Sri G. Satyanarayana As a matter of fact, Sri Satayanarayana was a man of means and this fact was brought to the notice of the ITO as early as 12th April, 1984 the assessee in his letter in which it was stated that Sri Satyanarayan was manufacturing cattle feed and poultry feed and was doing business in Nellore and Bellary districts, that he is a director of certain companies and that he owns a big poultry farm besides agricultural lands. No doubt the assessee was put in the dock in his failure to produce the creditor in the quantum proceedings, but in the light of so much material giving credence to the explanation of the assessee that the credits were all genuine, it cannot be held that the explanation of the assessee was false or remained unsubstantiated. In fact, the onus squarely lies on the revenue to prove that the explanation was either false or unsubstantiated and this onus has not been discharged.

7. Sri Swamy further submitted that the assessee lost his case before the appellate authorities because the many facts of the case had not been brought before them. The assessment was based on surmises and half-baked evidence and that cannot be a valid ground for levying penalty merely because the assessee had lost the quantum appeal. He relied on the following decisions:

STATE OF MAHARASHTRA vs. BHAISHANKAR KUALRAM JOSHI & ANR. AIR 1969 SC 1302 at 1303;

M/S. B. MOLEOD & Co. LTD vs. STATE OF ORISSA & ORS. 1971 Tax LR VOL. 1 1656 at 1659;

T.M.M MADALAI NADAR & CO vs. CIT/CEPT (1957) 30 ITR 191 (Mad) at 197;

STO, GANJAM & ANR. vs. UTTARESWARI RICE MILLS, (1973) 89 ITR 6 (SC);

CIT vs. RAMESHWAR DAYAL RATANLAL (1985) 156 ITR 411 (Pat);

SRI SOHAN LAL JAIN vs. ITO (1986) 20 TLR 410 (Jp) (Trib);

LALCHAND BHAGAT AMBICA RAM vs. CIT (1959) 37 ITR 288 (SC) at 290;

C. VASANTLAL & CO. vs. CIT (1962) 45 ITR 206 (SC) at 209;

ADDI. CIT vs. BURUGUPALLI CHINA KRISHNAMURTHY (DECD) & ORS. (1980) 121 ITR 326 (Appeals);

CIT vs. H. ABDUL BAKSHI & BROS. (1986) 58 CTR (Appeals) 13 (FB): (1986) 160 ITR 94 (Appeals) (FB);

SIR SHADILAL SUGAR & GENERAL MILLS LTD & ANR. vs. CIT (1987) 64 CTR (SC) 199: (1987) 168 ITR 705 (SC);

GIRDHARILAL SONI vs. CIT (1989) 179 ITR 111 (Cal); and also the observations by Chaturvedi & Pithisaria on Income-tax (3rd Edition) Vol. 3 pages 2805 and 2793 and Vol. 2, page 1960.

8. Sri M.K. Rao, learned Departmental Representative, submitted that the assessee has not proved the credits. The Tribunal has upheld the addition on the ground that the onus on the assessee was not discharged by him. This is good evidence for levy of penalty. The assessee has not adduced any fresh evidence in the penalty proceedings to rebut the presumption that was raised against him in the assessment proceedings. He referred to the order of the Tribunal in the quantum assessment and contended that none of the contentions of the assessee was accepted and, therefore, the explanation offered by the assessee can be said to be either false or unsubstantiated. It is not necessary for the ITO to conduct further enquiries in the penalty proceedings; it is for the assessee to dislodge the inference by discharging the onus that got shifted to him as a result of the assessment proceedings. He relied on the following decisions:

CIT vs. DURGA PRASAD MORE (1971) 82 ITR 540 (SC);

ORIENTAL WIRE INDUSTRIES (P) LTD vs. CIT (1981) 20 CTR (Cal) 264 : (1981) 131 ITR 688 (Cal); and the observations in Chaturvedi & Pithisaria (3rd edition) Vol. 5 pp. 4934 and 4935.

Thus he relied on the orders of the authorities below.

9. Having regard to rival submissions and the materials on record, we cancel the levy of penalty under s. 271(1)(C), All the three creditors are not bogus creditors; their identity was established because they have been contacted by no less a person than the IT Inspector. It is true, two of them had denied having made the advance in their statement before the Inspector, but the result of the enquiry conducted by the Inspector was not put to the assessee. This is evident from the fact that whereas the Inspector had submitted his report on each one of the creditors on 15th March, 1983, the ITO had addressed a letter to the assessee on 5th March, 1983 itself making a vague suggestion that his independent enquiries revealed that the credits were not genuine. The learned departmental representative submits that the Inspector, before submitting his report formally in writing at a future date, might have apprised the ITO in advance of the result of the enquiries leading to the issue of such a letter on the part of the ITO and therefore, there cannot be any grievance on the part of the assessee. Sri Swamy objects vehemently to this proposition and he is supported by the observations of the Honourable Andhra Pradesh High Court in NAGULAKONDA VENKATA SUBBA RAO vs. CIT (1957) 31 ITR 781 (Appeals) at 787:

"In our view the mere statement of the Income Tax authorities that on the enquiries instituted by the ITO they were reliably informed that the assessee was not only in the habit of omitting transactions from his books, but was known to charge much higher rates of interest than the prescribed one, is not sufficient. It is not in the first place shown that the assessee was given an opportunity, nor is it sufficient to justify the assessment which not only does not furnish the basis on which the estimate is made but which, without doubt, can be said to be a guess."

Thus, we upheld the contention of Sri Swamy in this regard.

10. But, that is not the end of the matter. The assessee had suo motu furnished an affidavit from Sri G. Satyanarayana in which he had retracted the statements made before the IT Inspector. The ITO wanted the assessee to produce the creditor but he was unable to produce him. There is force in the contention of Sri Swamy that in a situation where there are two conflicting statements from the same person, one before the IT Inspector and another an affidavit sworn before Notary Public who is a public authority, and the assessee is unable to produce the person, the ITO before he draws an adverse inference, ought to issue summons on the person and examine him. This has not been done. The assessee had explained in his letter dt. 12th Nov, 1984 that Sri G. Satyanarayanan is manufacturing cattle feed and poultry feed and was shifting between Nellore and Bellary districts and that he had obtained the affidavit dt. 14th Feb., 1984 before the Notary Public and Sri Satyanarayana had expressed his inability to appear in person before the ITO in view of his busy tours. Thus, the assessee had expressed his inability to produce Sri Satyanarayana before the ITO. If still the officer persisted in his doubt, he ought to have issued summons at least under s. 131 of the IT Act, 1961. Instead, he was fastening the assessee with the burden of producing the creditor even though the assessee had expressed his inability frankly in his letter dt. 12th Nov., 1984. Therefore, the adverse inference drawn by the ITO in his assessment order dt. 21st April, 1 84 in respect of this creditor cannot be used against the assessee in the penalty proceedings. It would appear from the penalty order that the creditor Sri Satyanarayana, denied having issue any affidavit and the affidavit being a forgery. We do not know from what material such an inference was drawn against the assessee in the penalty order, except the averments to that effect in the order levying penalty. From the statements filed before us, it would appear that the assessee was examined by the ITO on 12th March, 187 and questions 7 to 10 and the answers thereto are as follows:-

"Q7. G. Satyaranarayana also denied having lent any moneys to you. Please explain.

A. It is not correct. He has lent the money to me

Q8. The signature of G. Satyanarayana in the sworn statement taken by the ITO. On 25th March, 1985 (which I am showing you) and in the alleged affidavit are at variance. Please explain.

A. This matter I cannot explain as I am not an expert in hand-writing.

Q9. Do you admit my suggestion that the affidavit filed by you is a fabricated one and signature of G. Satyanarayana is the affidavit is forgery.

A. No I do not agree.

Q10. G. Satyanarayana has also stated that he never appeared before the Notary public Bapatla to sign the so called affidavit. What do you say.

A. I do not know. He has given himself the affidavit to my clerk who has handed over to me."

In this context, another affidavit filed by the assessee's clerk, one Karuparthy Rama Rao, before Notary Public on 18th April 1985, explaining the circumstances in which the affidavit from Sri G. Satyanarayana was obtained, is on record. In that affidavit, the clerk explained that he was asked by Sri Satyanarayana to wait in the lodge (where he was staying), that he would go to the Notary Public and obtain the affidavit. Later on, he asked the clerk to meet him in the evening and when he met him in the evening at the lodge, Sri Satyanarayana handed over the affidavit. The assessee also had furnished an affidavit on 18th April 1985 vouchsafing for his clerk meeting Sri G. Satyanarayana and obtaining the affidavit after some delay. He has also stated that the stamp paper for the document was not purchased by him. He has further averred that Sri Satyanarayana has turned inimical to him and was trying to harm his interest. When so much is told about the creditor and also in the context of the flat denial of forged signatures, it is incumbent of the ITO to have summoned Sri Satyanaryana under the provisions of s. 131 and obtained a statement on oath and examined him on oath with the right of cross-examination being given to the assessee. This course was not adopted by the learned ITO nor was the Notary Public before whom the creditor Sri Satyanarayana is purported to have made the declaration affirming the giving of the loan, examined by the ITO. Therefore, we conclude that no adverse inference can be drawn against the assessee in the penalty proceedings, the primary reason being that the ITO has not discharged the onus on his part to say that the explanation offered by the assessee was false, or even to say that the assessee has not substantiated his explanation.

11. Now, we take up the credit of Rs. 12,000 standing in the name of Sri B. Harinarayana. Adverse inference was drawn in the quantum proceedings on a certificate issued by the Village Munusif of Timmididapadu on 4th March, 1983 to the effect that Sri B. Harinarayana was never in the habit of lending monies to others. This was not even put to the assessee in specific terms. A discharged pronote was also produced and the ITO in the assessment proceedings doubted the signature and thus the bona fides of the discharged pronote. The creditor was not produced before the ITO. The assessee in his letter dt. 12th Nov., 1984 had stated that the person was cultivating tobacco in Gunturpalli, Mulugu Taluk, Warangal District, and has expressed his inability to come over to the office. Still no summons were issued to the creditor by the ITO especially when he entertained doubts about the bona fides of the signature etc. In the discharged promissory note which was produced before him as a piece of evidence in support of the loan though in the face of the material it becomes all the more important for the ITO to have summoned the creditor and verified the matters. This has not been done, either in the assessment proceedings or in the penalty proceedings. It would appear that the ITO, karimnagar, had examined Sri Harinarayana who had confirmed the advance before him.

12. From the records, it is seen that the CIT(A) has remarked that there was an affidavit from Sri. B. Harinarayana which was examined by the Government Examiner of Questioned documents and that the signature appearing in the said affidavit was not of the alleged creditor. This is obviously a mis-statement of fact on the part of the learned first appellate authority because Sri B. Harinarayana had not filed any affidavit. No reference to such an affidavit was made either in the assessment order or in the penalty order by the ITO. Therefore, we do not find any material to sustain the observation of the CIT(A) so far as the credit from Sri B. Harinarayana is concerned.

13. Lastly, we take up the credit of Rs. 10,000 in the name of Sri K. Ramaiah, Penalty is levied on the assessee for the reason that the addition was confirmed in quantum proceedings. Sri K. Ramaiah, in his statement before the IT Inspector, had denied having made the advance but the statement was not put to the assessee in the course of the assessment proceedings. Subsequently, Sri Ramaiah gave an affidavit on 9th Jan., 1984 affirming the loan. The assessee in his letter dt. 12th Nov., 1984 had stated that the creditor was growing cotton in Bellary area and that he would be out of station most of the time, and when the assessee had requested him to attend the IT Office, he had stated that as he had "to sell cotton and he could not afford to stay" and so gave an affidavit affirming the loan. Before the ITO there were two statements; one given before the IT Inspector denying the advance, and another an affidavit solemnly affirmated before a Notary Public confirming the advance. There is also a letter from the assessee explaining his inability to produce the creditor. Natural justice demands that if the ITO still persisted in his doubt about the genuineness of the credit, he ought to have summoned the creditor for examination and cross examination. This has not been done. Whatever might have happened in the quantum appeal, it cannot be gainsaid that penalty proceedings are separate and distinct and it is for the ITO to prove that the explanation offered was false or that the assessee was unable to substantiate his explanation. The ITO did neither. Therefore, penalty cannot be sustained.

14. It was vehemently argued before us by the learned Departmental Representative that once an addition was made under s. 68 the findings in the assessment proceedings are valid grounds and it is for the assessee to prove in the penalty proceedings that he is innocent. We do not subscribe to this view in the ratio of the decision of the Honourable Andhra Pradesh High Court (Full Bench) in CIT vs. H. ABDUL BAKSHI & BROS. Additions under s.68 could be made when there is no explanation for the cash credit or the explanation offered by the assessee is found to be unsatisfactory by the ITO. In such circumstances only the cash credits are deemed to be the income of the assessee. In the case cited, Explanation to s. 271(1)(c) as it was in force w.e.f. 1st April, 1964 to 31st March 1976, credited a legal fiction of concealment with two presumptions viz., (a) the amount of assessed income is the correct income and it is in fact the income of the assessee, and (b) failure of the assessee to return correct income was due to fraud or gross or wilful neglect on the assessee's part. These presumptions are raised against the assessee by the Explanation as it stood prior to 1st April, 1976, but of course the presumptions were held to be rebuttable. In other words, during the period from 1st April, 1964 to 31st March, 1976, the charge of concealment would be invoked against the assessee the moment the difference between the assessed income and the returned income exceeded 20%. The revenue did not have to do anything more except to point out to the difference. It is for the assessee to rebut the presumptions and then the burden would shift to the revenue to establish that the assessee had concealed the income. Even in such circumstances, it was held in that case that the letter of confirmation and sworn statements of creditors relating to the factum of lending the amounts constituted prima facie evidence having the effect of discharging the initial burden. The case is not governed by the Explanation as it stood before 1st April, 1976. We have dealt with the provisions prior to 1st April, 1976 only to underline the fact that confirmation letter and sworn statements would constitute good pieces of evidence for discharging the initial burden. With the scrapping of this Explanation by Taxation Laws (Amendment) Act, 1975 (41 of 1975), it cannot be held that the amount added under s. 68 on grounds of unsatisfactory explanation would automatically lead to the inference that there has been concealment of income. This conclusion we reach from an analysis of s. 68 and Explanation 1 to s. 271(1)(c) which are as follows:-

S. 68 "Where any sum is found credited in the books an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the ITO, satisfactory, the sum so credited may be charged to income tax as the income of the assessee of hat previous year."

Explanation 1 to s. 271(1)(c):

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

(A) such persons fails to offer an explanation or offers an explanation which is found by the ITO or the AAC or the Commissioner (Appeals) 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 cl. (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 cl. (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 fact relating to the same and material to the computation of his total income have been disclosed by him."

From a reading of these two provisions, it would be clear that if the assessee did not offer any explanation for credits appearing in his books of account, he will not caught both under s. 68 and also within the mischief of Explanation 1(A) to sec. 271(1)(c) on the mere ground that there was no explanation, additions can be sustained under s. 68 if the explanation is not found to be satisfactory by the ITO. For this reason alone no penalty can be levied, because Explanation 1(A) to s. 271(1)(c) purposely uses the words "offers an explanation which is found to be false". There is a long distance between an explanation remaining as unsatisfactory and an explanation being found to be false. Thus while additions could be made on the basis of unsatisfactory explanation under s. 68, penalty is not leviable for that reason unless it is shown that the explanation was false. Clause (B) of Explanation 1 to s. 271(1)(c) deals with an Explanation which is not substantiated by the assessee. This cannot be equated to an explanation found to be unsatisfactory by the ITO as embedded in s. 68. This is because cl. (b) has to be read with the proviso thereto which makes it abundantly clear that no penalty can be levied under cl. (B) of the Explanation if the explanation was bona fide one and all facts relating to the same and material to the computation of the total income have been disclosed. To put it explicitly, one can visualise a bona fide explanation with the relevant facts being stated but still it was not to the satisfaction of the ITO as a result of which addition under s. 68 can be made, but on this ground alone no penalty is leviable in terms of Explanation 1(B) read with the proviso thereto. In the instant case, we are satisfied that the assessee had offered an Explanation which was substantiated by sworn depositions of discharged promissory notes which were rejected by the ITO without examining the deponent-creditors or the promises or the Notary Public. So, this is simply a case of rejection of explanation though substantiated by the assessee.

15. For all these reasons, the penalty levied under s. 271(1)(c) in respect of the additions sustained by the Tribunal is vacated. The appeal is allowed,

 

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