Income Tax Appellate Tribunal - Pune
Income-Tax Officer vs Deelip Dresses on 30 January, 1990
Equivalent citations: [1990]34ITD126(PUNE)
ORDER
T.V.K. Natarajachandran, Accountant Member
1. These appeals by the revenue are consolidated and disposed of by a common order for the sake of convenience as they relate to same assessee and involve common facts and the contentions are also similar.
2. These appeals pertain to assessment years 1974-75 to 1976-77 and 1978-79 to 1980-81 and arise out of the orders of the C.I.T(A), Nashik, for the assessment years 1974-75 and 1980-81 and the orders of the A.A.C., Abramabad for the assessment years 1975-76, 1976-77, 1978-79 and 1979-80. The A.A.C. Abramabad, followed the reasons and conclusions drawn by the C.I.T. (A), Nashik. Both the C.I.T.(A) and the A.A.C have cancelled the penalties imposed by the I.T.O. Under Section 271 (1)(c) for these years, holding that in the totality of circumstances and facts of the case as well as conduct of the assessee, there was no conscious attempt to conceal any income or furnish inaccurate particulars of income and following the principles of Courts, penalties were not warranted. The department is in appeal urging that the first appellate authority erred in canceling the penalties imposed by the I.T.O Under Section 271(1)(c) and therefore, their orders should be vacated and those of the I.T.O be confirmed.
3. The facts of the case leading to the imposition of penalties and cancellation of penalties are enumerated in the orders of the authorities. The gist of the case is that the assessee is a registered firm carrying on business in readymade garments and hosiery. Regular books of accounts have been maintained and the original assessments were completed for the assessment years 1974-75 and 75-76 under Section 143(3) while rest of the assessments were completed under Section 143(1). During the course of the assessment proceedings for the assessment year 1981-82 it transpired that the assessee had not accounted for the credit sales recorded in 'Jangad' books which, according to the method of accounting regularly followed by the assessee would be reflected in the sales as and when cash was realized from the customers by giving credit to the customers' account. It was also noticed that the assessee had not adjusted the goods returned to the suppliers in the purchases account but had shown separately in the balance sheet as a separate liability in the name and style of "readymade goods returned account". The assessee learnt from the I.T.O. that this method of accounting did not reflect the correct profits from the business. Consequently, the assessee filed revised returns for all these assessment years on 29-3-1982 and also revised return for the assessment year 1981-82 during the course of which proceedings the assessee was enlightened about the correct method of accounting. Since the revised returns were filed after completion of original assessments, they were regularized by issuing statutory notice under Section 148 after obtaining approval of the C.I.T. wherever necessary. The revised returns filed by the assessee were on the terms on which the assessee was enlightened by the I.T.O. which in fact amounted to new method of accounting different from what has been followed hitherto. In the revised returns, increase in debtors balances corresponding to the credit sales and also the goods returned account (Mal Parath Account) were duly taken into account and offered in the form of revised trading account relating to these assessment years. In other words, the entire accretion to the' Jangad' account and 'Mal Parath account' was offered as additional gross profits in the revised trading account and also as additional net profit in the profit and loss account. Thus, the assessee has made a clean breast of the whole thing in the revised returns filed for -these years. The re-assessments were completed accepting the revised returns, so to say.
4. Consequent to the revised assessments based on the returns filed by the assessee, the I.T.O. issued show-cause notice for levy of penalty Under Section 271 (1)(c) on the view that the assessee had filed the so-called revised returns only after detection of concealment by the I.T.O. and there was concealment of income in the original returns filed by the assessee for these years. The assessee filed written submissions dt. 22-11-1984 citing the various legal decisions and pointing out that the assessee had co-operated with the department throughout assessment proceedings both at original stage as well as at reassessment stage and has also paid all the taxes and also relied on the press note dt. 5-10-1981 issued by the Central Board of Direct Taxes.
5. The I.T.O. held that there was detection of income which escaped assessment for these years and but for the particulars called for by the I.T.O. the assessee would have gone scot-free and the income would have escaped tax. Therefore, he was satisfied that the assessee concealed particulars of income and furnished inaccurate particulars of income in the original returns filed for these years. Consequently, he levied minimum penalty for these years as detailed in the penalty orders.
6. On appeal, the C.I.T. (A), Nashik, while disposing of the penalties for assessment years 1974-75 and 1980-81 elaborately considered the facts of the case, written explanation offered by the assessee and concluded that in the totality of circumstances and the facts of the case as well as the conduct of the assessee, there was no conscious attempt to conceal any income or furnish inaccurate particulars of income in the light of decisions relied upon by him and therefore, held that there was no justification for levy of penalty. Therefore, he cancelled the penalties imposed by the I.T.O. for the assessment years 1974-75 and 1980-81.
7. The A.A.C., Abramabad, followed the reasons and conclusions of the C.I.T. (A), Nashik and consequently cancelled the penalties imposed by the I.T.O. for the other assessment years. Hence the appeals by the revenue to the Tribunal urging that the first appellate authority erred in canceling the penalties imposed by the I.T.O. Under Section 271(1)(c) and therefore, their orders should be vacated and those of the I.T.O. be confirmed.
8. At the time of hearing, the learned departmental representative supported the order of the I.T.O. and relied on the decision of the Gauhati High Court in the case of Padma Ram Bharali v. CIT [1977] 110 ITR 54, decision of the Madras High Court in the case of CIT v. Ramdas Pharmacy [1970] 77 ITR 276, the Madhya Pradesh High Court in CIT v. Navnitlal M. Mehta [1970] 77 ITR 990, Addl. CITv. T.K. Perumalswamy [l984] 150 ITR 600 (Mad.), and the decision of the Tribunal, Hyderabad Bench (Third Member) in the case of Katika Ramulu & Bros. v. ITO [1989] 47 Taxman (Tax - Mag.) 246. The contention of the learned departmental representative was that if after examination of accounts, omission or wrong statement was discovered by the I.T.O. filing of the revised return would not save the assessee from penal consequences. In view of the aforesaid decisions, it was submitted that the penalties were warranted in law.
9. The learned counsel for the assessee, on the other hand, submitted that the business was started in the assessment year 1971-72 and the gross profit shown by the assessee was accepted at 15.1% subject to addition of Rs. 1000 for possible omission and commission for the assessment year 1974-75. For the assessment year 75-76 there was miscellaneous addition only. As for the assessment year 81-82, a lump sum addition of Rs. 2,000 was made in the trading account adding back separately the net balance in the sundry debtors balance Rs. 6,175 (-) Rs. 554 being negative figure in Mal Parath Account. According to the learned counsel for the assessee, the assessee had maintained Jangad Vahi or approval sales account according to which sales effected on credit were not duly accounted for in sales account, but kept separately in the books and as and when realizations were made, they were duly accounted for as sales. Similarly, the assessee has maintained a separate account called "Mal Parath Account" in respect of purchases returned to the suppliers by debiting suppliers' account and crediting Mal Parath Account. The closing stock was, however, shown on estimate basis only. It is only with reference to the method of accounting regularly followed by the assessee the income in respect of Jangad Vahi and the expenditure in respect of Mal Parath Account have not been duly adjusted and reflected in the books of accounts. When once the I.T.O. has pointed out the correct method of accounting of profits from business, the assessee had chosen to file revised return admitting resultant income in respect of these two items. He submitted that mere omission to admit the income did not amount to concealment or deliberate furnishing of inaccurate particulars of income, unless attributed to an intention or desire on the part of the assessee to hide or conceal income so as to avoid imposition of tax. Reliance was placed on the decision of the Bombay High Court in the case of D.M. Dahanukar v. CIT [1967] 65 ITR 280, Madras High Court in A.V. Thomas & Co. (India) Ltd. v. CIT [1966] 59 ITR 499, Karnataka High Court in Mahadeswara Movies v. CIT [1983]144ITR 127 and the Andhra Pradesh High Court in the case of Lakshmi Jewellery v. CIT [1988] 171 ITR 649 for the proposition that the moment the I.T.O. has pointed out the correct method of accounting, the assessee has admitted additional income and there was no intention to conceal income or furnish inaccurate particulars of income. He also submitted that the decision of the Madras High Court in T.K. Perumalswamy's case (supra) and Tribunal decision in Katika Ramulu &Bros.' case (supra) were not applicable as they were on different facts. He submitted that the revised returns filed by the assessee shows bona fide intention of the assessee, though filed after assessments were finalised.
10. As regards the quantum of penalty, the learned counsel for the assessee, submitted that it should be levied as per the new Law effective from 1-4-1976, namely, with reference to the tax sought to be avoided. He relied on a number of decisions of Courts in this regard, vide, Rasoolji Buxji v. CIT [1988] 174 ITR 328 (Raj.), R. Kuppuswamy Chetty v. CIT [1982] 135 ITR 235 (Mad.) (FB), CIT v. CM. Sheth [1989] 179 ITR 30 (Mad.),and Capital Cinema v. CIT [1989] 179 ITR 628 (Punj. & Har.). He also relied on the decision of the Delhi Court in the case of Jain Bros. v. Union of India [1969] 74 ITR 808 and Madhya Pradesh High Court in CIT v. Ratanlal Mishrilal [1983] 143 ITR 929 for the proposition that Explanation to Section 271(1)(c) was applicable for the assessment years 1964-65 to 1967-68. He has further submitted that mere rejection of the explanation was not justification for levy of penalty as long as the stand taken by the assessee was bona fide. Therefore, he has strongly supported the orders of the first appellate authority.
11. In reply, the learned departmental representative submitted that the closing stock shown by the assessee actually did not reflect the correct position and therefore, it could not be said that whatever net balance is shown in the Jangad Vahi account was truly reflected in the closing stock. In other words, he urged that the closing stock shown by the assessee was absurd. Even the petition filed by the assessee before the C.I.T. Under Section 273 A was not relevant for the purpose of levy of penalty Under Section 271(1)(c) and the C.I.T. rejected the petition for waiver of penalty filed by the assessee.
12. We have duly considered the rival submissions, paper compilation and the record. At the outset, it is to be pointed out that the assessee has been following only cash method of accounting both in respect of cash sales and credit sales which were on approval basis. The orders passed by the I.T.O. are inconsistent in this regard. However, the assessment order for the assessment year 81-82 during the course of hearing of which the defects came to the surface shows that there is a contradiction in the statements of the I.T.O. in this regard. In para 1 of his assessment order for the assessment year 81-82, the I.T.O. described the "peculiar method" of accounting and went onto say that credit sales for which bills were issued were not shown in the trading account on the date of sale, but were accounted for when the sales were realized. At the same time, in para 2 of his assessment order, he stated as under:
No bills for sales either cash or credit are issued by the assessee.
The statement contained in para 2 of assessment order is more emphatic and is conclusive of the issue as to the cash method of accounting followed by the assessee. This conclusion is reinforced by the fact that when the I.T.O. called upon the assessee to produce particulars of trade debtors on 9-2-1982, the assessee furnished details of credit sales on 1-3-1982 for the assessment years 74-75 and 75-76. The I.T.O. wanted relevant particulars for the other years. Instead of filing these details, the assessee filed revised returns for these years admitting the net accretion in respect of credit sales account and Mal Parath account (Purchases returned account). In this connection, it is relevant to mention that for the assessment years 74-75 and 75-76, assessments were already completed Under Section 143(3) on 5-10-74 and 20-10-76respectively. The assessments for assessment years 76-77, 78-79, 79-80 and 80-81 were already completed Under Section 143(1) on 26-11-77,20-9-78,9-8-79 and 27-8-80 respectively. It is also relevant to point out that the assessee also filed a revised return on the same date 29-3-82 in respect of the assessment year 84-82 offering additional income of Rs. 5,621 being the net balance of the Jangad Vahi account and the Mal Parath account. The assessment for the assessment year 1981-82 has been completed adding back the additional income shown in the revised return, besides adding a lump sum addition of Rs. 2,000 by invoking the provisions of Section 145 of the Income Tax Act, 1961 on account of defects in accounts. Thus it is seen that the assessee has filed revised returns not only for the pending assessment year 81-82, but also in respect of other completed assessment in order to regularise the same on the basis of proper method of accounting pointed out by the I.T.O. The reason is not far to seek. The written submission of the assessee regarding the method of accounting regularly followed by it as seen from the extract in the order of the C.I.T.(A) at page 4 thereof shows that the accounting of credit sales was merely postponed till actual cash was received and such faulty method of accounting arose out of ignorance of the correct accountancy principles. Again it is seen in para 4 of the appellate order at page 6 thereof that the assessee was illiterate and therefore could not apply proper method of accounting, though the method of accounting was consistently followed by them year after year and on coming to understand the proper method of accounting and before any detection by the I.T.O., the assessee suo motu included the net outstanding sales at the end of each year and filed revised returns by paying taxes immediately. The returns of income of the firm as well as the partners were revised voluntarily with the intention of avoiding further legal complication. Therefore, the assessee prayed that no concealment was involved in the accounting method followed by the assessee and relied on various decisions enumerated in the appellate order.
13. From the aforesaid extract of the written submissions before the C.I.T.(A), it is clear that when once the proper method of accounting was brought to the notice of the assessee, the assessee hastened to make a clean breast of the whole affairs and admitted the net accretion in the credit sales account and goods returned account not only for the assessment year 81-82 but also for earlier years for which assessments were already completed. In these circumstances, it cannot be said that the assessee had deliberately furnished inaccurate particulars of income or concealed particulars of income in terms of Section 271(1)(c) of the Income Tax Act, 1961. On the contrary, all the material facts relating to the credit sales account and goods returned account were duly reflected in the accounts of the assessee. It is with reference to these material particulars the assessee could collate the net accretion and offer the same as additional income in respect of these assessment years under consideration to enable the I.T.O. to regularise the assessments. At this juncture, it is relevant to point out that alongwith the revised returns filed by the assessee, the assessee has shown reconstructed trading accounts for these years showing the entire increase in the credit sales account which went to boost up the gross profit shown in the trading account in the respective assessment years. For example, for the assessment year 1974-75 addition in the credit sales account of Rs. 51,181 was shown which increased the gross profit to Rs. 87,331 as against Rs. 36,150 as per original return. The net profit was increased to Rs. 75,757 as against Rs. 24,517 as per the original return. Similarly for the assessment year 75-76 the revised trading account showed addition of credit sales account of Rs. 21,485 which resulted in gross profit of Rs. 65,118 as against Rs. 43,633 as per the original return and net profit was increased to Rs. 48,810 as against Rs. 27,325 as per original return. For the assessment year 76-77, net increase in credit sales was shown at Rs. 23,079 which increased the gross profit to Rs. 67,053 as against Rs. 43,974 as per original return. The net profits were increased to Rs. 64,803 as against Rs. 31,729 as per original return. For the assessment year 78-79, net increase in the credit sales account was Rs. 12,368 (including Mal Parath account of Rs. 12,368) pushing up gross profit to Rs. 68,056 as against Rs. 52,727 as per original return. The net profits were increased to Rs. 51,778 as against Rs. 36,449 as per original return. For assessment year 79-80 net increase offered was Rs. 16,426 which pushed up the gross profit to Rs. 77,209 as against Rs. 60,783 as per original return. The net profits were increased to Rs. 57,955 as against Rs. 41,529 as per original return. For the assessment year 80-81 net increase offered was Rs. 30,789 which pushed up the gross profit to Rs. 76,420 as against Rs. 45,620 in the original return. The net profits were increased to Rs. 56,873 as against Rs. 26,074. These revised returns were regularized by the I.T.O. by issuing notice Under Section 148 and the reassessments were completed accepting the revised income shown in toto. Thus it is clear that whatever revised statements and resultant additional income shown by the assessee for these years based on revised statements enclosed to the revised returns were accepted by the I.T.O. Thus, it is abundantly clear that the assessee has made a clean breast of the true income according to the proper method of accounting insisted upon by the I.T.O. as seen from his assessment order for the assessment year 1981-82. We have already pointed out that these revised statements and the revised returns were based on the material particulars already available on record and therefore the basic facts had been disclosed and there was no attempt of suppression of any material fact on the part of the assessee. Such was the situation even in respect of the earlier assessment years right from the assessment year 1971 -72 because the assessee had followed the same method of accounting. Thus the case of the assessee boils down to one of changing the original method of accounting adopted by the assessee, namely, cash method of accounting into hybrid method of accounting adopted by the I.T.O. for the assessment year 1981-82, in that, the credit sales made on approval basis were also treated as regular sales notwithstanding the fact that the assessee has been accounting for only cash sales as sales. Therefore, it is only a question of substitution of hybrid method of accounting insisted upon by the I.T.O. for the original cash system of accounting followed by the assessee. In the circumstances closing stock shown is not relevant for consideration.
14. In these circumstances, the assessee could not be held to be guilty of the offence of concealing particulars of income or furnishing inaccurate particulars of income, because the so-called balance in the credit sales account was shown in the balance sheet in the same way the purchases returned to suppliers were also shown in the balance sheet. The cumulative effect of the credit and debit balances would not affect the net financial worth of the assessee, because the closing stock was an estimated figure which was not reduced in respect of credit sales. In other words, the credit balance in the balance sheet in respect of Jangad Vahi account would be offset by the unadjusted value of the closing stock shown in the trading account. Similarly, the inflated purchases to the extent purchases were returned to the suppliers is offset by the credit balance in the Mal Parath account shown in the balance. There is also equal debit balance of sundry debtors in the balance sheet as if due from the suppliers to the assessee. In the event of the I.T.O. not insisting on the details of sundry debtors and the assessee not coming forward to offer the additional income in respect of sundry debtors for credit sales, the I.T.O. could not have reopened the assessments for these years Under Section 147(1)(a) because all the material facts or basic facts were duly reflected in the accounts of the assessee. Therefore, we are satisfied that the assessee has not concealed particulars of income nor furnished inaccurate particulars of income. The returns filed by the assessee offering additional income were only regularized by the I.T.O. by issuing notice Under Section 148 for these years.
15. In this connection, it is relevant to point out that the I.T.O. had issued notice Under Section 148 for the assessment years 78-79 and 80-81 on 29-1-82 on account of differential income arising from Mal Parath account. This is the same feature as noticed in the other years and also assessment year 81-82. The only question is whether the issue of notice Under Section 148 prior to filing of revised returns would save the assessee from penal consequences on the ground that the returns were not filed voluntarily and before detection of concealment of income by the I.T.O. It appears that even before the I.T.O. concluded the assessment for 1981-82 he issued notice Under Section 148 for the aforesaid two years because of the fact that there was credit balance in the Mal Parath Account for these two years. Obviously it is in the course of assessment proceedings for 81-82 during which the proper method of accounting has been pointed out by the I.T.O., the I.T.O. could validly reopen the assessment for the years 78-79 and 80-81. The assessee had filed returns so as to enable the ITO to regularise the assessments for those years. It can be seen that the so-called concealment of income in respect of which the I.T.O. has reason to believe that income has escaped assessment for those two years, was nothing but a credit balance in the Mal Parath account which was the snare involved in the assessment year 81-82 and also other earlier years. The common reasons recorded by the I.T.O. for reopening the assessments as seen from the record are as under:
A.Ys. 78-79 & 80-81 :
The assessment in this case was finalised Under Section 143(1) on 29-9-78/27-8-80 on a total income of Rs. 37,910/Rs. 27,280. During the course of assessment proceedings for A.Y. 81-82, it is noticed that the assessee has not accounted for goods returned at Rs. 12,368/Rs. 12,222 in the trading account while the cost of the same was debited to the trading account. This has resulted in under-assessment of income by Rs. 12,368/Rs. 12,222. I have, therefore, reason to believe that by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment, income chargeable to tax to the extent of Rs. 12,368/Rs. 12,222 has escaped assessment within the meaning of Section 147(a). A notice Under Section 148 is therefore issued.
From the reasons recorded, it is seen that the I.T.O. came to the conclusion that the purchases were inflated to the extent of goods returned to suppliers and therefore, the assessee has not disclosed fully and truly all material facts necessary for the assessment. As already pointed out earlier all the primary or basic facts necessary for completion of assessments were already born on record of the assessee and we have pointed out that the I.T.O. could not have reopened the assessments. It is necessary to reiterate that the assessee has shown credit balance in the Mal Parath Account which would counter-balance inflation of purchases in the purchases account. If the true nature of the credit balance in the Mal Parath account was understood by the I.T.O. he could have added back the same as income or unexplained cash credit. Similarly if the credit balance in the credit sales account was not properly explained by the assessee or if the true nature of the balance was properly understood by the I.T.O. at the time of original assessment, he could have added back as sales or income straightaway. Therefore, these primary or basic particulars were already part of the record when original assessments were made by the I.T.O. for these years. Just because the I.T.O. issued notice Under Section 148 earlier to the date of filing of returns in compliance with the notice, it could not be said that the returns were not filed voluntarily and the income was offered even before the I.T.O. detected the concealment. The additional income was offered by the assessee for the assessment year 81 -82 and also for these years under consideration only on account of a dialogue or discussion between the assessee and the I.T.O. as to the correct or proper method of accounting to be followed. At this juncture, we shall not go into the question of correct method of accounting to be followed in this case, inasmuch as the assessee has chosen to adopt the revised method of accounting and which is acceptable to the department. However we are only concerned with the question whether penalty for concealment of income is warranted or not. It is admitted that each case law stands on its own peculiar facts and therefore, it is not necessary to deal with the cases relied upon by the parties. In view of the facts and reasons stated above, we are satisfied that there was no concealment of particulars of income or furnishing of inaccurate particulars of income by the assessee. Therefore, penalty is not warranted for these years.
16. However, for the sake of completion of proceedings, we shall consider the question of quantum of penalty also. If at all penalty was to be levied, penalty should be levied only with reference to tax base as held in Rasoolji Buxji's case (supra), R. Kuppuswami Chetty's case (supra), CM. Sheth's case (supra) and Capital Cinema's case (supra).
17. In the result, we uphold the orders of first appellate authority canceling the penalties for these years. The appeals are dismissed.