Income Tax Appellate Tribunal - Kolkata
Kanoi Udyog vs Income-Tax Officer on 1 March, 1995
Equivalent citations: [1995]53ITD441(KOL)
ORDER
R.V. Easwar, Judicial Member
1. This appeal by the assessee is directed against the order of the CIT(A) by which he confirmed the levy of penalty of Rs. 50,118 imposed on the assessee under Section 271(1)(c) of the Act.
2. The appeal arises this way. The assessee is a partnership firm. On 2-3-1977 a new firm by the name Hanumanbax Jwala Prasad & Sons was constituted consisting of the very same persons who constituted the assessee-flrm. Both the firms applied for registration separately and also filed separate returns. In short it was the assessee's contention that the new firm constituted on 2-3-1977 was a separate legal entity and its income did not belong to the assessee-flrm. In respect of the assessment year 1978-79 the revenue authorities treated the income of the new firm as that of the assessee-flrm. The assessee-firm carried the matter in appeal and ultimately the Tribunal by order dated 21-6-1984 held that the new firm Hanumanbax Jwala Prasad & Sons was a benami of the assessee-firm and, therefore, its income was rightly included in the assessment of the assessee-firm. The order of the Tribunal was accepted by the assessee. In the meantime the return of income for the assessment year 1979-80, which is the year under appeal, had been filed in which the assessee did not include the income of the new firm. The ITO, following the view taken by him in the assessment year 1978-79, included the income of the new firm in the assessee's assessment. Such income was determined at Rs. 78,650. After thus completing the assessment, penalty proceedings were initiated for concealment of income. The assessee explained that all the facts had been placed before the ITO with regard to both the firms, that separate returns had been filed, that registration had also been separately applied for and, therefore, merely because the ITO had clubbed the income of both the firms it cannot be stated that the assessee was guilty of concealment. It was pointed out that the penalty proceedings on the same ground were initiated for the assessment year 1978-79 but were dropped.
3. The ITO did not accept the explanation. He was of the view that the assessee had attempted to mislead the revenue by filing two returns of income though both the firms were one and the same for all practical purposes. With reference to the dropping of the penalty proceedings in the assessment year 1978-79 he was of the view that there was no res judicata in income-tax proceedings and the dropping of the proceedings for the earlier year did not prevent him from taking action for concealment for the year under appeal. On these grounds a penalty of Rs. 50,118 being 100% of the tax sought to be evaded was imposed.
4. On appeal the CIT(A) confirmed the penalty holding as under :
Having considered the facts and circumstances of the case as has been enumerated in the penalty order I am not impressed by the submission of the appellant as represented by the Ld. A.R. for the same reason for which the Assessing Officer also found them unacceptable. The other submission that splitting up of income into the firms may at most be a legal device to reduce the tax liability also does not have merit as the I.T.A.T. being the final fact finding body has already held that there was interlacing and/or inter-locking of the fund between the appellant firm and M/s. Sri Hanumanbax Jwala Prasad & Sons and therefore that income was one and the same. In a situation like this filing two returns at two different places have certainly an element of misleading the department for reducing the tax liability. This is definitely concealment of income as well as furnishing inaccurate particulars of income. In that view I am fully satisfied that the action of Assessing Officer in imposing the penalty of Rs. 50,118 under Section 271(1)(c) is in order. Therefore, the order of the Assessing Officer under appeal stands confirmed.
5. In the further appeal before us it is submitted that all the facts have been disclosed to the ITO, that the returns of both the firms were filed before him, the relevant partnership deeds and registration applications were also produced before the ITO and, therefore, no motive to conceal the facts or the income of the new firm can be attributed to the assessee. It was pointed out on behalf of the assessee that the acceptance of the order of the Tribunal confirming the inclusion of the income of the new firm in the assessee's hands would not "per se" amount to acceptance of the fact that the assessee concealed its income. Our attention was drawn to the order of the Tribunal and it was contended that on the facts found by the Tribunal two views were equally plausible and that merely because the Tribunal has taken the view that the new firm was a benami for the assessee-firm, it cannot automatically follow that the assessee must be visited with penalty for concealment of income. It is submitted that the Tribunal's decision was on the basis of an overall impression gathered by it and there is no finding of any guilt in the order of the Tribunal. It was further argued that the facts for the assessment year 1978-79 where penalty proceedings were dropped were similar to the facts for the year under appeal and though it was correct to say that res judicata is not applicable to the income-tax proceedings, if parties have permitted a certain finding to remain unchallenged on the basis of the same set of facts for a particular year normally the same finding should follow in the subsequent year also, provided there are no changes in the facts or the legal position. Our attention was drawn to the judgment of the Supreme Court in the case of Deputy CST v. K. Kelukutty [1985] 155 ITR 158 as well as the judgment of the Full Bench of the Andhra Pradesh High Court in the case of CIT v. G. Parthasarathy Naidu & Sons [1980] 121 ITR 97 for the purpose of showing that the enquiry must always be to ascertain whether under the Partnership Act there existed a valid firm or not and also for the proposition that there was no legal bar to the constitution of a new firm by the same partners having the same profit sharing ratio. In other words, what the learned counsel for the assessee wanted to impress upon us was that the mere fact that another firm was constituted with the same partners does not spell any sinister motive and one should not immediately jump to the conclusion that it is a tax evasion measure for which penalty should be levied. It was further pointed out that the Tribunal's order was accepted only because the firm's tax was very low and in the hands of the partners the assessment of the income of the new firm in the assessee's hands made no difference in their individual rates of income-tax and, therefore, there was no motive to avoid or evade any tax.
6. The learned D.R., on the other hand, contended that the acceptance of the Tribunal's order would amount to acceptance of the fact that the new firm was a benami or alias of the assessee-firm and inasmuch as the income of the new firm was not included in the assessee's return there was concealment justifying the levy of penalty. The learned D.R. pointed out that thus by conduct the assessee has admitted its guilt which was rightly penalised. He also submitted that what the department did in the penalty proceedings for the assessment year 1978-79 was wholly irrelevant. He also invoked the aid of Explanation 1 to Section 271(1)(c). The following judgments were also relied upon :
1. CIT v. Mussadilal Ram Bharose [1987] 165 ITR 14 (SC)
2. CIT v. K.R. Sadayappan [1990] 185 ITR 49 (SC)
3. Thakur V. Hari Prasad v. CIT [1987] 167 ITR 603 (AP).
7. On a careful consideration of the rival contentions, we are of the view that the penalty has no justification and should be cancelled. It is not disputed that the assessee had placed all the facts before the ITO. Both the firms filed returns of income. Here the departmental authorities have made a mistake in saying that the returns were filed at two different places. This does not appear to be correct. In the grounds before us it has been stated, in ground (e), that the returns were filed before the same ITO and this assertion has remained uncontroverted. It is not also disputed that the relevant partnership deeds and the applications for registration were also filed before the assessing authority concerned. When all the facts have been placed before the revenue authorities, the fact that they did not accept the contention that both the firms were different does not ipso facto lead to the conclusion that the assessee attempted to conceal its income or to furnish inaccurate particulars thereof. In the case of ITO v. Burmah Shell Oil Storage & Distributing Co. of India Ltd. [1987] 163 ITR 496 the Calcutta High Court has held that when a legal contention is taken on the basis of certain facts and evidence and if all those facts and evidence are placed before the revenue authorities, it cannot be stated that the assessee was guilty of concealment. If the position is otherwise and if the assessee, notwithstanding the creation of a separate firm, is required to include the income of that firm in its hands, file the return on that basis, pay the tax thereon and thereafter contend that the income of the new firm cannot be taxed in its hands that would be opposed to the judgment of the Supreme Court in the case of Cement Marketing Co. of India Ltd. v. Asstt. CST [1980] 124 ITR 15. At page 18 of the report the Supreme Court pointed out that where the assessee does not include a particular item as its income under a bona fide belief that he is not liable to do so, it would not be right to condemn the return as a false return. The absurd situation that is likely to arise if the assessee is required to include it in the return was pointed out by the Supreme Court at page 19 of the report. It was held that such a result could never have been intended by the Legislature. In the present case there is no finding by the revenue authorities to the effect that the belief held by the assessee, namely, that the income of Sri Hanumanbax Jwala Prasad & Sons should be assessed separately and not as part of the assessee's income is not bonafide. It is also not the law, as held by the Supreme Court in K. Kelukutty's case [supra] after a review of all the authorities on the subject that there cannot be two separate firms with the same partners. Under the Income-tax Law, though not under the partnership law, a firm is treated as a separate identity with a separate personality of its own de hors the partners and every partnership firm which is brought into existence by an agreement, as a separate legal entity and is required to be assessed as such. At any rate as held by the Supreme Court in the case of K. Kelukutty (supra) the officer assessing tax has to apply the partnership law for determining whether there is a firm and not the income-tax law. The Supreme Court further held that where the same partners entered into two separate agreements of partnership, each agreement constitutes a distinct and a separate partnership and, therefore, a separate and distinct firm. Each partnership agreement embodies a different relationship. From this decision it is clear that from the mere fact that there are two firms with identical partners it does not follow that their income should be clubbed and treated as one and the same for income-tax purposes. Therefore, the view of the revenue authorities in the present case that by constituting a new firm the assessee-firm had attempted to mislead the department and evade the tax is wholly untenable.
8. The order of the Tribunal for the assessment year 1978-79 on which heavy reliance was placed by the revenue authorities as well as the learned D.R. before us does not clinch the issue in favour of the department. The Tribunal in that appeal proceeded to examine the facts. The Tribunal accepted that there is no prohibition for the creation of the two firms with the same partners. After examining the facts of the case the Tribunal came to the following findings :
1. There was interlacing of funds between the firms and there was continuous money transactions between them.
2. The business of the two firms was different. The assessee's business was in tea whereas the new firm was doing money-lending.
3. The assessee's business was mainly financed by the new firm.
4. Both the firms carried on business in the same premises.
5. The members of the staff were not the same. There were fourteen members in the assessee-firm and three in the new firm.
After recording the above findings the Tribunal came to the following conclusion :
Taking all the circumstances into consideration, particularly the interlacing and inter-locking of funds between the two firms, we find that the other firm was benami of the assessee-firm as their business was one.
9. It would thus be seen that the Tribunal had gained an overall impression that the new firm was a benami of the assessee-firm. Though we are not to be mistaken as doubting the correctness of the conclusion of the Tribunal and though we are respectfully bound by the findings, that does not preclude us from examining the order of the Tribunal to find out whether another view is plausfble in penalty proceedings, since the argument was raised on behalf of the revenue that the acceptance of the Tribunal's order would tantamount to acceptance of guilt by the assessee. Before arriving at the final conclusion and while listing the facts in support of the conclusion the Tribunal has used certain expressions which indicate that the assessee's case is not without merit. The Tribunal has recorded that the business of both the firms were different. However, this distinction was held not to destroy the inference that both the firms 'were in a sense one'. The Tribunal also noted the fact that there were separate sets of accounts. It further noticed that the new firm was having money-lending transactions not only with the assessee but also with others. The members of the staff were found to be different, but the Tribunal was 'very much doubtful as to how duties of all those staff members could be kept in watertight compartment', when the premises of business and their employers were the same. These observations of the Tribunal would show that much is to be said in favour of the view that the assessee was justified in taking up the position before the ITO that both the firms were different. The ITO does not appear to have attempted to examine whether there was in law and fact another partnership firm and for this purpose has not examined the facts with reference to the Partnership Law, as held by the Supreme Court in the case of K. Kelukutty (supra). The issue should have been examined in the light of the partnership law at least in the course of the penalty proceedings, since the assessment proceedings are not the last word in penalty proceedings and findings given in the assessment proceedings, though they constitute prima facie materials or evidence, cannot be solely relied upon in penalty proceedings (please see Supreme Court judgment in the case of CIT v. Khoday Eswarsa & Sons [1972] 83 ITR 369). Nor is it permissible to rest the penalty proceedings on the fact that the assessee accepted the Tribunal's order for the assessment year 1978-79. Acceptance of the Tribunal's order does not amount to an admission that there was deliberate concealment and as held by the Supreme Court in the case of Sir Shadilal Sugar & General Mills Ltd. v. CIT [1987] 168 ITR 705, at page 713, from agreeing to the additions it does not follow that the amount agreed to be added was concealed income. The acceptance of the Tribunal's order does not absolve the revenue from proving the mens rea of a quasi-criminal offence. We must also remember that the assessee was justified in not pursuing the matter further for the assessment year 1978-79 since in the partners' hands, where the tax rates were higher, it would have made no difference whether the income of the two firms is separately assessed or clubbed. The firms were paying tax at low rates and the real impact would only be in the partners' individual's assessments, but even that is not material in the present case. That apart, for the very year for which the Tribunal upheld the assessment, the penalty proceedings have been dropped. Though each year is to be treated separately under the Income-tax Law, in a matter where the charge of concealment is based on essentially the same facts it cannot be postulated that the assessee would be penalised for one year while the penalty proceedings for another year would be dropped. If the department was satisfied in the assessment year 1978-79 that the assessee was not guilty of concealment, on the same set of facts, the department would not be justified in imposing the penalty on the assessee. Due regard must be had to a fundamental decision taken by the revenue authorities and an order dropping penalty proceedings cannot be brushed away lightly. We may refer in this connection to the judgment of the Supreme Court in the case of Radhasoami Satsang v. CIT [1992] 193 ITR 321 wherein the impact of certain fundamental decisions taken by the revenue authorities has been highlighted.
10. The learned D.R. had referred to Explanation 1 to Section 271(1)(c). In our opinion, the Explanation has no application. This is not a case where the assessee has failed to offer any explanation. Nor is it a case where the explanation has been found false. Here is a case where the assessee has offered an explanation which he has been able to substantiate by pointing out to the legal position which permits the formation of two separate firms with the same partners. Factually also the firms are evidenced by separate agreements. Since the explanation is supported by the evidence as well as the legal position it cannot be stated that it is not bona fide. We have already seen that all the facts such as partnership agreements, registration applications, etc., were furnished before the revenue authorities. Under such circumstances the Explanation 1 has no application.
11. For the aforesaid reasons we are of the view that the assessee is not guilty of concealing its income or of furnishing inaccurate particulars thereof. The revenue authorities were not justified in imposing the penalty. It is cancelled and the appeal is allowed.