Income Tax Appellate Tribunal - Mumbai
Income-Tax Officer vs Veena Estates (P.) Ltd. on 30 October, 2001
Equivalent citations: [2002]81ITD401(MUM)
ORDER
R.V. Easwar, Judicial Member
1. This appeal by the Department is directed against the order of the Commissioner (Appeals) by which he cancelled the penalty of Rs. 33,34,096 imposed on the assessee under Section 271(1)(c) of the Income-tax Act.
2. The appeal arises this way. The assessee is a company. It dealt in real estate and carried on business in construction. It purchased a plot of land in 1982 in Agripada, Bombay for Rs. 25 lacs. A sum of Rs. 26,61,283 was incurred towards development and construction. The balance in the account stood at Rs. 51,61,282. On 19-9-1983, a partnership was formed between the assessee and six others. The name of the firm was Nirmal Enterprises. The assessee revalued the kind at Rs. 1,04,53,500, being the market value as on 19-9-1983, and introduced the same into the firm as its capital.
3. In respect of the assessment year 1984-85, for the previous year ended 31-3-1984, the assessee filed its return of income on 29-9-1984 declaring "nil" income. The Assessing Officer sought the instructions of the Inspecting Assistant Commissioner (1AC) under the then Section 144A as to whether any income or capital gain was assessable in the assessee's hands on the writing up of the value of the land, being the assessee's stock-in-trade and on the introduction of the same, as capital of the assessee in Nirmal Enterprises. By order dated 1-4-1985, the IAC opined that on the basis of the decision of the Supreme Court in the case of CIT v. Hind Construction Ltd. [1972] 83 ITR 211 no income could be said to have arisen to the assessee either when it wrote up the value of the land or when the same was introduced into the firm as its capital. He instructed the Assessing Officer accordingly. He also made a note to the effect that the case had also been discussed with the concerned CIT who was also of the same opinion.
4. On the basis of the IAC's instructions, the Assessing Officer proceeded to complete the assessment. No profit or capital gain was assessed in respect of the capital contribution of the assessee into Nirmal Enterprises. The assessment was however made on an income of Rs. 33,89,467 in respect of other transactions in the course of the assessee's business, which was adjusted fully against the losses brought forward. The assessment was completed on 20-4-1985 under Section 143(3).
5. Proceedings under Section 263 were thereafter initiated by the CIT on the basis of the judgment of the Supreme Court in the case of Sunil Siddharthbai v. CIT [1985] 156 ITR 5091. In this case, it was held by the court that though there was a "transfer" involved when a partner brought in his asset to the firm as his capital contribution there arose no capital gains due to the peculiar nature of a partner's rights in the firm. The CIT however relied on certain observations made by the Supreme Court (at page 523-4) to the effect that if the formation of the partnership firm was a ruse or device to convert the personal asset of the partner into money which would substantially remain available to him without any liability to tax on capital gains, it would be open to the taxing authorities to go behind the transaction. They are entitled to examine whether the formation of the partnership was genuine and if the conversion of the personal asset of the partner into partnership asset is a genuine contribution to the capital of the firm or a device to avoid tax liability. Even if the partnership is genuine, the taxing authorities can examine whether there is a genuine attempt to contribute to the capital of the firm for the purpose of carrying on the partnership business or it is only a ruse or device to convert the personal asset into money substantially for the benefit of the assessee while evading tax on capital gains. The CIT noted that if such circumstances existed, it would be open to the Department to disregard the apparent and tax the profits or capital gains. He also relied on the judgment of the Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 1482 where the right of the income-tax authorities to pierce the veil or smokescreen created by dubious or colourable devices and tax the profits was upheld. He noted that the Assessing Officer had not applied his mind to these aspects when he completed the assessment. He had not attempted to verify whether the transfer of stock-in-trade worth more than Rs. 50 lakhs was an attempt to avoid tax through a colourable device nor did he verify whether there was a genuine intention to contribute to the capita! of the firm. The CIT further noted from the deed of partnership that though the assessee had contributed stock-in-trade worth more than Rs. 1 crore, the other partners contributed nothing and that they had merely promised that they would bring in money as and when required. Despite this, they have been given 60% share (aggregate). The Assessing Officer, according to the CIT, did not evaluate whether the other partners were really capable of matching the contribution of the assessee. The Assessing Officer had also not gone into the question of genuineness of the firm. Under these circumstances, the CIT set aside the assessment and directed the Assessing Officer "to make a fresh assessment in accordance with law after verification pi the facts on the lines indicated above."
6. The assessment was accordingly redone. In the fresh assessment, the Assessing Officer recorded the following findings:
(a) Though para (ii) at page 4 of the partnership deed stated that the other partners joined the firm in order to contribute to the development of the property, which will require substantial funds, during the two years after the formation of the firm the work-in-progress had increased only to Rs. 1,38,47,107 from Rs. 1,04,53,500;
(b) At the same time, the assessee had drawn out of the firm a major portion of its investments; within 9 months of the transfer, the assessee had drawn 75% of the investment, in the 2nd year it drew Rs. 10 lakhs out of Rs. 17 lakhs standing in its capital account, and by the end of the 3rd year (14-8-86) the balance in the capital account was only Rs. 2 lakhs.
(c) That on 28-2-1989 the assessee retired from the firm, though the project was not complete.
From these facts, the Assessing Officer concluded that the assessee had not only transferred the stock-in-trade at the market value but had also withdrawn the profits arising therefrom which were not disclosed and that the events were so arranged that the assessee had the enjoyment and benefit of the monies though the tax due thereon was not paid. In this view of the matter, he brought the sum of Rs. 52,92,218 to tax as profit on transfer of stock-in-trade to Nirmal Enterprises. Apparently this amount has been worked out as follows :
Amount for which the land was transferred to the firm Rs. 1,04,53,500 Less: Cost of the land Rs. 25,00,000 Expenses on development Rs. 26,61,282
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Rs. 51,61,282
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Balance being profit: Rs. 52,92,218
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7. Aggrieved by the assessment the assessee preferred an appeal to the CIT(A). The CIT(A) took the view that the amendment to Section 45 by the introduction of Sub-section (3) to nullify the affect of Sunil Siddharthbai (supra) took effect only from the next year (asst. year 1985-86), that by mere revaluation of the stock-in-trade one cannot earn income unless the same is sold or transferred, that the assessee has merely transferred the land as its capital to the firm, that the Assessing Officer had not established that the firm was bogus or that it was specifically formed for availing tax liability, that the conditions laid down in Sunil Siddharthbai's case (supra) to come to the conclusion that the transfer was a ruse or device have not been satisfied inasmuch as the firm has not been established to be non-genuine, that the asset has not been converted into money and a mere revaluation of the asset does not result in any income. In this view of the matter, he deleted the addition of Rs. 52,92,218 and allowed the appeal filed by the assessee.
8. The Department preferred an appeal to the Tribunal against the aforesaid order of the CIT(A). The assessee had also preferred an appeal against the order of the CIT under Section 263. Both the appeals were heard and decided by the Tribunal together. In the Department's appeal, the Tribunal held that from the facts it was apparent that the assessee withdraw substantial amounts of money (from its capital account) after joining the firm, that the real purpose for which the partnership firm was established was neither the smooth running of the project nor the financial requirements as was made out by the assessee, that had the assessee sold the land to outsiders the sale proceeds would have been liable to tax, that the retirement of the assessee from the firm (on 28-2-1989) even before the project was completed revealed the true intention of the assessee, that there was no evidence to show that the other partners were taken into either buttress the purpose of the business or to expedite the project and that under these circumstances the judgment of the Supreme Court in Sunil Sidharthbai's case (supra) was clearly applicable. The judgment of the Supreme Court in the case of A.L.A. Firm v. CIT [1991] 189 ITR 2851 was also held applicable. In this view of the matter, the Tribunal allowed the appeal by the Department and restored the addition. The assessee's appeal against the order under Section 263 was rejected.
9. Penalty proceedings for concealment of income were initiated by the Assessing Officer under Section 271 (1 )(c) of the Act. A detailed reply dated 6-9-1993 was furnished by the assessee in response to the notice. In brief, it was stated by the assessee that the case was covered by the principle laid down in Hind Construction Ltd. (supra), that it did not fall within the ratio of either Sunil Sidharthbai's case (supra) or ALA firm (supra), that the firm of Nirmal Enterprises was genuinely constituted, that it did carry on business, that the transaction was at arm's length, that the other partners were men of business and not related to the assessee, that they actually carried on the firm's business and also contributed to the capital of the firm and brought in loans from relatives and friends, that the assessee withdrew monies from its capital account only to pay off its liabilities as per the terms of the deed of partnership and that too only after receipt of advances from buyers of the units in the firm, that the withdrawal of the capital was to make the capital proportionate to the respective profit-sharing ratios, that all the facts were furnished to the Assessing Officer and that under these circumstances there was no concealment of income or furnishing of inaccurate particulars thereof to warrant any levy of penalty.
10. After examining the reply in detail, the Assessing Officer rejected the explanation of the assessee and held that the assessee had attempted to avoid tax by adopting a device and therefore penalty was exigible. He rejected the claim of the assessee that it had furnished all the material facts. He thus held that the case was covered by Section 271(1)(c). He also invoked Explanation 1 to the Section 6n the ground that the Explanation of the assessee has been found to be false and that the assessee has not been able to substantiate the same. He accordingly imposed the minimum penalty of Rs. 33,34,096.
11. The assessee preferred an appeal to the CIT(A) against the levy of penalty. The CIT(A) noted that the assessee had furnished all the facts before the Assessing Officer and did not hold back anything. He further noted that in the assessment proceedings the CIT(A) had deleted the addition and though the Tribunal restored it, it showed that there was a bona fide difference of opinion amongst two authorities as to whether the transaction resulted in taxable profits. In such a case, according to the CIT(A), it cannot be said that the assessee was guilty of concealment. The CIT(A) also noticed that the Explanation 1 to Section 271(1)(c) has been invoked by the Assessing Officer for the first time in the course of the penalty proceedings without specific mention thereof in the penalty notice. He referred to the judgment of the Hon'ble Bombay High Court in the case of CIT v. P.M. Shah [1993] 203 ITR 7921 and held that the Assessing Officer cannot do so. On the applicability of the said Explanation, the CIT(A) took the view that the assessee's explanation has not been found to be false either by the CIT(A) or the Tribunal in the assessment proceedings and therefore it was not applicable. In this view of the matter, he cancelled the penalty.
12. The Revenue is in appeal. Mrs. Nishi Singh, the ld. CIT(DR), after narrating the facts briefly, contended that it is not a case of a mere difference of opinion with regard to the legal position as was sought to be made out by the CIT(A) while cancelling the penalty. She submitted that the IAC under Section 144A was called upon to decide only the legal question as to whether the writing up of the value of the asset by a partner and the handling over of the same to the firm as his capital would attract tax. This abstract proposition of law was decided by the IAC in accordance with the judgment of the Supreme Court in the case of Hind Construction Ltd. {supra). The fact that the assessee withdrew the monies from its capital account with Nirmal Enterprises was not before the IAC or at any rate that was not focussed upon, given the nature of the reference made to him by the Assessing Officer. The need for focussing upon the fact arose in the light of the judgment of the Supreme Court in the case of Sunil Siddharthbai {supra). This judgment was the basis of the CIT's order under Section 263. The CIT had directed the Assessing Officer to investigate the facts in the light of the said judgment and it was then that the fact that the assessee withdrew substantial monies from its capital account with Nirmal Enterprises assumed importance. She contended that Sunil Siddharthbai's case {supra) squarely applied to the facts of the case and the assessee was caught within the mischief of the observations made by the Supreme Court vis-a-vis a ruse or device adopted by he assessee to avoid tax liability even whilst enjoying the monies referable the transferred asset. According to her, a sale of stock-in-trade by the assessee has been passed of as a capital contribution through the medium of Nirmal Enterprises - something which is squarely hit by the observations of the Supreme Court in Sunil Siddharthbai's case (supra). She also submitted that the firm was not genuine and has been got up only to suit the design and as a medium to put into effect the device adopted by the assessee to realise its stock-in-trade. Since the constitution of the firm itself is not genuine, penalty was attracted. The ld. CIT(DR) also contended that the Tribunal's order in the assessment proceedings, by which the addition was restored, and the findings recorded therein are in favour of the Department and that in the light of those findings the levy of penalty was fully justified.
13. In support of the contentions, Mrs. Singh, the ld. CIT(DR), drew our attention to the following judgments of the Supreme Court:
(i) Mcdowell & Co. Ltd. 's case (supra)
(ii) Workmen Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77 (SC)
14. On the other hand, Mr. Pardiwalla, the learned counsel for the assessee, pointed out that the plot was the assessee's stock-in-trade and not a capital asset with the result that the judgment of the Supreme Court in the case of Hind Construction Ltd. (supra) was squarely applicable and not the judgment in the case of Sunil Siddharthbai (supra). He submitted that the legal position was thus in favour of the assessee's claim that nothing was taxable as profits of the business in the assessee's hands. With regard to Sunil Siddharthbai (supra), he contended that in this judgment the ratio was that there is no "transfer" of a capital asset for purposes of capital gains when a partner brings in his personal asset into the partnership as his capital and the present case falls squarely within this ratio and it was only the other observations made in the judgment that are sought to be invoked to the present case. Even these observations, Mr. Pardiwalla contended, were not attracted to the present case because the firm of Nirmal Enterprises was registered under the Income-tax Act and the assessee was a partner thereof for a continuous period of five and a half years. According to Mr. Pardiwalla, it is difficult to hold that a firm which was allowed registration can be non-genuine. He contended that even the Tribunal had not held that the firm was not a genuine firm. He further pointed out - and this was the mainstay of his contention - that all the facts material to the computation of the income had been disclosed to the Assessing Officer by the assessee. The assessee's capital account in Nirmal Enterprises, it was emphasised, was filed before the Assessing Officer in the course of the original assessment proceedings. On the basis of the facts, the assessee had raised a legal contention that the transfer of the plot as capital contribution did not attract, tax liability, relying on the Supreme Court judgment in Hind Construction Ltd.'s case (supra). This was the basis of the return filed. On a doubt being raised, the matter was referred to the IAC under Section 144A who also agreed with the assessee's claim. According to Mr. Pardiwalla, it was only after the Supreme Court pronounced judgment in the case of Sunil Siddharthbai (supra) that the departmental authorities initiated a reappraisal of the facts of the assessee's case and found that the assessee was liable to be assessed on the profits of Rs. 52,92,218. He contended that when all the facts are furnished to the taxing authorities and a legal plea is taken that the transaction does not attract tax it can hardly be said that the assessee was guilty of concealment of income unless the contention is dishonest, mala fide or frivolous. In this connection, he relied on the judgment of the Calcutta High Court in Burmah-Shell Oil Storage & Distributing Co. of India Ltd. v. ITO [1978] 112 ITR 592. The further contention was that at best the assessee can be charged only with tax planning on disclosed facts for which no penalty can be imposed. This contention was, according to Mr. Pardiwalla, supported even by the judgment in McDowell & Co. Ltd. (supra). Thus, when all the facts have been disclosed, the case does not fall under the main provisions of Section 271(1)(c) or even under the Explanation 1 thereto.
15. Mr. Pardiwalla proceeded further to point out that the orders of the Tribunal in the assessment proceedings are pending in reference before the Hon'ble High Court under Section 256(2). According to him, the effect of the orders of the High Court calling for a reference of a question of law is that the High Court prima facie feels that the order of the Tribunal may be erroneous and since in the present case questions of law have been called for there is a possibility that the decision of the Tribunal would be reversed, which possibility takes the case out of the purview of Section 271(1)(c). In support of this contention, he relied on the order of the Special Bench of the Tribunal in the case of Samir Diamonds Exports (P.) Ltd. v. ITO [1988] 25 ITD 73 (Bom.) at 81.
16. In support of his contentions, Mr. Pardiwalla relied on the following orders /judgments:
1. Yasmin Properties (P.) Ltd. v. CIT [1993] 46 ITD 331 (Bom.) alias para 14
2. ITO v. R.B.G.M. Modi & Bros. (P.) Ltd. [1989] 28 ITD 349 (Delhi)
3. V. Ramachandra Rao v. ITO [1990] 33 ITD 650 (Hyd.)
4. Maharaj Prithvirajv. Dy. CIT [1993] 45 TTJ (Delhi) 480
5. CIT v. Anand Water Meter Mfg. Co. [1979] 117 ITR 866 (Punj. & Har.)
6. Dy. CIT v. Lee & Muirhead Ltd. [1997] 60 ITD 57 (Mum.)
7. Bombay Bench (Tribunal) order in the case of K.C. Nariman alias N.K. Gajwani in ITA No. 8400 (Bom.) of 1993 dated 20-1-1989 (assessment year 1976-77)
8. Notes on clauses reported in 162 ITR (St.) 21 alias 38 - explaining the amendment to Explanation 1 to Section 271(1)(c).
17. In reply, Mrs. Nishi Singh, the ld. CIT(DR), made the following points. With regard to the contention based on the genuineness of the firm, she submitted that in Sunil Siddharthbai's case {supra) the Supreme Court has held that the genuineness of the firm was not decisive and various other considerations have also to be taken into account while examining whether the assessee had adopted a device or ruse to avoid its real tax liability. With regard to the contention of Mr. Pardiwalla that full facts have been disclosed by the assessee, she pointed out that the most vital fact, viz., withdrawal of monies by the assessee from Nirmal Enterprises, was not disclosed by the assessee and that at any rate, focussed or pointed attention to this fact assumed significance only when proceedings were initiated under Section 263. In this connection, she drew our attention to Explanation 1 to Section 147 which says that production before the Assessing Officer of books of account or other evidence from which the Assessing Officer could have discovered, with due diligence, the material facts does not amount to furnishing of full and true particulars. Though she admitted that the said Explanation may not control or affect the interpretation to be placed on Explanation 1 to Section 271(1)(c), she argued that it furnishes a clue as to what is to be considered as full disclosure of material facts and what is the duty of the assessee. As regards the claim that the explanation of the assessee was bona fide and has not been found false, Mrs. Singh contended that the claim cannot be accepted in the light of the position that the assessee did not disclose the fact that it has withdrawn the monies from its capital account with Nirmal Enterprises. With respect to the contention that there was difference of opinion even between the departmental authorities as to the taxability of the amount, she submitted that it was not decisive and that the guilt of the assessee must not be judged solely with reference to the same. As regards the contention vis-a-vis the effect of the High Court's orders under Section 256(2) calling for reference, Mrs. Singh submitted that the only effect is that a question of law arose from the orders of the Tribunal and that it would be too much to say that the mere possibility of the Tribunal's orders being overturned took the case out of the purview of Section 271(1)(c). Finally, as to the cases cited by Mr. Pardiwalla, she contended that the facts of each case may be different and the question as to whether the assessee is guilty of concealment of income has to be answered with reference to the facts of the particular case and mere reliance on decided cases is not justified. She also pointed out that the facts in the cases cited by Mr. Pardiwalla are different from the present case.
18. We have carefully considered the facts and the rival contentions, ably put forth before us by both sides. We are satisfied that the penalty was rightly imposed and that the CIT(A) was not justified in cancelling the same. In the proceedings under Section 144A, what was referred for the decision of the IAC was only a question of law, viz., "whether appreciation in value of stock-in-trade will result in income or capital gains". Within the framework of the question posed before him, and given the factual background, he decided that the assessee was not liable to tax, purporting to follow the judgment of the Supreme Court in Hind Construction Ltd. 's case (supra). That was a case of a mere writing up of the value of the stock by the assessee and handing over of the same at the written-up value to the firm in which the assessee became a partner. The question was whether there was a sale. It was answered in the negative. It is significant to note that in Hind Construction Ltd. s case (supra) the assessee who transferred the stock to the firm in which he was a partner did not receive any monies for the same. The asset was credited to his capital account as his capital contribution. If the case of the assessee before us had stopped there - with the mere credit being given to the capital account for the written-up value of the plot of land - it could perhaps be stated that there is no ground to hold the assessee to penalty for concealment. But the assessee before us has not only been credited with the enhanced value at which it brought the plot into the firm's books as its capital, but within a short span has also withdrawn monies almost equal to such value. This fact turns the case. Mr. Pardiwalla was at pains to point out repeatedly that the assessee's capital account in the firm's books showing the withdrawal of monies had been filed in the course of the assessment proceedings. Assuming it is filed, that does not let out the assessee because it has not brought the fact pointedly to the attention of the IAC in the course of the proceedings under Section 144A despite opportunity being given. At page 9 of the paper book filed by the assessee, we find the assessee's letter dated 23-3-1985 written to the IAC in the course of the proceedings under Section 144A. The assessee appears to have embarked upon a discourse on the legal aspect of the matter, without once disclosing that it has withdrawn monies almost equivalent to the enhanced value of the plot. Thus there is a failure in the duty of the assessee to draw the attention of the Income-tax authorities to a material or crucial fact. The argument of Mr. Pardiwalla would have been much stronger had to assessee drawn the attention of the IAC or even the Assessing Officer in the course of the original assessment proceedings to this crucial fact. The mere filing of the capital account, considering the magnitude of the case and the importance of the legal questions, does not, in our opinion, suffice. The assessee, in our opinion, ought to have drawn the pointed attention of the Income-tax authorities to the same. This it has failed to do. This fact came to light when the assessment was set aside under Section 263 for being redone after proper investigations in the light of certain observations in the judgment of the Supreme Court in Sunil Siddharthbai's case (supra). The impression gained by us is that the attempt of the assessee was to pass off the facts of its case as being similar to the facts in the case of Hind Construction Ltd. (supra) and gain an undue tax advantage by not bringing to the notice of the departmental authorities the vital distinction, viz., that the assessee not only wrote up the value of the asset and brought the same into Nirmal Enterprises as its capital at the enhanced value but also withdrew monies almost equal to the value of the asset within a short span of time.
19. In this context, the question as to what is proper disclosure comes up for consideration. The answer, in our opinion, is that it depends on the facts of each case. The magnitude of the stakes involved, the complexity of the question and so on are some of the important considerations. We are concerned with the tax liability on profits of around Rs. 53 lakhs. Here, every fact counts and may turn the case either in favour of the assessee or against it. Thus, it was the duty of the assessee to draw the attention of the Assessing Officer or IAC in the course of the original assessment proceedings to the fact that it had withdrawn substantial monies from its capital account with Nirmal Enterprises. The assessee, instead, took great pains and wrote pages to the IAC explaining the legal position and made a strong attempt to match the facts of its case with the facts in Hind Construction Ltd. 's case {supra), but conveniently omitted to point out that it had withdrawn monies from Nirmal Enterprises. The assessee's conduct appears to us to be contumacious. On the one hand it wanted to insure itself from the charge of withholding the material facts and with a view to doing so, unobtrusively filed the copy of the capital account before the Assessing Officer but at the same time it did not want to highlight the same, lest the Assessing Officer or the IAC would rely on the distinction in the facts and decide the issue against it. In our opinion, the withdrawal of monies by the assessee from its capital account with Nirmal Enterprises - almost equal to the value of the asset - was a material fact which the assessee ought to have pointedly, frankly and openly disclosed before the departmental authorities. Failure to do so, in our opinion, establishes contumacy on its part.
20. Mr. Pardiwalla posed the question as to how the assessee could have pointedly confessed to the income-tax authorities the fact that it had drawn monies almost equal to the value of the asset from the capital account and also contended at the same breath that despite the receipt of the monies nothing was taxable. May be there was a risk of the income-tax authorities not accepting the claim. That cannot be ruled out. But we are not concerned here with the attitude or the view which they would adopt. We are more concerned, in the present proceedings, with the attitude of the assessee. Its conduct should have been above board and not contumacious. If the material fact, viz., the receipt of monies from the capital account, had been specifically mentioned to the authorities, as we have already observed, the position of the assessee possibly would have been stronger. There is, in our view, a big difference between cases where all vital or material facts are disclosed and a principled or legal stand is taken, say, that a particular receipt is not taxable, and cases where vital or material facts are withheld or slipped in, in an inconspicuous manner, as in the present case where the assessee claims to have filed the copy of its capital account with Nirmal Enterprises and a claim is made that a particular sum or receipt is not taxable. The former category of cases fall within the ratio of the judgment of the Calcutta High Court in Burmah Shell Oil Storage & Distribution Co. Ltd. 's case {supra) cited by Mr. Pardiwalla, but the latter category does not. The whole question is about the conduct of the assessee, the manner in which he has made the disclosure. The disclosure should have been of material facts and it must be in a fair and open manner that would give the opponent - In this case the departmental authorities - a fair opportunity to judge the case. The degree of openness with which the crucial or vital or material facts are disclosed is indicative of the bona fide of the assessee. Here the assessee before us has been found wanting. Explanation 1 to Section 147 gives an indication as to what cannot be considered as full and true disclosure. There are facts which are exclusively within the knowledge of the assessee. They are sometimes embedded in the voluminous papers found in the record or the books of account. No doubt these records or books might have been produced before the Assessing Officer but it would be a near - impossible task for him to unearth the material or relevant facts from them. That is the reason why Explanation 1 to Section 147 says that mere production of books or record from which evidence could with due diligence have been discovered by the Assessing Officer does not amount to full and true disclosure. Here is a case where the fact of receipt of monies almost equal to the value of the plot of land from the firm is known only to the assessee. It is no doubt embedded in the record (the copy of the capital account) but a pointed or focussed attention thereto was the minimum required of the assessee, having regard to the magnitude of the stakes and the nature of the issue involved. The assessee has fought shy of such full, open, fair and pointed or focussed disclosure of this material fact. Such reluctance, when it could write a detailed reply to the IAC in proceedings under Section 144A with all legal embellishments, can be attributed only to an apprehension that if this material fact is disclosed the amount would be taxed. It was for the assessee to disclose the implications of the entries in the capital account and in as much as it has not done so there certainly was a lack of bona fide.
21. The answer to Mr. Pardiwalla's poser is that the assessee can escape penal consequences under Section 271(1)(c) only if, he (the assessee) takes a legal or principled plea or stand, after having disclosed all material facts fully and truly, including those which are buried or imbedded in the record of which the Income-tax Authorities have no reasonable means of knowing and those which are within his (assessee's) special knowledge. In the discharge of this burden, the assessee cannot attempt to be equivocal or devious or take advantage of the position that certain material facts could have been gathered if only a diligent examination of the record had been undertaken. Penal consequences will follow if half baked or incomplete facts are furnished, where what is withheld is material. We are unable to hold that the assessee furnished complete facts relating to the introduction of the land as its capital into Nirmal Enterprises; only part-disclosure was made, the vital or material fact of having received monies almost equal to the value of the plot of land, introduced as its capital in Nirmal Enterprises, having been really withheld without apparently seeming to do so. We are able to glean a design from the assessee's conduct a design to lead the Income-tax Authorities upto the garden path. In this connection, we wish to lay emphasis on the fact that even where an opportunity was afforded to the assessee in proceedings under Section 144A the fact was not disclosed and an attempt was made to show that the case was covered by the ratio of Hind Construction Ltd. (supra). There was not even an attempt to say that though the assessee received monies from the firm, still the case would be covered by Hind Construction for whatever reasons the assessee could think of. This shows that the assessee was happy to let the case proceed as if it was a simple handing over of an asset by a person to a partnership firm of which he was a partner, at an enhanced or written-up value. It (assessee) obviously had a lot to gain from this.
22. Even if it is assumed for the sake of argument that the mere filing of the capital account copy in the course of the original assessment proceedings amounted to disclosure of a material fact, viz., the receipt of monies near-equal to the value of the transferred asset, the assessee would still be guilty of concealment of income inasmuch as even on the stated facts there can be no escape from the conclusion that the assessee had earned taxable business profits. The assessment of such profits has been confirmed on appeal upto the Tribunal, it is true that the findings in the assessment proceedings cannot be automatically imported into or cannot be considered conclusive in the penalty proceedings where what is to be judged is the guilt of the assessee and not the tax liability, but it is equally true that such findings are good evidence. Such evidence is furnished by the manner in which the Tribunal has dealt with the case. The Tribunal has attached great importance to the fact that the assessee has withdrawn the monies within a short span of time after joining the firm. The Tribunal has also held that there are no facts to support the theory that the partnership was formed to meet the financial requirements of the project and to ensure its smooth progress. If financial requirements were the criterion, the assessee would not have withdrawn the monies and would have let them remain with the firm for use in connection with the project. The other partners, who are stated to be unrelated to the assessee and men of business, would have contributed substantial capital. There is a faint suggestion in the reply to the penalty notice (page 38 of the paper book at page 46) that the withdrawal of monies by the assessee was to pay off its liabilities and as per the deed of partnership and that the other partners had brought in loans from their friends and relatives. But no evidence has been produced to support these suggestions. It has also been said therein that the capital was withdrawn to make the partner's capital proportionate to their respective profit-sharing ratios. One is asked to believe that when the assessee introduced the land as its capital contribution at the written-up value of Rs. 1,04,53,500 nobody thought of the capital being proportionate to the profit-sharing ratios of the partners but within about 6 months thereof this aspect was seriously considered and the assessee was asked to withdraw the monies so that the capital of the partners would be in the ratio in which they shared profits. It is pertinent to note that in the meantime the firm of Nirmal Enterprises had admittedly received "advances from the buyers of the units in the firm" (see page 9 of the reply to penalty notice at page 46 of the paperbook) and was thus in possession of monies. The Tribunal, in its order, has, if we may say so with respect, pertinently observed towards the end of paragraph 8 that if the assessee had disposed of the stock-in-trade at the market value to the outsiders it would have been exigible to tax on the business profits. The scheme of things sought to be put into effect by the assessee is that it would write up the value of the land and introduce it into Nirmal Enterprises as its capital contribution at the written-up value, that the firm would then receive advances on the projects from prospective buyers which would be passed on the assessee as consideration for the stock-in-trade introduced as capital, that the assessee would continue in the firm nominally as partner for some time more, so as not to excite suspicion, even after receiving the entire monies in respect of the land and then quietly retire. The facts speak for themselves. The introduction of the firm was only as a conduit or medium to facilitate what is pretended with dignity to be "tax planning". The assessee clearly had no intentions of carrying on any business through the formation of Nirmal Enterprises, its continuance as a partner for five and a half years till 28-2-1989 served no useful purpose except that it was able to realise the market value for its stock-in-trade. There was, in our opinion, no genuine partnership firm in existence in the name of Nirmal Enterprises till the assessee retired. Even if it is assumed that the essentials of a valid partnership under Section 4 of the Partnership Act were present, that was only for the purpose of facilitating the so-called "tax planning" measure sought to be adopted by the assessee. If anything, the assessee can be said to have found an obliging friend in Nirmal Enterprises in obliging the assessee, Nirmal Enterprises was certainly genuine - and that is all the genuineness about it.
23. There is no explanation from the assessee as to what were the circumstances that forced or persuaded it to retire even when the project was unfinished. A partner is certainly free to retire whenever he wishes, subject to the terms of the deed of partnership but here we have a case where the assessee continued for some time even after it had received almost the entire monies in its capital account. As on 1-7-1985 the balance due to its was Rs. 17 lakhs out of which it received Rs. 10 lakhs on 3-6-1985. The balance remaining as on 30-6-1985 was Rs. 7 lakhs. This appears to have been paid over a period of time subsequently. The last two payments of Rs. 1,55,700 and Rs. 3018 were paid by 17th and 31st March, 1989 respectively. But these payments represent the share of profits due to the assessee. These figures have been taken out from the copy of the capital account placed at pages 6 to 8 of the paper-book. Even while the profits were quite handsome, the assessee has chosen to retire from the firm, though the project was unfinished. The reason for the retirement are not far to seek. The assessee's presence in Nirmal Enterprises was required or relevant only for the period during which it was to be paid the price for the stock-in-trade it brought into the firm as its capital. Thereafter there was no point in continuing as partner. Thus, so far as the assessee is concerned, it had no further use for the firm once the monies for the stock-in-trade had been received. Hence the retirement.
24. The next argument of Mr. Pardiwalla was that since the Hon'ble High Court had ordered a reference of the question of law under Section 256(2) from the order of the Tribunal in the assessee's appeal against the order under Section 263 and in the Department's appeal against the cancellation of the addition by the CIT(A), there is a possibility of the Tribunal's orders being reversed and that the granting of reference prima facie means that the view taken by the Tribunal may be considered erroneous. He contended that in both cases, no penalty could be levied. We have given anxious consideration to the argument. We have also perused the order of the Special Bench of the Tribunal in the case of Samir Diamonds Exports (P.) Ltd. (supra). It has been held there that where the Hon'ble High Court passes a speaking order under Section 256(2) touching upon the merits while rejecting a reference application under Section 256(2) it is possible to infer that the Hon'ble High Court considers the order of the Tribunal to be correct. In the present case however that is not the position. We are, therefore, unable to give effect to the argument.
25. The next argument that even the departmental authorities have differed in their view of the assessee's case, the IAC/AO in the original assessment proceedings and the CIT(A) in the fresh assessment proceedings holding in favour of the assessee as against the Assessing Officer and the Tribunal in the fresh assessment proceedings holding against the assessee and therefore it is not a case for penalty cannot be accepted as decisive of the question as rightly pointed out by Mrs. Singh, the ld. CIT(DR). We have found that there has been non-disclosure of material facts - the vital fact of monies having been received by the assessee from Nirmal Enterprises - and the AO/IAC in the original assessment proceedings did not have the benefit of this vital fact. It came to light only when the matter was examined again pursuant to the order of the CIT under Section 263. The approach of the CIT(A) in appeal against the fresh assessment, as we see from his order a copy whereof is kept at pages 27 to 32 of the paper-book, reveals that no importance has been attached by him to the fact that the assessee received monies from Nirmal Enterprises. It is not proper for us to comment upon the order of the CIT(A) in the present proceedings since it has already received scrutiny by the Tribunal (and has been reversed) but since Mr. Pardiwalla raised the argument we have perforced to deal with it in fairness to him. We have carefully gone through the order of the CIT(A). Not only has he not attached any importance to the fact that the assessee received monies from Nirmal Enterprises through its capital account, what is more surprising is that there is no reference at all to the fact in the order. Even more surprisingly, towards the end of his order, he has observed that "...the asset transferred is not converted into money" even while there are copious references to this fact in the fresh assessment order passed by the Assessing Officer at the last paragraph of page 3 (page 24 of the paper-book) and the first two paragraphs of page 5 (page 25 of the paper-book). We do not wish to speculate as to who is responsible for this grave faux pas. With a crucial fact forming the bedrock of the revised assessment order being completely missed, and an observation made contrary to the record in, with respect, a cavalier fashion, it beats us as to how the order of the CIT(A) can be considered as an "opinion". So much for the benefit of a difference of opinion.
26. Mr. Pardiwalla, with his usual thoroughness, cited a number of authorities which we have already referred to. We have gone through them but find that each one of them has been rendered on the peculiar facts of the case and those facts are quite distinct from the facts of the case before us. But the order of the Tribunal in the case of Yasinin Properties (P.) Ltd. (supra) needs mention as Mr. Pardiwalla relied upon it to contend that even where the principle laid down in McDowell & Co. Ltd. (supra) applies if all the facts are disclosed by the assessee then notwithstanding that the amount is taxable there can be no penalty for concealment. In that case, the finding of the Tribunal is that all facts were disclosed to the Assessing Officer. We are in broad agreement with the principle stated therein but our decision that the assessee before us is guilty of concealment of income is based on the fact that a material or vital fact was withheld by it or was not disclosed to the income-tax authorities in the manner and light in which it was obligatory for the assessee to do. We are therefore unable to extend the benefit of that decision to the present assessee.
27. Mr. Pardiwalla had stressed on the genuineness of Nirmal Enterprises on the ground that it was registered under the Income-tax Act which ruled out the applicability of the observations of the Supreme Court in Sunil Siddharthbai 's case (supra). The Supreme Court itself has observed that the genuineness of the firm cannot stop the taxing authorities from examining whether the contribution of the capital is with the genuine object of carrying on business or is nothing but a ruse or device to convert the personal asset into money and avoid tax. Even otherwise, we cannot understand the reservations expressed by the Supreme Court in such a narrow manner. The mere fact that Nirmal Enterprises is registered under the Income-tax Act is no ground to hold that the assessee did not adopt a ruse or colourable device to avoid tax. The genuineness of the firm is only one of the many criteria required if the case is to fell outside the mischief of the observations/reservations expressed by the Court. There are other criteria that are not satisfied in the present base. Even the observations of the Tribunal, as mentioned elsewhere, throw considerable doubt on the very object for which the firm Nirmal Enterprises was formed. As mentioned elsewhere, the focus is on the conduct of the assessee - has it been above board or has it been contumacious ? We are afraid that it has not been above board; it has, on the contrary, been contumacious.
28. We are therefore, of the opinion that the assessee is caught within the mischief of the main provisions of Section 271(1)(c) and is liable for penalty.
29. The CIT(A) has cancelled the penalty also on the ground that the Assessing Officer cannot invoke the Explanation 1 to Section 271(1)(c) without mentioning the same in the penalty notice, relying on the judgment of the Hon'ble Bombay High Court in the case of P.M. Shah {supra). In the light of the recent decision of the Supreme Court in K.P. Madhusudhanan v. CIT [2001] 251 ITR 99, this position no longer obtains. In fact Mr. Pardiwalla with his usual fairness stated that the judgment of the Supreme Court is against him on this point but contended that on merits Explanation 1 did not apply because the assessee had disclosed all facts material to the computation of its income and also acted bona fide. He also contended that the assessee did not submit any explanation which it could not substantiate and that its Explanation has not been found to be false, though it may not have been convincing, which is a different matter. He therefore, pleaded that the assessee fell within the exception provided in the said Explanation and hence no penalty is leviable.
30. This aspect of the matter has already been considered by us at some length. To briefly recapitulate at the cost of repetition, the fact that the assesee was in receipt of substantial amounts from Nirmal Enterprises through its capital account and that such receipts almost equalled the written-up value of the plot of land introduced as its capital in Nirmal Enterprises is, in our opinion, material to the computation of its income. The assessee did not disclose this fact in the manner required of it having regard to the nature of the case, the issue and the stakes involved. The "disclosure" through the filing of the capital account copy is not proper disclosure; it cannot be considered to be an overt disclosure of a material fact; it did not relieve the assessee of the burden to come out with the full and true facts pointedly and in a focussed manner, drawing the attention of the Income-tax Authorities specifically to the fact. The very conduct of the assessee, in trying to take advantage of the copy of the capital account filed in an inconspicuous or unobtrusive manner as if a material fact has been disclosed in the manner required of its smacks of mala fide. At no stage did the assessee volunteer the information. It had to be culled out from the record after investigation pursuant to the CIT 's order under Section 263. There has been no explanation worth the while with regard to the withdrawal of monies from Nirmal Enterprises through the capital account. The explanation given in the reply to the penalty notice to the effect that the monies were drawn as per the partnership deed to pay off the liabilities of the assessee and to bring the capital of the partners in proportion to their profit-sharing ratio has already been found by us not substantiated by any evidence. The explanation is inherently false because if the capital is to be reduced to levels proportionate to the profit-sharing ratios of the partners within 6 months of the capital contribution then what is the purpose of bringing in disproportionate capital in the first place? There is also an admission in the same explanation that the monies were drawn out of advances received by Nirmal Enterprises from the buyers of units. This disproves the other part of the explanation as to why the monies were withdrawn. Thus the explanation is inherently false. Therefore, even on merits, Explanation 1 to Section 271(1)(c) is fully attracted.
31. For the above reasons, we set aside the order of the CIT(A) cancelling the penalty and restore that of the Assessing Officer. The Department will have its costs from the assessee which we assess at Rs. 5,000 (Rupees five thousand only). The same shall be deposited by the assessee with the Registry of the Tribunal within 2 months from the receipt of this order. The Department may withdraw the same by filing an application to the Registry.
32. The appeal is allowed. 67/16