Income Tax Appellate Tribunal - Kolkata
Dinabandhu Pal vs Income Tax Officer on 19 October, 2006
Equivalent citations: [2007]293ITR199(KOL), (2007)110TTJ(KOL)868
ORDER
G.D. Agrawal, Vice President
1. This appeal of the assessee is directed against the order of CIT(A)-XXXIX, Kolkata dated 13-1-2006, for the assessment year 2001-02.
2. In this appeal by the assessee the following grounds were raised:
1. For that the ld. CIT(A) erred in dismissing the appeal of the appellant on the alleged grounds.
2. For that the ld. CIT(A) ought to have properly considered the submissions made and ought not to have upheld the levy of penalty of Rs. 2,87,253/- Under Section 271(1)(c).
3. For that further grounds of appeal may kindly be allowed to be taken at the time of hearing of the appeal.
3. At the time of hearing before us ld. counsel for the assessee argued at length. He stated that before initiating the penalty proceeding Under Section 271(1)(c) the satisfaction of the A.O. is necessary. In the assessment order no satisfaction is recorded by the A.O. for initiation of penalty proceeding and, therefore, the initiation and consequently the levy of penalty Under Section 271(1)(c) is not warranted In support of his contention he has relied upon the following decisions:
1. CIT v. Ram Commercial Enterprises Ltd. 246 ITR 568 [Delhi]
2. Diwan Enterprises v. CIT and Ors. 246 ITR 571 [Delhi]
3. CIT v. Vikas Promoters Pvt. Ltd. 277 ITR 337 [Delhi]
4. Kshetra Mohan Roy v. ITO 139 ITR 441 [Calcutta]
4 With regard to the merit of the levy of penalty for concealment he stated that the assessee has furnished the confirmation of the creditors before the A.O. The A O has asked the assessee tO produce the creditor since the assessee was unable to produce the creditors, fie surrendered the cash credit as income of the assessee. He has referred to the copy of the orders sheet to support his contention that the confirmation of the creditors was produced before the A.O. He stated that merely because the assessee could not produce the creditors and, therefore, accepted the cash credit as his income, it cannot be said that the assessee has concealed the particulars of income and he is liable for penalty of concealment of income. In support of this contention he has relied upon the following decisions:
1. CIT v. Suresh Chandra Mittal 251 ITR 9 [SC]
2. CIT v. Kerala Spinners Ltd. 247 ITR 541 [Kerala]
3. CIT v. K.R.Chinni Krishna Chetty 246 ITR 121 [Madras] 4.1 With regard to discrepancy in the balance sheet while recording the closing stock, ld. counsel fairly admitted that the assessee has no explanation for the alleged discrepancy. In view of the totality of the above facts ld. counsel stated that penalty levied Under Section 271(1)(c) may be cancelled
5. Ld. D.R. on the other hand relied upon the orders of the authorities below. He stated that for initiating the penalty proceedings it is not necessary that the A.O. must record his satisfaction. He further stated that even if it is held that recording of satisfaction is necessary, in the case under consideration before us, the satisfaction was duly recorded by the A.O. In this regard he referred to the finding in the assessment order. In support of this contention he has relied upon the following decisions:
1. Shyam Bin Works Pvt. Ltd. v. CIT 259 ITR 625 [Allahabad]
2. Becker Gray & Co. Ltd. v. ITO 112 ITR 503 [Calcutta]
3. M. Sajjanraj Nahar v. CIT 283 ITR 230 [Madras]
6. With regard to merit of the levy of penalty Under Section 271(1)(c) he stated that the disclosure by the assessee was not voluntary but it was made only after the detection of concealment by the Assessing Officer and, therefore, the levy of penalty Under Section 271(1)(c) is quite justified. In support of this contention he has relied upon the following decisions:
1. K.P. Madhusudan v. CIT 251 ITR 99 [SC]
2. CIT v. Mohd. Mohtram Farooqui 259 ITR 132 [Rajasthan]
3. CIT v. C. Ananthan Chettiar 273 ITR 401 [Madras]
7. We have carefully considered the rival submissions of both the parties and perused the material placed before us. The assessee has challenged the validity of the penalty order on the ground that the A.O. has not recorded the satisfaction in the assessment order for initiation of penalty proceedings. In support of his contention he has relied upon the three decisions of Hon'ble Delhi High Court and one decision of Hon'ble Jurisdictional High Court. We find that in the case of CIT v. Ram Commercial Enterprises Ltd. (supra) their Lordships held as under:
The satisfaction as to the assessee having concealed the particulars of his income or furnished inaccurate particulars of such income is to be arrived at by the Assessing Officer during the course of any proceedings under the Act, which would mean the assessment proceedings, without which, the very jurisdiction to initiate the penalty proceedings is not conferred on the assessing authority by reference to Clause (c) of Sub-clause (1) of Section 271 of the Income-tax Act 1961.
A bare reading of the provisions of Section 271 and the law laid down by the Supreme Court makes it clear that, it is the assessing authority who has to form his own opinion and record his satisfaction before initiating the penalty proceedings. Merely because the penalty proceedings have been initiated it cannot be assumed that such a satisfaction was arrived at.
7.1. Similar view was taken by their Lordships in the case of Diwan Enterprises v. CIT and Ors. (supra) wherein it was held as under:
that as regards Section 271(1)(c), the Assessing Officer had nowhere recorded till the conclusion of the assessment proceedings his satisfaction that the assessee had concealed the particulars of his income or furnished inaccurate particulars of such income. This was a jurisdictional defect which could not be cured. The initiation of the penalty proceedings was itself had and consequently all the subsequent proceedings leading up to the passing of the penalty order must fail.
7.2. In the case of CIT Vikas Promotres Pvt. Ltd. (supra) their Lordships of Delhi High Court following their own in the case of Ram Commercial Enterprises Ltd. (supra) held as under:
It is mandatory for the Assessing Officer to record satisfaction before drawing an inference for the purpose of levying penalty while completing the assessment under Section 143(3) of the Income-tax Act, 1961. The provisions of Section 271(1)(c) are penal in nature, thus must be strictly construed, and the element of satisfaction should be apparent from the order itself. It is not for the courts to go into the mind of the authorities or trace the reasons from the file of such authorities.
7.3. In the case of Kshetra Mohan Roy v. ITO (supra) Hon'ble Jurisdictional High Court held as under:
The condition precedent for the assumption of jurisdiction for the issue of a notice proposing to impose a penalty under Section 274 read with Section.271 of the Act is that the ITO should be satisfied that the assessee had concealed the particulars of his income or had deliberately furnished inaccurate particulars of such income. The decision of the ITO, as regards the concealment or the furnishing of inaccurate particulars, may be arrived at either before the assessment proceedings are concluded or even thereafter. But such satisfaction must appear from the records of the assessment proceedings.
7.4. However, their Lordships of Hon'ble Allahabad High Court in the case of Shyam Biri Works Pvt. Ltd. v. CIT (supra) dissented from the decision of Hon'ble Delhi High Court in the case of CIT v. Ram Commercial Enterprises Ltd. (supra) and held as under:
Whether the Assessing Officer has to record his satisfaction under the Income-tax Act, 1961, it is specifically mentioned, e.g. in Section 148(2) of the Act which states that "the Assessing Officer before issuing any notice under this section will record the reason for doing so". Section 273 does not have a similar provision requiring the recording of the reason or satisfaction. Hence, it is to be inferred that Parliament never intended that before initiating penalty proceedings and issuing notice under Section 273, the Assessing Officer must record his reasons in writing for doing so Although the Assessing Officer must have satisfaction as required under Section 273 of the Act, it is not necessary for him to record that satisfaction in writing before intimating penalty proceedings Under Section 273.
7.5. Hon'ble Jurisdictional High Court in the case of Becker Gray & Co. Ltd. v. ITO (supra) held as under:
that it was first contended for the appellant that before issuing a notice, it was incumbent on the Income-tax Officer to record his prima facie satisfaction about the condition specified in Section 271(1)(c). It is true that the Income-tax Officer should be prima facie satisfied before the penalty notice is issued, but it does not mean that he is required to record such satisfaction in writing in every case. Whether the Income-tax Officer was so satisfied before he issued a penalty notice under Section 271(1) depends on the facts and circumstances of each case. In the present case, the notice was issued by the Income-tax Officer during the course of assessment proceedings. He had all the relevant facts before him when he issued the notice. Further, in the assessment order he added a huge sum of money and also recorded that he had already issued a penalty notice. The facts thus furnish sufficient evidence to show that the Income-tax Officer was prima facie satisfied before issuing the penalty notice.
7.6. Hon'ble Madras High Court in the case of M. Sajjanraj Nahar v. CIT (supra) also dissented with the view taken by the Hon'ble Delhi High Court and held as under:
that the Assessing Officer had recorded his satisfaction regarding concealment of income by indicating in the assessment order that "penalty proceedings are initiated separately under Sections 271(1)(c) and 273(2)(a)". It was clear that the original return filed by the assessee, when compared with the revised return pursuant to the notice issued under Section 143(2) of the Act formed the basis for the satisfaction of the Assessing Officer for initiating penalty proceedings under Section 271(1)(c) of the Act. The Assessing Officer, therefore, had rightly reached the satisfaction that the assessee had concealed income in the original return by indicating his satisfaction that the penalty proceedings were proposed to be taken. The Tribunal had rendered a clear finding that (i) the assessee did not act bona fide and honestly in returning the correct income originally, (ii) the filing of the revised return offering additional income by adding interest expenditure could not be considered a bona fide act, and (iii) the Assessing Officer was fully justified in initiating and thereafter levying penalty under Section 271(1)(c) of the Act, after calling for explanation from the assessee, as the assessee failed to offer any convincing explanation and unless it was demonstrated that such indication by the Assessing Officer to initiate penalty proceedings was mala fide, perverse, based on no evidence, a misreading of evidence or which a reasonable man could not form or that the person concerned was not given due opportunity resulting in prejudice, the said proceedings needed no interference. The imposition of penalty was valid.
8. From the perusal of above decisions, it is clear that the Honble Delhi High Court at the one hand and the Honble Allahabad and Madras High on the other hand has taken the contrary decision. It is also interesting to note that the Hon'ble Delhi High Court in the case of Ram Commercial Enterprises Ltd. (supra) and the Hon'ble Madras High Court in the case of M. Sajjanraj Nahar (supra) has considered and relied upon the same decision of Hon'ble Apex Court in the case of CIT v. S.V. Angidi Chettiar 44 ITR 739 [SC]. Therefore, it would be useful to refer to the above decisions of Hon'ble Apex Court. In that case there was a partnership firm in the name and style of S.V. Veerappan Chettiar & Co. The firm was registered Under Section 26A of the Income Tax Act 1922. The A.O. levied the penalty for concealment of income for assessment year 1947-48, 1949-50 and 1950-51 upon the firm. The firm was dissolved as per agreement between the partners on 13th April 1951. One of the partners of the dissolved firm filed a writ petition before Hon'ble Madras High Court on the ground that the penalty cannot be levied after the dissolution of the firm. Hon'ble High Court accepted the plea of the petitioners and set aside the order of the Income Tax Officer dated 20th May 1954. The revenue filed an appeal against the above order of the Hon'ble High Court before the Hon'ble Apex Court. Hon'ble Apex Court held that the penalty can be levied against the registered firm notwithstanding the dissolution of the firm. However, during the course of argument before the Hon'ble Apex Court ld. counsel for the assessee challenged the validity of the penalty imposed on the ground that there was no evidence that the Income Tax Officer was satisfied in the course of assessment proceedings that the firm had concealed the particulars of its income. This argument has been dealt with by their Lordship at page 745 of the report. It would be important to re-produce the same which reads as under:
Counsel contended that in any event, penalty for the assessment year 1949-50 could not be imposed upon the assessee firm because there was no evidence that the Income-tax Officer was satisfied in the course of any assessment proceedings under the Income-tax Act that the firm had concealed the particulars of its income or had deliberately furnished inaccurate particulars of the income. The power to impose penalty under Section 28 depends upon the satisfaction of the Income-tax Officer in the course of proceedings under the Act; it cannot be exercised if he is not satisfied about the existence of conditions specified in Clauses (a), (b) or (c) before proceedings are concluded. The proceeding to levy penalty has, however, not to be commenced by the income-tax Officer before the completion of the assessment proceedings by first Income-tax Officer. Satisfaction before conclusion of the proceeding under the Act, and not the issue of a notice or initiation of any step for imposing penalty is a condition for the exercise of the jurisdiction. There is no evidence on record that the Income-tax Officer was not satisfied in the course of the assessment proceeding that the firm had concealed its income. The assessment order is dated the 10th of November, 1951, and there is an endorsement at the foot of the assessment order by the Income-tax Officer that action Under Section 28 had been taken for concealment of income indicating clearly that the Income-tax Officer was satisfied in the course of the assessment proceeding that the firm had concealed its income.
8.1. We find that the Hon'ble Delhi High Court in the case of Ram Commercial Enterprises Ltd. (supra) has considered the observation of their Lordships of Apex Court with regard to the necessity of satisfaction of the Income-tax Officer before the penalty proceedings are initiated and held that the satisfaction of the A.O. is must before initiating the penalty proceedings Therefore, they relied upon the finding of fact arrived at by the Tribunal that no satisfaction was recorded by the A.O. before initiating the penalty proceedings. Therefore, their Lordships of Delhi High Court held that no question of law arises out of the order of the Tribunal.
8.2. We find that Madras High Court in the case of M. Sajjanraj Nahar (supra) has not stated that the Assessing Officer is not required to record his satisfaction for initiation of the penalty proceedings but they have stated that the noting in the assessment order penalty proceedings are initiated separately Under Section 271(1)(c) is sufficient to prove that the A.O. was satisfied during assessment proceedings that the assessee has concealed his income.
8.3. Hon'ble Jurisdictional High Court in the case of Kshetra Mohan Roy (supra) has held that it is a condition precedent for assumption of jurisdiction for the issue of notice Under Section 271 of the Act that the Income Tax Officer should be satisfied that the assessee has concealed the particulars of his income.
8.4. In the case of Becker Gray & Co. Ltd. v. ITO (supra) the Hon'ble Jurisdictional High Court has held that it is true that the Income Tax Officer should be prima facie satisfied before the penalty the penalty notice is issued but it does not mean he is required to record such satisfaction in writing in every case.
8.5. In the case of Shyam Biri Works Pvt. Ltd. v. CIT (supra), their Lordships of Allahabad High Court has held although the Assessing Officer satisfaction as required Under Section 273 of the Act, it is not necessary for him to record that satisfaction in writing before initiating penalty proceedings Under Section 273 8.6. From the perusal of all the decisions there is unanimity in the views of their Lordships that satisfaction of the Assessing Officer during the course of assessment proceedings is a pre condition for initiating the penalty proceedings Under Section 271(1)(c) of the Act. However, whether the A.O. was prima facie satisfied or not during the course of assessment proceedings would depend upon the facts of each case. Now, the further question arises what is the yard-stick to gauge the satisfaction of the A.O. whether he has to record his satisfaction in detail or whether mentioning of the words "penalty proceedings are separately initiated" would be sufficient to infer the satisfaction of the A.O. On this point, there is difference amongst the opinion expressed by their Lordships of different High Courts. However, we find that the Hon'ble Apex Court in the case of CIT v. S.V. Angidi Chettiar (supra) has considered this issue. In that case also the Counsel for the assessee has challenged that the Income Tax Officer was not satisfied during the course of assessment proceedings that the firm had concealed the particulars of its income. Their Lordships of the Hon'ble Apex Court accepted the legal contention of the assessee that the power to impose the penalty depends upon the satisfaction of the Income Tax Officer in the course of proceedings under the act. However, after examining the facts, their Lordships held as under:
The assessment order is dated the 10th of November, 1951, and there is an endorsement at the foot of the assessment order by the Income-tax Officer that action under Section 28 had been taken for concealment of income indicating clearly that the Income-tax Officer was satisfied in the course of the assessment proceeding that the firm had concealed its income.
8.7. Thus the endorsement at the foot of the assessment order by the Income Tax Officer that the action Under Section 28 had been taken for the concealment of income was considered to be the sufficient satisfaction by the Income Tax Officer during the course of assessment proceedings. Though this Decision of the Honble Apex Court was delivered while dealing with Section 28 of the Income Tax Act 1922 however, as the language of Section 271 is similar to Section 28, the above decision would be squarely applicable while dealing with the penalty proceedings Under Section 271. Moreover, Hon'ble Delhi High Court in the case of CIT v. Ram Commercial Enterprises Ltd. (supra) and Hon'ble Madras High Court in the case of CIT v. C. Ananthan Chettiar (supra) has considered and applied this decision while dealing with the penalty Under Section 271(1)(c) meaning thereby that the ratio laid down in the above case is considered to be applicable to Section 271(1)(c) of the Income Tax Act 1961. Therefore, respectfully following the above decision of the Hon'ble Apex Court, we hold that if at the foot of the assessment order the A.O. has recorded the finding that penalty proceedings Under Section 271(1)(c) is separately initiated, it would be sufficient to hold that A.O. was satisfied during the course of assessment proceedings for initiation of penalty proceedings.
9. Reverting back to the facts of the case under appeal before us, we find that in the body of assessment order while making the addition the A.O. has mentioned "the addition clearly attracts the, penalty provision Under Section 271(1)(c)." At the end of the order i.e. after the determining of total income and the computation of tax again it is mentioned "penalty proceedings Under Sections 274/271(1)(c) is initiated separately.
10. Respectfully following the yardstick laid down by the Hon'ble Apex Court in the case of CIT v. S.V. Angidi Chettiar (supra) we hold that the A.O. was satisfied during the course of assessment proceedings that the assessee has concealed his income. Accordingly we reject the assessee's contention that penalty proceedings were not validly initiated.
11. Coming to the merit of the levy of penalty Under Section 271(1)(c), we find that the A.O. has levied the penalty on the concealment of income of Rs.9,57,5 10/- which consisted of two addition (i) unexplained cash credit added Under Section 68 of Rs. 8,70,000/- and (ii) unexplained difference between the closing stock shown in the trading account/balance sheet Rs 87.'510/- Writing will deal with both the above item separately.
11.1. Regarding addition of unexplained cash credit Under Section 68 of the Ace.
There was credit of Rs. 8,70,000/- m the assessee's books.of account being unsecured loans. The assessee has furnished loan confirmation of the creditors before the A.O. on 27-11-2002. On 7-11-2003 the assessee again filed details of loan taken. Thereafter, A.O. asked the assessee to produce the loan creditors in person immediately. On 11-11-2003 the assessee appeared before the A.O and stated that no loan creditor is ready to depose before the A.O. and therefore, he is forced to offer the whole amount for taxation. The above facts are evident from the order sheet entry made by the A.O., copy of which is placed before us On 30th December 2003 the A.O. completed the assessment making the addition of Rs. 8,70,000/-. He has also levied the penalty Under Section 271(1)(c) in this regard, which is upheld by the CIT(A).
11.2. At the time of hearing before us both the parties have relied upon the various judicial pronouncements. Ld. Counsel for the assessee has relied upon the decision of Hon'ble Apex Court in the case of CIT v. Suresh Chandra Mittal 251 ITR 9[SC]. In that case the assessee had initially filed the return showing meager income. In response to notice Under Section 148 he filed the revised return showing higher income. In the penalty proceedings Under Section 271(1)(c), it was claimed by the assessee that he had offered additional income to buy peace of mind and to avoid litigation. The penalty levied by the A.O. was confirmed by the CIT(A) but deleted by the ITAT. On a reference Hon'ble M.P. High Court upheld the order of the ITAT. The department preferred appeal to the Supreme Court Their Lordships dismissed the appeal and held as under:
We have read the order of the High Court and the statement of case. Given the facts and circumstances, we do not think that any interference with the order of the High Court is called for.
The civil appeals are dismissed.
Thus the order of the High Court was sustained by their Lordships of the Apex Court considering the facts and circumstances of that case.
11.3. Ld. Counsel for assessee has also relied upon the decision of Honble Kerala High Court. In the said case the A.O. has levied the penalty Under Section 271(1)(c) which was cancelled by the ITAT on the ground that Clause B of explanation 1 to Section 271(1)(c) was applicable. On reference by the revenue their Lordships of Kerala High Court held that no question of law arises. The relevant finding of their Lordships reads as under:
that mere failure on the part of the assessee to substantiate its explanation was not enough to warrant penalty if such explanation was bona fide and all facts relating to the same were disclosed by it. The assessee had offered an explanation in respect of the entries and it was a case of the assessee's failure to establish or explain them. Therefore, the Tribunal was justified in treating it to be a case covered by Clause (B) of Explanation 1 to Section 271(1)(c) and canceling the penalty. The Tribunal had based its conclusion on the factual aspects and hence no interference was called for.
11.4. From the above it is evident that their Lordships upheld the factual finding of the Tribunal that the Clause B of explanation 1 to Section 271(1)(c) was applicable and since the assessee's explanation was found to be bona fide and all facts relating to the same were disclosed the assessee was held to be not liable for the penalty.
11.5. In the case of K.R. Chinni Krishna Chetty (supra), relied upon by the ld. counsel, the facts were altogether different. In the above case the assessee has constructed a building. The Assessing Officer estimated higher cost of construction on the basis of Valuer's report. He added the difference between the cost of construction shown by the assessee and estimated by him and also imposed penalty Under Section 271(1)(c) thereon. The Tribunal cancelled the penalty and held that there was no concealment of income at all. On reference their Lordships upheld the order of the Tribunal and held as under:
The addition to the income of the assessee based on the report of the valuer was rightly regarded by the Tribunal as being insufficient for recording a finding of concealment of income. Concealment implies some deliberate act on the part of the assessee in withholding the true facts from the authorities. The fact that the valuer assessed the building at a figure higher than the one reported by the assessee did not by itself lead to the inference that there had been concealment. There was no evidence to show that the assessee had deliberately concealed the cost of construction. The assessee was not required re report the progress of the construction as the return did not require him to do so. There, the levy of penalty Under Section 271(1)(c) of the Act was not valid.
12. Ld. D.R. on the other hand relied upon the decision of Hon'ble Rajasthan High Court in the case of Mohd. Mohtram Farooqui (supra) wherein their Lordships held as under:
that the amount of Rs. 5,92,340/- was seized from the assessee by the police authorities. The assessee was not even able to state how much of the amount belonged to his brother and brother-in-law. He could not say for what purpose or in respect of which transaction the amount was being carried. When the income had been surrendered after seizure, it could not be said that the assessee had surrendered the income voluntarily. The levy of penalty was valid.
12.1. He has also relied upon the decision of Hon'ble Madras High Court in the case of C. Ananthan Chettiar (supra) wherein their Lordships held as under:
that the assessee had offered no explanation except to assert that he disclosed the income only to buy peace with the Department and what was disclosed was additional income. The reason for not having disclosed the income earlier was not stated. Thus, the Tribunal was not right in holding that no penalty should be levied with reference to the concealed income seized in the form of jewellery and cash following the ratio of the Supreme Court in Sir Shadilal Sugar and General Mills Ltd. v. CIT even after the amendment to Section 271 in 1964 and 1975.
12.2. Ld. D.R. has also relied upon the decision of Hon'ble Apex Court in the case of K.P. Madhusudhan v. CIT 251 ITR 99 [SC]. The facts of that case are that the assessee had taken certain bank drafts for payment to suppliers of rice. It had made entries in its account not on the dates on which draffs were obtained but a few days later. The explanation of the assessee was that sufficient cash balance was not available on those dates, therefore, it had obtained loans from friends and had expected to repay such loans within a short time but no entries were made in its books of account in respect of such loans. The assessee also stated that since it was unable to furnish evidence for such loans, it offered the amount of Rs. 93,000/- as additional income. The A.O. levied the penalty Under Section 271(1)(c) applying explanation 1(B). The ITAT cancelled the penalty but Hon'ble Kerala High Court on a reference held that the imposition of penalty was valid. On appeal by the assessee to she Supreme Court their Lordships affirmed the decision of High Court and held as under.:
The Explanation to Section 271(1)(c) is a part of Section 271. When the Assessing Officer or the Appellate Assistant Commissioner issues a notice under Section 271, he makes the assessee aware that the provisions thereof are to be used against him. These provisions include the Explanation. By virtue of the notice Under Section 271 the assessee is put to notice that, if he does not prove, in the circumstances stated in the Explanation, that his failure to return his correct income was not due to fraud or neglect, he shall be deemed to have canceled the particulars of his income or furnished inaccurate particulars thereof, and, consequently be liable to the penalty under the section. No express invocation of the Explanation to Section 271 in the notice under Section 271 is necessary before the provisions of the Explanation are applied.
12.3. From the above decision of the Hon'ble Apex Court, it is evident that the explanation to Section 271(1)(c) is part of Section 271 and when a notice is issued Under Section 271 the burden is upon the assessee to prove that his case does not fall within the circumstances stated in the explanation.
13. Now whether a particular case falls within the ambit of explanation or not would depend upon the facts of each case. Therefore, it would be appropriate to refer to explanation 1 to Section 271(1)(c) and examine the facts of the assessee's case in the light of the explanation.
13.1. Explanation 1 to Section 271(1)(c) reads as under:
Where in respect of any facts material to the computation of the total income of any person under this Act,-
(A) such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Commissioner (Appeals) or the Commissioner to be false, or (B) such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of Clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed.
14. From the above explanation it is evident that the explanation is a deeming provision if the assessees case falls within the ambit of circumstances provided in Part A or Part B of the explanation it will be deemed that the amount added or disallowed in computing the total income of the assessee represents the income in respect of which particulars have been concealed 14.1. Part A of the explanation would be applicable in circumstances - (i) where a person fails to offer an explanation; (ii) where a person offers an explanation which is found by the A.O. or by the CIT(A) to be false.
14.2. Part B of the explanation would be applicable - (i) where a person offers an explanation but he is unable to substantiate the same; (ii) and he also fails to prove that such explanation is bona fide and that all the facts relating to the same which are material to the computation of the total income have been disclosed by him.
14.3. Part B of the explanation would be applicable only if both the above conditions are satisfied i.e. where the assessee is unable to substantiate his explanation and also unable to prove that the explanation is bona fide. If the assessee is able to prove that the explanation is bona fide and all the facts relating to the same has been disclosed, the assessee's case would not fall within Part B of the explanation even if he is unable to substantiate the explanation 14.4. Let us examine the facts of the assessee's case in the light of the Part A and B of the explanation (i) to Section 271(1)(c). There was credit of Rs.8,70,000/-in the assessee's books of account. It was the explanation by the assessee that the credit is the loan taken from various parties. The assessee furnished the details of loan taken. He has also furnished the loan confirmation from the creditors. A.O. asked the assessee to produce the creditors. Thereafter the assessee offered the income because he was unable to produce the creditors. From these facts it is clear that the assessee offered explanation relating to cash credit by furnishing necessary details and also substantiated the same by producing the confirmation of creditors. The explanation of the assessee was not found to be false by the revenue. A.O. has asked the assessee to produce the creditors which assessee was unable to produce and, therefore, it offered the income. Thus it is clear: hat no material was found by the revenue to hold that the confirmation (if the creditors produced by the assessee was false. Therefore, the assessee's case does not fall within the ambit of Part A of the explanation.
14.5 So far as the Part B is concerned, we find that the assessee offered an explanation and also substantiate the same by producing the confirmation of creditors. Therefore, Part B is also not applicable.
15. In view of above, we hold that the assessee's case does not fall within the ambit of explanation of to Section 271(1)(c). Merely because the assessee accepted the credit as his income because he was unable to produce the creditors, it cannot be said that the assessee has concealed the particulars of income or furnished inaccurate particulars of such income specially when the assessee has furnished the complete details with regard to cash credit along with confirmation from all the: creditors. In view of above we hold that the assessee is not liable for penalty Under Section 271(1)(c) in respect of addition of Rs. 8,70,000/- for unexplained cash credit.
16. Regarding addition for unexplained difference between the closing stock shown in the trading account/balance sheet.
16.1 During the course of assessment proceedings while scrutiny of the books of account it was found by the A.O. that the assessee has shown the closing stock in the trading account and balance sheet at a different figures. He asked the assessee to explain the discrepancy. Since the assessee was unable to explain the discrepancy, he offered the income of Rs. 87,500/- in this regard. The A.O. made the addition of Rs. 87,500/- and has also levied the penalty Under Section 271(1)(c) which is upheld by the CIT(A).
17. At the time! of hearing before us, ld. counsel for the assessee was fair enough to admit that the assessee has no explanation for the discrepancy in recording the closing stock which shows at different figures in the trading account and balance sheet. In view of above position, Part A of the explanation i.e. "the assessee fails to offer explanation" would be satisfied. Therefore, as per explanation 1 Part A, the assessee shall be deemed to have concealed the particulars of income of Rs. 87,500/- We, therefore, uphold the levy of penalty income. Thus n is clear that no material was found by the revenue to hold that the confirmation of the creditors produced by the assessee was false. Therefore the assessee;s case does not fall within the ambit of the explanation 14.5 So far as the Part B is concerned, we find that the assessee offered an explanation and also substantiate the same by producing the confirmation of creditors. Therefore, Part B is also not applicable.
15. In view of above, we hold that the assessee's case does not fall within the ambit of explanation 1 to Section 271(1)(c). Merely because the assessee accepted the credit as his income because he was unable to produce the creditors, it cannot be said that the assessee has concealed the particulars of income or furnished inaccurate particulars of such income specially when the assessee has furnished the complete details with regard to cash credit along with confirmation from all the creditors. In view of above we hold that the assessee is not liable for penalty Under Section 271(1)(c) in respect of addition of Rs. 8,70,000/- for unexplained cash credit.
16. Regarding addition for unexplained difference between the closing stock shown in the trading account/balance sheet.
16.1 During the course of assessment proceedings while scrutiny of the books of account it was found by the A.O. that the assfessee has shown the closing stock in the trading account and balance sheet at k different figures. He asked the assessee to explain the discrepancy. Since the assesee was unable to explain the iscrepancy, he offered the income of Rs. 87,500/- in this regard. The A.O. made he addition of Rs. 87,500/- and has also levied the penalty Under Section 271(1)(c) which is upheld by the CIT(A)
17. At the time of hearing before us, ld. counsel for the assessee was fair enough to admit that the assessee has no explanation for the discrepancy in recording the closing stock which shows at different figures in the trading account and balance sheet. In view of above position, Part A of the explanation i.e. "the assessee fails to offer explanation" would be satisfied. Therefore, as per explanation 1 Part A, the assessee shall be deemed to have concealed the particulars of income of Rs. 87,500/- We, therefore, uphold the levy of penalty for concealment of income in respect of addition of Rs. 87,500/- and (sic) A.O. to re-compute the penalty on the above amount
18. In the result, assessee's appeal is partly allowed.
Order pronounced in the Court on 19.10.06.