Income Tax Appellate Tribunal - Ahmedabad
Patel Chemical Works vs Income-Tax Officer on 6 August, 1999
Equivalent citations: [2000]74ITD322(AHD)
ORDER
Shri T. N. Chopra, Accountant Member
1. This appeal, filed by the assessee, in directed against the order dated 26-2-1993 passed by the CIT(A)-II, Ahmedabad for assessment year 1982-83 whereby a penalty of Rs. 2,12,332 levied under section 271(1)(c) has been confirmed.
2. The relevant facts in brief are that for assessment year 1982-83 under reference the assessee-firm filed its return of income on 15-7-1982 showing total income of Rs. 95,965. The assessment was completed on total income of Rs. 2,59,383 vide order dated 30-3-1985 which included inter alia an addition of Rs. 1,61,018 on account of diversion of profits by sham transactions with the sister concerns. The Assessing Officer observed that out of total sales of Rs. 18,98,928, sales to the extent of Rs. 11,00,547 have been made to three sister concerns at prices which were lower than the prices which were charged by the assessee for selling the same goods to outsiders. The salient features noticed by the Assessing Officer in the course of assessment proceedings with regard to these transactions with the sister concerns may be briefly enumerated as under :
(a) Out of the total sales of the firm amounting to Rs. 18,98,928, sales to the extent of Rs. 11,10,548 have been made to three sister concerns viz., M/s. Patel Chemical Industries (abbreviated as 'PCI'); M/s. Patel Laboratory Furnishers (abbreviated as "PLF") and M/s. Harsidh Chemical Industries (abbreviated as "HCI").
(b) The price charged was considered to be lower than the prevailing market price.
(c) The sister concerns in turn had sold the goods to third parties on the same date and in the same quantity but at a higher price.
(d) The delivery of the goods was made directly by the assessee to third parties whereas sales to the sister concerns were merely paper transactions.
(e) The method of accounting adopted to affect the sales was first of all to prepare bill in the name of a sister concern and simultaneous preparation of another bill of the said sister concern to the third party. Thereafter, the delivery of the goods was affected to the third party from the assessee's factory premises and book entries were passed in the books of account of the assessee as well as the sister concerns.
(f) Out of the three sister concerns, M/s. HCI is a manufacturing concern having no separate manufacturing premises and using the assessee's factory premises without payment of any rent whatsoever to the assessee-firm. This firm manufactures Sodium Sulphide whereas the trading has been done in the products manufactured by the assessee firm being sodium bisulphate and sodium sulphate. The assessment year 1982-83 is the second year of its working. This firm is constituted by nine partners, four are brothers of main partner of the assessee-firm and the others are family members.
(g) The second sister concern with substantial chunk of sales from the assessee-firm is M/s. PCI which has five common partners viz., S/Shri G. B. Patel, D. S. Patel, G. S. Patel, M. B. Patel and B. J. Patel who are partners of the assessee-firm also.
(h) The third sister concern M/s. PLF has two common partners with the assessee firm viz., S/Shri D. S. Patel and Nilesh P. Patel.
3. The Assessing Officer on the basis of details collected from the assessee compiled the following chart at page 3 of the assessment order in order to show the amount of profits diverted to the three sister concerns :
----------------------------------------------------------------------
Sr. Name of the Sale Price Sale Price Diff. Percentage
No. sister charged by By sister
of profits concern "A" firm
1. P.C.I. 8,42,575 9,53,510 1,10,935 11%
2. P.L.F. 21,960 34,311 12,351 35%
3. H.C.I. 2,76,030 3,13,745 37,732 12%
-----------------------------------------------------------------------
4. While making an addition of Rs. 1,61,018 on account of diversion of profits to the sister concerns with the help of sham transactions, the Assessing Officer referred to similar addition made in the immediately preceding assessment year i.e., assessment year 1981-82. While completing the assessment the Assessing Officer initiated the penalty proceedings for default under section 271(1)(c) for concealment of income.
5. During the course of penalty proceedings, the Assessing Officer issued show-cause notices to the assessee on various dates i.e., 11-2-1989, 2-3-1989 and finally on 2-8-1989. The Assessing Officer's letter dated 2-8-1989 is placed in the paper book at page 6 wherein the Assessing Officer observed that the transactions made by the assessee with the sister concerns are sham and bogus and profits amounting to Rs. 1,61,078 had been diverted to the sister concerns and the assessee has thus concealed the particulars of income. The assessee furnished written submissions in response to the aforesaid show-cause notices on 15-3-1989, 8-8-1989 and again on 22-8-1989. The assessee's letter dated 22-8-1989 is placed at page 8 of the paper book filed before us. The Assessing Officer considered the submissions made during the course of penalty proceedings and proceeded to levy the impugned penalty of Rs. 2,12,332 for concealing the particulars of income under section 271(1)(c) of the Act.
6. Aggrieved with the order of the Assessing Officer, the assessee preferred an appeal before the CIT(A). The CIT(A) vide impugned order dated 26-2-1993 has considered the written submissions filed during the course of proceedings vide letters dated 25-3-1992 and 22-6-1992 and proceeded to confirm the penalty. The relevant observations of the CIT(A) are reproduced as under :
"Therefore, we have to examine the facts of this case and apply the law as it existed at the relevant time. It has been found that the sales were shown to have been made through three sister concerns only with a view to divert a part of the income of the appellant to the three sister concerns. Neither during the course of assessment proceeding nor during the course of these proceedings, the appellant has filed any worthwhile explanation as to why the goods were shown to have been sold through these three sister concerns when in fact even the delivery of goods had been made to outsiders direct by the appellant. It is clear that but for the enquiries made by the Assessing Officer, a part of the income of the appellant would not have been assessed in its hands. It has been established that as far as the three sister concerns are concerned, the only work done by them was to prepare sale bills in the name of third parties and make suitable entries in their books of account. In respect of the sales of the appellant firm, no business activity had been carried on by these concerns but still because of the device adopted by the appellant, a major chunk of the profit of the appellant was diverted to these concerns. The appellant had in a systematic manner taken steps to conceal the real transactions namely the sales to outsiders at substantial profit. If a person has taken systematic steps to see that the real income remains outside the tax net, the case of concealment of income is clearly established against such an assessee. Merely because the question of law has been referred to the High Court, the position does not undergo a change. It was for the appellant to come forward and explain why the sales of its products had been routed through these sister concerns, who had absolutely no role to play in these transactions except to enable the appellant to conceal a portion of its income. I am, therefore, of the opinion that the case of concealment of income has been established against the appellant."
7. Aggrieved with the order of the CIT(A) the assessee has come up in appeal before us. It would be relevant to mention here that the addition of Rs. 1,61,018 made by the Assessing Officer for assessment year 1982-83 under reference has been confirmed in appeal by the Tribunal on the basis of its order for the immediately preceding assessment year i.e., assessment year 1981-82. The facts and circumstances of the case for assessment year 1982-83 are identical with that of the assessment year 1982-83 and therefore the Tribunal while confirming the addition has followed its earlier order for assessment year 1981-82. The relevant portion of the Tribunal's order for assessment year 1981-82 reads as under :
"7.1 An appraisal of the present facts clearly shows that the firm has adopted a well device system of effecting sales to its sister concerns at a price substantially lower than the prevailing market price. It has also been established by the ITO and in fact not contradicted before us by the learned counsel that all the transactions have been affected under the same roof and by the same set of persons representing one firm or the other. The ITO has also established that only book entries were being affected by the various concerns although in fact the entire sale transaction was carried out by the assessee firm including the delivery from its own premise. It is also seen that sales are effected on the same day for a like quantity by the assessee firm as well as in the sister concerns and the only change in the name of the customer on the bill book of the sister concern and the change in the sale price. A perusal of the chart which we have reproduced in the earlier part of this order shows that the difference in the sale price between that charged by the assessee and that charged by the sister concern in some of the cases worked out to a figure as high as 89.96% whereas in the other two cases it is 44.73% and 14.63%. There is no doubt that the IAC under section 144B directed the ITO not to tax the item in respect of one of the firms, viz., P.G.C.I., where the profit margin was only 9.39%. The strong reliance placed by the learned counsel for the assessee on this aspect of the matter, however, does not help him in any appreciable manner. According to us, the totality of the facts and circumstances governing the transactions has to be looked into and these, we are afraid, weigh heavily against the assessee."
8. The Tribunal further observed in para 7.2 as under :
"7.2 According to us it seems rather strange that the assessee has chosen to effect its sales through the medium of its sister concerns specially when it has the entire infrastracture to effect sales on its own. According to us this is nothing but a method to avoid payment of taxes which would include not only the firm tax but the individual tax as well. This is specially so since partners are either common or some of them are related to the partners of the assessee firm. The ITO has been able to make out a good case for the addition in question whereas the assessee in the course of proceedings before the ITO gave either evasive replies or skirted the issue."
9. Thus, for both the assessment years 1981-82 and 1982-83 the additions made by the Assessing Officer for diversion of profits to the sister concerns have been upheld.
10. Shri K. R. Dixit, the ld. counsel for the assessee, assailing the impugned order of the CIT(A), argued that the case of the Revenue is predominantly based on the judgment of the Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148/22 Taxman 11. However, the assessee has filed the return for assessment year 1982-83 under appeal on 15th July, 1982 i.e., much before McDowell & Co. Ltd.'s case (supra). The ld. counsel argued that the judgment in the case of McDowell & Co. Ltd.'s case (supra) has been rendered in 1985 any would therefore, not be applicable for levy of penalty. According to the ld. counsel the assessee's case would be governed by the ratio of the decision in the case of CIT v. A. Raman & Co. [1968] 67 ITR 11 (SC) which held the field when the return was filed by the assessee. In A. Raman & Co.'s case (supra) it has been held that the avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. On this basis the ld. counsel submitted that the legality of the transactions with the sister concerns can not be challenged by the Revenue and therefore the diversion of profits by routing the sales through the sister concerns is legally permissible.
11. The ld. counsel next argued that the decision of the Tribunal confirming the quantum additions are not binding for the purpose of levy of penalty under section 271(1)(c). The ld. counsel next assailed the impugned penalty on the ground that the Assessing Officer has taxed the profits in the hands of the sister concerns. Therefore, the genuineness of the sales made to the sister concerns cannot be doubted in the case of the assessee firm. The ld. counsel submitted that the approach of the Revenue in making additions on the ground of diversion of profits to the sister concerns and again assessing the same profits in the hands of the sister concerns leads to double taxation and therefore the impugned penalty under section 271(1)(c) cannot be in any case be sustained.
12. The ld. counsel assailed the legality of the impugned penalty on the ground that the penalty as been levied for a default which is different and distinct from the default for which the penalty proceedings were initiated. In the assessment order the Assessing Officer has directed initiation of proceedings for default under section 271(1)(c) for concealment of income whereas in the show-cause notice the Assessing Officer has allowed opportunity in connection with the default of concealing the particulars of income.
13. The next legal objection raised by the ld. counsel pertained to invocation of Explanation 1 to section 271(1)(c) by the CIT(A) for sustaining the impugned penalty whereas the Explanation was not invoked by the Assessing Officer while levying the penalty. In support of his contention, the ld. counsel has placed reliance on two decisions of Bombay High Court in the cases of CIT v. P. M. Shah [1993] 203 ITR 792 and CIT v. Dharamchand L. Shah [1993] 204 ITR 462/70 Taxman 414.
14. According to the ld. counsel, once the applicability of Explanation 1 is excluded, the levy of penalty would have to be considered in the light of the celebrated decision of the Supreme Court in the case of CIT v. Anwar Ali [1970] 76 ITR 696. The ld. counsel further placed reliance on the decision of the Supreme Court in the case of CWT v. Arvind Narottam [1988] 173 ITR 479/39 Taxman 368 and argued that the sale bills issued to the sister concerns have to be given effect to and cannot be treated as sham or unreal.
15. Shri R. K. Gupta, the learned D.R. appearing on behalf of the Revenue, on the other hand, supported the orders of the authorities below and argued that Explanation 1 to section 271(1)(c) has been specifically invoked and considered by the CIT(A) while confirming the penalty. According to the ld. DR the penalty has been rightly confirmed under the main provisions as well as Explanation 1 to section 271(1)(c) of the Act.
16. We have given our thoughtful consideration to the rival submissions and carefully gone through the facts and material on record as well as the judicial pronouncements cited before us. Section 271(1)(c) may be attracted where in the course of any proceedings under the Act the Assessing Officer or the first Appellate Authority is satisfied that any person -
- has concealed the particulars of his income; OR
- has furnished inaccurate particulars of such income.
17. The expressions "has concealed the particulars of income" and "has furnished inaccurate particulars of income" have not been defined either in the section or elsewhere in the Act. It is quite obvious that in the former situation the keeping of certain portion of income is directed whereas in the later situation it may be indirect. In furnishing the return of its income the assessee is required to furnish particulars and accounts on which such returned income has been arrived. These may be particulars as per the books of account. Inaccuracy made in such books of account which resulted in keeping off or concealing a portion of his income would be liable to be penalized as furnishing inaccurate particulars of income. The assessee may in such a situation also be construed as having concealed the particulars of its income inasmuch as a portion of his income has been kept off of the return by him. Both the offences thus in most situations may be overlapping. In the instant case before us, we find that the Assessing Officer has recorded in the assessment order dated 30-3-1985 that the notice for default under section 271(1)(c) may be issued for concealment of income. During the course of penalty proceedings, apart from issuing a formal show-cause notice under section 271(1)(c), the Assessing Officer has vide his letter dated 2-8-1989, placed at page 6 of the paper book, specially confronted the assessee with the facts pertaining to diversion of profits through the instrumentality of sham sale transactions with the sister concerns and called upon the assessee to explain why penalty for concealing the particulars of income may not be levied. The assessee furnished its reply dated 22-8-1989 which is placed at pages 8 to 11 of the paper book. The Assessing Officer after elaborate discussion of the facts and circumstances of the case came to the conclusion that the assessee has concealed the income by diverting the profits to its sister concerns. The Assessing Officer has further observed that the assessee has furnished inaccurate particulars of its income. From these facts we find that the charge of concealment has been specifically and unambiguously brought out by the Assessing Officer in the show-cause notice issued to the assessee as well as in the penalty order passed by the Assessing Officer. In the show-cause notice dated 2-8-1989 the Assessing Officer has clearly indicated the default of concealing the particulars of income. The satisfaction recorded in the assessment order using the words "concealment of income" clearly brings out the charge that the penalty is proposed to be levied for concealing the particulars of income. The income can be concealed obviously by concealing the particulars thereof. Looking to the fact that the penalty proceedings before the Assessing Officer do not have formal trappings of a criminal trial and nuances of criminality cannot be imported into such proceedings, we feel that strict procedural requirements of a criminal trial like issue of a formal charge-sheet are not necessary in such proceedings. The assessee has been allowed appropriate opportunity of being heard as per the provisions of section 274 which envisages that a reasonable opportunity of being heard be allowed to the assessee to meet the default which should be specifically confronted to the assessee. This basic requirement has been, in our opinion, duly complied with by the Assessing Officer inasmuch as the Assessing Officer has indicated that the penalty under section 271(1)(c) is proposed to be levied for concealing the particulars of income represented by diversion of profits through sham transactions with the sister concerns. No prejudice therefore, has been caused to the assessee in the matter of rebutting the case against it. The contention of the ld. counsel for the assessee is therefore without merit and is dismissed.
18. The decision of the Gauhati High Court in the case of Padma Ram Bharali v. CIT [1977] 110 ITR 54 relied upon by the ld. counsel in support of his contentions is clearly distinguishable. In the said case the facts were that initiation of penalty proceedings was for concealment of particulars of income. The High Court held that the Tribunal finally sustained the penalty on an entirely different ground which involved invoking the deeming provisions contained in the Explanation and the Tribunal held that the assessee would be deemed to have concealed the particulars of income or to have furnished inaccurate particulars of income. The issue before the Gauhati High Court thus involved invocation of Explanation to section 271(1)(c) for sustaining the penalty. In so far as the basis for levying the penalty is concerned, the decision renders no assistance to the assessee's case.
19. The legal contention of the ld. counsel regarding invoking of the Explanation by the First Appellate Authority would be discussed by us later and the Guahati High Court decision cited by the ld. counsel would again be considered in the said context.
20. In our opinion, the facts of the case, as borne out from the records, amply indicate that the assessee has taken resort to routing it sales through sham or unreal transactions which are merely paper transactions, with its sister concerns for the sole purpose of diverting its profits. There are tell tale signs in ample measure starting from the record which indicate that these sale transactions with the sister concerns are illusory transactions. The sale bills in the name of sister concerns have been issued on the same date for the same quantity and the goods have been directly delivered from the assessee's premises to the real purchaser. The transactions with the sister concerns are admittedly at rates much lower than the prevailing market rates and the only justification adduced by the assessee is the legal sanction supposedly flowing from A. Raman & Co.'s case (supra). The assessee has obviously resorted to a make believe arrangement whereunder the sister concerns have been used as conduits for siphoning off of its profits. The Assessing Officer has brought out at page 4 of the penalty order the close inter-connection of the assessee with the sister concerns. Five partners of the assessee firm are also partners in the three sister concerns utilised for profit diversion. The substantial chunk of sham transactions are routed through M/s. Patel Chemical Industries (PCI). From the assessment order of the said concern placed at pages 13 to 15 of the paper book it appears that the following partners of PCI are also partners in the assessee firm :
1. Shri Dasrathlal S. Patel 10%
2. Shri Gangaram B. Patel 10%
3. Shri Gautam S. Patel 15%
4. Shri Maneklal B. Patel 17.5%
5. Shri Bipin J. Patel 17.5%
21. From the aforesaid situation it would be seen that 70% of profits in the sister concerns is held by the five partners of the assessee firm who are common. The other partners also are closely related family members. From the assessment order of PCI for assessment year 1982-83 it appears that the total turn over shown is Rs. 10,39,828 which include paper sales of Rs. 9,53,501 in respect of transactions routed through this intermediary. These facts provide irrefutable evidence that the transactions with the sister concerns are merely a ruse to divert the profits. In fact the sale transactions of the assessee with the sister concerns and the subsequent transactions of the sister concerns with the outside parties form an integral and indivisible part of the composite scheme of tax planning of the assessee. The decision in the case of McDowell & Co. Ltd. (supra), which is a locus classicus in the field of tax jurisprudence, squarely applies to the facts of the case. This is a landmark judgment rendered by Five Judges Bench of the Supreme Court and makes a radical departure in the approach to tax planning schemes from the days of A. Raman & Co.'s case (supra). The Supreme Court held that the colourable device can not be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. Their Lordships observed at page 161 of the Report -
"It is neither fair nor desirable to expect the legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation with the aid of "emerging" techniques of interpretation as was done in Ramsay, Burma Oil and Dawson, to expose the devices for what they really are and to refuse to give judicial benediction."
22. McDowell & Co. Ltd.'s case (supra) has taken note of the far reaching changes in the approach to the tax planning schemes in the field of tax jurisprudence by the British Courts whereby ghost of Duke of Westminster has been exercised in W.T. Ramsay Ltd. v. IRC [1981] 2 WLR 449 (HL); IRC v. Burmah Oil Co. Ltd. [1982] 2 STC 30 and Furniss v. Dawson 2 WLR 226 (HL). In those decisions the House of Lords considered the schemes of tax avoidance which consisted of a series of preordained transaction which was intended to avoid taxation. The House of Lords declined to accord judicial benediction to such transactions and held that the fiscal consequences of a preordained series of transactions are generally to be ascertained by considering the series as a whole and not by considering each individual transaction separately. The ghost of Duke of Westminster has haunted the tax jurisprudence far too long. The ghost might have found quietude with the decisions in W.T. Ramsay Ltd.'s case (supra) Burmah Oil Co. Ltd.'s case (supra) and Furniss case (supra) followed by a string of Supreme Court decisions in McDowell & Co. Ltd.'s case (supra), Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77 (SC) and Sunil Siddharthbhai v. CIT [1985] 156 ITR 509/23 Taxman 14W etc. The contention of the ld. counsel that the authority of McDowell has been diluted by the decision of the Supreme Court in Arvind Narottam's case (supra) is entirely misconceived and cannot be accepted. In the first instance Arvind Narottam does not in any manner disapprove or dilute the ratio of McDowell & Co. Ltd.'s case (supra). It is further to be noted that Arvind Narottam's case (supra) judgment rendered by Two Judges Bench of the Supreme Court, could not possibly have overruled or disapproved McDowell & Co. Ltd.'s case (supra) judgment delivered by Five Judges Bench. So McDowell still holds the field and is binding on us. The principles laid down by the McDowell have been followed by the Gujarat High Court in the case of CIT v. Smt. Minal Rameshchandra [1987] 167 ITR 507/30 Taxman 282 and it has been held that where a device has been adopted to evade tax, the Court is entitled to unravel the device. The court must examine the substance of the transaction and then decide whether the transaction is such that the judicial process may accord approval to it.
23. Applying the aforesaid principles laid down by the Supreme Court and reiterated by the Gujarat High Court, it was the bounden duty of this Tribunal to unravel the tax saving device adopted by the assessee and to determine the true character of the transactions.
24. In the totality of the facts and circumstances of the case, we have no hesitation in holding that the assessee firm has adopted non-genuine and artificial device of showing paper transactions with the sister concerns with the objective of reducing its tax liabilities. These transactions are commercially inert and have been entered into as part of tax saving scheme. The penalty for concealment levied under section 271(1)(c) is therefore, liable to be upheld.
25. One of the grounds on which the ld. counsel assailed invocation of McDowell & Co. Ltd.'s case (supra) is that the decision has been rendered in the year 1985 whereas the return has been filed in 1982. The contention, in our opinion, is legally untenable and deserves to be rejected. McDowell & Co. Ltd.'s case (supra) cannot be equated with the statute in so far as the issue of retrospectivity is to be considered. McDowell articulates a well accepted principle of tax jurisprudence that colourable device cannot be a part of tax planning. It is a fact that the McDowell disapproves of certain observations contained in A. Raman & Co.'s case (supra). However, the difference is in the matter of shifting emphasis while considering the nature and character of the transactions from the taxation point of view. A. Raman & Co.'s case (supra) by no stretch of imagination accords judicial approval to sham or unreal transactions which are merely illusory in character. A Raman & Co.'s case (supra) can not conceivably accord judicial acceptance to the sham transactions of the assessee entered into with the sister concerns by way of preconceived and pre-planned scheme of diversion of profits. In our opinion, the principles laid down by the Supreme Court in McDowell & Co. Ltd.'s case (supra) cannot be excluded from consideration on the erroneous ground of retrospectivity.
26. We have earlier considered the issue of levy of penalty on the basis of main provisions contained in section 271(1)(c) and held that the assessee is liable to penalty under section 271(1)(c) for concealing the particulars of income as well as furnishing inaccurate particulars of income. We shall now deal with the levy of penalty by applying Explanation 1 to section 271(1)(c). The ld. counsel has strongly urged that the CIT(A) is not justified in invoking Explanation 1 to section 271(1)(c) since the Explanation has not been considered and invoked by the Assessing Officer while levying the penalty. Explanation 1 has been appended to clause (c) of section 271(1) by the Taxation Laws (Amendment) Act, 1975 w.e.f. 1-4-1976 by way of substitution of the original Explanation which earlier inserted by the Finance Act, 1964 w.e.f. 1-4-1964. Explanation 1 incorporates a rule of evidence and shifts the onus on the shoulders of the assessee in furnishing the Explanation before the Assessing Officer. The Explanation does not constitute an ingredient of the offence and it lays down only a rule of evidence. The Explanation does not confer any discretion on the Assessing Authority to invoke it or not. It automatically applies to cases where penalty proceedings under section 271(1)(c) for the offence of concealing the particulars of income have been initiated. The consequences from the applicability of Explanation 1 follow as a matter of law. If the assessee fails to offer Explanation OR the Explanation is found to be false or the assessee is not able to substantiate the Explanation, the presumption that he concealed the particulars of income is bound to be drawn. In the instant case we find no infirmity in the order of the CIT(A) in invoking the Explanation for the purpose of considering the exigibility of the penalty under section 271(1)(c). In support of our view reliance is placed on the decisions of the Punjab and Haryana High Court in the cases of CIT v. Rajeshwar Singh [1986] 162 ITR 173/26 Taxman 439 and CIT v. Simco Auto India [1989] 179 ITR 265/[1990] 49 Taxman 270. In Shri Rajeshwar Singh's case (supra), the ITO did not invoke the Explanation for levying penalty for concealment of income and the AAC also did not refer to the Explanation when he deleted the penalty. The High Court held that the Revenue for the first time before the Tribunal can invoke the Explanation to seek reversal of the AAC's order deleting the penalty and the Tribunal cannot rule out of consideration the applicability of the Explanation. In support of this view, the High Court referred to the judgment of the Gujarat High Court in the case of Kantilal Manilal v. CIT [1981] 130 ITR 411/[1980] 4 Taxman 548 wherein it has been held as under : "The Explanation to section 271(1)(c) of the Income-tax Act, 1961, enacts a rule of evidence and the authority which imposes penalty is competent to invoke its aid in reaching the final conclusion on the question of concealment, although it may not have been resorted to at the stage when the reference was made to the authority imposing the penalty. Therefore, merely because the Explanation has not been referred to in the show-cause notices, there is no legal bar against invoking the Explanation during the course of the penalty proceedings."
27. The Division Bench of the Gujarat High Court has held in CIT v. Drapco Electric Corpn. [1980] 122 ITR 341, that -
"Since the Explanation enacts merely a rule of evidence, it is competent to the authority which imposes the penalty to invoke its aid in reaching the final conclusion on the question of concealment, although the Income-tax Officer may not have resorted to it at the stage when he made the reference to the authority."
28. The contention of the ld. counsel against the invocation of the Explanation by the CIT(A) is thus contrary to the decisions of the Punjab & Haryana High Court as well as the Gujarat High Court which is the jurisdictional High Court for us. A similar view has been taken by the Orissa High Court in CIT v. Laxmi Auto Stores [1977] 106 ITR 626. The Allahabad High Court has also taken a similar view in CIT v. Zeekoo Shoe Factory [1981] 127 ITR 837. Thus various High Courts like Punjab & Haryana, Orissa, Allahabad as well as Gujarat High Court have consistently taken the view that the Revenue can invoke the Explanation for the first time before the Tribunal or before the CIT(A) for seeking confirmation of penalty levied by the Assessing Officer under section 271(1)(c).
29. Regarding the two decisions of the Bombay High Court cited by the ld. counsel, we may state that the view taken by the other High Courts like Punjab & Haryana, Orissa, Allahabad and Gujarat High Court is in favour of the Revenue. At this juncture it would be relevant to mention here that we had invited attention of the ld. counsel for the assessee to the aforementioned decisions of the High Courts. The contention of the ld. counsel against the invocation of the Explanation by the CIT(A) for sustaining the penalty, is therefore rejected.
30. The ld. counsel next assailed the invocation of the Explanation on the ground that Explanation 1 can be invoked "in respect of any facts material to the computation of the total income" and not in respect of addition of Rs. 1,61,018 made on account of diversion of profits to the sister concerns. The contention of the ld. counsel is, in our opinion, without any substance and is liable to be rejected. Explanation 1 clearly envisages that once the Explanation is applied, "the amount added or disallowed in computing the total income would be deemed to represent the income in respect of which particulars have been concealed."
31. Applying Explanation 1 to the facts of the instance case, the explanation of the assessee is to be examined by applying the test of preponderance of probabilities for arriving at a conclusion whether the deeming fiction as contained in Explanation 1 applies. In case of concealment of income, the modus of concealment is obviously within the special knowledge of the assessee. The settled and virtually hallowed rule of evidence in this context is epitomised in section 106 of the Evidence Act :
32. Section 106 - When any fact is specially within the knowledge of any person, the burden of proving that fact is upon him.
33. It was in the light of the aforesaid rule of evidence that the provisions of Explanation 1 are to be construed and applied. The presumption raised in Explanation 1 is a rebuttable presumption and it is for the assessee to prove by adducing material or exhibiting from that already on record for rebutting or dislodging such presumption. In the instant case before us the assessee has merely relied upon the sale bills issued to the sister concerns and argued that no illegality has been committed by routing the sale transactions through the sister concerns by the assessee. We have already discussed hereinbefore that the sale transactions are sham and unreal; the assessee cannot be allowed to get away by putting sanctimonious mantle of legality on the transactions which are a part of tax planning and are non-genuine. The assessee has failed to rebut the presumption on the test of preponderance of probabilities. Therefore, in our opinion, Explanation 1 is clearly applicable and penalty under section 271(1)(c) is therefore leviable.
34. In support of the view being taken by us above reliance is placed on the decision of the Supreme Court in CIT v. Jeevan Lal Sah [1994] 205 ITR 244 in which it has been held that rule regarding burden of proof enunciated in Anwar Ali's case (supra) was no longer valid and the cases to which the Explanation was attracted have to be decided in the light of the law enunciated in the cases of CIT v. Mussadilal Ram Bharose [1987] 165 ITR 14/30 Taxman 546H (SC) and CIT v. K. R. Sadayappan [1990] 185 ITR 49/51 Taxman 304 (SC).
35. The last contention of the ld. counsel which remains to be considered is based on so called principle of double taxation as argued by the assessee. The ld. counsel urged that since the profits diverted by the assessee to the sister concerns have already been assessed in the hands of the sister concerns, these cannot be assessed again in the hands of the assessee firm and on this ground penalty, according to the ld. counsel, cannot be sustained under section 271(1)(c). In our considered opinion the plea based on the concept of double taxation, suffers from an inherent infirmity inasmuch as it proceeds on the erroneous presumption that the Revenue is debarred from assessing the income belonging to the assessee in the hands of the assessee on the ground that the said income has been declared by another person and the same has been assessed by the Assessing Officer. It is well established by various judicial pronouncements of the Hon'ble Supreme Court as well as the other High Courts that when an assessee shows certain income in his return, the Revenue does not act in consistently if it accepts the return of that assessee on its face value and at the same time tax that income in the hands in which it ought really to be taxed. Reference in this context may be made to the decisions of the Supreme Court in Jamnaprasad Kanhaiyalal v. CIT [1981] 6 Taxman 61/130 ITR 244, ITO v. Rattan Lal [1984] 145 ITR 183/16 Taxman 25 and ITO v. Bachu Lal Kapoor [1966] 60 ITR 74.
36. The Apex Court observed in the case of ITO v. Ch. Atchaiah [1996] 218 ITR 239/84 Taxman 630 as under :
"We are of the opinion that under the present Act, the Income-tax Officer has no option like the one he had under the 1922 Act. He can, and he must, tax the right person and the right person alone. By 'right person', we mean the person who is liable to be taxed, according to law, with respect to a particular income. The expression 'wrong person' is obviously used as the opposite of the expression 'right person'. Merely because a wrong person is taxed with respect to a particular income, the Assessing Officer is not precluded from taxing the right person with respect to that income. This is so irrespective of the fact which course is more beneficial to the Revenue."
37. In view of the aforesaid settled legal position, the contention of the ld. counsel is entirely misconceived and is therefore, dismissed.
38. Having regard to the aforesaid discussion, we hold that the penalty under section 271(1)(c) is leviable in the instant case under the main provisions as also by applying Explanation 1 to section 271(1)(c). However with regard to the quantum of penalty, the Assessing Officer has levied maximum penalty of Rs. 2,12,332 whereas the minimum penalty leviable works out to Rs. 1,06,166. We would uphold the levy of penalty to the extent of Rs. 1,06,166.
39. Before parting, we may observe that various judicial authorities cited before us have been duly considered by us even if some of these authorities may not be specifically referred to in our order above.
40. In the result, the assessee's appeal is partly allowed.