Kerala High Court
Commissioner Of Income-Tax vs T. Abdul Majeed on 6 September, 1996
Equivalent citations: [1998]232ITR50(KER)
JUDGMENT V.V. Kamat, J.
1. Dealing with the penalty proceedings relating to the assessment for the year 1977-78 we are expected to answer the following question in the present proceedings :
"Whether having regard to the facts and circumstances of this case and having regard to the provisions of Section 271(1) of the Act, the Appellate Tribunal was right in holding that the assessee cannot be said to have concealed any income or intended to furnish inaccurate particulars thereof, and that therefore penalty was not leviable under Section 271(1)(c) ?"
2. For the assessment year in question in pursuance of notice under Section 145(2) of the Income-tax Act, 1961, the assessee who was running a textile business under the name and style of "Textile Centre", filed a return declaring an income of Rs. 85,200.
3. On January 12, 1977, there was a search of the business premises of the assessee under Section 132(1) of the Act and it is seen from the factual matrix that in the course of this search, stock inventories prepared by the assessee on December 30, 1976 (a few days before), were seized.
4. As per the return filed the assessee's trading account disclosed total sales of Rs. 1,05,32,644.81. The closing stock credited to the trading account is seen as Rs. 10,36,384.75, and a percentage of 5.85 gross profit is disclosed at Rs. 5,67,261.
5. As per the picture found from the inventories that came to be seized in the search, the following particulars seem to have been noted :
"Stock as per book No. 1 9,09,791.13 Stock as per book No. 2 1,76,749.60 Other items 1,45,682.80 Total 12,52,223.53 Less : Sales on 31-12-1976 14,497.81 Balance 12,17,725.72"
6. The assessee was expected to account for this amount of Rs. 12,17,725. The factual matrix further shows undisputedly that the assessee accounted for Rs. 10,36,384 and his explanation in regard thereto was accepted as the value of the closing stock. The difference related to an amount of Rs. 1,81,341.
7. With regard to the above difference of Rs. 1,81,341, the assessee explained that there was duplication in the closing stock inventory taken in respect of several items. It was contended that this resulted in the appearance of the above difference.
8. The assessment proceedings initiated in accordance with the directions of the Inspecting Assistant Commissioner under Sections 144B(4) of the Act (see annexure A) proceeded on the basis that this explanation was totally untenable. It was observed that the closing stock inventory appeared to have been taken carefully and meticulously. There was yet a second facet of the explanation. The assessee contended that there were some damaged goods in the stock which would also appear to have been taken into consideration by the Inspecting Assistant Commissioner, thereby reducing the closing stock value from Rs. 1,81,341 to Rs. 1,71,341. In the assessment proceedings it was this amount of Rs. 1,71,341 that was added to the assessee's disclosed income of Rs. 85,200. It needs to be mentioned that this order dated March 14, 1980, of the Income-tax Officer has received finality by reason of its confirmation by the first appellate authority as well as the Income-tax Appellate Tribunal.
9. Therefore, in view of simultaneous initiation, penalty proceedings, under Section 271(1)(c) of the Income-tax Act commenced before the Income-tax Officer according to law.
10. It is necessary to reproduce the contention of the assessee in reply to the notice dated March 24, 1980, requesting the officer to drop the penalty proceedings. The contents are already reproduced in the order of the officer (annexure "B") and they are as follows :
"The addition has been made on the basis of stock figures from the closing stock inventory taken from the business premises on January 12, 1977, which has not been checked up and there were a number of mistakes and duplications in it. The stock inventories were not totalled up nor checked at the time when the business premises were searched on January 12, 1977. In the presence of the Inspecting Officer only the total of the inventory was put in a hurry. The books of account were with the Department. The return of income was filed after checking these papers. While filing the return of income the closing stock figure adopted by the assessee was different in view of the discrepancies and mistakes traced out in the inventories taken away by the department. The addition has been made only as a matter of estimate. The discrepancies are quite possible."
11. It would be seen that the assessee had placed his difficulties and circumstances at the outset. Reading the order of the Income-tax Officer in the penalty proceedings it appears that the officer has given the solitary emphasis to the reasoning of the Tribunal and its observations in the quantum proceedings--order dated April 10, 1981, in fact the said observations are quoted verbatim and they are reproduced hereinafter :
"We have carefully considered these arguments. The learned representative of the assessee has pointed out in the course of the hearing the different instances where there were, according to him, duplications. We have gone through the two note books which were produced by the Departmental representative. We are unable to agree with the assessee that there has been duplication of the stock in the stock-taking on December 30, 1976. As has been pointed out by the Income-tax Officer in the assessment order and by the Commissioner of Income-tax in his appellate order the stock has been taken in a meticulous and systematic manner and it is for the assessee to show beyond doubt that some stock has been taken into account twice in his stock inventory. It cannot be said that the assessee has been able to establish this in the circumstances. The note books show that the assessee has given a description of the goods, the number of pieces and the quantity of cloth in each piece. In addition to pieces of cloth which had not been opened after delivery from the manufacturer to the assessee there are also pieces of cloth which have been partly cut and sold. The assessee has in respect of such items given the available length of the cloth in that particular piece. It is difficult in the context to accept that the assessee has considered the same item of goods once again in the stock taking."
12. The officer observed that these aspects were considered at the time of assessment, at the time of the appeals and were rejected in toto, leading him to record a conclusion that there is no hesitation that it is a fit case for levy of penalty under Section 271(1)(c) of the Act. Accordingly, penalty of Rs. 1,20,000 was imposed by him under Section 271(1)(c) of the Act.
13. The first appellate authority in the penalty proceedings, the Commissioner of Income-tax (Appeals), Ernakulam, disagreed with the finding and by the order dated February 17, 1982 (annexure "C"), cancelled the officer's order levying penalty.
14. The first appellate authority took up for consideration the primary question as to whether there was any concealment at all. The first appellate authority noted that the return was filed on December 3, 1977. It also noted that the details of the stock were known to the Income-tax Officer almost 12 months before the return was filed. This was in view of the fact that in an action under Section 132(1) of the Act on January 12, 1977, from the business premises of the assessee, stock inventories prepared by him as on December 30, 1976, were seized by the Department.
15. The first appellate authority also considered another aspect to the effect that the assessee was able to make the necessary adjustment and extract the information for the return only with reference to the books in the custody of the Income-tax Department and therefore any mistake resulting under the circumstances could not be treated as concealed. The first appellate authority recorded the conclusion of fact that there is no question of concealment, mostly on the basis that as a consequence of the act of search, the record was with the Department itself.
16. Reading the judgment of the appellate authority we find that the first appellate authority considered the question that furnishing inaccurate particulars and failure of the assessee to disclose the value of the closing stock, would not tantamount to concealment or deliberate furnishing of inaccurate particulars. The first appellate authority also considered the situation that if there is no evidence on the record except the explanation given by the assessee which explanation has been found to be false, the situation would not necessarily follow that the receipt (sic) that any kind of concealment could have any relationship with the process of dealing with the situation. The first appellate authority also adverted to the position that it is necessary to consider as to whether the assessee has consciously and deliberately concealed the particulars of his income and was deliberate in furnishing inaccurate particulars of the income. This reasoning is adopted by the first appellate authority on the strength of, firstly, the decision of the Patna High Court in Shanker Lal Kejriwal v. CIT [1964] 54 ITR 541, then on the decision of this court in R. Madhavan Nair v. CIT [1973] 87 ITR 362, and, lastly on the decision of the Rajasthan High Court in CIT v. Sohan Lal Brij Lal [1979] 120 ITR 901. The matter travelled further before the Income-tax Appellate Bench. The Tribunal did not find any reason to interfere with the order of the first appellate authority. In the process of its short reasoning in paragraph 5 of its order the same aspect was emphasised that the search was conducted on January 12, 1977, and the stock register and inventories were taken possession of by the Department, when the return was filed long thereafter on December 3, 1977. The Tribunal has observed that the assessee disclosed stock of less value only because there were some duplications in the stock register and some stock had been damaged and which had not been checked leading to the situation that the assessee can be expected to show in the return only the value of the stock, which according to him is the correct value. The Tribunal keeping itself conscious of the fact that ultimately the assessee's case with regard to the quantum of the stock was not accepted by the Income-tax Officer and also by the further appellate authorities. It held that it cannot be said in the circumstances that by filing the return showing a stock of a smaller value, the assessee concealed any income or intended to furnish inaccurate particulars thereof. With this reasoning the Tribunal confirmed the order of the first appellate authority and thereby dismissed the appeal of the Revenue.
17. The above narration of facts will naturally leave a clear and safe place for certain undisputed factual positions or well established material facts for the purpose of consideration. It would be seen firstly that in the return filed on December 3, 1977, the assessee disclosed total sales as per the trading account at Rs. 1,05,32,644.81. The assessee also valued the closing stock credited to trading account at Rs. 10,36,384.75. It was on the basis of this position disclosed in the return the gross profit at 5.85 per cent. was disclosed at Rs. 5,67,261.
18. As against this in pursuance of the availability of the record as a result of search under Section 132(1) of the Income-tax Act, 1961, conducted on January 12, 1977, the closing balance is seen at Rs. 12,17,725. This left a balance of Rs. 1,81,341.
19. The second aspect that floats on the surface of the record is that the explanation of the assessee was acceptable to the Department with regard to the amount of Rs. 12,17,725 as far as the amount of Rs. 10,36,384, as regards quite a sizeable proportion in regard thereto, leaving the difference only of Rs. 1,81,341.
20. The third aspect that is seen floating on the surface of the record is that the assessee offered explanations with two alternatives. One was the possibility of duplicate entries and the other was damage to the goods. In regard to the damage to the goods it has to be emphasised that it was not rejected by the Department even in the quantum proceedings and on that count reduction though of a token character has been granted at Rs. 10,000 in regard thereto leaving the difference ultimately at Rs. 1,71,341.
21. Fourthly, it would be seen that the first appellate authority has also recorded that there is no concealment of income although reasons in regard thereto may be somewhat different and debatable.
22. Fifthly, the Tribunal on taking into consideration the circumstances has observed that it cannot be said that the assessee has concealed any income or intended to furnish inaccurate particulars thereof.
23. In the light of the above factual situation learned senior standing counsel for taxes with some justification contended that the two appellate authorities have considered the question by applying the old law in regard thereto, therefore, as a consequence making observations that what is required to be established is that the assessee had filed his return consciously and deliberately withdrawing truth resulting in concealment or furnishing inaccurate particulars. Learned counsel submitted that the two appellate authorities were blissfully unaware of the correct position of law of the things required to be taken into consideration in dealing with the penalty proceedings. Learned counsel firstly took us through the statutory provision of Section 271 as is applicable to the relevant assessment year. In addition thereto, learned counsel relied on the decision of the Supreme Court in CIT (Addl) v. Jeevan Lal Sah [1994] 205 ITR 244 giving the position of law governing the situation.
24. There is no dispute and it cannot be said that the two appellate authorities did not apply the correct position of law in regard to the situation.
25. As stated at the outset the factual matrix would not present any difficulty. Section 271(1)(c) of the Act statutorily requires that the assessee has either concealed the particulars of his income or has furnished inaccurate particulars of such income, it is Explanation 1 to the said section that speaks of what is required to be taken into consideration in the matter of determination of the liability under Section 271(1)(c) of the Act. Bare perusal of the said statutory provision of Section 271(1)(c) in its application to the factual peculiarities specified hereinbefore that are undisputed would show that the assessee has furnished inaccurate particulars of such income. The assessee has filed a return and in regard to which we have already specified the position ultimately relatable to the difference of Rs. 1,71,341. In this context, on the face of the situation unfolded by the factual matrix it will have to be seen that the assessee offered an explanation. This explanation has been held to be of a situation that the assessee has not been able to substantiate the same. If Explanation 1 is considered for its application it would be seen that this is a situation where the assessee has not been able to substantiate by way of explanation supplied by him.
26. It would not be out of place to reproduce Explanation 1 and it is as follows :
''Explanation 1--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 Income-tax Officer or the Appellate Assistant Commissioner to be false, or (B) such person offers an explanation which he is not able to substantiate, 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 :
Provided that nothing contained in this Explanation shall apply to a case referred to in Clause (B) in respect of any amount added or disallowed as a result of the rejection of any explanation offered by such person, if such explanation is bona fide and all the facts relating to the same and material to the computation of his total income have been disclosed by him."
27. Referring to the contents of the above Explanation it would be obvious that the situation would be governed by Clause (B) thereof. The next consequence that would legally flow from the said situation would be that the situation would get governed by the proviso thereto and it is to the effect that the Explanation would not operate in respect of any amount added or disallowed as a result of any rejection of explanation offered by the assessee, if such explanation is bona fide and all the facts relating to the same and material to the computation of his total income had been disclosed by him.
28. In other words, when the facts show that inaccurate particulars are furnished and in regard thereto the result is of the rejection of the said explanation, it has to be found as to whether such explanation could be bona fide and is based on the disclosure of all facts relating thereto and the material necessary for the computation of the total income.
29. In Jeevan Lal Sah's case [1994] 205 ITR 244 the apex court had an occasion to consider the Explanation to declare the law in regard thereto. The decision declares that the Explanation creates a presumption of law which is no doubt rebuttable. It creates a deeming position that the assessee shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income, unless he proves what is required by the statutory provision. It is further declared that this results in the shifting of the burden of proof to the assessee relating to the situation covered thereby. In its absence, the presumption will become a finding making it open to the authority to levy the penalty. It is further observed that even after the amendment to the statutory provision, penalty proceedings would continue to be penal proceedings. After observing as above it has also been declared that the question whether the assessee has concealed particulars of his income continues to remain a question of fact. The Explanation creates a situation which has the effect of shifting the burden of proof. In the process it has been clearly observed by the apex court that the rule regarding the burden of proof in the well-known Anwar Ali's case [1970] 76 ITR 696 (SC) is no longer valid. It is also observed that the principle in Anwar Ali's case [1970] 76 ITR 696 (SC) that mere rejection of the explanation is not sufficient for levying penalty no longer holds good and it does not require the Department to go further to spell out conscious concealment of particulars of income or deliberate failure to furnish accurate particulars.
30. This court also had an occasion to consider the position in the light of the above decision of the apex court. This was in I. T. R. No. 69 of 1992, Anand Liquors v. CIT [1998] 232 ITR 35 (Ker), by the judgment (to which one of us-myself-was a party delivering the judgment). This court has been conscious that the Explanation creates what is known as a deeming situation. The position has to be considered with reference to its application to the above undisputed factual matrix.
31. We have already spread over the factual matrix in necessary details. The situation shows that the inaccurate particulars are found from the disclosures of the return from which an inference of concealment is sought to be drawn. We also find that the assessee had disclosed the total sales of Rs. 1,05,32,644.81. He had also shown the closing stock credited to trading account at Rs. 10,36,384.75. On the basis thereof he had also disclosed gross profit of Rs. 5,60,261 approximately at 5. 85 per cent. The Income-tax Officer on the basis of material seized on January 12, 1977, relating to stock inventories prepared by the assessee on December 30, 1976, found the closing stock amounting to Rs. 12,17,725 and in regard thereto had accepted the explanation, to the tune of Rs. 10,36,384. The material on record also presents an undisputed position that with regard to the difference amounting to Rs. 1,81,341 on one of the counts of explanation of the assessee with regard to damaged goods even the Inspecting Assistant Commissioner thought of granting reduction may be to the token amount of Rs. 10,000. The above factual matrix shows that this is a situation where the explanation is not held to be substantiated on all counts and also right up to the level of the Tribunal in the quantum proceedings. In our judgment the facts unhesitatingly make out a case of furnishing inaccurate particulars by the assessee from which at the most concealment might be an inference. As stated before, the factual matrix would be governed by Clause (B) of the said Explanation leaving us to consider the application of the proviso.
32. Throughout the travel of the proceedings, it would be seen and it will have to be held that the assessee has given an explanation which will have to be accepted as bona fide. The facts further establish that as far back as on January 12, 1977, all that was in the possession of the assessee with regard to the state of accounts such as stock inventories prepared by him as on December 30, 1976, were seized and were with the Department. This would lead to the undisputed conclusion that the necessary material for the computation of the total income was with the Department and cannot be said that it was (not ?) disclosed by him. In our judgment, therefore, the case is governed by the provisions of the proviso to Explanation 1 to Section 271 of the Income-tax Act, 1961, stating that this is a case where inaccurate particulars are furnished by the assessee in regard to which his explanation in part is rejected by the authorities.
33. In view of the above position, in our judgment there is no justification for initiation of the penalty proceedings and though for different but obvious reasons the orders of the appellate authorities would get support.
34. Learned senior standing counsel for taxes strenuously urged that this should be left to the Tribunal to consider and decide in regard thereto. Learned counsel urged that what is necessary is the recording of a finding of the Tribunal in the context in view of the position that this court is answering the question referred by the Tribunal. Learned senior standing counsel for taxes to buttress the submission placed reliance on an old decision of the apex court in Hoshiarpur Electric Supply Co. v. CIT [1961] 41 ITR 608 especially with regard to the observations at page 611 thereof to the effect that it is not open for this court to enter upon the factual question in the absence of there being a finding in regard thereto by the Tribunal.
35. With anxiety, carefully and cautiously we have considered the matter from all the possible angles to find out if there is any lack of bona fides or failure to disclose the necessary material. We have also given our thought even to a remotest possibility on the facts and circumstances before us in regard to which there cannot be any dispute, as to whether on any count it could be said that there is lack of bona fides or failure to disclose. We have emphasised these aspects earlier. We find that once the provisions of the proviso are considered in its application to the factual matrix no other conclusion would follow and the situation would be inescapable.
36. The law and decisions in regard thereto have an element of dynamism to suit the changing conditions and requirements in regard thereto. The travel of law is a flow of a river which continues to flow filling up the ditches and covering up the obstacles. The limits of jurisdiction and natural shyness of the court to be within the limits has also to be taken into consideration meaningfully in the context of time and requirements of the situation. The factual situations that float on the surface of the record discussed by us earlier are such that acting in a conservative manner, would be a direction to the Tribunal as an idle exercise. On obvious facts and circumstances the decision is inevitable.
37. Apart therefrom such a direction as has been submitted by learned counsel has also to be understood in the context of time. In this context, we asked a pointed question to learned senior standing counsel as to for whose benefit the Tribunal would decide when the decision is obvious and could not be otherwise in any event. In our judgment, it is not necessary if the things are obviously floating on the surface of the record as discussed by us. For all the above reasons we answer the question in the affirmative, against the Revenue and in favour of the assessee.
38. A copy of the judgment under the seal of this court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench as required by law.