Income Tax Appellate Tribunal - Pune
Income Tax Officer vs Patil Automobiles on 7 March, 2003
Equivalent citations: [2004]91ITD1(PUNE), [2005]276ITR174(PUNE), (2003)79TTJ(PUNE)359
ORDER
U.B.S. Bedi, J.M.
1. This is Revenue's appeal directed against the order passed by the learned CIT(A), Nasik, dt. 20th April, 1993, relevant to asst. yr. 1985-86 whereby the Department has challenged the deletion of penalty of Rs. 1,38,540 imposed by the AO under Section 271(1)(c) of the Act.
2. The relevant facts are that the return of income was filed on 30th Sept., 1985, declaring income of Rs. 78,944 and the assessment was completed under Section 143(1) of the Act on 9th Jan., 1986. The case for subsequent year i.e., asst. yr. 1986-87 was selected for scrutiny and when assessee was asked to explain the source of investment of three credit entries of Rs. 54,525 in each of these persons, the assessee filed revised return on 18th Dec., 1987, for the asst, yr.
1985-86 declaring additional income of Rs. 1,00,000 on account of unexplained investment in cash certificate credits of Syndicate Bank of Rs. 50,000 each in the name of Smt. Smita B. Patil and Shri Deelip P. Patil. Again on 30th March, 1998, the assessee filed another revised return declaring sum of Rs. 50,000 on account of unexplained investment in Vikas Cash Certificates of Syndicate Bank in the name of late Shri Bhika Punju Patil. The AO completed the assessment under Section 143(3) and initiated the penalty proceedings for the year under consideration on account of additional income of Rs. 1,50,000. In response to the penalty proceedings, the assessee contended before the AO as under :
"1. The assessment proceedings for the asst. yr. 1986-87 were reopened while the firm offered the additional income for asst. yr. 1985-86 for which no prior notice was issued by the Department;
2. The facts have been disclosed by the firm itself; the Department cannot claim the right of deletion:
3. The revised return is filed before issuing notice under Section 148,
4. The amounts were deposited in the bank and the same were transferred directly in the CC loan a/cs of the firm;
5. The firm has furnished revised returns subject to non-levy of penalty and interest;
6. The Department could not prove the concealment;
7. The returns were furnished and the taxes were paid before the proceedings could be started;
8. The firm offered the amount for taxation due to circumstances and to avoid the litigation and lengthy procedure of the assessment."
However, the AO did not accept the above arguments by observing that the entries stand in the books of the assessee, the burden would lie upon the assessee to establish and satisfy the AO that it is real and not fictitious. According to the AO when the assessment for the asst. yr. 1986-87 was taken up for hearing on the basis of question raised, the assessee realized that for the immediately preceding year i.e., 1985-86, it had furnished inaccurate particulars. Therefore, the assessee knew furnishing of inaccurate particulars would definitely come up during the course of hearing for the asst. yr. 1986-87 as it had direct link with the query raised assessee has no source to explain, so he had no option but to come forward to disclose these amounts. As per the AO the contention that the surrender was prior to the detection by the AO was not to be acceptable. Therefore, the AO observed that assessee failed to explain satisfactorily the source and nature of the amount and it was not necessary for the Revenue to locate the exact source. The AO relied on the decision 53 ITR 263 (sic) and observed that the assessee had not filed any appeal against the assessment order. He was, therefore, satisfied that the assessee had concealed its real income and furnished inaccurate particulars of such income. He, therefore, imposed penalty of Rs. 1,38,540.
3. The assessee took up the matter in appeal and the learned CIT(A) while considering and accepting the plea of the assessee has concluded at pp. 8 to 10 of his order as under :
"I have gone through the assessment order. In the penalty order, except for observing that the appellant had surrendered additional income, the AO has nowhere observed whether the income was treated as income of the year under consideration on account of unexplained investment or on account of credits appearing in the books of accounts of the appellant. If the AO was assessing the additional income on account of surrender of unexplained investments made on 14th March, 1984, then of purchase of cash certificates of Rs. 1.50 lakhs, then the income would have been assessed as income of the asst. yr. 1985-86. On the financial year basis, it would belong to the asst. yr, 1984-85. If he was assessing the income on the basis of cash credit entries appearing in the appellant's books of account on 3rd July, 1985, then the income would have been assessed on the previous year basis in the asst. yr. 1986-87. The AO has merely accepted the offer of the appellant in the year under consideration without correctly relating to the year to which the income pertained, As the things stand, the AO has assessed the income offered by the appellant voluntarily before issue of notice. Therefore, it can not be related to the unexplained investments as 14th March, 1984, which date pertains to the asst. yr. 1984-85, nor to the appearing of the credits in the books of the appellant on 3rd July, 1985, which pertains to the asst. yr. 1986-87. Further, apart from the appellant's own disclosure, there is no material on record to indicate that the impugned amount of Rs. 1,50,000 belonged to the appellant and not to the three persons who are claimed to be possessing huge agricultural lands. The Supreme Court in Sir Shadilal Sugar and Gen. Mills Ltd v. CIT 3(1987) 168 ITR 705 (SC) has held that "from the assessee's agreeing to addition, it does not follow that agreed addition was concealed income because there may be many reasons for such admission. This does not absolve the revenue from proving mens rea Of quasi-criminal offence". The Bombay High Court in Jainarayan Babulal v. CIT (1988) 170 ITR 399 (Bom) has held that "the question of year of assessability could be raised in penalty proceedings. In that case cash credits were assessable in asst. yr. 1949-50 but were actually assessed in asst, yr. 1950-51. It was held that no penalty was possible for asst. yr. 1950-51". The Kerala High Court in CIT v. George and Bros. (1986) 160 ITR 511 (Ker), has held that 'mere surrender of income cannot be sole basis of penalty. The revenue must prove its case independently'. In CIT v. Bhimjee Bhanjee & Co. (1984) 146 ITR 145 (Bom), the assessee admitted cash credits because he could not produce the creditors due to his disputes with them. The Bombay High Court held that penalty could not be levied merely because the credits were surrendered as there was no admission that the credits were income. In CIT v. Haji Gaffar Haji Dada (1988) 169 ITR 33 (Bom), the assessee addressed a letter to the ITO offering credits for assessment and also stating that penalty be imposed on merits. The Bombay High Court held that this did not amount to admission of concealment.
In the light of above judgments and having regard to the particular facts that income surrendered by the appellant on account of cash certificates could not have been legally assessed as income of the year under consideration, but for surrender made by the appellant, the original and first revised return filed cannot be said to be a false return. The penalty levied as above cannot be sustained. The same is hereby deleted."
4. Aggrieved, the Department is in appeal and while relying upon the basis and reasoning as given by the AO it was pleaded for setting aside the order of the learned CIT(A) and restoring that of the AO. The learned Departmental Representative further submitted that the assessee, in this case, when called upon to reply certain queries, in assessment proceedings for asst. yr. 1986-87, which had link with unexplained investment in asst. yr. 1985-86, filed the so-called revised returns--one on 18th Dec., 1987, and another on 30th March, 1988, declaring additional income of Rs. 1,00,000 and Rs. 50,000, respectively. Since the so-called revised returns of income were filed by the assessee after completion of the regular assessment and that too beyond the date permitted for filing of the revised return, so this cannot be taken as revised returns. In order to regularize the proceedings, the AO issued notice under Section 148 after filing of the first revised return. The assessee thereafter, filed the second so-called revised return and the assessment was completed by making addition of Rs. 1,50,000 in the income declared in the original return filed. Therefore, the action of the assessee cannot be held to be voluntary. As regards year of taxability of the amounts not disclosed in the original return and taxed in the year under consideration is concerned, the relevant investment was made on 14th March, 1984, which falls in the previous year of the assessee i.e., for the period 1st Jan,, 1984 to 31st Dec., 1984, relevant to asst. yr. 1985-86 and the assessee also filed the so called revised return for the year ending declaring those amounts and were taxed as such so the penalty is exigible in the year under consideration and the AO has correctly imposed the same but the learned CIT(A) was not justified in deleting the penalty when the assessee has concealed the income by furnishing inaccurate particulars of income in the original return. Therefore, the penalty is clearly attracted in this case and the AO has rightly imposed the same. The learned CIT(A) was not justified in, deleting the same.
5. The learned counsel for the assessee while relying upon the basis and reasoning as given by the learned CIT(A) has pleaded for confirmation of the impugned order. It was further submitted that under the circumstances and in view of the Bombay High Court decision Jainarayan Babulal v. CIT (1988) 170 ITR 399 (Bom), the learned CIT(A) has rightly deleted the penalty, which could otherwise not be imposed by the AO. The assessee's investment was with respect to the entire amount of Rs. 1,50,000 falling in the year ended on 31st March, 1984, relevant to the asst. yr. 1984-85, so going strictly by the language of the statute as contained in Section 69, the assessee could validly challenge the imposition of penalty on this count and the learned CIT(A) has rightly deleted the same. It was, therefore, urged for confirmation of the impugned order.
6. We have heard both the sides, gone through the orders of the authorities below as well as the documentary evidence to which our attention was drawn and the relevant provisions of the law as well as the case law cited.
7. After careful consideration of the arguments of both sides and material on record, we find that after completion of the assessment on the basis of original return filed when case for asst. yr. 1986-87 was taken up for scrutiny and explanation about three credit entries of Rs. 54,525 each was sought from the assessee, and knowing fully well that it's case is related to the three certificates purchased of Rs. 50,000 each on 14th March, 1984, which period is covered in the previous year ending 31st Dec, 1984, relevant to asst. yr. 1985-86, so it filed first so-called revised return offering Rs. 1,00,000 as additional income and in the second return filed, after issue of notice under Section 148, further additional income of Rs. 50,000 was offered as it was not able to offer any explanation about these amounts which could not be otherwise substantiated from any known sources of income.
8. Moreover, the assessee, in this case, filed following explanation with regard to these amounts in appeal proceedings for the earlier assessment year :
"3. On 14th March, 1984, Shri Bhikan Patil, Smt. Smita Bhikan Patil (his wife) and Shri Deelip Patil (his brother) purchased cash certificates called 'Vijay Certificates' of Syndicate Bank of Rs. 50,000 each. The investment was made out of the individual resources of the parties. The certificates were to carry interest at the rate of 13 per cent. The appellant-firm applied and got the cash credit of Rs. 1,50,000 from the Syndicate Bank. Apart from the personal security, the above cash certificates were given as collateral security to the bank. As on 31st Dec., 1984, relevant to the asst. yr. 1985-86 the cash credit account shows total amount due at Rs. 1,53,256 due to certain disputes with the bank, the cash credit of the firm was closed on 3rd July, 1985. On that date, the above three persons prematurely encashed the certificates. The principal amount of Rs. 50,000 plus interest of Rs. 4,575 receivable by each partner were allowed to be adjusted in payment of the cash credit. Since the firm used the amount of each of the cash holding, in the books of the firm cash credit account was debited an amount of Rs. 54,525 each in the books of the firm.
4. The assessment of the appellant-firm for the asst. yr 1985-86 was completed under Section 143(1) on 9th Jan., 1986, for subsequent year, i.e., asst. yr. 1986-87, the IAC, Nasik, selected the case for scrutiny. In the course of scrutiny, the ITO issued notice to the appellant firm to explain the credits of Rs. 54,525 in the name of Shri Bhikan P. Patil, Smt. Smita B. Patil and Shri Deelip P. Patil..........
7. The assessment of the appellant-firm there after was completed under Section 143(3) by addition of Rs. 1,50,000 as offered in the two revised returns. This assessment has become final as far as the Department and the appellant firm is concerned. In the penalty proceeding under Section 271(1)(c) the appellant had raised a technical point that the addition could not have been in the asst. yr. 1985-86 because the investment fell in the financial year 1983-84. It was also pleaded that if cash credit was the basis for the addition, the addition could have been made in the asst. yr. 1986-87. These technical points were raised only to show that penalty under Section 271(1)(c) was not leviable for the asst. yr. 1985-86. In appeal, the penalty under Section 271(1)(c) was deleted by the learned CIT(A) and the matter is now before the Hon'ble Tribunal, Pune Bench, Pune."
9. From the above-noted explanation it is amply clear that the assessee has just taken the technical point for the purposes of avoiding imposition of penalty and otherwise there is no dispute regarding taxability of the amount in the year under consideration. So far as levy of penalty is concerned, reliance was placed on Bombay High Court decision in the case of Jainarayan Babulal v. CIT (supra) by learned CIT(A) to delete the penalty and he has totally ignored the important observation of Hon'ble High Court about this provision being different and not applicable under the 1961 Act as in that case, dispute relates to the period prior to the period when 1922 Act was applicable and relevant para of the above decision is reproduced as under :
"The entries aggregating to the said amount of Rs. 24,600 were made during the course of the financial year that began on 1st April, 1948, and ended on 31st March, 1949. The relevant assessment year for that financial year was the asst. yr. 1949-50. The assessment of the said amount of Rs. 24,600 as income from undisclosed sources for the asst. yr. 1950-51 would, therefore, appear to have been made in error. At any rate, no penalty can be imposed for non-disclosure of that income for the asst. yr. 1950-51.
Needless to say, this position obtains because the provisions of the 1922 Act are applicable. The position would be different under the 1961 Act."
(emphasis, italicised in print, supplied) From the above important observation of Hon'ble jurisdictional High Court, it can be held that learned CIT(A)'s reliance on the above-noted decision to delete the penalty is misplaced.
10. Otherwise, the relevant period pertains to the previous year of the assessee and financial year 1983-84 also ends on 31st March, 1984. Therefore, the income, as on the end of the financial year, and relevant dates (both) fall within the previous year relevant to the assessment year under consideration and income too has been assessed for the said assessment year more so when assessment has since attained the finality and the assessee has also not been able to explain satisfactorily the source and nature of investment made in the certificates with any documentary or other evidence. Apart from this, had there been no scrutiny for the subsequent year and AO had not asked query relating to said deposits/certificates, assessee could not come forward to disclose the amount of additional income which was not disclosed in the original return filed and this amply proves the intention of the assessee not to disclose the correct income in the original return filed. This action of the assessee makes it liable for default. Our view is fortified by the latest decision of the Karnataka High Court in the case of CIT v. Sudharshan Silks and Saiees (2002) 253 ITR 145 (Kar). Therefore, in our considered view, penalty is exigiable which could validly be imposed in this case for the year under consideration. The learned CIT(A) is not justified in deleting the same. While reversing his order, we restore that of the AO.
11. In the result, the appeal of the Revenue is accepted.
B.L. Chhibber, A.M.
1. Regretting my inability to persuade myself to agree to the view taken in the order of my learned Brother, I proceed to write a dissenting order.
2. The facts' that are brought on record by the learned CIT(A) show that the assessee was a registered firm constituted of two partners, viz., Shri B.P. Patil and Smt. A.R. Chaudhary having 50 per cent share each. On 14th March, 1984, Shri B.P. Patil, his wife Smt. Smita B. Patil and brother Shri Dilip B. Patil purchased cash certificates of Rs. 50,000 each of Syndicate Bank. The date of investment falls in asst, yr. 1984-85, a year previous to the year under appeal. The assessee firm had obtained a cash credit of Rs. 1,50,000 from the Syndicate Bank. Apart from personal security, the above three cash certificates were given as a collateral security.
3. The balance of cash credit account was Rs. 1,53,256 on 31st Dec., 1984, in the books of the firm which followed calendar year as its accounting year. Due to disputes with the bank, the cash credit was closed on 8th July, 1985, on which date the cash certificates were prematurely encashed by the owners. The principal amount of Rs. 50,000 plus interest of Rs. 4,525 were adjusted against the cash credit. Since these certificates were utilised in clearing the cash credit account of the assessee-firm, the account was opened in the name of above three owners and Rs. 54,525 each was credited in that account. Thus, in asst. yr. 1986-87, i.e., year after the year under appeal, there were three credits of Rs. 54,525 in the books of the firm.
4. During the course of scrutiny for the asst. yr. 1986-87, a summons was issued to explain the investment of the creditors. Since Shri B.P. Patil had strained relations with his brother Dilip and did not want his wife Smt. Smita Patil who came from orthodox family to go before the AO, it was decided to offer Rs. 1,00,000 as income of the firm for the asst. yr. 1985-86 (year under appeal) at the behest of the AO, though the amount was proposed to be offered in the asst. yr. 1984-85 in the hands of the investor. Hence, a return offering additional income of Rs. 1,00,000 was filed for the asst. yr. 1985-86 because 14th March, 1984, fell in the accounting year ending 31st Dec., 1984, relevant to asst. yr. 1985-86. In the covering letter dt. 18th Dec., 1987 (p. 10 of the paper book of the assessee), the assessee offered additional income of Rs. 1,00,000 voluntarily with a condition that no penalty be initiated. The additional tax was also paid on 18th Dec., 1987.
5. On 3rd Jan., 1988, Shri P.B. Patil died in an accident. This was a catastrophy for the family and the firm. Smt. Smita P. Patil became partner in his place and decided to offer the investment made by her late husband Shri P.B. Patil in cash certificate as neither she nor her partner Smt. A.K. Chaudhary had any knowledge of the evidence to explain the investment of Rs. 50,000 in the name of late Shri P.B. Patil. Another revised return was filed on 28th March, 1988, offering Rs. 50,000 as additional income with a request not to initiate penalty as the return was filed to buy peace and to avoid litigation (p. 8 of paper book of the assessee). The additional tax was paid on 28th March, 1988.
6. It is not clear from the record as to how these two revised returns were regularized by the AO. The assessment order is dt. 18th Jan., 1989. On the front side of the assessment order, he writes that the assessment is made under Section 143(3) r/w 143(2)(b) while at the end of the order he writes "assessed under Section 143(3)/147(a)". There is no mention of any notice issued under Section 147 in the assessment order. What is being added is "cash credit through bank certificates not disclosed in firm's books of account". It may be stated that the cash credits, if any, that too for acknowledging liability of the firm were in asst. yr. 1986-87. The investment in cash certificate was in asst. yr. 1984-85.
7. In the penalty proceedings initiated under Section 271(1)(c), the assessee contended that additional income was declared without there being a prior notice, returns were filed with a condition of non-levy of penalty, Department did not prove the concealment, the returns were furnished and taxes were paid before proceedings could be started and that the offer of additional income was due to circumstances and to avoid litigation. However, rejecting the contentions, the AO levied penalty of Rs. 1,38,540 against the minimum penalty of Rs. 92,360.
8. In appeal filed by the assessee against the above order, the learned CIT(A) cancelled the penalty. He observed that nowhere in the assessment order or penalty order the AO had made it clear whether the income was treated as income of the year under consideration on account of unexplained investment or on account of cash credits appearing in the books of the firm. If the AO wanted to assess the additional income as investment made on 14th March, 1984, then the income could not be assessed as income of the asst. yr. 1985-86. It was assessable on financial year basis in asst. yr. 1984-85. If he was assessing the income on the basis of entries appearing in the books on 3rd July, 1985, the income was assessable in asst. yr. 1986-87. The CIT(A), therefore, held that the AO merely accepted the offer of the assessee in the year under consideration without correctly relating the year to which the income pertained. It was further held that apart from the assessee's disclosure, there was no material to hold that the impugned amount belonged to the assessee and not to the concerned persons who were having substantial agricultural income. The learned CIT(A) relied on the judgment of the Bombay High Court and Supreme Court and came to the conclusion on the peculiar facts that income surrendered could not have been legally assessed as income of the year under consideration, but for the surrender made by the assessee, the original and first revised return could not be considered as false return. He, therefore, deleted the penalty.
9. Aggrieved by the order of the learned CIT(A), the Revenue is in appeal before this Tribunal. The arguments of the learned Departmental Representative have been summarised by my brother in para 4 of his order. But here I may add that the learned Departmental Representative could not answer the query from the Bench how the impugned amount could be legally assessed in the year under consideration. The arguments of the learned counsel Shri K.A. Sathe have been summarised by my learned brother in para 5 of his order and I need not repeat the same.
10. I have considered the rival submissions and perused the facts on record. The main point to be considered in this appeal is whether a person can be penalised for offering an income subject to the condition that no penalty be levied, if that income was not legally assessable. When such a conditional offer was made, it was open to the Revenue not to act on such offer and proceed to assess the income on its own merits and on the basis of enquiry and evidence it has. In the present case, if the Department had to act on its own, firstly, it had no basis whatsoever to assess the income in the year under consideration. The investment in cash certificate was made on 14th March, 1984, by three persons, only one of whom was a partner of the firm. If this investment was to be taxed as unexplained, it could be done under Section 69 only in the asst. yr. 1984-85. This also could be done if the Department had anything in its possession first to show that the investment has come out of the resources of the firm; secondly, that the concerned persons had no means to make the investment. Even for the sake of argument it was assumed that these three persons could not explain the source, still the nexus with the firm had to be established. This is now well-settled position of law by the decision of the Hon'ble Supreme Court in the case of CIT v. Daulatram Ravatmall (1973) 87 ITR 349 (SC)
11. If the credits in the name of the three persons on 3rd July, 1985, in the books of the firm was a matter of consideration, then these credits were obviously to be considered in view of Section 63 as income of the asst. yr. 1986-87, and not in the year under appeal. Here also what was credited was not any amount received by the firm as such. The credits really represented the liability of the firm to three holders of cash certificates whose certificates were liquidated to clear the dues of the firm. The nature and source of the credits was clearly explained and in any case to be considered in the asst. yr. 1986-87.
12. If thus the Department could not have taxed the amount of Rs. 1,50,000 on its own for the asst. yr. 1985-86 and it did so only because of the declaration made by the assessee, it could not have ignored the condition attached not to levy penalty.
13. In the context of a conditional offer of this nature, in Variety Cloth Centre v. ITO (1997) 59 ITD 377 (Pune), this Bench has held as under :
"It was legally optional for the AO at that stage of the proceedings, either to make addition on agreed basis or to launch enquiry/investigation. Once he had made the addition on agreed basis, it was not open to him to direct initiation of penalty proceedings under Section 271(1)(c). The Department was clearly estopped from doing so. It was not open to the Department to accept one part of the agreement and to reject other part of the same agreement. There was a clear estoppel from doing so. In the circumstances, the AO was justified in not passing direction for initiation of penalty proceedings under Section 271(1)(c)."
The Hon'ble Allahabad High Court in the case of CIT v. Saran Khandsari Sugar Works (2000) 246 ITR 216 (All) held that a conditional surrender of cash credits or agreement to certain assessment does not attract penalty proceedings. In this case, the Tribunal had held that in view of the assessee's agreement to a higher assessment on the condition that no penalty would be imposed, penalty was not leviable. The Hon'ble High Court held that this was a finding of fact and similarly the finding that no actual concealment was established was also a finding of fact and, therefore, the assessee would be held to have discharged the onus under Explanation to Section 271(1)(c) of the IT Act.
14. The learned CIT(A) has relied on the decision of the Hon'ble Bombay High Court in the case of Jainarayan Babulal v. CIT (1988) 170 ITR 399 (Bom). In this case, certain cash credits were noticed in the books of the assessee in the accounting year ending on Diwali 1949. It was explained on behalf of the assessee that the amounts had been earned in speculation business. The ITO included the cash credits in the asst. yr. 1950-51 and also imposed penalty under Section 28(1)(c) of the IT Act. In appeal before the Tribunal, the assessee contended that penalty could not be imposed in the asst. yr. 1950-51. But the Tribunal upheld the penalty and held that cash credits were rightly assessed in asst. yr. 1950-51. The assessee in his reference before the Hon'ble Bombay High Court contended that the concerned cash credits could not be assessed in asst. yr. 1950-51. Under the law as it then prevailed, cash credits could be assessed only on the basis of financial year and hence it was contended that on the basis of financial year cash credits were assessable in the asst. yr. 1949-50. The concerned cash credit, therefore, fell outside the scope of the assessment year i.e., asst. yr. 1950-51. Two aspects of the question were considered by the Hon'ble High Court. The first was whether it was open for an assessee to raise a question in penalty proceedings whether the income at all could be assessed in asst. yr. 1950-51. Relying on their earlier judgment in the case of CIT v. Gokuldas Harivallabhdas (1958) 34 ITR 98 (Bom) the Hon'ble High Court held that proceedings under Section 28(1){c) are penal proceedings and a decision given in assessment proceedings cannot be binding on the authority in levy of penalty. It is open for the ITO in penalty proceedings to consider his earlier finding that a particular receipt constituted income for a particular assessment year, but he was not bound by that finding. On the basis of this principle, the High Court considered the issue of assessability of the cash credits in asst. yr. 1950-51. It is in this context that the Hon'ble High Court held that as per the law then existing that the cash credits were assessable on financial year basis in asst. yr. 1949-50 and not in asst. yr. 1950-51. Since this was the law in regard to the cash credits which underwent a change in IT Act, 1961, their Lordships observed as under;
"Needless to say, this position obtains because the provisions of 1922 Act are applicable. The position would be different under the 1961 Act."
The above observations of the High Court are in the context of assessability of cash credits and not in the context to their earlier finding that in penalty proceedings it is open to consider whether income is assessable in that year. The decision of the Hon'ble Bombay High Court is clearly good law even today for the proposition that assessment proceedings and penalty proceedings being independent, it is open for consideration in penalty proceedings whether income actually assessed is assessable in law. In the present case, if one goes by the investment made by the three depositors that investment falls to be considered under Section 69 on the financial year basis in the asst. yr. 1984-85, this is the correct position of law as per the present IT Act. If thus the amount is not assessable in the current year, a person cannot be penalised only because he offered income wrongly in the year under appeal. In the present case, as stated earlier, there is absolutely no material to indicate that the investment made by the three depositors has unexplained investment of the firm, that too in the year under appeal.
15. After perusing the order of the AO, I find that the Department, itself is not very clear as to what is being taxed, is it the investment or is it the cash credits. In either way, the same is not assessable in the year under appeal. Merely because the assessee surrendered income in the current year by misunderstanding the law that it was the income of the year, it would not be correct to levy penalty. The assessee has already suffered taxes on the amount offered. The circumstances under which the offer had been made by the assessee has also been clarified before the authorities and it is very clear that there were no mala fide intentions in offering the amount, except to avoid litigation. The concerned three depositors had ample resources to explain the investment, but it was because of the peculiar situation that the amount was offered for taxation, Accordingly, I hold that it would be improper to levy penalty and I accordingly delete the same.
16. In the result, the appeal is allowed, (sic-rejected) REFERENCE UNDER S. 255(4) OF THE IT ACT, 1.961 U.B.S. BEDI, J.M.
1. As there is a difference of opinion between the Members on the Bench, following point of difference is being referred to Hon'ble President for hearing on such point/s or for nominating the Third Member or to pass such orders as the Hon'ble President may deem fit and proper :
"On the facts and circumstances of the case, whether the order of the JM reversing the impugned order is justified or the order of the AM deleting the penalty while accepting the appeal is justified?
R.V. Easwar, J.M.
1. The following question has been referred to me under Section 255(4) by the Hon'ble President, on a difference of opinion between the Members who heard the appeal originally :
"On the facts and circumstances of the case, whether the order of the JM reversing the impugned order is justified or the order of the AM deleting the penalty while accepting the appeal is justified".
2. The brief facts are that the assessee is a partnership firm consisting of two partners. They are Bhikaji Patil and Mrs. Choudhary. In respect of the asst. yr. 1985-86, which the year under appeal, for which the accounting year was the calendar year ended 31st Dec., 1984, the assessee-firm filed a return of income on 30th Sept., 1985, declaring income of Rs. 78,944 which was accepted under Section 143(1). Later, in the course of assessment proceedings for the asst. yr 1986-87, the AO noticed the following credits in the books of accounts of the assessee :
1. Bhikaji Patil Rs. 54,525
2. Smita Patil Rs. 54,525
3. Dilip Patil Rs. 54,525 Smita Patil was the wife of Bhikaji Patil and Dilip Patil was the brother. They were not partners in the assessee-firm. There is a slight confusion as to the date of credit--whether it is 3rd July, 1985, or 8th July, 1985. However, it does not matter for the purpose of the appeal as both the dates fall within the previous year relevant to the asst. yr. 1986-87. The AO would appear to have raised a query regarding the credits in the course of the assessment proceedings for the asst. yr. 1986-87. As a consequence, on 18th Dec., 1987, the assessee-firm filed a revised returns for the asst. yr. 1985-86 declaring additional income of Rs. 1,00,000 representing Rs. 50,000 each in the name of Smita Patil and Dilip Patil. This was filed along with the covering letter.
Another revised return was filed on 30th March, 1988, for the asst. yr. 1985-86, in which an amount of Rs. 50,000 was shown as the firm's additional income, in the name of Bhikaji Patil. This was also filed with a covering letter. Accordingly, the AO assessed the additional income of Rs. 1,50,000 by assessment order dt. 18th Jan., 1989, as "cash credits through bank certificates not disclosed in firm's books of accounts." There is some uncertainty as to under which provision this assessment was made because in the first page of the order, it is stated that the assessment was completed under Section 143(3) r/w Section 143(2)(b) whereas in the last portion of the assessment order below the computation of income, it is stated that the total income is assessed under Section 143(3)/147(a) of the Act. I will revert to this aspect presently.
3. I will now refer to the contents of the covering letter filed by the assessee along with the revised return of income in order to bring out the reason as to why the revised returns were filed. In these letters, it was explained by the assessee-firm that on 14th March, 1984, Bhikaji Patil, Smita Patil and Dilip Patil purchased cash certificates from Syndicate Bank of the face value of Rs. 50,000. The assessee-firm also took loan of Rs. 1,50,000 from Syndicate Bank. The cash certificates were given as a colateral security for the loan. Due to certain disputes between the assessee-firm and the bank the loan was closed on 8th July, 1985. The interest on the cash certificate amounted to Rs. 4,525 in respect of each certificate and, therefore, the amount of Rs. 54,525 in each of the names of Bhikaji Patil, Smita Patil and Dilip Patil were adjusted against the loan account. In other words, the proceeds of the cash certificates upto 8th July, 1985, were used by the firm for repaying the loan with interest. Accordingly, entries were made in the firm's account on 8th July, 1985, crediting the amount of Rs. 54,525 in each of the aforesaid names, as stated earlier. It was these credits which were sought to be verified by the AO while completing the assessment proceedings for the asst. yr. 1986-87, since the credits appeared on a date which fell within the accounting year relevant to that assessment year. The assessee's explanation while filing the revised return, briefly, was that Dilip Patil had fallen out with Bhikaji Patil and, therefore, it was not possible for the assessee-firm to request him to furnish proof thereof. Smita Patil, according to the assessee's explanation, came from a very orthodox family and, therefore, it was not feasible to request her to appear before the AO and confirm the credit. Therefore, the amount of Rs. 1,00,000, being Rs. 50,000 in each of the two names, was offered as the income of the firm in the first revised return. On 31st Jan., 1988, Bhikaji also died in an accident at an young age of 29 years and, therefore, it became impossible for the assessee-firm to obtain any proof in support of the credit in his name. Therefore, second revised return was filed offering further Rs. 50,000 as an additional income. In the covering letters these facts were explained in detail. It was pointed out that though cash credits were genuine but the changed circumstances made it difficult for the firm to prove them and, therefore, in order to avoid any litigation and to buy peace and cooperate with the Department, the firm was filing the revised returns. It was, however, stipulated that no penalty proceedings should be initiated for concealment of income.
4. The AO, however, initiated proceedings under Section 271(1)(c) for the asst. yr. 1985-86. According to him, the assesses could not discharge the burden of proving the credit entry in its books, that only when the assessment proceedings for the asst. yr. 1986-87 was taken up for hearing "the assessee realized that for immediately preceding year i.e., 1985-86 it has furnished inaccurate particulars, that the assessee knew that the furnishing of inaccurate particulars will definitely come up during the course of hearing for the asst. yr. 1986-87 and, therefore, assessee's explanation though it has furnished the required particulars before detection by the AO cannot be accepted. He also held that once the assessee failed to satisfactorily establish the sources of the amounts, concealment stood proved, more so when the assessment was accepted by the assessee. For these reasons, he rejected the assessee's explanation and levied the penalty of Rs. 1,38,540 under Section 271(1)(c).
5. On appeal, CIT(A) held that except observing that assessee had surrendered the additional income shown in revised return, the AO has nowhere observed whether the income was the income of the year under consideration either as unexplained investment or as unexplained credits appearing in the books of accounts. According to him, if the case is treated as one of unexplained investment, then the cash certificates having been purchased on 14th March, 1984, could not have been assessed as income for the asst. yr. 1985-86. On financial year basis, as per Section 69, they could have been assessed only in the asst, yr. 1984-85. If, on the other hand, AO had assessed the cash credits appearing in the books on 3rd July, 1985/8th July, 1985, then the assessment could have been made only for asst. yr. 1986-87, relevant to the previous year 1st April, 1985 to 31st March, 1986. CIT(A) further noted that the AO has merely accepted the assessee's offer without correctly relating the income to the proper year. Assessee had offered the income in the revised returns voluntarily before the issue of any notice. Apart from the assessee's own disclosure, there was no material on record to indicate that the amount of Rs. 1,50,000 belonged to the assessee-firm and not to the three persons mentioned above. CIT(A) further cited several authorities and finally held that there is no justification for the penalty. Accordingly, he deleted the same.
6. The Department preferred an appeal to the Tribunal. The learned JM felt that the assessee was liable for penalty and that the CIT(A) was not justified in cancelling the same. In brief, his findings are that it was only when the return for the asst. yr. 1986-87 was taken up for scrutiny and explanation regarding the credit entry was sought from the assessee that the assessee filed revised return for the asst. yr. 1985-86, that the assessee had taken the technical point regarding the proper year of assessment of the income only for the purposes of avoiding imposition of penalty and that otherwise, there is no dispute regarding the taxability of the amount for the asst. yr. 1985-86. He observed further that the reliance placed by the CIT(A) on the judgment of the Bombay High Court in the case of Jainarayan Babulal v. CIT (1988) 170 ITR 399 (Bom) was misplaced since that judgment would not apply to a case arising under the 1961 Act. The learned JM further held that both the relevant dates i.e., the date of investment in the cash certificate and the date of cash credits in the firm's books fell within the previous year relevant to the assessment year and that the assessment has also attained finality. According to him, the assessee could not explain satisfactorily the source and nature of investment made in the certificates with any documentary or other evidence. The assessee would not have come forward with the revised returns but for the scruting made by the AO in the assessment for the asst. yr. 1986-87. The mere filing of the revised returns, according to the learned JM, could not absolve the assessee of the guilt. Thus, he reversed the order of the CIT(A) and restored the penalty.
7. The learned AM, however, held that the main point to be considered was whether the assessee could be penalized for offering the income subject to the condition that no penalty be levied if that income was not legally assessable. He answered the question by holding that where the conditional offer such as the one made by the assessee in the present case was made, it was open to the Revenue not to act on such offer and proceed to assess the income on its own merits and on the basis of the enquiry and evidence it possesses. According to the learned AM, if the Department had to act on its own, it had no basis whatsoever to assess the income in the asst. yr. 1985-86 because the investment in the cash certificate was made on 14th March, 1984, by three persons of whom only one was a partner of the assessee-firm, which date fell in the financial year 1983-84 and as per Section 69 of the Act it could be assessed only in the asst. yr. 1984-85. Going by the date of credit, the income could have been assessed under Section 68 to the Act only in the asst. yr. 1986-87, since the credits appeared in the assessee's books on 3rd July, 1985/8th July, 1985. The learned AM further observed that even if Section 69 were to be applied, there has to be evidence to show that the investment came out of the undisclosed sources and that the persons in whose name the investment stood had no means to make the same. Further, the Department also had to prove the nexus between those persons and the assessee-firm. If the provisions of Section 68 are to be invoked for the asst. yr. 1986-87 the Department has to prove that the assessee received the amount. In the present case on 3rd July, 1985, or 8th July, 1985, nothing was received by the assessee-firm except that the cash certificates were adjusted against the loans due by the assessee to Syndicate Bank. The credit in these circumstances really represented the assessee-firm's liability to those three persons because the firm had used the cash certificate's for redemption of the loan. Thus, in the opinion of the learned AM, the amount cannot be assessed as income at all for the asst. yr. 1985-86. Since the Department could not have taxed the amount on its own for the asst. yr. 1985-86 and did so only because of the assessee's declaration by revised returns, he could not have ignored the condition viz., that no penalty should be imposed. With regard to the judgment of the Bombay High Court in the case of Jainarayan Babulal (supra), the learned AM pointed out that this case cannot be distinguished. According to him, the observation of the High Court that the position would have been different under the 1961 Act, was with regard to the year in which the cash credits should be assessed and that the other principle laid down by the High Court viz., that it was open to assessee to raise a question in the penalty proceedings as to whether the income could be assessed at all in that assessment year hold good even under the 1961 Act. The learned AM thus clarified the observation of the Bombay High Court to the effect that the position would have been different under the 1961 Act and applying the decision to the present case held that it was open to the assessee to take up the plea that the income of Rs. 1,50,000 cannot in any case be assessed in the asst. yr. 1985-86, either as cash credit under Section 68 or as investment under Section 69. For these reasons, he upheld the order of the CIT(A) cancelling the penalty.
8. Since different conclusions were reached by the Members constituting the Bench, the matter has been placed before me under Section 255(4). I have considered the rival contentions, the facts on record and the orders of the learned Members. In my humble opinion, the conclusion of the learned AM seems to be more reasonable and the better view taken on the facts of the case. There is nothing to show that the AO had made such detailed enquiries in the course of the proceedings for the asst. yr. 1986-87 regarding credit that the assessee was cornered and had no option but to surrender the income. My attention was not drawn by the learned Departmental Representative to any such evidence or material in the possession of the Department. Even in the penalty order what I find is only a reference in para 6 to the fact that when the assessment for the asst. yr. 1986-87 was taken up for hearing, assessee realised that for the immediately preceding year i.e., asst. yr. 1985-86 some inaccurate particulars had been furnished. I have to therefore, proceed on the basis that no incriminating evidence or evidence which could damnify the assessee-firm came to the possession of the AO when he took up the assessment proceedings for the asst. yr. 1986-87. Even the assessment order for the asst. yr. 1985-86 does not contain any such finding. Under these circumstances, it would be reasonable to presume that only a routine query was raised about the credits and since, under the circumstances outlined by the assessee in the covering letter accompanying the revised return, the assessee-firm found it difficult to prove the credits, it came forward with revised returns offering additional income of Rs. 1,50,000 for the asst. yr. 1985-86. Here also it is pertinent to note that in the first revised return only the credits in the name of Smita Patil and Dilip Patil were offered as income on the ground that Smita Patil had some difficulties in appearing before the AO and Dilip Patil had fallen out with his brother Bhikaji Patil. This shows that at least with regard to Bhikaji the assessee did not have any difficulty in proving the credit. However, when Bhikaji also died in an accident, there was no way that the credit in his name could be proved. Therefore, the second revised return was filed offering the credit in his name as additional income. These are the circumstances under which the revised returns were filed. I am, therefore, unable to hold that these were not voluntarily filed or that they were filed only to save the assessee from penalty proceedings, as has been inferred by the learned JM. In the covering letter, assessee has also stated that the additional income was being offered only with a view to co-operate with the Department, purchase peace and to avoid prolonged litigation in view of the fact that there were difficulties in proving the credits. Request was also made that no penalty proceedings should be initiated if the offer is accepted. Though it is true that there can be no estoppel against the statute and that the AO cannot be estoppel from initiating penalty proceedings if he finds that the penalty proceedings could be initiated with justification, it is equally true that when the AO accepts the offer of additional income or surrender of the income without regard to the question whether the income is assessable at all in the assessment year in which it offered, then it cannot be definitely asserted that the assessee has concealed its income or furnished inaccurate particulars thereof for that year. In the present case, the learned AM, has pointed out in detail as to how the income could not have been assessed in the asst. yr, 1985-86 either as cash credits under Section 68 or as unexplained investment under Section 69: If at all it could have been assessed under Section 69 only in the asst. yr. 1984-85 or under Section 68 in the asst. yr. 1986-87. Even then the other questions would arise viz., whether the investment really came out of the assessee's resources or whether the three persons who made the investment had no means to invest the money and so on so forth. All these aspects would have had to be considered. Even if the income is assessed under Section 68 in the asst. yr. 1986-87, the question whether it is a cash credit proper will have to be considered in the light of the facts that the monies were merely utilized for the purposes of paying off the loan taken by the assessee from Syndicate Bank. All these questions would have cropped up and would have had to be examined. We are not concerned with these aspects because the AO merely accepted the offer of the assessee and brought the amount of Rs. 1,50,000 to tax in the asst. yr. 1985-86 without examining the question whether it was properly assessable in that year at all. I, therefore, agree with the learned AM that in these circumstances, apart from the question of any condition being imposed for not levying the penalty, even on merits, there was no justification for levying the penalty for the year under consideration. In my opinion, the learned AM has rightly applied the judgment of the Bombay High Court in the case of Jainarayan Babulal (supra) on the aspect as to whether in penalty proceedings, the assessee can raise the question as to the legality of the assessment at all. In my humble understanding of the judgment it is open to the assessee to do so. On this aspect, there is no difference between the law under 1922 Act and that under 1961 Act. The difference in the legal position exists only in the case of assessability of cash credits. Whereas under the pre-1961 law, the cash credits were assessable only in the financial year in which they appeared, under Section 68 of the 1961 Act, the credit may be charged to tax as the income of the assessee of the relevant previous year. In this case, the credit was on 3rd July, 1985/8th July, 1985, which date fell within the previous year ended 31st March, 1986, and could have been assessed only in the asst. yr. 1986-87. The judgment cited supra, therefore, applies to the present case so far as the other aspect mentioned earlier is concerned and has been rightly applied by the learned AM. In this connection, it would appear that the learned JM, with respect, was not accurate in saying that both the relevant dates viz., the date of investment and the date of credits would fall within the previous year relevant to the asst. yr. 1985-86, in para. 10 of his order.
9. As regards the question whether any notice was issued under Section 148 for the year under consideration, there appears to be some uncertainty about this, as already pointed, in the first page of the assessment order, it is stated by the AO that the assessment is made under Section 143(3) r/w Section 143(2)(b) whereas towards the end, it is stated that the income is assessed under Section 143(3)/147(a). In the body of the assessment order, however, there is no mention of any notice under Section 148 having been issued nor was any record produced before me to show any such notice was issued. It appears to me therefore, that the position is not clear at all but if notice under Section 148 had been issued, I would assume that it would have been mentioned in the body of the assessment order itself.
10. The learned Departmental Representative cited before me the following judgments ;
(1) S.S. Ratanchand Bholanath v. CIT (1994) 210 ITR 682 (MP) (2) CIT v. Abdul Gam Bhat (2000) 246 ITR 607 (J&K) On perusal, I find that these two cases are not of any assistance to the Revenue in the present case. The other submission made by the learned Departmental Representative that there can be no conditional offer of income has already been considered by me earlier. This aspect of the matter has also been dealt with by the learned AM in paras 10 to 12 of his order with which I respectfully agree.
11. In the result, I agree with the learned AM that the order of the CIT(A) cancelling the penalty was justified.
12. The matter will now go before the regular Bench for deciding the appeal in accordance with the opinion of the majority.
U.B.S. Bedi, J.M.
1. As there was a difference of opinion between the AM and the JM, following question was referred to a Third Member :
"On the facts and circumstances of the case, whether the order of the JM reversing the impugned order is justified or the order of the AM deleting the penalty while accepting the appeal is justified."
2. The learned JM, Shri R.V. Easwar, sitting as Third Member, by his opinion dt. 24th Jan., 2003, has concurred with the view of the AM. In accordance with the majority view, the order of the learned CIT(A) cancelling the penalty is confirmed and the appeal is allowed, (sic-rejected/dismissed)