Income Tax Appellate Tribunal - Chandigarh
Sangrur Vanaspati Mills Ltd. vs Deputy Commissioner Of Income Tax on 31 December, 2001
Equivalent citations: [2002]80ITD143(CHD)
ORDER
Phool Singh, J.M. Nov., 1997
1. These eight appeals of the assesses are directed against the order dt. 15th March, 1991, recorded by the CIT (Central), Ludhiana by which three orders dt. 8th Nov.. 1989, recorded by the Dy. CIT. Spl. Range. Patiala (hereinafter referred as the AO) dropping the penalty proceedings under Section 271(1)(c) of the IT Act, 1961 (hereinafter referred as the Act) for the asst. yrs. 1986-87, 1987-88 and 1988-89 as well as three orders dt. 8th Nov., 1989, by which penalty proceedings under Section 273(2)(aa) of the Act for the asst. yrs. 1986-87 to 1988-89 as well as two orders dt. 8th Nov., 1989 recorded under Rule 40(5) of the IT Rules, 1962 waiving of the interest under Section 215 of the Act were cancelled and the AO was directed to proceed with the penalty proceedings afresh in the light of observations made in the said order. As all these appeals involve common questions, these were heard together and being disposed of by this composite order.
2. It will be in the fitness of things to give out the brief facts under which the CIT invoked the jurisdiction under Section 263 of the Act. The assessee-company was engaged in manufacturing of edible vansapati ghee during the assessment years under consideration as in the past and also started manufacturing of soap, utilising its own soapstock which was a bye-product. A survey under Section 133A of the Act was conducted at the business premises of the assessee on 4th Oct., 1988 in which two diaries/ledgers and some loose papers were found and impounded under Section 131. Statement of Dr. Rohit Jindal one of the directors of the assessee-company was recorded during the survey proceeding and he allegedly admitted that entries in the seized ledgers were not recorded in the books of accounts of the company in the relevant period. When the assessment proceeding were in progress, the assessee moved a letter dt. 4th Nov., 1998, surrendering the additional income of Rs. 23.5 lacs for the asst. yr. 1986-87, Rs. 7.5 lacs for the asst. yr. 1987-88 and Rs. 4 lacs for the asst. yrs. 1988-89. The AO completed the assessment order on the returned income plus the amounts so surrendered by the assessee in each of the assessment years as well as by making addition of Rs. 1 lac each in all the assessment years and proceedings under Sections 271(1)(c). 273(2)(aa) for the asst. yrs. 1986-87, 1987-88 and 1988-89 the years under consideration before us were also ordered to be initiated as well as interest under Section 215 was ordered to be charged. The necessary notice under Section 274 r/w Section 271(1)(c) and separate notice under Section 274 r/w Section 273(2)(aa) were accordingly issued for each of the assessment year. The assessee filed explanation taking up different pleas legal as well as factual and the important one was that assessee had offered additional income in all the assessment years to purchase peace and to seek expeditious disposal of assessment proceedings and to cooperate with the Department. The other place was that conditional offer of surrender was made as there was prayer in surrender application itself that no penalty proceedings shall be initiated or interest to be charged. The legal plea was also raised and after due consideration the AO vide-order dt. 8th Nov., 1989, recorded in each of the proceedings for penalty under Section 271(1)(c) as well as for 273(2)(aa) of the Act for each of the assessment years dropped the proceedings. So far as the charging of interest under Section 215 was concerned, the assessee moved necessary petition under Rule 40(5) of the IT Rules and after considering all the facts and on the ground that in case amount of surrender is excluded from the total income shown by the assessee then no default existed and the interest under Section 215 was waived for the period from the date of filing of return onwards for both the asst, yrs. 1986-87 and 1987-88.
3. The CIT(A), Ludhiana, on perusal of the records of the above proceedings found that the above referred to 8 orders recorded by the AO were erroneous in so far as they were prejudicial to the interest of Revenue. A notice under Section 263(1) of the Act was issued to the assessee on 18th/22nd Jan., 1991, calling upon the assessee to show-cause as to why those orders may not be cancelled under Section 263 of the Act. The learned CIT also gave out the reasons on which those orders were going to be cancelled. It was pointed out that disclosure made by the assessee was neither full and true nor voluntary but was made by the assessee when assessee was cornered with the various ledgers and other loose papers found at the time of survey. The assessee submitted detailed reply to the above notice in which it was placed that notice issued by the CIT was without jurisdiction and without complying the manadatory conditions of Section 263. The order passed by the AO were correct in law and proceedings were dropped after considering the full facts and the circumstances of the case and following the decision of the Hon'ble Supreme Court in the case of Sir Shadtial Sugar and General Mils Ltd. and Anr. v. CST (1987) 168 ITR 705 (SC). On facts, it was submitted that at no stage the assessee admitted the surrendered amount as its concealed income. Even though that addition vide letter dt. 4th Nov., 1988 was conditional one and made to purchase peace with the Department and for expeditious settlement of the cases. The assessee specifically mentioned in that application that no penal action and levy of interest was chargeable. Even assessments were completed for 'all the years after making additions of the amount as offered by the assessee vide letter dt. 4th Nov., 1988. The plea of the assessee was that except the offer made by the assessee, nothing is with the Department on the basis of which it can be inferred that the assessee had knowingly concealed the income justifying the addition. The seized documents were having no connection with the business of the assessee as explained during the penalty proceedings. Apart from this factual position, legal pleas were also taken up to the fact that the action of the AO was justified in the facts and the circumstances of the case and the C1T(A) has no jurisdiction to cancel the order of AO.
4. Reliance was also placed on the decision of the Hon'ble Supreme Court in the case of CIT v. Simon Carves Ltd. (1976) 105 ITO 212 (SC) in which it was laid down that if there were two modes permissible in law to be adopted by an authority and if authority has adopted one permissible mode and charged the tax then that order is definitely justified and does not require any reopening by higher authority. In the same way, the other decision of Madras High Court in the case of Venkatakrishna Rice Company v. CIT (1987) 163 ITR 129 (Mad) was relied in which scope of Section 263 was defined and it was observed by their lordships that if assessment is in accordance with law then it cannot be erroneous and hence could not be prejudicial to the interest of the Revenue, hi the end, reliance was further placed on the decision of the CIT v. T. Naiayana Pai (1975) 98 ITR 422 (Kai), in which the exercise of jurisdiction under Section 263 was held as not justified in the absence of finding recorded by the CIT that consideration of sale shown by the assessee was less than the market value. Apart from it the decisions of the Tribunal in the case of Transactional Analytic Centre for Education, Research & Trang. v. ITO (1988) 24 FTD 400 (Del), in the case of Island Sea Foods (P) Ltd. v. ITO (1988) 27 TTD 247 (Coch) and that of Naiendia Associates, Engineers & Contractors v. ITO (1988) 26ITD 406 (Hyd) were relied upon in which the order of CIT passed under Section 263 were held liable to be cancelled.
5. About the proceedings under Section 273(2)(aa), the contention of the assessee was that legal position is quite clear and no penalty under that section is leviable unless it is proved that estimate submitted by the assessee was untrue at the time of filing of estimate. In the case in hand, it was contended by the assessee that nothing is proved that estimate filed by the assessee was untrue when it was filed. About the waiver of the interest, the plea was that the AO has rightly waived off the same in the facts and the circumstances of the case. Further reliance was also placed on certain case laws reproduced in para 11 of the order of the CIT.
6. After considering the pleas of the assessee, CIT found no merit in the same. According to him, the documents seized at the time of survey were written in the handwriting of Dr. Rohit Jindal, one of the directors, who owned the same and admitted that transactions entered in those ledgers were not recorded in the books of accounts of the company. For these, the CIT reproduced relevant questions and answers relating to deposition of said Dr. Rohit Jindal. It was further noted that the contention of the assessee offer was made merely to purchase peace with the Department and for expeditious settlement of the case was also wrong as offer was made when the assessee found concerned by the statement of Dr. Rohit Jindal as well as by incriminating seized material. He further proceeded to distinguish the ratio of the case laws relied upon by the assessee before him and concluded that it was a case of penalty under Section 271(1)(c). About the penalty proceedings under Section 273(2)(aa) of the Act, it was noted by the CIT that the plea of the assessee that estimate of advance-tax was filed under bona tide belief on the basis of income is not correct as assessee was fully aware that it was concealing its income, which was subsequently proved to be untrue found in the seized documents and then the estimate cannot be believed to be true to the knowledge of the assessee and dropping the proceedings of penalty under Section 273(2)(aa) was erroneous and prejudicial to the interests of the Revenue. On the same reasoning waiver of interest chargeable under Section 215 was held erroneous and accordingly all the orders were cancelled with direction to the AO to frame the orders afresh. These orders of the learned CIT(C), Ludhiana is subject-matter of all these appeals.
7. The learned representative of the assessee, P.C. Jain, C.A. started by giving out the sequence of the happening starting from the date of survey i.e. 4th Oct., 1988. He further pointed out that the assessee in order to purchase peace and to seek expeditious disposal of all assessments made offer vide application dt. 4th Nov., 1988, by which substantial amount was offered to the Department with condition that no penalty or interest shall be levied and the Department on the basis of that offer, completed the assessments without making any addition or making any disallowance to the returned income plus the additional income so offered vide application dt. 4th Nov., 1988. Apart from it, the Department was having no evidence with it, which could have otherwise justified in addition and even the offer of amount made by the assessee was more than the Department could have visualised even on appreciation of seized material, which is evident from the note left away by the AO at the time of completing the assessment orders, in which the entries in the diaries seized at the time of survey were scrutinised and entries of one diary got tallied from regular sale and the entries of other diary were not found legible and looking to this difficulty. Rs. 20 lacs were found as the amount of advance made during the year under consideration and the assessee had already made offer of Rs. 23.5 lacs as an addition. The contention is on the basis of this note, which is reproduced by the CIT(A) in his order dt. 5th Sept., 1994 in the assessee's appeal against imposition ol penalty under Section 271(1)(c) of the Act for the asst. yts. 1986-87, which has been filed by the assessee. The plea of the learned authorised representative remains that assessee made the offer with all sincerity and the amount is even more than what could have detected by the Department and on this bona fide approach of the assessee, no penalty was leviable.
8. Apart from it, the learned counsel has taken up the legal plea in respect of consequence of such offer or surrender made by the assessee. He started placing reliance on the decision of apex Court in the case of Sir Shadilal Sugar & General Mills Ltd. (supra) in which it has been held that there may be 101 reasons for making surrender by the assessee but it is always not sufficient to attract penalty as the Revenue cannot be allowed to absolve from proving the facturn of concealment with other material evidence on record. The other case of Krishna Lal Shiv Chand Rai v. CIT (1973) 88 ITR 293 (P&H) was referred to in which it was laid down by their Lordships that surrender of any amount on the basis of admission of the assessee is not sufficient. To Justify the penalty under Section 271(1)(c), the assessee is to be given chance afresh to prove that his admission was incorrect. Another decision of Allahabad High Court in the case of CIT v. Mansa Ram & Sons (1977) 106 JTR 307 (All) was referred to in which the assessee surrendered the amount of cash credit as desired by the AO provided no penalty was leviable. However, penalty was levied and their Lordships concluded that no penalty was leviable as the assessee was induced by offer of Department. Again the jurisdictional High Court decision in the case of Sohinder Singh & Bios. v. CIT (1980) 121 ITR 834 (P&H) was referred to in which except surrender, there was no evidence with the Department to infer that the income was concealed one and their Lordships held that no penalty was leviable. The Madhya Pradesh High Court in the case of CIT v. Punjab Tyres (1986) 162 ITR 517 (MP) has also laid down the same view and the same view is there in the case of Mahavir Transport Co. v. ITO (1987) 23 ITD 206 (Hyd). On the basis of these case laws, the plea of the assessee's learned authorised representative in the case in hand is that the Department was having nothing except the amount of offer, which has been added and in the absence of any finding that the amount of surrender was concealed income or in the absence of any evidence to that effect, penalties were not leviable and proceedings were rightly dropped.
9. So far as the jurisdiction of the learned CIT is concerned, it was contended by the learned authorised representative that it was necessary to state in same manner in which he considered the order of the AO as erroneous or prejudicial as held by the Tribunal in the case of Transactional Analytic Centre for education, Research & Trng. v. ITO (supra) and further reliance was placed on the decision of Island Sea Foods (P) Ltd v. ITO (supra) in which it has been laid down that in order to assume lawful jurisdiction, the CIT must have jurisdictional facts and these facts include that the order of the AO is erroneous as well as prejudicial to the interests of the Revenue and on the record there exists evidence to support this inference. Again reliance was placed on the decision of Narendra Associates, Engineers & Contractors (supra) and the case of T. Naiayana Pai (supra) in which the scope of jurisdiction to be exercised under Section 263 by the CIT was discussed in detail and these decisions were even cited before the learned CIT.
10. The other plea of the learned counsel for the assessee was that levy or not to levy the penalty is quasi judicial proceedings and based on objective satisfaction of the AO. It has been held in the case of ITO v. Eastern Scales (P) Ltd. (1978) 115 FTR 323 (Cal) that interference by superior authority in judicial or quasi-judicial functions of the officers is not called for. Following the same view, the Tribunal Calcutta Bench in the case of Asstt. CIT v. Kesoram Industries Ltd. (1993) 44 ITD 158 (Cal) concluded that any direction given by the higher authorities to the AO as to manner in which a rectification order is to be passed amounts interference with his judicial or quasi-judicial functions and thus the CIT was not justified in giving such direction. On the basis of these case laws, the learned authorised representative contended that the impugned order recorded by the CIT is nothing but a direction and such direction cannot be allowed to operate as it amounts to interference in the discharge of quasi-judicial proceedings by the AO.
11. The learned authorised representative also submitted that in the case in hand, several enquiries have been made by the AO before dropping the penalty proceedings under Section 271(1)(c) and 273(2)(aa) of the Act and in waiving of the interest and if such were the basis, no interference is expected. No interference is called for at the hands of the CIT. Further the view taken by the CIT is nothing but mere change of opinion and the CIT cannot invoke the jurisdiction under Section 263 on mere change of opinion.
12. So far as the proceedings under Section 273(2)(aa) was concerned, the learned authorised representative has taken the same pleas as were taken by the assessee before the CIT in response to notice under Section 263. Reliance was placed on the decision of the Calcutta High Court in the case of CIT v. Bilia Cotton Spinning & Weaving Mills Ltd. (1986) 157 FTR 516 (Cal) in which burden of proof to prove the filing of false estimate of advance tax by the assessee is on Revenue and it should also be proved hat mens rea at the time of filing estimate was there. In the case in hand, the assessee was not having any mala fide intention at the time when original estimate was filed on the above income and amount of advance-tax fell short on account of surrender amount by the assessee after survey. The learned authorised representative also pleaded that authorities below have not opined in anyway that assessee was having full knowledge about its income and filed false estimate of advance tax. The other decision relied by the authorised representative was of CIT v. S.B. Electric Mart (P) Ltd. (1981) 128 HR 276 (Cal) and that of Ramnagar Cane & Sugar Co. Ltd. v. CIT (1982) 134 YTR 609 (Cal). The plea was that in the absence of any specific finding or material to prove the mens rea on the part of the assessee, the AO rightly dropped the proceedings and on the facts and the circumstances of the case, waiver of interest under Section 215 was rightly made as in case surrendered amount is excluded then tax paid will not be in anyway short to the required percentage and no charge of interest under Section 215.
13. On the basis of the above, the learned C.A. justified the dropping of the proceedings by the AO in respect of penalties under Sections 271(1)(c) and 273(2)(aa) and waiver of interest under Rule 40(5) for all the concerned assessment years and submitted that orders, in question, required to be cancelled.
14. As against it, the learned Departmental Representative placed reliance on the order of the CIT(A), Ludhiana, which was said to be containing all the facts as well as reasoning. Starting from the very beginning, the learned Departmental Representative pointed out that it was not bona fide disclosure of substantial amount made by the assessee nor it was made in order to purchase peace or not to seek expeditious disposal of assessment proceedings as averred by the assessee and argued by the learned authorised representative but facts are quite otherwise. The actual facts have specifically been mentioned by the CIT that during the statement of Dr. Rohit Jindal, one of the directors specifically admitted that entries in the ledgers seized at the time of survey were not recorded in the account books of the company and those entries were in his own handwriting and transactions relate to the business of the assessee. After these admissions made by Dr. Jindal, the Department has detected the concealed income of the assessee and when cornered, the assessee came with offer of surrender vide application dt. 4th Nov., 1988, and prayer was also made to the effect that no penalty proceedings be initiated or penal interest be charged but that prayer was rejected as the AO initiated proceedings under Sections 271(1)(c) and 273(2)(aa) of the Act. It clearly shows that offer was not conditional one and even that prayer of the assessee stands rejected. The second plea of the learned authorised representative was that it is wrong a allege on the part of the assessee that the amount so offered by the assessee alone was added to the total income but each year the AO has made additional addition of Rs. 1 lac each to the returned income plus the surrendered amount and thus surrender was not treated as true and correct. All these facts, according to the learned authorised representative, show that it was a case of contumacious concealment of income by the assessee as duly supported by the evidence in the shape of seized ledgers and loose papers and specific admission made by Dr. Rohit Jindal. The learned Departmental Representative further submitted that it is wrong to allege on the part of the assessee that except offer no other evidence was with the Department to charge the assessee with the penalty of concealment or of filing wrong estimate of advance tax as that evidence was existing on the record. On the basis of above, the learned Departmental Representative contended that once admission is made and even the assessee came with the surrender then penalty cannot be dropped/waived and on the facts and the evidence available on record, it was a case of imposition of penalty under Section 271(1)(c) as well as under Section 273(2)(aa) of the Act and interest was also to be charged under Section 215.
15. So far as the legal position is concerned, the learned Departmental Representative placed reliance on the decision of R.B. Shreeram Durgaprasad & Fatechand Naisinghdas (Export) Finn v. CIT (1987) 168 ITR 619 (Bom) in which the penalty was found leviable in case where positive material to indicate that concealment of income was there. The Hon'ble High Court has placed reliance on the decision of the apex Court in the case of CIT v. Anwai All (1970) 76 ITR 696 (SC). Further decision in the case of CIT v. Standard Mercantile Co. (1987) 166 STR 39 (Pat) was referred to in which the assessee admittedly doing clandestine business and addition made to profits and that was treated as concealed income and levy of penalty was held justified. The learned Departmental Representative submitted that ratio of both these cases is fully applicable to the facts of the case as there is concealment of income as per specific admission of Dr. Rohit Jindal but admitted that transactions entered in the ledger found at the time of seizure were not recorded in the account books of the assessee and that fact coupled with the surrender of substantial amount by the assessee. There was no other inference except treating the said amount as of concealed income.
15.1. About the scope of Section 263 of the Act, the learned Departmental Representative placed reliance on the decision of the Hon'ble Gujarat High Court in the case of Addl. CFT v. Mukur Corporation (1978) 111 ITR 312 (Guj) in which the AO failed to carry out the necessary enquiries in regard to the deduction and exercise of jurisdiction in Section 263 was held justified and even in such cases the CIT was not expected to arrive at the firm conclusion about the allowability or otherwise of such claim of the assessee. On the basis of this ratio the learned Departmental Representative pointed out that the AO did not make any enquiry as he has simply dropped the proceedings. Referring to the evidence which was available with the AO, the learned Departmental Representative, pointed out that the AO did not refer to the statement of Dr. Rohit Jindal in which he specifically stated that transaction of ledgers seized at the time of survey do not form part of account books and those ledgers were also not looked into by the AO except a bare recital of those facts. The learned Departmental Representative further emphasised on the facts that if the AO while dropping the proceedings of penalties under Section 271(1)(c) did not look into the evidence, then the CIT can look into the whole evidence while exercising jurisdiction under Section 263 as held in the case of CIT v. SM. Oil Extraction (P) Ltd : (1991) 190 ITR 404 (Cai). The learned Departmental Representative has also placed reliance on the decision of the Madras High Court in the case of L.K. Shaik Mohd. Bros. v. CIT (1977) 110 ITR 808 (Mad) in which it was concluded that if there was sufficient material in the assessment proceedings to conclude the finding of conscious concealment then the penalty was held justifiable. Relying upon this, it was argued that in the case in hand there was sufficient material leading to the levy of penalty but the AO wrongly dropped the proceedings without looking into the material available on record.
15.2. About the proceedings of penalty under Section 273(2)(aa) of the Act, the contentions were the same as taken up by the learned CIT. Ludhiana that the assessee himself has surrendered the amount on the basis that said amount was concealed income and that led to inference that assessee was fully aware about the concealed income and estimate filed for advance-tax cannot be taken as true and it was fit case for levy of penalty and the AO wrongly dropped the same. Further the same plea was taken against the action of the AO in waiving of the levy of interest under Section 215. The substance of the argument of the learned Departmental Representative was that the order, in question, was rightly passed by the CIT as orders recorded by the AO were apparently erroneous and liable to be quashed. He further pointed out that the CIT has rightly directed the AO to proceed in the matter, as after cancelling the orders, the AO was directed to reframe the same according to law and on the basis of observations and in case directions of the CIT may not appear to be conclusively necessary, observations restricting the direction of the CIT can be passed by the Tribunal.
16. In rejoinder, the learned counsel for the assessee, pointed out that all the proceedings of penalties under Sections 271(1)(c), 273(2)(aa) and waiver of interest under Section 215 reached finality as no audit objection in these cases have been raised and thus final orders should have not been disturbed unless prima facie they are held to be illegal. Reiterating the earlier arguments, the learned CIT (sic) pointed out that orders have rightly been passed by the AO after exercise of powers vested in him. The other plea of the counsel was that conditional offer made by the assessee has not been rejected and once accepted then it should be treated as accepted in toto including acceptance of plea of the assessee for not levying the penalties and interest, About addition of Rs. 1 lac each in three assessment years, the plea of the learned authorised representative was that it was an ad hoc addition and assessee in order to purchase peace did not try to appeal against it but that fact will not make that amount of Rs. 1 lac, apart from the amount of surrender, as concealed income of the assessee. Reliance was also placed on the decisions of the Hon'ble Delhi High Court in the case of Addl. CIT v. Sudershan Talkies (1993) 200 ITR 153 (Dei) and that of CIT v. Sudershan TaMes (1993) 201 ITR 289 (Del). Further the learned Departmental Representative pointed out that all the facts were considered by the AO and he made necessary enquiries and seized material as the AO noted that ledgers seized under survey operation were not decipherable. He further tried to distinguish the case laws relied by the learned Departmental Representative and pointed out that the order, in question, is not that of open set aside but the CIT has given out specific finding on the basis in which the AO in second innings levied penalty, which, no doubt, stood deleted by the CIT(A) in the order referred (supra). On the above basis, the learned C.A. argued that matter has rightly been concluded by the AO and no interference was warranted from the CIT.
17. We have considered the rival submissions and perused the records. The facts have been reiterated in the earlier part of the order and need not detain us any more. The only point requires scrutiny in the appeals relating to penalty proceedings under Section 271(1)(c) is whether the AO was Justified in dropping the proceedings for all the three assessment years or not. The order recorded by the AO in all the assessment years read as under:
"Order under Section 271(1)(c) Penalty proceedings started in this case are hereby dropped.
Sd/-
8th Nov., 1989.
Deputy Commissioner of Income-tax, Special Range, Patiala."
This order is not speaking one and when query was made by Bench, the learned C.A. filed a copy of order of CIT(A), Patiala dt. 5th Sept., 1994, by which penalty under Section 271(1)(c) in the case of the assessee imposed by the AO in pursuance to the order under Section 263 recorded by the CIT stood deleted and at p. 4 thereof, the learned CIT(A) had reproduced office-note dt. 30th Dec., 1988, by which penalty proceedings were proposed to be dropped. A reading of that shall reveal that the learned AO has taken note of the reply given by the assessee to the show-cause notice issued by him under Section 274 r/w Section 271(1)(c). He further noted that the assessee nowhere admitted that surrendered amount was assessee's concealed income or seized documents belonged to the assessee-company or has any relation to any transaction of the assessee-company. Further much reliance has been placed on the offer made by the assessee of more sum for assessment vide letter dt. 4th Nov., 1988, for all the three assessment years and further observations were that seized documents were not verified by the Department and names of the parties as well as amount involved therein could not be ascertained. He further appreciated the cooperative conduct of the assessee as assessee made immediate payment of tax on the surrendered amounts and even did not challenge the additions in appeal. These facts as well as the reasoning in the case of Mahavir Transport Co. (supra). Sohinder Singh & Bros, (supra) and other cases decided by different Benches of the Tribunal relied by the assessee were taken as basis for dropping the proceedings of penalty.
18. These facts as noted by the AO and appreciated on the basis of averments of the assessee are prima facie, not correct. A perusal of order of the learned CIT recorded under Section 263 of the Act shall show that during the survey proceedings statement of Dr. Rohit Jindal, director of the company, was recorded and the seized ledgers as well as different entries were put up to him. From the relevant questions and answers reproduced by the CIT, it is evident that Dr. Jindal admitted that transactions noted in the seized ledgers are of assessee's business as well as relate to assessee-company but these have not been recorded in the books of accounts. He further admitted that different amounts of advance money given to different firms did not appear in the regular books. From the above, the assertion of the assessee that seized ledgers or transaction noted in them did not belong to the assessee-company appears to be prima facie incorrect. The other fact that entries in the ledgers were not decipherable/legible is also not appearing correct as Dr. Rohit Jindal stated about those transactions. These facts were very much available with the Department prior to the surrender application dt. 4th Nov., 1988. It is settled proposition of law even mentioned by the assessee in grounds of appeal that penalty proceedings are quite distinct to the assessment proceedings and the Department has to proceed separately in both the proceedings. This applies to the facts in the case in hand as in case of assessment proceedings, the Department may have acted upon the surrender of the assessee and made the necessary additions but so far as penalty proceedings are concerned, the factum of concealment in the facts and the circumstances of the case was to be examined separately by the AO which unfortunately has not been done, as the AO has failed to make necessary investigations on relevant points.
19. First of all the AO was under obligation to come to the definite finding as to whether the surrender of the amount in each assessment year was made by the assessee before detection. The other plea which should have been examined and decided conclusively by the AO was whether there was any sort of agreement in between the assessee and the Department before surrender application dt. 4th Nov., 1988. The other important finding to be recorded by the AO after due investigation was to the effect, whether surrender amount was concealed income of the assessee or not. Necessary investigations should have been made by him about the contents of the diaries and ledgers seized at the time of surrender. These facts were material one, so far as the penalty proceedings under Section 271(1)(c) were concerned, but admittedly the AO has not done. We are fully alive to the fact that the AO was to find out whether prima facie case of concealment under Section 271(1)(c) is made out or not but a close scrutiny of the facts existing on record made by the CIT was sufficient only to show that puma facie case of concealment was there subject to further scrutiny by the AO as the AO in the case while dropping penalty proceedings did not make necessary enquiries nor given out his finding on the relevant point as noted above. On these facts, the only conclusion will be that order of AO cannot be called as made in accordance with law.
The case laws referred to by the parties is very much specific on the points that in case order of AO is not in accordance with law then the same shall be erroneous as well as prejudicial to the interests of the Revenue. The above discussion shall show that order in question recorded by the AO dropping proceedings was definitely not sustainable being erroneous and prejuducing to the interest of Revenue and CIT rightly invoked the jurisdiction.
20. So far as the legal pleas raised by the learned authorised representative about the exercise of jurisdiction under Section 263 are concerned, the same has rightly been exercised as prima facie penalty proceedings should not have been dropped in the manner done by the AO as the AO failed to make necessary enquiries on the relevant points and as held in the case of CIT v. Mukui Corporation (supra) by the Gujarat High Court, the order of the AO is not based on the result of necessary enquiries, the CIT is justified in setting aside the said order. The ratio of this case is fully applicable to the facts of the case.
21. The other plea of the learned authorised representative in the case of surrender, surrender alone will not be sufficient for attracting penalty of concealment and the AO rightly dropped the proceedings, we may point out that undisputedly proposition of ratio is to the effect as laid down in the cases referred to by the learned authorised representative that admission or surrender alone is not sufficient for penalty under Section 271(1)(c) and the Department is to bring on record something in the shape of material evidence to prove the factum of concealment. In the case in hand admission of Dr. Rohit Jindal coupled with the seized incriminating' documents viz., ledgers and loose papers etc. were sufficient material on record, which should have been scrutinised by the AO in right perspective, which has not been done and in the absence of that, the CIT was right in passing the impugned order. Further this plea shall be examined at length when penalty is to be imposed and we are not making any comments on the same as matter has been set aside by the CIT for making fresh order.
22. So far as the plea of the learned authorised representative that CIT has not merely set aside the order of the AO but directed to frame assessment orders afresh on the basis of discussion and discussion goes to show that CIT has held the assessee's case of concealment by specific finding, here we may note that order is of setting aside on the observation and we may further amend that order to this that in a case of open set aside necessary directions, which require investigation by the AO should not be made and the order of CIT may be modified to that extent that the AO shall not feel bound by finding by making fresh enquires into the factum of concealment and we do the same.
23. On the basis of the above, we conclude that order of CIT was justified in the facts and the circumstances of the case and all the pleas of the learned authorised representative are not going to help the case of the assesses except that AO shall not be bound by observation of CIT in second innings.
24. So far as the penalty under Section 273(2)(aa) of the Act are concerned, these are related to the factum of concealment and in case penalties under Section 271(1)(c) are going to be decided against the assessee then plea of the assessee about the bona fide belief about the estimate of income shall go away. Accordingly, these penalty proceedings are to be treated as wrongly dropped by the AO and we are not going to help the assessee but directing the AO to decide these penalty proceedings afresh according to law, without feeling bound by the directions of the learned CIT.
25. About the orders under Rule 40(5) of the IT Rules for the asst. yrs. 1986-87 and 1987-88, we are in agreement with the argument of the learned Departmental Representative and conclude that the CIT rightly set aside the orders of waiver of interest and the AO shall be deciding the matter afresh along with the penalty proceedings and order of the CIT is to be confirmed.
26. On the basis of above, we are of the opinion that the appeals of the assessee are without any force and are dismissed.
R.K. Bali, A.M. 10th Dec., 1997
1. I have very carefully gone through the proposed order of November, 1997, by my learned brother JM, Shri Phool Singh but I am unable to agree with his reasoning as well as conclusion in upholding the action of the CIT taken under Section 263 in cancelling the orders passed by the AO under Sections 271(1)(c) and 273(2)(aa) for the asst. yrs. 1986-87, 1987-88 and 1988-89 as well as two ordeis passed under Rule 40(5) of the IT Rules, 1962 waiving the interest under Section 215 of the Act.
2. Before appreciating the arguments of the learned representatives of the parties and the view of my learned colleague with which I am unable to agree, it will be in the fitness of thing to give out the factual position as the facts have not been brought out in detail by my learned brother in his order of November, 1997.
3. The assessee in these appeals is a private limited company deriving income from manufacture of Vanaspati Ghee. It also manufactures soap, utilising its own soapstock which was a bye-product.
4. A survey under Section 133A of the Act was conducted at the business premises of the assessee on 10th Oct., 1988, by the Dy. CIT, Spl. Range, Patiala, who was holding jurisdiction over the case at that time. During the course of survey the following documents were found ;
(i) One despatch diary containing 31 written pages in the handwriting of (Dr) Rohit Jindal, one of the directors of the assessee-company (relating to asst. yrs.
1986-87).
(ii) One 'Neelgagan' ledger containing 59 pages in the same handwriting (relating to asst. yr. 1987-88).
(iii) Five loose sheets containing various entries (relating to asst. yr. 1988-89).
These documents were subsequently impounded under Section 131. Before the survey under Section 133A was conducted on 10th Oct., 1988, hearing of the case for asst: yrs. 1986-87 was already fixed before the AO on 17th Oct., 1988. The case was attended by the assessee-company on that date and was adjourned to 24th Oct., 1988. The assessee attended the proceedings on that day and the case was again adjourned to 31st Oct., 1988. The order sheet only mentioned these facts. On the next date of hearing i.e., 4th Nov., 1988, the assessee filed a letter which reads as under:
"In order to get expeditious completion of the assessment and to avoid long drawn assessment proceedings and to purchase peace With the Department by offering full co operation for expeditious completion of assessment, we offer to be assessed as under on the following income instead of the declared income :
Rs Income alreadv declared before deduction under s 80HH 92,63,342 Add : Income now offered 23,60.000 1,16,03,442 Less : Deduction under s. 32A 3,57,708 under s. 80J 19,26,217 under s. 80HH 23,20,644 46,04,569 Net income offered for assessment 69,98,773 We hope, that the offer will be accepted and the assessment Will be made expeditiously at your earliest convenience and no penalty and penal interest under any of the provisions of the Act may be imposed.
Assuring our full cooperation in the early completion of assessment,"
5. The assessment order for asst. yrs. 1986-87 was passed on 30th Dec.. 1988.
Para 4(iii) of the assessment order which is relevant to the levy of penalty is reproduced, for the sake of better appreciation of the facts, as under:
"Surrendered income by the assessee :.
During the course of survey under Section 133A on 10th Oct., 1988, certain papers showing unaccounted transactions were found. These were admitted to be belonging to the assessee-company by one of the directors Dr. Rohit Jindal. Consequently vide letter dt. 4th Nov., 1988, the assessee offered an additional income of Rs. 23.5 lakhs. These incriminating documents and subsequent offer of the assessee clearly shows that the accounts of the assessee are not reliable and deserves to be rejected. Rejecting the same, the additional income earned or investments and advances made by the assessee outside the account books is estimated at Rs. 24.5-lakhs. This includes Rs. 23.5 lakhs offered by the assessee. This is being done under Section 145(2) of the IT Act, 1961......"
While passing this assessment order, the AO left a note in the file which is reproduced below:
"1. During the course of survey under Section 133A of the IT Act, 1961 on 10th Oct., 1988, two diaries/ledgers were found besides some other papers. These diaries related to the period relevant to the asst. yrs. 1986-87 and 1987-88. Loose papers related to expenses etc. for current year (i.e., for asst. yrs. 1988-89). These diaries are in the handwriting of Dr. Rbhit Jindal, director. Shri Jindal in his statement has admitted the same. The first diary contains entries regarding despatch of Vanaspati whereas the second diary relates to various advances. The entries in the first diary were got tallied from regular sales for the asst. yrs. 1986-87. It was stated that Dr. Jindal had just started sitting in the office and used to note down despatchs on the diary which were later on transferred to regular books. However, it cannot be ruled out that some of the transactions might not be recorded as exact verification is very difficult there being no address against each entry. The profit and investment on such transaction is assessed at Rs. 1 lakh. This amount, however, is covered by vide assessee's offer of Rs. 23.5 lakhs.
2. The other diary contains entries of advances to various parties. At some places these entries are legible but at most places they are not legible as the same have been cut and mutilated. The entries, however, relate to asst. yr. 1986-87 and 1987-88. They relate to assessee-company and are in the hand writing of Dr. Rohit Jindal one of the directors. The facts are admitted. The quantities of advances, however, are difficult to make out. The assessee voluntarily offered an amount of Rs. 23.5 lakhs to be assessed for assessment year under consideration. Looking to the fact that these entries are difficult to decipher and even on rough estimate, the advances are about Rs. 20 lakhs only during the period under consideration, the offer at Rs. 23.5 lakhs appears to be correct in context. It was vehemently argued by the assessee that income was generated from business and, therefore, all allowances admissible for business should be granted. After a careful consideration-this fact is admitted and income is assessed as income from 'business or profession'."
6. Penalty proceedings for asst. yrs. 1986-87 however, were initiated under Section 271(1)(c) and 273(2)(aa) by'a notice dt. 30th Dec., 1988. The interest was also directed to be charged under Section 215. The assessee filed a written reply on 26th Feb., 1989, through its advocates. It was argued in that reply that the assessee had offered some additional income to avoid long drawn assessment proceedings and to purchase peace with the Department and that it did not conceal any income whatsoever. The penalty proceedings under Section 271(1)(c) for asst. yrs. 1986-87 were dropped by the successor Dy. CIT Spl. Range, Patiala, vide order dt. 8th Nov., 1989. Office-note available on the file reiterates the same facts for dropping the penalty proceedings which were mentioned in the note dt. 30th Dec., 1988, by the earlier AO and which has already been reproduced above. This note, however, further added as under: "Notice under Section 271(1)(c) was issued to the assessee to show-cause as to why penalty under Section 271(1)(c) should not be imposed. In reply, the assessee has submitted that the assessee-company offered a sum for assessment to get expeditious completion of assessment and to avoid long drawn assessment proceedings and to purchase peace with the Department by offering, full cooperation for expeditious settlement. It also contended that at no stage the assessee-company admitted that the offered amount was assessee's income or that alleged documents belonged to the assessee-company or have any relation to any transaction of the assessee-company. It also stated that voluntary offer of more sum for assessment vide its letter dt. 4th Nov., 1988, was made subject to the condition that penalty or penal interest shall not be charged and it was bona fide understanding on the part of the assessee and the penalty is called for. The assessee has placed reliance on the following case laws in support of its contention and pleads that no penalty should be imposed :
1. Punjab & Haryana High Court--Sohinder Singh & Bros. v. CIT (1980) 121 )TR 834 (P&H);
2. ITAT Hyderabad Bench B--Mahavir Transport Co. v. ITO (1988) 30 TTJ (Hyd) 156 : (1987) 23 ITR 206 (Hyd);
3. ITAT Delhi Bench-C--ITO v. Moti Ram Subhash Chand Jain (1988) Taxation 91(4) 117;
4. ITAT Bench Amritsar--ITO v. Shashi Bhushan L/h of Tej Bhan (deed.);
5. ITAT Delhi Bench 'D'--Pamiinder Kumai Gupta v. ITO (1988) 32 TTJ (Del) 549 : (1988) Taxation 89(4) 55;
6. High Court of Andhra Pradesh--CIT v. Md. Yakub (1989) Taxation 90 (3) 449;
7. M.P. High Court--CJT v. Punjab Tyres (1986) 162 ITR 517;
8. Punjab & Haryana High Court--Krishna Lal Shiv Chand v. CFT (1973) 88 ITR 293 (P&H);
9. Punjab & Haryana High Court--Gumani Ram Shri Ram v. CIT (1972) 85 ITR 67 (P&H);
10. Allahabad High Court--CIT v. Mansa Ram & Sons (1975)'CTR (All) 163 : (1977) 106 ITR 307 (All);
11. Supreme Court of India--Sir Shadi Lal Sugar & General Mills Ltd. and Anr. v. CIT (1987) 168 ITR 705 (SC); and
12. Allahabad High Court--Addl. CIT v. Solar Chemicals (P) Ltd. (1984) 150 ITR 410 (All).
It may be pointed out here that the assessee only offered some amount to be assessed in addition to the returned income only to buy peace of mind and even on merits of the case on the basis of seized documents, a particular amount cannot be quantified which can be said to have been- concealed. The assessee did not revised the return to admit that it has any concealed income nor did the Department verify the entries contained in two diaries. These entries are all struck off and the amount and parties cannot be ascertained. Keeping in view all these facts as well as the case laws cited coupled with the facts that assesses has been cooperative and on surrender of this amount-it immediately paid the taxes on the same and did not go in appeal in this point. I am left with no alternative but to drop the penalty proceedings." Similarly the assessments for asst. yrs. 1987-88 and 1988-89 were completed by the AO on the returned income plus the amount of Rs. 7.5 lakhs for asst. yr. 1987-88 and Rs. 4 lacs for asst. yrs. 1988-89 so surrendered by the assessee in each of the assessment years as well as by making addition of Rs. 1 lakh each in both the assessment years and proceedings under Section 271(1)(c) and 273(2)(aa) were also ordered to be initiated as well as interest under Section 215 was ordered to be charged for the asst. yr. 1987-88.
7. The AO also dropped the penalty proceedings for asst, yrs. 1987-88 and 1988-89 under Section 271(1)(c) and also dropped the penalty proceedings under Section 273(2)(aa) to asst. yrs. 1986-87, 1987-88 and 1988-89 on 8th Nov.. 1989. Similarly the AO on an application by the assessee under Rule 40(5) reduced/waived the interest under Section 215 for asst. yrs. 1986-87 and 1987-88 by passing a speaking order.
8. It appears that after the orders dropping the penalty and waiving the interest were passed on 8th Nov., 1989, by the Dy. CIT Sr., Patiala, the jurisdiction over the case was transferred to Central Circle, Ludhiana and the CIT Central. Ludhiana, issued a notice under Section 263(1) on 18th/22nd Jan., 1991, for the cancellation of the orders dropping the penalty proceedings under Section 271(1)(c) and 273(2)(aa) for the asst. yrs. 1986-87. 1987-88 and 1988-89 and also for cancellation of order under Rule 40(5) for waiving the interest for the asst. yrs. 1986-87 and 1987-88. After considering the submissions of the assessee as incorporated in the impugned order the learned CIT cancelled the above referred 8 orders holding them to be erroneous and prejudicial to the interests of the Revenue.
9. Aggrieved with the above orders of the learned CIT the assessee has filed these 8 appeals which were heard by the Chandigarh Bench on 3rd July, 1997, and the cases were alloted to my learned brother for dictation who has passed the proposed order of November, 1997, upholding the action of the learned CIT and has dismissed the appeals filed by the assessee.
10. The submissions of the learned representative of the assessee P.C. Jain have been recorded by my learned brother in paras 7 to 13 of his order of November, 1997. The arguments in essence means that to levy or not to levy the penalty is a quasi judicial process based on the objective satisfaction of the AO and the CIT in his revisional jurisdiction cannot interfere in the exercise of quasi judicial function of the AOs. The submissions of the learned Departmental Representative who 'supported the order of the CIT have been recorded by my learried brother at pp. 14. to 18 of the proposed order and his own findings are given in paras 17 to 25 of the proposed order wherein he has' upheld the action of the CIT in setting aside the orders passed by the AO dropping the penalty proceedings under Section 271(1)(c) and 273(2)(aa) for the three years under consideration as well as the order passed by the AO under Rule 40(5) for waiving of interest for the asst. yrs. 1986-87 and 1987-88 with the modification in para 23 that the AO shall not be bound by the observations of the CIT in second innings. From the findings recorded by my learned brother in paras 23 and 24 it appears that he is of the opinion that the penalties have been dropped by the AO and interest has been waived without properly scrutinizing the seized material impounded under Section 131 in the proper perspective as recorded in paras 20 and 21. According to my learned brother the AO has failed to make necessary inquiries on the relevant points and has failed to properly scrutinize the ledger/loose papers impounded under Section 131 before dropping the penalty proceedings by passing a non-speaking order.
11. The above findings of my learned brother do not appear to be in accordance with material available on record. It is no doubt true that the penalties have been dropped by passing a one line order but the AO has given an office-note in the file indicating the reasons for dropping the penalty proceedings which has been reproduced by me in paras 5 and 6 above. Similarly the order for waiving interest under Rule 40(5) is a speaking order. It may be further pointed out that after setting aside was done by the CIT vide order dt. 15th March, 1991 the AO allowed a fresh opportunity to the assessee for completing setting aside proceedings relating to penalties under Sections 271(1)(c) and 273(2)(aa) etc. vide letter dt. 19th March, 1991 and the case was fixed for 25th March, 1991. The assessee filed a written reply dt. 25th March, 1991, contending that it was filing the appeal against the order dt. 15th March, 1991 under Section 263 to the Tribunal and prayed that the penalty proceedings may be kept in abeyance till the decision in the appeal by the Tribunal. The AO/Asstt. CIT, Central, Patiala, with whom the jurisdiction vested however rejected the plea of the assessee and sent draft orders dt. 26th March, 1991, to the Dy. CIT, Central Ludhiana, which was received by him on the same date at his camp office at Patiala and was approved on 26th March, 1991, itself. Penalty orders were subsequently passed on 27th March, 1991. Thus it is clear that even in the second innings no inquiries worth the name were made on the relevant points which according to my learned brother, the AO failed to make while dropping the penalties. The penalties were imposed in the second innings simply because the CIT has cancelled the earlier orders dropping the penalties by assuming the jurisdiction under Section 263 which according to my understanding the CIT cannot assume, as the jurisdiction to levy or not to levy penalty exclusively vests with the AO/Dy. CIT(A)/CIT(A) as per the scheme of 'the Act and CIT is not empowered to levy penalties. Of course, the CIT can waive or reduce the penalties levied by the AO under Section 271(4A) and 273A but he has no jurisdiction to levy any penalty to give direction to the AO to levy penalties.
12. As already mentioned, out of the above eight orders, six orders relate to the dropping of penalty proceedings by the AO who is the by. CIT Spl. Range and who has dropped the penalties by duly'applying his mind to the facts of the case and after considering the material available, on record as 'well as the submissions made on behalf of the assessee. Section 263 of the IT Act, 1961, under which the CIT has cancelled these orders read as under:
"263. The CIT may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the AO is erroneous insofar as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment."
From the reading of the above section it is clear that the CIT can cancel an order only if the order is erroneous and prejudicial to the interests of Revenue. Penalty is not a source of revenue for the State. Penalties are incorporated in the statute so as to act as a deterrent for the taxpayer to comply with the provisions which enjoins on the assessee to pay the legitimate tax due to the state. In this view of the matter dropping of penalty proceedings after duly applying the mind cannot be considered as prejudicial to the interests of the Revenue because penalty is not a source of revenue. Penalty in the broad sense may be defined as any suffering in person or property by way of forfeiture, deprivation or disability imposed as a punishment by law or judicial authority in respect of an act prohibited by the statute. If penalty is a suffering it will be misnomer to call it "additional tax" and thereby found jurisdiction in the CIT. No one loves taxes, it is true. But everyone dreads pains and penalties. The difference between a pecuniary penalty and a tax is that the former is a sum required in respect of an unlawful act, and the latter is a sum retired in respect of a lawful act. The Hon'ble Supreme Court in Jain Bros. v. Union of India (1970) 77 HR 107 (SC) at p. 116, has observed :
"Although penalty has been regarded as an additional tax in a certain sense and for certain purposes, it is not possible to hold that penalty proceedings are essentially a continuation of the proceedings relating to assessment where a return has been filed."
Philosophically, linguistically and morally, it is a contradiction in terms to say that penalty is an "additional tax". To raise penalty to the status of tax is to lend it a dignity, a respectability, which by no canon of ethics it would deserve. In other words we will be asking virtue to pay homage to vice. The word used under Sections 271(1)(c) and 273(2)(aa) are the AO "may" impose. The word "may" imports a discretion and "shall" an obligation. In the matter of penalty I am of the considered opinion, that the legislature in its wisdom has left it to the discretion of the ITO/Dy. CIT(A)/CIT(A). To the CIT it is a forbidden territory. If the legislature does not trust its own AO/Dy. CIT(A)/CIT(A), it can always alter the law. It can give to the CIT more discretionary powers and make him the trustee and guardian of the tax administration in the moral and legal sense of the term. However, as the language of Section 263 stands, the penalty is not in the CIT's province and power, whatever else may be. Revisional power of the CIT is not administrative but quasi judicial. A revisional authority cannot ask the initial authority to do something which the former is not empowered to do under the law. The power conferred upon the CIT is hedged with restrictions. It is not an unfettered power. It is cabined, caged and confined by the limitations of the fiscal process. The CIT himself cannot impose penalty. It is left to the AO by the legislature. It is the AO who has to be satisfied in the course of assessment that penalty proceedings should be initiated. If, ultimately, the AO finds no case either for initiation or for imposition, there is precious little that the CIT can do. He can only cancel the assessment and direct a fresh assessment but he cannot impose penalty. The uncontrollable width of the language of Section 263 adds little to his powers in the matter of penalty. Section 275 says that no order imposing a penalty shall be passed after the expiry of two years from the date of the completion of assessment in the course of which the proceedings for the imposition of penalty were commenced- There are also limitations of two years in Section 263(2) and this strongly suggests that two proceedings are separate and distinct. If the word "assessment" is not given a limited meaning, limitation periods will become meaningless. Not only there will be much overlapping, the intention of the legislature will also be defeated. The limitation enacted for the protection of the taxpayer will become illusory. Nothing will be finished within the time limited by Sections 263 and 275. The taxation troubles will never end.
From the above discussion, it is clear that the penalty is to be measured only by tax on income which is the subject of regular assessment. After the assessment has been completed, the AO has a discretion to inflict penalty for the violation of statutory provisions. The area within which he has to operate is indicated in Chapter XXI. Penalty has been prescribed by the legislature for a very wide variety of defaults but the sequence of events clearly indicates that the CIT's jurisdiction extends to the "regular assessment" where the total tax liability is ascertained and the expression "assessment" cannot be expanded to include a penalty under Section 263.
The matter can be looked at from another angle. The initiation of penalty has to be during the course of assessment proceedings after the AO records his satisfaction to this effect. After the initiation it is the AO who has to complete the penalty proceedings either by imposing the penalty or by dropping the same after considering the submissions of the assessee and the material available on record. If it is held as is the opinion of my learned brother, that the CIT can cancel the order dropping the penalty proceedings, then the CIT has to cancel the assessment order also because in the next round after setting aside by the CIT the AO has to further record his satisfaction during the course of assessment proceedings which cannot be done now in these appeals before us because the CIT has not cancelled the assessment orders framed by the AO under Section 263. Thus it has to be held that the CIT has no jurisdiction to cancel the orders passed by the AO dropping the penalty proceedings.
Even assuming that the CIT has jurisdiction to cancel the order dropping the penalty proceedings, jurisdiction under Section 263(1) being in the nature of supervisory jurisdiction can be exercised only if the circumstances specified therein exist. The power can be exercised only if (i) the order is erroneous; and (ii) by virtue of the order being erroneous prejudicial must have been caused to the interests of the Revenue. An order cannot be called as erroneous unless it is not in accordance with law. If an AO acting in accordance with law drops the penalty proceedings the same cannot be branded as erroneous by the CIT simply because, according to him, the order should have been written more elaborately. This section does not visualise a case of substitution of the judgment of the CIT for that of the AO, who passed the order, unless the decision is held to be erroneous. Cases may be visualised where the AO while making an assessment examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determines the income either by accepting the accounts or by making some estimate himself. The CIT, on perusal of the records may be of the opinion that the estimate made by the AO concerned was on the lower side and left to the CIT he would have estimated the income at a higher figure than the one determined by the AO. That would not vest the. CIT with power to re-examine the accounts and determine the income himself at a higher figure. This is because the AO has exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the CIT does not feel satisfied with the conclusion. It may be said in such a case that in the opinion of the CIT the order in question is prejudicial to the interests of the Revenue. But that by itself would not be enough to vest the CIT with the power of suo motu revision because the first requirement, namely, that the order is erroneous, is absent. This has been so held by the Hon'ble Bombay High Court in the case of CIT v. Gabriel India Ltd (1993) 203 ITR 108 (Bom). Applying the ratio of the above decision to the facts of the case it is clear that the AO has dropped the penalty proceedings under Section 271(1)(c) and 273(2)(aa) as well as waived the interest under Rule 40(5) after duly applying his mind in exercise of his quasi-judicial powers which are vested in him by the statute, and his action cannot be termed as erroneous simply because the CIT does not feel satisfied with the conclusion.
13. Before concluding, I may point out that after the cancellation of the orders in dispute by the CIT the successor AO levied penalties under Section 271(1)(c) and 273(2)(aa) which were taken in appeal to the CIT(A) by the assessee and the penalties under Section 271(1)(c) levied by the AO were deleted by the CIT(A), Patiala, by order dt. 5th Sept., 1994 copies of which were furnished to us during the course of hearing of these appeals. I may mention that in the facts and circumstances of the case it has to be held that the CIT had wrongly invoked the jurisdiction under Section 263 inasmuch no inquiries were required and in fact no inquiries were made and no fresh material was brought on record in the fresh penalty proceedings. As such the revisional jurisdiction cannot be allowed to be exercised by the CIT for substitution of his own opinion for that of the AO. Accordingly I will allow all the eight appeals filed by the assessee and cancel the order passed by the CIT under Section 263.
23rd Dec., 1997 REFERENCE UNDER SECTION 255(4) OF THE IT ACT, 1961 As there is a difference of opinion between the Members of the Bench who heard these appeals, the following point of difference is referred to the Hon'ble President, Tribunal, for the opinion of the TM :
"Whether, on the facts and in the circumstances of the case, the view of the JM that the order of the CIT under Section 263 cancelling the orders passed by the AO dropping the penalty proceedings under Sections 271(1)(c) and 273(2)(aa) for the asst. yrs. 1986-87, 1987-88 and 1988-89 and waiving of interest under Rule 40(5) for asst. yrs. 1986-87 and 1987-88 is correct or the view of the AM that the CIT has no jurisdiction to cancel the aforesaid orders passed by the AO is justified."
R.M. Meht, A Vice President (As A Third Member) 31st Dec.. 2001
1. The following point of difference has been referred to me under Section 255(4) of the IT Act, 1961 :
"Whether, on the facts and. in the circumstances of the case, the view of the JM that the order of the CIT under Section 263 cancelling the orders passed by the AO dropping the penalty proceedings under Sections 271(1)(c) and 273(2)(aa) for the asst. yrs:. 1986-87, 1987-88 and 1988-89 and waiving of interest under Rule 40(5) for asst, yrs. 1986-87 and 198'7-88 is correct or the view of the AM that the CIT has no jurisdiction to cancel the aforesaid order passed by the AO is justified ?"
2. At the outset, it may be mentioned that the facts of the case are recorded in the orders of both the learned Members of the Division Bench who had heard the appeals and a perusal thereof shows that they are agreed on the facts but to summarise these as follows :
The assessee is a private limited company deriving income from manufacturing of Vanaspati Ghee as also manufacturing of soap from its own-stock, which is a bye product.
3. There was a survey under Section 133A at the business premises on 10th Oct., 1988, during the course of which the following documents were found :
(i) A despatch diary containing 31 written pages in the handwriting of Dr. Rohit Jindal, one of the directors of company relating to asst. yrs. 1986-77;
(ii) One "Neelgagan" ledger containing 59 pages in the same handwriting relating to asst. yrs. 1987-88; and
(iii) Five loose sheets containing various entries relating to asst. yrs. 1989-90.
4. All the aforesaid documents were impounded under Section 131 and the statement of Dr. Rohit Jindal was recorded during the' course of survey and he allegedly admitted that the entries in the seized documents were not recorded in the books of accounts during the relevant period. However, the case for asst. yr. 1986-87 was already in progress before the AO prior to the survey and the hearing was fixed on 17th Oct., 1988'. The assessee attended the proceedings and the case was adjourned to 24th Oct., 1988, and again to 31st Oct., 1988. It is noted by the learned AM in his dissenting order that other than the fact of adjournments on the aforesaid dates nothing was mentioned in the order-sheet. On 4th Nov., 1988, which was the next date of hearing the assessee filed a letter wherein it offered additional income of Rs. 23.50 lakhs to purchase peace with the Department to avoid long drawn assessment proceedings, but with the request that no penalty or penal interest be levied. The AO completed the assessment for asst. yrs. 1986-87 on 30th Dec., 1988, and vis-a-vis the additional amount surrendered/offered for tax, he observed as under:
"Surrendered income by the assessee During the course of survey under Section 133A on 10th Oct., 1988, certain papers showing unaccounted transactions were found. These were admitted to be belonging to the assessee-company by one of the directors Dr. Rohit Jindal. Consequently, vide letter dt. 4th Nov., 1988, the assessee offered an additional income of Rs. 23.5 lakhs. These incriminating documents and subsequent offer of the assessee clearly shows that the accounts of the assessee are not reliable and deserves to be rejected. Rejecting the same, the additional income earned or investments and advances made by the assessee outside the account books is estimated at Rs. 24.5 lakhs. This includes Rs. 23.5 lakhs offered by the assessee. This is being done under Section 145(2) of the IT Act, 1961......"
5. The AO initiated penalty proceedings under Sections 271(lj(c) and 273(2)(aa) for asst. yrs. 1986-87 by issue of a notice dt. 30th Dec., 1988, and also directing charge of interest under Section 215. In response thereto assessee filed a written reply on 26th Feb., 1989, contending that it had offered additional income to purchase peace and avoid long drawn assessment proceedings and that it did not conceal any income. The AO dropped the penalty proceedings.
6. The assessments for asst. yr. 1987-88 were completed on identical lines i.e. by adding to the returned incomes amounts of Rs. 7.5 lakhs for the asst. yrs. 1987-88 and Rs. 4 lakhs for the asst. yrs. 1988-89 plus a further addition of Rs. 1 lakh in each year. The penalty proceedings were also initiated and levy of interest under Section 215 was also directed for the asst. yrs. 1987-88. As in the asst. yr. 1986-87 the AO dropped the penalties under Section 271(1)(c) for the asst. yrs. 1987-88 and 1988-89 as also those under Section 273(2)(aa) for the asst. yrs. 1986-87 to 1988-89 on 8th Nov., 1989. Similarly on application under Rule 40(5) the AO by means of a speaking order waived/reduced interest under Section 215 for the asst. yrs. 1986-87 and 1987-88.
7. After the various orders dropping the penalty proceedings and waiving interest were passed by the AO numbering in all to 8 the CIT issued notice under Section 263 on 18th/22nd Jan., 1991, for cancelling the orders on the ground that these were erroneous and prejudicial to the interests of the Revenue. After considering the submissions of the assessee opposing the action under Section 263 the CIT cancelled the orders directing the AO to frame them afresh. The main grounds on which the CIT did so were as follows :
(i) Documents seized at the time of survey were in the handwriting of Dr. Rohit Jindal a director of the company and who admitted that transactions entered therein were not recorded in the books o£ the company;
(ii) The contention that the offer of additional income was made to buy peace with the Department and for 'expeditious settlement of the case was wrong since the offer was made when the assessee found itself cornered by the statement of Dr. Jindal as also the incriminating material found;
(iii) The decisions relied upon by the assessee were held to be distinguishable; and
(iv) The plea of the assessee that estimate of advance tax was filed under bona fide belief was not correct as the assessee was fully aware that it was concealing its income.
8. Being aggrieved the assessee filed appeals to the Tribunal, at which stage, the following main submissions were made :
(i) The assessee in order to purchase peace and to seek expeditious disposal of its assessments made an offer vide communication dt. 4th Nov., 1988, by which substantial amounts were offered for tax to the Department with the condition that no penalty or interest should be levied and that the Department on the basis of the offer in question completed the assessments without making any addition/disallowance to the returned income plus the additional income offered;
(ii) The Department had no evidence with it which could otherwise justify the addition and even the offer of the various amounts was more than the Department could have visualized even on appreciation of the seized material;
(iii) The assessee made the offer with all sincerity and the amount so offered was more than what could have been detected by the Department and on this bona fide approach of the assessee. no penalty was leviable;
(iv) The legal position was in favour of the assessee vis-a-vis the offer/surrender made and in this respect reliance was placed on the following judgments :
(i) Sir Shadi Lal Sugar & General Mills and Anr. v. CIT (1987) 168 ITR 705 (SC);
(ii) Krishna Lal Shiv Chand v. CIT (1973) 88 ITR 293 (P&H);
(iii) CIT v. Mansa Ram & Sons (1977) 106 ITR 307 (All),
(iv) Sohznder Singh & Bros v. CIT (1980) 121 ITR 834 (P&H);
(v) CIT v. Punjab Tyres (19S6) 162 ITR 517 (MP);
(vi) Mahavir Transport Co. v. ITO (1988) 30 TTJ (Hyd) 186 : (1987) 23 ITD 206 (Hyd);
(v) Vis-a-vis the jurisdiction of the CIT, who invoked the provisions of Section 263 it was necessary on the part of the CIT to specify in the order as to in which manner he considered the order of the AO as erroneous and prejudicial.
Reliance was placed on the following judgments :
(i) Transactional Analytic Centre for Education Research & Trng. v. ITO (1988) (1988) 24 ITD 400 (Del);
(ii) Island Sea Food (P) Ltd. v. ITO (1988) 27. TTD 247 (Coch); and
(iii) Narendra Associates, Engineers & Contractors v. ITO (1988) 26 ITD 406 (Hyd).
(vi) To levy or not to levy the penalty was in the realm of quasi judicial proceedings based on objective satisfaction of the AO and interference therein by a superior authority in judicial or quasi-judicial functions of the offer was not called for Reliance was placed on the following judgments :
(i) ITO v. Eastern Scales (P) Ltd. (1978) 115 ITR 323 (Cal); and
(ii) Asstt. CIT v. Kesoram Industries Ltd. (1993) 44 FTD 15 (Cal).
(vii) That the AO had before dropping the penalty proceedings under ss.
271(1)(c) and 273(2)(aa) made detailed enquiries and this was also the position in waiving interest under Section 215 and under these circumstances no interference was called for at the hands of the CIT:
(viii) The view taken by the CIT in the order passed under Section 263 was nothing but mere change of opinion and jurisdiction under Section 263 could not be invoked on mere charge of opinion;
(ix) As regards the proceedings under Section 273(2)(aa) the submission was that burden of proof to prove the filing of false estimate of advance tax lay on the Revenue and it was also required to be proved that there was mens tea at the time of filing the estimate. In the case in hand the assessee did not have any mala fide intention at the time when original estimate was filed and the amount of advance tax paid fell short of the assessed tax only on account of the amounts surrendered by the assessee after the survey. That it was not the Revenue's case that the assessee had full knowledge about its income and filed a false estimate of advance tax. Reliance was placed on the following judgments :
(i) CIT v. Birla Cotton Spg. & Wvg. Mills ltd. (1986) 157 ITR 516 (Cal);
(ii) CIT v. S.B. Electric Mart (P) Ltd (1981) 128 ITR 276 (Cal); and
(iii) Ramnagar Cane & Sugar Co. Ltd. v. CIT(1982) 134 ITR 609 (Cal).
(x) That the waiver of interest under Section 215 had been rightly made since the exclusion of the amount surrendered would not lead to a situation where the tax paid would be short of the required percentage.
9. On the basis of the aforesaid submissions the assessee's counsel justified the dropping of the penalties under the relevant sections and also contended that the interest had been rightly waived under Rule 40(c). The plea, in other words, was that the consolidated order of the CIT under Section 263 for the various assessment years was required to be cancelled.
10. As against this the main arguments advanced on behalf of the Revenue were as follows :
(1) The order of the CIT under Section 263 was valid and justified since it was not a bona fide disclosure of substantial amounts made by the assessee and nor was it made in order to purchase peace or to seek expeditious disposal of the assessment proceedings;
(2) The facts were to the contrary inasmuch as Dr. Rohit Jindal, one of the directors had specifically admitted at the time of survey that the documents found were in his handwriting and the transactions recorded therein pertained to the assessee's business and that these had not been recorded in the regular books of accounts:
(3) After detection by the Department and when the assessee found itself cornered it came forward with the offer of surrender and made a prayer to the effect that no penalty proceedings be initiated or penal interest be charged;
(4) The AO did not accept the offer as penalty proceedings were initiated;
(5) It was wrong on the part of the assessee's counsel to state that the amount offered by the assessee alone was added to the total income since in each of the assessment years in question additions of Rs. 1,00,000 over and above the surrendered amounts were made;
(6) It was a case of contumacious concealment of income by the assessee as duly supported by evidence in the. shape of seized ledgers and loose papers and the specific admission made by Dr. Rohit Jindal.
(7) It was improper on the part of the assessee's counsel to say that except the offer no other evidence was available with the Department to charge the assessee with the penalty for concealment or of filing wrong estimate of advance tax;
(8) That after an admission has been made and subsequently the assessee comes up with a surrender, then it cannot be a case where penalty can be dropped/waived, more so, when on the (act and the evidence available on record it was a case of imposition of penalty under Section 271(1)(c), penalty under Section 273(2)(aa) as also interest chargeable under Section 215. On the legal position, reliance was placed on the following judgments :
(i) R.B.Shreeiam Durgaprasad & Fateh Chand (Export Finn) v. CIT (1987) 168 ITR 619 (Bom); and
(ii) CIT v. Standard Mercantile Co. (1987) 166 ITR 39 (Pat).
(9) As regards the jurisdiction of the CIT under Section 263 the case of the Revenue was that the CIT was not expected to arrive at a firm conclusion and further the AO had not made any enquiries simply dropping the proceedings by a non-speaking order. Further, the AO had not referred to the statement of Dr. Rohit Jindal in which he had specifically stated that the transactions in the ledgers/documents found at the time of survey were not reflected in the regular books of accounts. Reliance was placed on the following decisions :
(i) Addl. CIT v. Mukur Corporation (1978) 111 ITR 312 (Guj);
(ii) CIT v. S.M. Oil Extraction (P) Ltd. (1991) 190 JTR 404; and
(iii) L.K. Shaik Mohd. Bros. v. CIT (1977) 110 TTR 808 (Mad).
(10) As regards the penalty under Section 273(2)(aa) the assessee himself had surrendered the amount in question and the only inference which could be drawn was that the assessee was fully aware about the concealed income and the estimate filed in respect of advance tax could not be taken as true, A similar submission was made in respect of the waiver of interest under Section 215.
11. In view of the aforesaid detailed submissions as also the decisions cited the learned Departmental Representative appearing on behalf of the Revenue supported the order of the CIT under Section 263 whereby the orders of the AO dropping the penalties as also waiving interest under Section 215 had been cancelled with a direction to the AO to reframe the same, according to law.
12. In rejoinder the assessee's counsel submitted that the addition of Rs. 1,00,000 in each of the three assessment years over and above the amount surrendered/offered represented an ad hoc addition and the assessee in order to purchase peace did not appeal against the said addition, but this fact by itself would not make the said suad of Rs. 1,00,000 as the concealed income of the assessee. Further submission, was to the effect that all the relevant facts were considered by the AO, who made necessary enquiries about the seized ledgers and documents. In respect of the decisions relied upon by the Department, the learned counsel stated that these were distinguishable and not applicable to the facts of the assessee's case. In concluding it was urged that the orders dropping the penalty proceedings as also the action of waiver of interest under Section 215 be upheld.
13. The learned JM, who passed the initial order, at the outset, referred to the order passed by the AO dropping the proceedings under Section 271(1)(c) for the three assessment years observing that the order was not a speaking one. He also referred to the order passed by the CIT(A), Patiala, in respect of the penalty levied under Section 271(1)(c) by the AO pursuant to the order under Section 263 passed by the CIT highlighting the office-note dt. 30th Dec., 1989, by means of which the penalty proceedings were proposed to be dropped. In para 17 of his order the learned JM has discussed the said office-note observing that a note had been taken of the reply to the show-cause notice and further the assessee nowhere admits that the surrendered amount was its concealed income or that the seized documents had any relationship to the transactions of the assessee-company. According to the learned JM much had been made on behalf of the assessee about the offer of various amounts for the assessment years under consideration as also observations to the effect that the seized documents were not verified by the Department and the names of the parties as also the amounts involved could not be ascertained. A reference was also made to the observation of the AO appreciating the cooperative attitude of the assessee as also the immediate payment of taxes on the surrendered amounts and the additions not being challenged in appeal. According to the learned JM the aforesaid observations by the AO in the office-note were prima facie not correct since the order of the CIT under Section 263 showed that during the survey operations statement of Dr. Rohit Jindal, the director of the company was recorded and it was accepted by him that the transactions noted in the seized ledgers were of the assessee-company but these had not been recorded in the books of accounts. There was also admission on his part that different sums of money given to different parties/firms did not feature in the regular books. From the aforesaid the learned JM observed that the assertion of the assessee about the seized ledgers or the transactions noted therein were prima fade incorrect. He also held as incorrect the observations/finding that the entries in the ledgers were not decipherable/legible and further relevant facts were available with the Department prior to the surrender application dt. 4th Nov., 1988. According to the learned JM it was a well-settled proposition of law that penalty proceedings and assessment proceedings were distinct and separate and even if the Department had acted upon the surrender made by the assessee in one manner there was nothing to bar it from considering the matter in a different light when dealing with the penalty proceedings. The learned JM was of the view that the AO had failed to make necessary investigation on relevant points and he was in fact under obligation to come to a definite finding as to whether the surrender of the amount in each of the assessment years was made by the assessee before detection. He was also of the view that the AO should have decided conclusively as to whether there was any signed agreement in between the assessee and the Department before the surrender application was filed. According to the learned JM the AO should have after due investigation given a finding as to whether the surrendered amount was the concealed income of the assessee or not. The conclusion, in other words, was that the AO while dropping the penalty proceedings did not make necessary enquiries nor give any findings on relevant points and this in turn meant that the order of the AO could not be called as made in accordance with the law and the action of the CIT in holding the same to be erroneous and prejudicial to the interests of Revenue was justified.
14. As regards the plea on behalf of the assessee that surrender itself would not lead to the conclusion that there had been concealment of income leading to penalty the learned JM observed that the admission of Dr. Rohit Jindal coupled with the seized incriminatory documents was sufficient evidence which in fact should have been scrutinized by the AO in the right perspective and which had not been done.
15. Coming to the other two aspects of the matter i.e., levy-of penalties under Section 273(2)(aa) and the order under Rule 40(5) of the IT Rules, the learned JM took and identical view i.e., the penalties had been wrongly dropped and that the waiver had also been erroneously made. In line with his earlier view about the penalty under Section 271(1)(c) he set aside the aforesaid two orders as well dismissing the assessee's appeals against the consolidated order of the CIT under Section 263 for various assessment years with reference to various provisions of the IT Act.
16. The learned AM, however, did not concur with the view taken by the learned JM and he while recording a separate dissenting order referred at length to the facts of the case, but since these have already been adverted to in the earlier part of the order, I do not repeat the same. I would only proceed to highlight those facts, to which he referred at length and which resulted in the conclusion that there was nothing erroneous. These are :
(i) Letter of surrender dt. 4th Nov., 1988, reproduced at pp. 28 & 29 of the order wherein the assessee made a request for expeditious completion of the assessment with a view to avoid long drawn assessment proceedings and to purchase peace with the Department and for which purpose additional income was offered for tax with the further request that no penalty or penal interest be imposed. The assessee in the said communication offered lull co operation;
(ii) The AO while passing the assessment order categorically referred to the survey on 10th Oct., 1988, the impounding of various documents, ledgers, etc. during the said survey and the recording of the statement of Dr. Rohit-Jindal;
and lastly, the offer of additional income being made by letter dt. 4th Nov., 1988, and which led him to conclude that the amounts of the assessee were not reliable and these, therefore, deserve to be rejected and which was being done under Section 145(2) accepting the additional income offered plus a further addition of Rs. 1,00,000;
(iii) The specific findings recorded by the AO in the office-note while passing the assessment order, and which was a part of the record, the following were found relevant; .
(a) The entries in one diary were got tallied from the regular sales for the asst. yr. 1986-87 and although it was the assessee's explanation that Dr. Rohit Jindal had just started sitting in the office and noted down the despatches in the diary, which were later on transferred to the regular books, it could not be ruled out that some of the transactions might not be recorded as exact verification was difficult, there being no address against each entry;
(b) The second diary contained entries pertaining to advances to various parties and at some places the entries were legible, but in most they were not legible as these have either been cut or mutilated. The entries no doubt relate to the assessee-company and are in the handwriting of Dr. Rohit Jindal, but the quantities of advances are difficult to make out;
(c) Considering the fact that the entries are difficult to decipher, but on rough estimate the advances are about Rs. 20 lakhs during the period under consideration the offer at Rs. 23.5 lakhs appears to be correct,
(iv) Coming to the penalty proceedings, these had been initiated and interest was also directed to be charged under Section 215 and in response to the show-cause notices the assessee's reply was that additional income had been offered to avoid long drawn assessment proceedings and to purchase peace with the Department and it was not a case where income had been concealed. Once again reference was made to office-note available on the file and which led the AO to conclude that the penalty proceedings were required to be dropped. This office-note is reproduced at pp. 32 to 34 of the order of the learned AM. This note contains the facts of the case, the reply to the penalty notices, the decisions cited in support of the arguments advanced and lastly, the ultimate conclusion of the AO not to go ahead with the penalty proceedings;
(v) A reference was made to asst. yrs. 1987-88 and 1988-89 where the additional income offered was Rs. 7.5 lakhs and Rs. 4 lakhs respectively and which was accepted along with making further additions of Rs. 1,00,000 each. Identical penalties were initiated as also interest under Section 215 directed to be charged for asst. yr. 1987-88. That penalty, proceedings were directed to be dropped as in asst. yr. 1986-87 and there was also a reference to the orders of the AO under Rule 40(5) reducing/waiving interest under Section 215 for the asst. yrs 1986-87 and 1987-88.
17. The learned AM although referring to the arguments on behalf of the assessee and which had been recorded in the order of the JM proceeded to highlight another argument raised on behalf of the assessee and that being to the effect that to levy or not to levy the penalty was a quasi judicial process based on the objective satisfaction of the AO and the CIT in his revisional jurisdiction could not interfere in the exercise of quasi judicial functions of the AO. The learned AM also referred to the order passed by the learned JM wherein the latter had observed that the AO had failed to make necessary enquiries on relevant points and further failed to properly scrutinize the ledger/loose papers impounded under Section 131 before dropping the penalty proceedings by a non-speaking order. According to the learned AM the aforesaid, observations of the learned JM did not appear to be in accordance with law arid material on record inasmuch as while the penalties have been dropped by a single line order, the AO had given a detailed office-note in the file indicating the reasons for dropping the penalty proceedings and similarly the order for waiver of interest under Rule 40(5) was a speaking order. It was also noted by the learned AM that after the set aside by the CIT, the AO had allowed a fresh opportunity to the assessee for completing to set aside proceedings relevant to penalties under Sections 271(1)(c) and. 273(2)(aa) and the hearing was fixed on 25th March, 1991, but on which date the assessee by means of a written reply contended that it was filing appeals against the order of the CIT under Section 263 and prayed that the penalty proceedings be kept in abeyance till the decision of the appeal by the Tribunal, but rather than accepting the said request the AO rejected the same and made draft order dt.
26th March, 1991, sending the same for approval to the Dy. CIT (Central), Ludhiana, and which-was received by him on the same date at his camp office at Patiala and approved on 26th March, 1991. That penalty orders were separately passed on 27th March, 1991. According to the learned AM it was clear that even in the second round no enquiries were made on the relevant points on which, according to the learned JM, the AO failed to make while dropping the penalties. According to the learned AM penalties. had been imposed simply because the CIT had cancelled the earlier orders dropping the penalties by assuming jurisdiction under Section 263 and which according to the learned AM the CIT could not assume as the Jurisdiction to levy or not to levy penalty exclusively vested with the AO/Dy. CIT(A) and CIT(A) as per the scheme of the Act and the CIT was not empowered to levy penalties.
18. The learned AM at this stage referred to the provisions of Section 263 observing that the CIT could cancel an order only if the order was erroneous and prejudicial to the interests of Revenue and that penalty was not a source of revenue to the state and penalties were incorporated in the statute so as to act as a deterrent for the taxpayer to comply with the provisions which enjoin on the assessee to pay the legitimate tax dues to the state. According to him the dropping of penalty proceedings after due application of mind could not be considered as prejudicial to the interests of Revenue because penalty was not a source of revenue. The learned AM also referred to the word used in Sections 271(1)(c) and 273(2)(aa) i.e., "may" which according to him merited a discretion whereas the word "shall" an obligation. It was the further observation that the legislature in its wisdom had left to the discretion of the ITO/Dy. CIT/CIT(A) the question of penalty and for the CIT it was a forbidden territory. The further view expressed by the learned AM was that the revisional power of the CIT was not administrative, but quasi-judicial and a revisional authority could not ask the initial authority to do something which the former was not empowered to do under the law. The CIT himself could not impose penalty, according to the learned AM and this duty was assigned to the AO by the legislature and it was he who had to be satisfied in the course of the assessment proceedings that penalty proceedings should be .initiated. According to the learned AM, the CIT acting under Section 263 could only cancel an assessment directing it to be made afresh, but he could not impose penalty. The further observations in the same direction on the part of the learned AM were with reference to provisions of Section 275 as also Section 263(2) i.e., both on the aspect of limitation. The learned AM was also of the view that the powers of the CIT under Section 263 extended,to a "regular assessment" where the total tax liability was ascertained and the expression "assessment" could not be extendable under Section 263 to include a penalty. According to him the initiation of penalty had to be during the course of the assessment proceedings after the AO recorded his satisfaction and after such initiation it was for the AO to complete the penalty proceedings either by imposing the penalty or by dropping the same after considering the submissions of the assessee and the material available on record. According to the learned AM if the view of the learned JM to the effect that the CIT could cancel the order dropping the penalty proceedings was appropriate then the CIT had to cancel the assessment order as well since in the next round after setting aside by the CIT the AO had to further record the satisfaction during the course of the assessment proceedings, which could not be done now. Even on this ground, the learned AM held that the CIT had no jurisdiction to cancel the orders passed by the AO dropping the penalty proceedings.
19. The further opinion of the learned AM was to the effect that when the AO acting in accordance with the law dropped the penalty proceedings the order could not be branded as erroneous by the CIT simply because according to him the order should have been written more elaborately. Section 263, according to the learned AM did not visualize a case of substitution of the judgment of the CIT for that of the AO, who passed the order unless the decision was held to be erroneous. In conclusion the learned AM relying on the judgment of the Hon'ble Bombay High Court in the case of CTT v. Gabriel India Ltd. (1993) 203 YTR 108 (Bom) held that since the orders of the AO dropping the penalty proceedings under Section 271(1)(c) and 273(2)(aa) were after due application of mind as also the order of waiver of interest under Rule 40(5) once again after due application of mind these could not be termed as erroneous simply because the CIT did not feel satisfied with the conclusion. The learned AM at the end of his order referred to the subsequent proceedings pursuant to set aside by the CIT noting that penalties levied by the AO were deleted by the CIT(A), Patiala. It was also observed by him that this was a case where jurisdiction under Section 263 had been wrongly invoked inasmuch as no enquiries were required and in fact no enquiries were made and no fresh material was brought on record in the fresh penalty proceedings. As a result of the aforesaid detailed discussion, the learned AM ultimately held that the order passed by the CIT under Section 263 was required to be cancelled and he directed accordingly.
20. Before me the learned counsel for the appellant argued at length and his main submissions are highlighted as under:
(i) The CIT had cancelled the orders passed by the AO dropping the penalties and waiving interest and it was not the case of mere set aside;
(ii) Under Section 263 only assessment orders could be modified or cancelled, but not penalty orders;
(iii) It was only the AO or the first appellate authority who can initiate and levy penalties and not the CIT;
(iv) What a person or an authority cannot do directly cannot be allowed in law to be done indirectly and in the present cases the CIT although not empowered to levy penalties, cancelled the orders of the AO dropping such penalties;
(v) The manner in which the CIT had acted under Section 263 had made the provisions of Section 275 pertaining to limitation nugatory;
(vi) The CIT could not tamper with penalty orders without cancelling the assessments;
(vii) For penalty recording of satisfaction was necessary and it was to be done during the course of assessment proceedings whereas by the present order under s. 263 it appears that the penalty had to be on the satisfaction of the CIT; and
(viii) The learned JM by making certain observations in para 22 of his order had changed the entire complexion of the order passed by the CIT and which was adverse to the assessee since the AO had been asked not to feel bound by the observations of the CIT and he had been directed to make fresh enquiries into the factura of concealment;
(ix) Addition of Rs. 1 lakh in each assessment year over and above the amount surrendered was not relatable to any concealed income or unrecorded expenditure or acquisition of any asset;
(x) Dr. Rohit Jindal was a person with a medical background and not much experienced in the assessee's line of business or dealing with the IT Department;
(xi) The order dropping the penalties was passed by an officer different to the one who had initiated the same;
(xil) Order for waiver of interest was passed on merits;
(xiii) When the AO acting as a quasi judicial authority passed an order, then the CIT could not act under Section 263;
(xiv) That the term used in the penalty provision is "may" and not "shall" and the AO had applied his mind and acted as a quasi judicial authority while cancelling the penalties;
(xv) In a given case when two views were possible and the AO had adopted one and acted in a particular manner, then the CIT could not act under Section 263;
(xvi) The one line orders dropping the penalties are backed by detailed office-notes of the AO;
(xvii) Whether the statement of Dr. Rohit Jindal and the diary found conclusively proved that income had been concealed. That these could be used no doubt for assessment purposes, but it must be appreciated that it was a case of survey and not search;
(xviii) No difference was found in respect of stock and cash;
(xix) Even in the office-note the AO had observed that the figures in the diary could not be verified;
(xx) Penalty was not a source of income, but the lawful taxes due to the state and therefore, the orders passed dropping the penalties could not be treated as erroneous;
(xxi) That Maxwell's Interpretation of Penal Actions had advocated a lenient view whereas the CIT had held to the contrary;
(xxii) The learned JM had described the orders as non-speaking ones, but choosing to ignore the detailed office-notes and whereas the CIT had not said so;
(xxiii) There was ample case law for the proposition that even where penalty is not initiated the CIT cannot act under Section 263;
(xxiv) There was ample case law for the proposition that the CIT acting under section 263 could not substitute his opinion for that of the AO and the present could be treated even as a case of "change of opinion";
(xxv) The jurisdiction of the cases changed from CIT, Patiala, to CIT (Central) and whereas the former did not act under Section 263 when the jurisdiction was vested with him the latter did;
(xxvi) The statement of Rohit Jindal was duly considered in the office-note and the observation of the JM to the contrary was not correct;
21. In conclusion the learned counsel vehemently supported the order of the learned AM placing reliance on the following decisions :
(i) Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC);
(ii) (1987) 168 ITR 705 (SC) (supra);
(iii) Kanshi Ram Wadhwa v. CTT (1982) 138 TTR 830 (P&H);
(iv) (1973) 88 ITR 293 (P&H) (supra);
(v) CIT v. Jaswant Rai;
(vi) 2000 (4) SCC 594;
(vii) CIT v. Gabriel India Ltd. (1993) 203 ITR 108 (Bom):
(viii) Addl. CIT v. J.K. D'Costa (1982) 133 ITR 7 (Del);
(ix) CIT v. Nihal Chand Rekyan (2000) 242 ITR 45 (Del);
(x) CIT v. Keshrimal Paras MaJ (1986) 157 ITR 484 (Raj);
(xi) Addl. CIT v. Kantilal Jain (1980) 125 ITR 373 (MP);
(xii) CIT v. Linotype Machinery Ltd. (1991) 192 ITR 337 (Cal);
(xiii) CIT v. Simon Carves Ltd. (1976) 105 ITR 212 (SC) ;
(xiv) CIT v. R.K. Metal Works (1978) 112 ITR 445 (P&H);
(xv) Plastic Concern v. Asstt. CIT (1998) 61 TTJ(Cal) 87;
(xvi) ITO & Ors. v. Eastern Scales (P) Ltd. (1978) 115 ITR 323 (Cal);
(xvii) Sirpur Paper Mills Ltd. v. CIT (1970) 77 ITR 7 (SC);
(xviii) 1969 AIR 49;
(xix) CIT v. Gaig Enterprises (1998) 62 TTJ (Chd) (TM) 583 : (1999) 67 ITD 13 (Chd) (TM);
(xx) Chand Rajmal Jain v. IAC (1997) 57 TTJ (Pune 341 : (1997) 60 ITD 47 (Pune);
(xxi) Balwant Singh v. ITO (1996) 54 TTJ (Jp) 560 : (1995) 55 JTD 363 (Jp);
(xxii) Bharat Dairy Farm v. Dy. CIT (1997) 57 TTJ (Pune) 257: (1997) 60 TTD 321 (Pune);
(xxiii) Island Sea Foods (P) Ltd. v. ITO (1988) 27 ITD 247 (Coch);
(xxiv) Transitional Analytical Centre for Education & Research Trng. v. ITO (1988) 24 YW 400 (Del);
(xxv) Narendra Associates, Engineers & Contractors v. ITO (1988) 26 ITD 406 (Hyd);
(xxvi) Modi Xerox Ltd. v. Dy. CIT (1999) 63 TTJ (Del) 278 : (1998) 67 KD 252 (Del);
(xxvii) N.S. Ichhoparii v. Asstt. CIT (1997) 58 TTJ (Chd) 73 : (1995) 55 TTD 88 (Chd);
(xxviii) 1969 AIR 49.
22. The learned Departmental Representative, on the other hand, strongly supported the view expressed by the learned JM. According to her (1) the surrender was not made at the time of survey, but during the course of assessment proceedings; (2) further that the CIT could act under Section 263 on any order and his powers were not restricted to an assessment order only; (3) even the CIT had reached a conclusion on the basis of the office-note; (4) Rohit Jindal in his statement had admitted that the transactions were not recorded; (5) the orders of the AO dropping the penalty proceedings read with the office-note were not reasonable or valid in law and, therefore, erroneous; (6) there was no application of mind by the AO in dropping the penalties; (7) there were a large number of discrepancies found during the survey with reference to the statement of Rohit Jindal and the diaries and documents; (8) there was no assurance by the Department to the assessee not to initiate or levy the penalty; (9) the CIT had not stepped into shoes of the AO as he had asked him to decide the matter afresh; (10) the learned JM had only clarified the view of the CIT (para 22 of his order) and the assessment were not put in the type of adverse position as canvassed by its counsel; (11) the AO had not kept in mind relevant documents before dropping the proceedings under Section 273(2)(aa); and (12) orders of waiver under Rule 40 could not be passed in view of the facts and circumstances of the case.
23. In concluding the learned Departmental Representative supported the view expressed by the learned JM.
24. In reply the learned counsel for the assessee reiterated that the AO had considered the diary and statement of Rohit Jindal before passing the necessary orders. Further submission was that applying the doctrine of approbate and reprobate a document should be considered in full. This was with reference to the documents and statement where points in favour of the assessee were also present. The further submission of the learned counsel was that the CIT had reappraised the same evidence as done by the AO and he did nothing more but directed levy of penalty which the AO did in subsequent proceedings. The only other arguments of the learned counsel were that the statement of Rohit Jindal was circumstantial evidence, but this could not supercede evidence on record and that the orders dropping penalty under Section 273(2)(aa) and waiving interest under Rule 40 were consequential to orders dropping 271(1)(c) penalty and passed by the AO acting in quasi judicial capacity and the CIT acting in the same capacity could not substitute his view unless mala fides were shown.
25. I have considered the rival submissions minutely perusing the orders passed by the learned Members of the Division Bench. At the outset, I would like to mention that both the learned members have dealt with various facets of the controversy, but in my opinion, the controversy can be resolved on one or two important issues to which I would like to advert straightaway. However, before I do so, I would like to mention that a number of authorities have been cited by the assessee's counsel, no doubt, with reference to various facets of the controversy and to deal with one of these a number of decisions pertained to the non-initiation of penalty proceedings by the AO and the subsequent jurisdiction which is to be exercised by the CIT under Section 263. It is an accepted fact that there are decisions both in favour and against the viewpoint propounded by the learned counsel that a CIT cannot cancel an assessment under Section 263 just because the AO had not initiated penalty proceedings. On the facts of the present case, these arguments are of no avail and neither are the authorities cited since the penalty proceedings have been initiated but dropped and interest has been charged, but order for waiver passed.
26. Similariy, certain decisions have been cited on the aspect of surrender and although there is material on record to show that though the assessee had offered to be assessed at certain amounts subject to no penalty action being taken, there was nothing on record to show that the AO had accepted such surrender or that the surrender had been made at the instance of the AO. In case the penalty had been initiated under Section 271(1)(c) merely on the basis of the surrender made by the assessee and at the instance of the AO, then the matter would have stood on a different footing. In the present case, the penalty proceedings were initiated with reference to the survey carried out under Section 133A when the statement of Rohit Jindal, director of the company was recorded with reference to certain diaries, etc. found. It could be said that the assessee had no option, but to surrender certain amounts when placed in an adverse situation and in case the AO had accepted the amounts surrendered and not done anything else the assessee could have argued that the surrender had been made to buy peace, but the AO made further enquiries and found that the offer made was inadequate and this led to further additions of Rs. 1,00,000 in each of the assessment years under consideration.
27. It could also be argued that the AO had accepted the offer of the assessee, but this was not correct since penalty proceedings had been initiated. However, it must be emphasised that in law an authority which can initiate penalty proceedings recording due satisfaction is not obliged to levy the penalty when in the course of the penalty proceedings he on the facts of the case forms an opinion that penalty otherwise is not leviable. If it is the Revenue's case that after initiating the penalties he has to levy them as a matter of routine, then I am afraid this cannot be the correct line of argument. Should the AO levy the penalty even if he is of the view that it is not so leviable and sit back leaving the assessee to proceed further before the appellate authorities ? In my opinion, a person who can initiate the penalty is correspondingly empowered not to levy the same, but on the facts of the case drop the penalty proceedings if so warranted on facts and in law.
28. An argument has been raised before me by the learned counsel that under the Act a CIT is not empowered to initiate and levy penalties and by passing the order under Section 263 in the present case he has assumed himself with such powers. The plea of the learned counsel is that satisfaction has to be recorded by the AO or by the CIT(A) and not by the CIT. In my opinion, these arguments are found to be without any merits since the powers of the CIT under Section 263 cannot be curtailed since the reference is to "any proceedings" under the IT Act. In my opinion, a CIT can act under Section 263 in case he finds any order passed by an IT authority below him to be erroneous insofar as it is prejudicial to the interests of the Revenue. In the present case the CIT has so acted, but on the premises that a single line order dropping the penalty proceedings does not show application of mind and the learned JM has approved of the view expressed by the CIT.
29. The initial impression which would normally be gathered would be the same as expressed by the CIT and the learned JM, but in the present case, such single line orders dropping the penalties have to be read with the detailed office-notes left on the file by the AO in a manner that such office-notes could be treated as a part of the orders dropping the penalty proceedings. The learned AM in his detailed order has extracted the detailed office-notes and for purposes of disposing of the present reference I do not propose to repeat them, but these would be treated as a part of the present order. At pp 30 and 31 of the order of the learned AM the office-note of the AO is reproduced and specific reference may be made to the following :
(i) The entries in the first diary were not tallied from the regular sales for the asst. yr. 1986-87;
(ii) Dr. Jindal had just started sitting in the office and used to note down the despatches on the diary, which were latter on transferred to regular books. However, it cannot be ruled out that some of the transactions might not be recorded as exact verification is very difficult, there being no address against such entry;
(iii) The quantities of advances, however, are difficult to make out;
(iv) The assessee voluntarily offered an amount of Rs. 23.5 lakhs to be assessed for assessment year under consideration; and
(v) Looking to the fact that these entries are difficult to decipher and even on rough estimate the advances are about Rs. 20 lakhs only during the period under consideration, but offer at Rs. 23.5 lakhs appears to be correct in context.
30. The learned AM has noted as a fact that the assessee had offered some additional income to avoid long drawn assessment proceedings and to purchase peace with the Department. At pp 32 to 34 of the order of the learned AM there is a reproduction of another office-note wherein the assessee reiterated that it had offered various sums for assessment to get expeditious completion of the assessments and to avoid long drawn assessment proceedings and to purchase peace with the Department by offering full co-operation for expeditious settlement- Further at no stage had the assessee-company admitted that the amount offered was assessee's income or that the alleged documents had any relation to any transaction of the assessee-company. At p. 34 there is a specific reference in the office-note to the amount being offered in addition to the returned income only to buy peace of mind and vis-a-vis the merits of the case on the basis of documents, but the AO noted as a fact that relevant amounts could not be quantified and that the Department did not verify the entries contained in the two diaries as these had already been struck off and the amounts and the parties could not be ascertained.
31. In my opinion, the order of the learned AM can be approved on the aforesaid solitary ground by reading the single line orders dropping the penalties along with the detailed office-note which no doubt reveals that there is application of mind on the part of the AO and once he has taken a quasi judicial view to drop penalties even after recording; satisfaction no fault can be found in his orders dropping the penalties or for that matter in the order of waiver pertaining to the levy of interest. It must be emphasised that when satisfaction for penalty proceedings is recorded it is only a prima facie view on the part of the AO. Subsequently, during the course of the penalty proceedings there may be circumstances, which may not justify the levy of penalty and the present matter before me is one such case where after initiating the penalty proceedings the AO on the facts of the case opined that these were not required to be levied and rather than pass a mechanical order loading the assessee with penalties, he very fairly and rightly in law proceeded to drop these penalties. The order of waiver on account of interest was also valid in the eyes of law and the same has been cancelled by the CIT consequential to the view taken by him in respect of the penalties under Sections 271(1)(c) and 273(2)(aa).
32. In the ultimate analysis, I hold that inasmuch as the AO had dropped the penalties on the appreciation of facts and due application of mind the CIT could not exercise, his powers under Section 263 to cancel such orders as also to set at naught the order for waiver of interest. The learned JM has also mentioned that the orders dropping the penalty proceedings were non-speaking ones, but the learned AM has set out at length in his separate order the detailed office-notes recorded by the AO and to which I have already referred in the earlier part of the present order. In the view that I have taken aforesaid, I do not find it necessary to deal with certain other arguments advanced by the parties and these pertaining to other facts of the controversy and which I do not propose to decide in the present reference. The learned AM has written much about the status, which is to be accorded to a penalty and what a penalty represents visa-vis the legitimate taxes recoverable from a citizen. I do not propose to say anything about the aforesaid observations of the learned AM as these, in my opinion, are not at all necessary for disposing of the present reference.
33. The learned AM also noted as a fact that position subsequent to the orders passed by the CIT under Section 263 observing in para 13 at p. 44 that subsequently the AO levied the penalties but no further appeal the CIT(A) cancelled the same. During the course of the hearing of the present reference nothing has been stated by the parties as to the fate of the orders passed by the CIT(A), i.e., whether they have become final or second appeals have been filed before the Tribunal. I can only observe that the AO in dropping the penalties and the CIT(A) in the subsequent proceedings in cancelling the penalties have gone in the same direction whereas the CIT by passing an order under Section 263 has opined otherwise. This could also be termed as a case where there has been a change of opinion on the part of the CIT acting in a quasi judicial capacity when he has proceeded to cancel the orders passed by the AO dropping the penalties and waiving the interest by due application of mind and considering the facts of the case.
34. In the final analysis, I approve of the action of the learned AM in cancelling the consolidated order passed by the CIT under Section 263 for the assessment years under consideration. Let the matters be listed before the Division Bench for passing an order in conformity with the majority opinion.