Income Tax Appellate Tribunal - Ahmedabad
Prabhat Oil Traders vs Income-Tax Officer (No. 3) on 21 September, 1995
ORDER
A. Satyanarayana (Vice-President)
1. This appeal has come before me for my opinion as a Third Member, under Section 255(4) of the Income-tax Act, 1961, as there was a difference of opinion on the following point between the Members of the Tribunal, who heard the appeal :
"Whether the assessee is liable for penalties levied under Sections 271(1)(c) and 273(2)(aa) in view of the addition of Rs. 1,28,100 made under Section 69 of the Income-tax Act, 1961, and for which a separate reference under Section 255(4) has been made to the Hon'ble President, Income-tax Appellate Tribunal, being I. T. A No. 4710/(Ahd) of 1989 (see [1996] 218 ITR (AT) 1) ?"
2. This appeal, filed by the assessee, is against the order of the Commissioner of Income-tax (Appeals) dated March 16, 1989, for the assessment year 1983-84 for which the previous year is from October 28, 1981, to November 15, 1982 (Samvat year 2038).
3. The assessee is a partnership doing wholesale business in groundnut oil, vegetable oil, soya bean, grease, yarn and wheat, etc. A return of income was filed on July 4, 1983, showing a total income of Rs. 54,915. The assessment was completed under Section 143(3) by an assessment order dated January 6, 1986, wherein the total income was computed at Rs. 1,96,526. In the said assessment order, an addition of Rs, 1,28,100 was made towards the alleged purchase of 600 tins of oil and profit on the same on the ground that they were sold outside the books of account. According to the Assessing Officer, who passed the order under Section 271(1)(c) of the Income-tax Act, 1961, dated March 10, 1986, in the case of the assessee, Prabhat Oil Traders, a search under Section 132 was carried out on January 20, 1984, and the books of account and certain other documents besides cash of Rs. 12,550 were seized. Search operations were also carried out in the residential premises of the partner, Shri Shailesh J. Parekh ("SJP, for short). During the search of the residential premises of Shri Shailesh J. Parekh, two purchase bills dated April 10, 1982, and April 13, 1982, were found. As Shri Shailesh J. Parekh could not explain the presence of these bills in his house, these bills were also seized. On verification, it was found that these purchase bills were not accounted for in the books of account of the assessee-firm. During the proceedings under Section 132(5) and assessment proceedings, this point was examined in depth. These purchase bills were in respect of 550 and 50 tins of groundnut oil purchased by the assessee on April 10, 1982, and April 13, 1982, respectively, from United Bros. ("UB", for short), Merchants and Commission Agents, Dhasa, Bhavnagar District. In his statement under Section 131 before the Assistant Director of Inspection (Investigation), Surat, dated January 30, 1984, Shri Shailesh J. Parekh had stated that the quality of the goods purchased under the abovementioned two bills was not good and, hence, the entire lot of oil tins was returned to United Brothers and delivery of the said goods was not taken and as such the said purchases were not accounted for in the books of account. A letter dated January 30, 1984, of the manager of United Brothers confirming the above statement was also filed. However, in order to verify the genuineness of the above transaction, further enquiries were made through the Income-tax Officer, Bhavnagar, who was the Assessing Officer of United Brothers, It was intimated by the Income-tax Officer, Bhavnagar, vide his letter dated March 16, 1984, that the entries relating to the goods received or goods sold or goods stated to have been returned by the assessee did not appear in the stock register of United Brothers. The said Income-tax Officer, Bhavnagar, examined one of the partners of United Brothers, Shri Jayant Hemant Parekh ("JHP", for short) in this regard. In his statement on oath under Section 131 dated March 2, 1984, Shri Jayant Hemchand Parekh declared that he was also a partner of the assessee-firm, that the entries for the goods sold to the assessee on April 10, 1982, and April 13, 1982, were made in the stock register of United Brothers, but subsequently rubbed out because the said goods purchased from Shree Shakti Oil Industries of Mahuva ("SSOI", for short) and were sent to Surat directly and again returned from Surat to Mahuva directly. The Income-tax Officer, Bhavnagar, made on the spot enquiry at Mahuva and intimated that there is no oil industry at Mahuva in the name of Shree Shakti Oil Industries. The said Income-tax Officer also intimated that Shri Jayant Hemchand Parekh could not produce bills or vouchers for the purchase of goods from the so-called Shree Shakti Oil Industries and the duplicate bills dated April 10, 1982, and April 13, 1982, issued to the assessee. After considering all these facts, it was held in the assessment order that the purchases of 600 tins of groundnut oil were made by the assessee outside the books of account and, therefore, the purchases amounting to Rs. 1,25,300 and profit on these tins at Rs. 2,800 were treated as the suppressed income of the assessee-firm. Penalty proceedings under Section 271(1)(c) were initiated.
4. In the explanation filed by the assessee, the assessee denied having concealed any income or any particulars thereof. He also urged that the Assessing Officer's inference in regard to the alleged purchases of a consignment of 550 tins and another 50 tins of oil was incorrect in fact and law and that, inasmuch as the said tins were returned to the consignors without taking delivery, it could not form part of its trading activity. It was further urged that the assessee's books of account and other independent relevant data furnished before the Assessing Officer amply proved the same. It was finally urged that the additions made in the assessment order were under contest and so the penalty proceedings may be kept in abeyance till the disposal of the quantum appeal. The Assessing Officer rejected the plea of the assessee to keep the penalty proceedings in abeyance till the disposal of the quantum appeal. He levied a penalty of Rs. 95,000, vide order dated March 10, 1986, passed under Section 271(1)(c) of the Income-tax Act, 1961, by observing as under :
"7. Now, let us see the provisions of Section 271(1)(c) which read as follows :
'If the Income-tax Officer in the course of any proceedings under this Act, is satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed twice the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income :
Explanation.--Where in respect of any facts material to the computation of the total income of any person under this Act ;--
(A) such person fails to offer any explanation or offers any explanation which is found by the Income-tax Officer to be false, or (B) such person offers an explanation which he is not able to substantiate, then the amount added or disallowed in computing the total income of such person as a result thereof shall be deemed to represent the income in respect of which particulars have been concealed.'
8. Thus the case, no doubt, comes within the provisions of Section 271(1)(c) as the assessee has clearly concealed the purchase and sale of 600 tins of groundnut oil.
9. Considering all the facts and circumstances of the case, I am satisfied that the assessee has concealed the particulars of his income and I, therefore, levy a penalty of Rs. 95,000 (rupees ninety-five thousand only). The penalty working is given below."
5. While levying the penalty in the said order, he stated that the concealed income was Rs. 1,28,100. Aggrieved by the said penalty, the assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals).
6. Before the Commissioner of Income-tax (Appeals), the assessee reiterated its arguments advanced before the Assessing Officer. The Commissioner of Income-tax (Appeals) observed that the onus to prove that the said income was not the concealed income was on the assessee, that in appeal against the addition in the total income, nothing could be proved that the action of the Income-tax Officer was unjustified and that the action of the Assessing Officer was confirmed. He held that the assessee had acted deliberately in defiance of law and was guilty of conduct contumacious or dishonest and acted in conscious disregard of its obligations, which gives rise to contumacious character liable to penalty for concealment of income. He also held that no substantial or cogent reasons have been given by the assessee either before him or before the Income-tax Officer except that the alleged purchase of a consignment of 550 tins and another 50 tins of oil was incorrect and that the said tins were returned to the consignors without taking delivery. Ultimately, he held that the assessee's case for levy of penalty was governed by the Explanation to Section 271(1)(c) and in that view of the matter, he confirmed the levy of the impugned penalty.
7. The learned Judicial Member opined that the penalty was levied in respect of the addition made on account of income from undisclosed sources towards the purchases made by the assessee-firm outside the account books. He observed that he had held that the Assessing Officer erred in making the addition of Rs. 1,28,100 and had deleted the additions so made. Accordingly, he held that since the Assessing Officer initiated and levied enalty under Section 271(1)(c) on account of the said addition, the penalty levied by the Assessing Officer, therefore, deserved to be cancelled. He cancelled the said penalty. However, the learned Accountant Member was of the considered opinion that the assessee-firm made a "wilful attempt" to conceal the particulars of its true income by making purchases of oil to the tune of Rs. 1,28,100 outside the books of account and, hence, the levy of penalty under Section 271(1)(c) was justified.
8. Before me, the assessee's counsel filed a photostat copy of notice under Section 274 read with Section 271 of the Income-tax Act, 1961, dated January 6, 1986, and written submissions dated April 20, 1995 and April 26, 1995. The arguments of the assessee's counsel were to the following effect :-- The Assessing Officer levied penalty by invoking Explanation 1 to Section 271(1)(c). However, during the course of assessment proceedings, Explanation 1 to Section 271(1)(c) was not invoked. As per law, for proposing the penal action under Section 271(1)(c), the requisite satisfaction has to be reached by the Assessing Officer in the course of the assessment proceedings itself. Once the penalty proceedings are initiated on a particular footing, it has to be concluded on the same footing. The Bombay High Court in the cases of CIT v. P. M. Shah [1993] 203 ITR 792 and CIT v. Dharamchand L. Shah [1993] 204 ITR 462 had held that the Explanation to Section 271(1)(c) extends the provision of Clause (c). Therefore, once the Explanation is invoked in the show-cause notice, the burden is not only shifted on the assessee but was also heavy to prove that he had not concealed the particulars of his income or furnished inaccurate particulars thereof. However, in the absence of invoking the Explanation specifically, the burden would remain on the Revenue to bring the assessee's case within the mischief of the main provisions of Section 271(1)(c). The Bombay High Court relied upon the judgment of the Gujarat High Court in the case of CIT v. Lukhdhir Lalji [1972] 85 ITR 77, wherein it was held that if the penalty proceedings have been initiated on a particular limb of the substantive provision, the basis of the same cannot be changed in the subsequent proceedings. As the penalty proceedings have been initiated on the main provision of Section 271(1)(c), the penalty cannot be levied for deemed income. In order to levy penalty, the deemed income has to be converted into actual income. There can be deemed income, but there cannot be deemed concealment, unless the case is brought by the Assessing Officer under any of the Explanations to Section 271(1)(c) during the course of assessment proceedings. The assessee relies on the judgments of the Supreme Court in the cases of CIT v. Anwar Ali [1970] 76 ITR 696 ; CIT v. N. A. Mohamed Haneef [1972] 83 ITR 215 ; CIT v. Khoday Eswarsa and Sons [1972] 83 ITR 369 and Sir Shadilal Sugar and General Mills Ltd. v. CIT [1987] 168 ITR 705. Even if it is assumed that the Assessing Officer can invoke Explanation 1 directly in the penalty order, the above decisions still hold good as the presumption laid down by the Explanation has been rebutted by the appellant on the basis of the balance of probability. Once the initial burden cast on the assessee as per the Explanation was discharged, the burden will shift to the Department to prove that the explanation offered was false. In the case of CITv. Mussadilal Ram Bharose [1987] 165 ITR 14, the Supreme Court has held that, where the circumstances do not lead to the reasonable and positive inference that the assessee's explanation is false, the assessee must be held to have proved that there was no fraud or gross or wilful neglect on his part. In the case of CIT v. K. R. Sadayappan [1990] 185 ITR 49, the Supreme Court held that the onus was rebuttable; the presumption of concealment was rebutta-ble by cogent, reliable and relevant material. It has been held in the cases of CIT v. Nathulal Agarwala and Sons [1985] 153 ITR 292 (Patna) [FB] and Vishwakarma Industries v. CIT [1982] 135 ITR 652 (P & H) [FB] that the onus of proof for rebutting the presumptions lies squarely on the assessee. However, the burden can be discharged, as in civil cases, by preponderance of evidence and it would be permissible in the penalty proceedings for the assessee to show and prove that on the existing material itself, the presumptions raised by the Explanation stands rebutted. The Gujarat High Court in the case of CITv. S. P. Bhatt [1974] 97 ITR 440 held that the legal fiction could be displaced if the assessee proved that the failure to return the correct income did not arise from any fraud or gross or wilful neglect on his part. If the assessee could do that, he could thereby throw the burden of bringing the case within Section 271(1)(c) again on the Revenue. The judgment of the Kerala High Court in the case of CIT v. Saraf Trading Corporation [1987] 167 ITR 909 is also in favour of the assessee. Assuming that the assessee's case falls within Explanation 1, inserted with effect from April 1, 1976, the assessee's case is covered by the proviso which was deleted from September 10, 1986. The assessee filed the return of income on July 4, 1983, and so the law that would be applicable is the law that was prevailing at that time, i.e., before the amendment made from September 10, 1986. The assessee submitted the explanation to the effect that there was no direct or indirect evidence with the Department so as to hold that the assessee had made any initial investment in goods covered by the alleged bills found and seized in the course of the search. It was submitted that, as in the case of United Brothers, similar addition on substantive basis was made by the Assessing Officer vide assessment order passed on March 31, 1986, which has become final as United Brothers accepted the addition by filing the revised return on the same day on March 31, 1986, and paying additional tax, no addition in the case of the assessee could be sustained on the ground of double taxation. The Accountant Member, who differed against the deletion of the addition has accepted that the addition can be sustained only on the basis of surrounding circumstances. The fact that the two learned Members differed on the point of addition suggests that the explanation furnished by the assessee was bona fide. The explanation offered by the assessee is not false although the assessee might be treated as not being able to substantiate its explanation. So the case of the assessee at best would fall under Explanation 1(B) and not Explanation 1(A). In this case, the assessee is saved by the proviso to Explanation 1 as all the material facts for computation of the total income were disclosed by the assessee and the explanation was bona fide. In the present case, there is no material on record to come to the conclusion that the explanation furnished by the assessee was false. The assessee's explanation may be treated as unproved but the same has not to be disproved and the circumstances do not lead to the reasonable and positive inference that the assessee's case is false, there being no material on record to show that the amount in question which has been treated as income from undisclosed sources, was the income of the assessee. The mere fact that the assessee's explanation had not been found to be satisfactory would not be conclusive of the fact that the assessee's explanation was false. Considering the totality of the present circumstances of the case and evidence on record, Explanation 1(A) is inapplicable. Whereas for the purpose of Section 69, substantiating the explanation is to the satisfaction of the Assessing Officer, for the purpose of application of Explanation 1(B) to Section 271(1)(c), one has to consider the explanation furnished by the assessee so as to come to the conclusion whether the evidence furnished by the assessee creates a belief in favour of the assessee. If it is found that the evidence produced creates a belief in favour of the assessee, then in penalty proceedings, the benefit of doubt has to be given to the assessee. Reliance is placed on the orders of the Tribunal in the cases of : (i) First ITO v. P. Palaniswamy, (Madras) 16 ITD 529 ; (ii) Raj Engg. Co. v. ITO [1988] 17 ITD 171 (All) ; (iii) ITO v. Moti Ram Subhash Chand Jain [1989] 27 ITD 44 (Delhi) ; (iv) Doon Valley Roller Flour Mills P. Ltd. v. IAC of I. T. [1989] 31 ITD 238 (Delhi); (v) Kishan Gupta v. ITO [1989] 31 ITD 448 (Delhi); (vi) V. Ramachandra Rao v. ITO [1990] 33 ITD 650 (Hyd); (vii) ITO (Sixth) v. Kumar Metal Industries [1991] 36 ITD 261 (Bom) and (viii) Smt. Shanta Kumari v. ITO [1991] 38 ITD 175 (Delhi) in support of the plea that the assessee's case is covered by the proviso to Explanation 1 to Section 271(1)(c). In the case of c, the Gujarat High Court held that an unexplained demand draft encashed by the assessee which was taxed under Section 69A does not attract penalty under Section 271(1)(c). The Karnataka High Court in the case of CITv. Jewels Paradise [1975] 101 ITR 265, held that the inclusion of the amount in the assessment due to the special provisions of Section 69A cannot be dovetailed into Section 271(1)(c).
9. The arguments of the Departmental Representative were to the following effect :-- The proviso to Explanation 1 applies only when the assessee's case falls under Clause (B) of the said Explanation. But in the present case, the assessee's case comes under Clause (A). The Assessing Officer has mentioned Explanation 1 in his penalty order dated March 10, 1986. He is not bound to mention the Explanation in the assessment order or in the penalty notice issued under Section 271 read with Section 274 of the Income-tax Act, 1961. Since the offence is covered by the main section itself, ,the ratio of the judgment in the case of Anwar Ali [1970] 76 ITR 696 is not applicable. Further the ratio laid down in the case of CIT v. Vinaychand Harilal [1979] 120 ITR 752 (Guj) is not applicable as the addition was made under Section 69, but applies only to the addition made under Section 69A. Penalty can be. levied under Section 271(1)(c) where there was no satisfactory explanation regarding the investment and the unexplained amount was added under Section 69. Reliance is placed on the judgments of the Calcutta High Court in the case of Rahmat Development, and Engg. Corpn. v. CIT [1981] 130 ITR 602 and Shri Loknath Chowdhury v. CIT [1985] 155 ITR 291. Penalty under Section 271(1)(c) can be levied for concealment of deemed income as laid down by the High Courts in the cases of Hindustan Tools Mfg. Co. v. CIT [1976] 102 ITR 174 (P & H) ; CIT v. Aya Singh Ishar Singh [1973] 92 ITR 182 (P & H) and CIT v. Behari Lal Pyare Lal [1977] 107 ITR 587 (P & H). Penalty under Section 271(1)(c) is exigible under the main provisions of Section 271(1)(c). Reliance is placed on the judgments in the cases of L K. Shaik Mohd. Bros. v. CIT [1977] 110 ITR 808 (Mad) ; R. B. Shreeram Durgaprasad and Fatechand Narsinghdas (Export Firm) v. CIT [1987] 168 ITR 619 (Bom) ; Rajaram and Co. v. CIT [1992] 193 ITR 614 (Guj) ; CIT v. Yusuf Abdulla Patel [1994] 208 ITR 202 (Bom) and CIT v. S. K. Agarwal [1994] 208 ITR 668 (Bom). The Department has established the concealment to the hilt.
10. In reply, the assessee's counsel contended that the explanation offered by the assessee was not found to be false either by the Assessing Officer or by the Commissioner of Income-tax (Appeals). Hence, Clause (A) of Explanation 1 is not attracted. The judgment of the Gujarat High Court in the case of CIT v. Vinaychand Harilal [1979] 120 ITR 752 is equally applicable for the addition made under Section 69 and is binding on the Tribunal as the assessee is from Gujarat. Further the mere rejection of the explanation of the assessee does not render the assessee's explanation false as laid down by the Allahabad High Court in the case of CJT v. Devi Dayal Aluminium Industries P. Ltd. [1988] 171 ITR 683.
11. I have considered the rival submissions, the case law cited and perused the papers filed before me. In paragraph 14 of the assessment order dated January 6, 1986, the Assessing Officer came to the conclusion that the purchases as per the bills dated April 10, 1982, and April 13, 1982, were made by the assessee out of its income from undisclosed sources and that the profit earned on the sales of 600 tins of groundnut oil purchased under these bills was also suppressed by it by way of not accounting for the same in the books of account. Therefore, he added an amount of Rs.1,28,100 and initiated proceedings for concealment of income under Section 271(1)(e). Admittedly, the said purchase bills dated April 10, 1982, and April 13, 1982, were only credit bills. The Assessing Officer had not substantiated with any material brought on record that the assessee had purchased the impugned goods and paid the amounts of Rs. 1,14,950 and Rs. 10,350 within the relevant accounting year and that he sold the goods outside the books of account and made profit. On the other hand, the assessee has adduced evidence in the form of entries in the cash books of United Brothers showing the return of goods (600 tins of oil) and for transport charges paid in respect of Surat to Mahuva in the books of Sonal Enterprises (transporter). They can be seen at pages 61 to 65 and 68 to 69 of the assessee's paper book. For the detailed reasons given by me in my order dated August 31, 1995, in I. T. A. No. 4710/(Ahd) of 1989 (see [1996] 218 ITR (AT) 1) (quantum appeal). I have deleted the addition of Rs. 1,28,100. Hence, I hold that no penalty under Section 271(1)(c) is exigible on this count.
12. In the penalty order under Section 271(1)(c), the Assessing Officer in paragraph 7 simply quoted Section 271(1)(c) and Explanation 1. He did not state in the said penalty order, whether the assessee's case comes under Clause (A) or Clause (B) of the said Explanation 1. The assessee has offered the explanation that 600 tins of oil were returned. The Assessing Officer based on the report dated March 8, 1984, by the Inspector of Income-tax, Mr. M. L. Khavadia, and letter dated March 16, 1984, from the Income-tax Officer, Bhavnagar, concluded in paragraph 13(ix) of the assessment order dated January 6, 1986, that the statement of Jayant Kumar Parekh to the effect that the goods returned by the assessee were directly sent to Shree Shakti Oil Industries was obviously false. In my order dated August 31, 1995 (see [1996] 218 ITR (AT) 1) in the quantum appeal, I have held as under (at page 30) :
" A careful perusal of the Inspector's report shows the hollowness of the stand of the Department that there is no oil mill in the name of Shree Shakti Oil Industries at Mahuva. This is because the transactions took place in April, 1982, while the Inspector conducted the enquiry in March, 1984. The Inspector simply reported that there is no such oil mill named Shree Shakti Oil Industries at Mahuva. He did not say that in April, 1982, Shree Shakti Oil Industries did not exist."
13. From the above, it would be seen that the Assessing Officer was not at all justified in rejecting the assessee's explanation and dubbing it as false. So Clause (A) of Explanation 1 is not attracted. Further, it cannot be held that the assessee is not able to substantiate its explanation. The Department has only rejected the explanation offered by the assessee. So even Clause (B) of Explanation 1 is not attracted.
14. Thus, on the facts and the circumstances of the case, I hold that it cannot be held that the assessee had concealed the particulars of its income or furnished inaccurate particulars thereof. The learned Judicial Member has rightly deleted the impugned penalty. I agree with him.
15. The matter should go before the regular Bench and they should decide the same according to majority opinion.
ORDER Jordan Kachchap (Judicial Member)
16. In accordance with the order passed by the Third Member dated September 21, 1995, and, in conformity with the majority view, this appeal is allowed.