Patna High Court
Dr. (Mrs.) K.D. Arora vs Commissioner Of Income-Tax on 17 October, 1985
Equivalent citations: [1986]162ITR481(PATNA)
JUDGMENT Uday Sinha, J.
1. These are two references under Section 256(1) of the Income-tax Act, 1961 (hereinafter called "the Act"), at the instance of the assessee. Two questions have been referred at the instance of the assessee. They are as follows :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in upholding the imposition of penalty under Section 271(1)(c) of the Income-tax Act, 1961, read with its Explanation ?
2. If the answer to the first question is in the affirmative, whether, on the facts, the amount of Rs. 10,000 shown in Part IV of the return attracted penalty under Section 271(1)(c) ? "
2. The following two questions have been referred to us at the instance of the Revenue:
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the additions of Rs. 10,393 and Rs. 4,826 did not attract penalty under Section 271(1)(c) ?
2. Whether considering the fact that return of income was filed on July 9, 1968, the Tribunal was correct in holding that the penalty was to be imposed according to the law which was in force on April 1, 1966, and not in accordance with the amended provisions of Section 271(1)(c)(iii) which came into force from April 1, 1968 ? "
3. The assessee is a lady doctor and was posted as Assistant Professor of Obstetrics and Gynaecology in Darbhanga Medical College at Darbhanga. In these references, we are concerned with assessment year 1966-67. The assessee did not file any return for the said assessment year. Notice under Section 148 was issued. In response thereto, she filed her return disclosing an income of Rs. 23,172 which included the following :
Rs.
(i) Salary 8,388
(ii) Profession 13,500
(iii) Other sources (examination fee, etc.) 3,600
4. In the assessment, the Income-tax Officer added the following sums in the total income of the assessee;
(i) Rs. 10,000;
(ii) Rs. 20,000;
(iii) Unexplained investment over construction of house Rs. 10,393 ; and
(iv) Income from house standing in the name of Bibhuti Narain Arora, minor son of the assessee Rs. 4,826.
5. The income returned in the return filed on July 9, 1968, was Rs. 25,488 and the income assessed ultimately was Rs. 66,891. A difference of 20% having been found between the returned sum and the assessed sum, penalty proceeding was initiated against the assessee under Section 271(1)(c) read with Section 274(2) of the Act.
6. Out of the four items mentioned above, the stand of the assessee in regard to the first item of Rs. 10,000 was that this was an amount of gift received by her minor son, Bibhtiti Narain Arora, on the occasion of his birthday. She, therefore, claimed that this item was not liable to be added to her total income and, therefore, it had been shown in Part IV of the return. In regard to the next item of Rs. 20,000, the assessee's stand was that these also were gifts of Rs. 10,000 each to her minor son, Bibhuti Narain Arora, by Shrimati Sheela Devi (Sita Devi ?) and Shrimati Kuldip Kaur. The third item was the sum added to her total income, which she had not been able to explain, in the construction of a house in the name of her minor son, Bibhuti Narain Arora, and the last item was an income of Rs. 4,826 from the said house to the aforesaid minor son. In regard to the construction of the house, she did not deny that it had been constructed by her although the house stood in the name of her minor son. She explained the investments. The Revenue, however, estimated that the expenditure over the construction was short by Rs. 10,393. This figure was arrived at by the Revenue on an estimate. The stand of the assessee was that since the house belonged to her minor son, she did not consider it necessary to include it in her return and claimed exemption on that account by mentioning it in Part IV of her return. In short, her stand was that there had been no concealment by her and, therefore, there was no case for imposition of penalty. The Inspecting Assistant Commissioner, after hearing the assessee, assessed the concealed income as being of the tune of Rs. 58,518 on which he imposed a penalty of Rs. 60,000.
7. The matter was then taken in appeal to the Appellate Tribunal by the assessee. In regard to the gifts of Rs. 10,000 and Rs. 20,000, the Tribunal concurred with the Inspecting Assistant Commissioner and upheld his order. The appeal to that extent was dismissed.
8. In regard to the last two items relating to the house in the name of the minor, the Tribunal set aside the order of the Inspecting Assistant Commissioner observing that in regard to the unexplained investment of Rs. 10,393 and the income from that house of Rs. 4,826, no case of penalty had been made out. To that extent, the appeal was allowed.
9. The assessee being aggrieved by the order rejecting the appeal so far as the two sums of Rs. 10,000 and Rs. 20,000 were concerned and the Revenue in so far as the sums of Rs. 10,393 and Rs. 4,826 were concerned got separate references made to this court. The questions referred to us have been set out earlier in paragraph 1 of this judgment.
10. At the outset, it must be observed that on her own showing, the asses-see had assessable income, but she did not file any return under Section 139(1) of the Act. This factor would be relevant for appreciating the mental attitude of the assessee.
11. The explanation in regard to the separate items must now be considered in order to answer the questions referred to us. The explanations in regard to the sums of Rs. 10,000 and Rs. 20,000 claimed to be gifts to the assessee's minor son were consistently rejected by all the Revenue authorities in the assessment proceedings as well as in the penalty proceedings. The concurrent findings were that they were really assets of the assessee herself and the story of gifts was nothing but a device or contrivance to escape assessment. In the penalty proceedings, the assessee brought no material on the record to substantiate her stand that the aforesaid sums were really gifts to her minor son. It is true that in penalty proceedings, the findings of fact in the assessment proceedings are not conclusive, but it cannot be denied that they are relevant materials. It is also true that in penalty proceedings, it is not necessary for the assessee to adduce additional evidence. But, if there are materials already on record, they may well be looked into for considering whether the explanation of the assessee is possible or not. Applying these standards in these references, we find that there was neither anything on the record already to substantiate her stand nor was any extra material brought on the record in the penalty proceeding to make her explanations probable. In that situation, in terms of the Explanation to Section 271(1)(c), there could be no escape from the conclusion as held by the Inspecting Assistant Commissioner, that the assessee had attempted to defraud the Revenue. The Tribunal also recorded findings against the assessee. In regard to the gift of Rs. 10,000, the Tribunal held that the story woven out was a cloak to cover her income. In regard to the gift of Rs. 20,000, the Tribunal recorded a categorical finding as follows :
" On the other hand, there are clear indications that the disclosure made by the two ladies were devices which the assessee used for saving payment of due tax. Thus, there is force in the arguments of the Inspecting Assistant Commissioner that there was a clear attempt to defraud the Revenue."
12. In the face of the concurrent findings in regard to the aforesaid gifts, Mr. K. N. Jain, learned counsel for the assessee, had a difficult time. He however, submitted with his usual ingenuity that the sums referred to above could not be held to be the concealed income, as the assessee had not concealed them, but had shown them in Part IV of the return which is meant for showing income or property which the assessee claims is not liable to taxation. This submission, on behalf of the assessee, is manifestly untenable. It is true that the assessee had shown the sum of Rs. 10,000 in Part IV of her return, but that also shows her frame of mind. She could not establish that any gift was made to her minor son. The finding that there was no such gift is binding on this court. The necessary inference therefrom is that the assessee knew that it was her income and yet she showed it in the column meant for exempted income in Part IV in the hope that she would get away with it. It was a clever device but unfortunately it did not click. The obvious conclusion is that she tried to conceal.
13. In regard to the gift of Rs. 20,000 to the aforesaid minor son, the position of the assessee is not better. The finding of fact recorded by the Tribunal, quoted earlier, really concludes the matter. The matter was considered by the Department with all the care that it required. They found that Kuldip Kaur and Sheela Devi (Sita Devi ?) were not in a position to make the gifts as alleged. The Income-tax Officer had clearly held that they were the real assets of the assessee herself routed to her minor son through her two female relations. The findings recorded by the Income-tax Officer in annexure A, the Inspecting Assistant Commissioner in annexure B and the Tribunal in annexure C at paragraphs 8 and 9 clearly show that there was concealment of income. After hearing counsel for the assessee, I have not the least doubt that the findings were correctly recorded. Upon the findings which appear to us to be well merited, there can be no escape from the position that there was concealment of income by the assessee. That being so, the order of penalty on those amounts had to follow. Considering all aspects of the matter specially in the background of the fact that the assessee did not file any return although on her own showing she had earned taxable income, there can be little doubt that the order of penalty was well merited and was rightly upheld by the Tribunal.
14. In my view, therefore, both the questions referred to this court at the instance of the assessee must be answered in favour of the Revenue and against the assessee.
15. I shall now take up the first question referred to us for our opinion at the instance of the Revenue. This question is in two parts. The first is the unexplained investment in the construction of the house and the second, the income from that house property. To recapitulate, the house stood in the name of the minor son of the assessee. The Tribunal deleted the penalty in respect of the unexplained investment of Rs. 10,393 on the ground that this sum represented the estimate of the Revenue in the assessment proceedings. The Tribunal seems to be labouring under the impression that where an assessment is done on estimate, penalty cannot be levied on the estimated addition. I have some difficulty in accepting this bald proposition. A Full Bench of this court in CIT v. Nathulal Agarwala and Sons [1985] 153 ITR 292, to which both of us were party, laid down that where there is a difference of 20% between the returned income and the assessed income, a presumption of concealment arises. The second proposition laid down by the Full Bench was that that presumption has to be rebutted by the assessee. The explanation need not be proved affirmatively and may be shown to be reasonable and probable. The asses-see in showing the probability of his/her stand may rely upon the materials or circumstances already on record and need not necessarily adduce fresh evidence. If the assessee fails to show in the penalty proceeding that his or her stand or the explanation afforded was reasonable or probable, the penalty must follow. Relying upon the dicta of the Full Bench, the assessee failed to show that the estimate was improbable or unreasonable. In that situation, there was no escape from the levy of penalty. An assessment may be according to the books of the assessee or it may be on an estimate to the best judgment of the Revenue. In either situation, the assessment cannot be assailed. For the purposes of imposition of penalty, an assessment by estimate is not different from an assessment on the basis of the books of the assessee. The wide proposition enunciated by counsel for the assessee and apparently being the basis of the order of the Tribunal cannot be accepted.
16. Learned counsel for the assessee, in support of his submission, that penalty cannot be imposed where the assessment had been done on estimate placed reliance on CIT v. Lalit Mohan Deb [1977] 107 ITR 84 (Cal). In my view, the reliance placed is entirely misplaced. That was a case where the assessee had constructed a house. The assessee contended that it was constructed out of loins from three persons. The Income-tax Officer found that none of the creditors could have been in a position to advance the amounts. Proceedings under Section 34 of the Indian Income-tax Act, 1922, were initiated. The three creditors appeared before the Income-tax Officer in the reassessment proceedings and supported the stand of the assessee, but the Income-tax Officer did not accept the explanation of the assessee and treated the amounts spent over construction as assessee's income from undisclosed sources. Thereafter, penalty proceedings under Section 28(1)(c) of the 1922 Act were initiated and penalty was imposed. In imposing the penalty, the Income-tax Officer relied on the fact that in the assessment proceedings, the Appellate Assistant Commissioner had confirmed the findings of the Income-tax Officer and held that the cash credits were not genuine and that the amounts represented the assessee's income from undisclosed sources. The imposition of penalty was upheld by the Appellate Assistant Commissioner observing that the Income-tax Officer had held that the explanation of the assessee was false. The Tribunal set aside the order of the Appellate Assistant Commissioner observing that the Revenue had failed to satisfy that the assessee had deliberately furnished inaccurate particulars. On a reference at the instance of the Commissioner, the High Court upheld the order of the Tribunal following the decision of the Supreme Court in CIT v. Anwar Ali [1970] 76 ITR 696. It is worthy of note that none of the four questions referred to the High Court in that case touched on the problem with which we are faced. The Calcutta High Court did not lay down anywhere in the judgment that where assessment has been computed on estimate, penalty cannot or should not be imposed. I am, therefore, unable to regard the Calcutta decision in CIT v, Lalit Mohan Deb [1977] 107 ITR 84, as an authority for the proposition enunciated by learned counsel for the assessee.
17. The next decision relied upon by learned counsel for the assessee in support of his proposition is in CWT v. S. Venugopala Konar [1977] 109 ITR 52 (Mad). This was a case of assessments under the Wealth-tax Act. The assessment of wealth had taken place for four years. The special feature to be noticed in this decision is that the building was under construction on the valuation date. The assessment was for the years ending March 31, 1966, to March 31, 1969. The period of construction was May 28, 1965, to September 30, 1969. Ismail J. observed for the court as follows (at p. 55 [1977] 109 ITR :
"If the construction was completed on September 30, 1969, the building should have been only incomplete on August 14, 1969, and, therefore, there was no question of valuing the building which was incomplete as on August 14, 1969, and allowing depreciation in respect thereof for a period of five years. It is this aspect of the matter which has been overlooked by the Inspecting Assistant Commissioner when he imposed the penalty. In respect of any incomplete construction, normally there cannot be any market value as on successive valuation dates on the basis of the progress in the construction work and the only manner in which the value of such incomplete construction, as on different valuation dates, could be arrived at was by finding out the actual amount spent on the construction as on the different valuation dates. As the Tribunal pointed out, the Department had not placed any material to show that the amount incurred by the assessees on the respective valuation dates and as entered in the construction account was incorrect. Again assuming that the Department was right in rejecting the construction account maintained by the assessees and estimating the total cost of construction, still no principle or basis was brought to our notice to justify the action of the Department in spreading the said total cost over the period of four years in question at the particular amounts on the respective valuation dates as it has actu-ally done in these cases. "
18. Where the building was under construction and was incomplete on the valuation dates, there can be no quarrel that that situation may not attract penalty. That may be a circumstance to show that the assessee had established that there had been no wilful concealment or gross neglect. His stand may be considered reasonable and probable.
19. Both the decisions, therefore, cited at the bar on behalf of the assessee do not support the wide proposition enunciated for the assessee that whenever there is assessment by estimate, law relating to imposition of penalty must be put on the shelf. I see neither logic nor reason nor judicial precedent to support the wide proposition. On the other hand, we have a clear authority of the Allahabad High Court in CIT v. Swarup Cold Storage and General Mills [1982] 136 ITR 435, where it was specifically urged on behalf of the assessee that no penalty could be levied in respect of estimated income and their Lordships rejected that contention squarely in the following words (at p. 439):
"Even if the difference between the income returned and that assessed has been due to an estimate, the applicability of the Explanation will not be affected."
20. In CIT v. Kedar Nath Ram Nath [1977] 106 ITR 172 (All), the assessee's books had been rejected as being unreliable and a best judgment assessment was resorted to. The Tribunal had deleted the penalty on the ground that the assessment was by process of best judgment assessment and Justice Satish Chandra observed as follows (at p. 177) :
" In our opinion, the Tribunal has misconceived the real position. The Explanation very clearly covers a case where best judgment assessment is made under Section 144 of the Income-tax Act and it is found that the income returned by the assessee falls short of 80% of the income so assessed as reduced by bona fide expenditure incurred by the assessee for the purpose of earning any income included in the assessee's total income. The Explanation clearly provides that in such a case unless the assessee proves that failure to return the aggregate income did not arise from any fraud or gross or wilful neglect on his part, it will be deemed that he has concealed the particulars of his income. "
21. The same question was raised before the Madras High Court in A. K. Bashu Sahib v. CIT [1977] 108 ITR 736, in which V. Ramaswami and V. Sethuraman JJ. observed as follows (at p. 743) :
"We are also unable to agree with the argument that in all cases where the taxing authorities estimated the income at a higher figure than what was estimated by an assessee, no penalty was leviable. Where the estimate of the assessee amounts to deliberate under-estimate, an inference of concealment of income could certainly be drawn. "
22. On the basis of the authorities mentioned above, I have not the least doubt that it is not a correct proposition of law that whenever assessment is done by estimate, penalty cannot be levied. Such a view would encourage assessees not to produce any accounts before the Department or producing irregular/bogus accounts so that the Department may have to take recourse to the best judgment assessment, thus forestalling the Department from levying penalty. The assessments by estimate also fall within the ambit of the Explanation to Section 271(1)(c) of the Income-tax Act. I am fortified in the view that I have taken, from a decision of the Supreme Court in N. A. Malbary v. CIT [1964] 51 ITR 295. That was a case where in the first instance, the Income-tax Officer made an assessment by estimate. The Income-tax Officer levied penalty on the basis of that estimate. Later, when he ascertained the true facts and realised that a much higher penalty could have been imposed, he passed another order imposing higher penalty without recalling the earlier order. The imposition of the second order imposing higher penalty was challenged on the ground that the Income-tax Officer could not pass two penalty orders. The stand of the assessee was rejected by the Supreme Court observing that the omission to recall the earlier order would not make the second order invalid. In the view of the Supreme Court, the Income-tax Officer had full jurisdiction to make the second order and he could not lose that jurisdiction because he had omitted to recall the earlier order though it may be that the two orders could not be in force simultaneously or be taken together. The proposition posed before us was not directly in issue before the Supreme Court. Malbary's case [1964] 51 ITR 295 (SC), therefore, cannot be regarded as an authority for the proposition enunciated by me, but I cannot restrain myself from observing that it does lend support to the view that even an assessment by estimate may attract penalty.
23. I am, therefore, definitely of the view that even if an assessment has been done by estimate, penalty cannot be deleted merely on the score of assessment by estimate. But I should make it clear that it is not intended to be conveyed that in every case of estimated assessment specially in the case of investment over construction of buildings, penalty must be imposed. If the difference is marginal between the returned investment and the assessment so that it may be said that there is scope for honest difference of opinion, that will not be a case for imposition of penalty. If the difference is minimal, the assessee may well say that the circurmstances point in the direction of honest mistake or miscalculation.
In that situation, the assessee may be deemed to have discharged the onus of showing that there was no conscious concealment, gross default or neglect. This must be so on the footing that honest difference in estimation should not be penalised. It is the mental attitude coupled with the act of the assessee which calls for penalty. But if the difference in the figures given by the assessee and the figures estimated by the Department leave scope for doubt, the assessee will have made out a reasonable and probable case for deleting the penalty, but where there is an unexplained yawning gap between the return and assessment, penalty cannot be deleted.
24. Learned counsel for the assessee brought to our notice a decision of this court in CIT v. Patna Timber Works [1977] 106 ITR 452 to impress upon us that assessment by estimate cannot attract penalty. I regret, that is not the ratio of that decision. It is true, assessment had been done on an estimate and the penalty was knocked down by this court. On the facts of that case, their Lordships held that the reasons for enhancing the same as set out in the order of the Inspecting Assistant Commissioner were non est. Therefore, that decision is clearly a decision on the facts of that case. As I have said above, a marginal variation in estimate may not attract penalty but this also cannot be raised to the point of a dictum. It will depend upon the facts and circumstances of each case. In that case, rate of profit had been enhanced by one per cent. Untwalia C.J. applied himself as to whether the explanation of the assessee was tenable or not. Where the estimate leaves scope for honest difference of opinion, it should generally be taken that there was no active concealment, wilful default or gross neglect.
25. In the case before us, the assessee had built a building. The statement of facts does not disclose the cost of construction returned by the assessee and the estimate found by the Income-tax Officer. The difference was of Rs. 10,393. In the matter of construction of building where accounts are not rigorously and meticulously maintained, there may be scope for honest difference of opinion to the extent of Rs. 10,393. In my view, therefore, on the special facts and circumstances of this case, the Tribunal was justified in deleting this item of Rs. 10,393 from the penalty. The explanation should have been accepted. It can well be concluded that there had been no active concealment, wilful default or gross neglect.
26. The next matter to be considered in the first question raised by the Revenue relates to the deletion by the Tribunal of the sum of Rs. 4,826 from penalty. This sum represents the income from the house property. The Tribunal in paragraph 10 of its order held that the stand that as the property stood in the name of her minor son, she may not have been sure whether she was expected to disclose it and that to show her bona fides she had shown it in Part IV of her return. I regret, this submission is fallacious. It may be recalled that one of the gifts of Rs. 10,000 discussed earlier had also been shown in Part IV of the return. In regard to that sum, the Tribunal observed that "showing of this amount in Part IV of the return indicated the guilty mind of the assessee". How can the same frame of mind of the assessee become an extenuating circumstance in regard to income from house property when the assessee clearly knew that she had constructed the house. She had explained the source of investment. She did not dispute that the investment over construction of the house had been made by her. If she had built the house by her own money and the minor son did not have any income of his own, it should have been obvious to her that the income from that property, i.e., Rs. 4,826, had to be treated as her own income and exigible to tax as such. The approach of the Tribunal in regard to the entry in Part IV of the return was rather contradictory. It is difficult to support the deletion of this amount of Rs. 4,826 for the purposes of imposition of penalty. This question, therefore, also must be answered in favour of the Revenue and against the assessee.
27. The last question referred to us at the instance of the Revenue was whether the Tribunal was correct in holding that the penalty was to be imposed according to law which was in force on April 1, 1966, and not in accordance with the amended provisions of Section 271(1)(c)(iii) which came into force from April 1, 1968. Although the return was for the year 1966-67 (A.Y.), it was filed only on July 9, 1968. The return having been filed after April 1, 1968, it is obvious that penalty would be imposed in accordance with the law applicable on the date of filing of the return, i.e., July 9, 1968. This point has been set at rest by the Supreme Court in Brij Mohan v. CIT [1979] 120 ITR 1. Mr. K. N. Jain, learned counsel for the assessee, was candid in conceding that the Tribunal was not correct in the view that it took of the matter. Mr. K. N. Jain was justified in making this concession after the decision of the Supreme Court in the case of Brij Mohan [1979] 120 ITR 1. The second question also, therefore, referred to us at the instance of the Revenue must be decided against the assessee and in favour of the Revenue.
28. In fine, the Tribunal was correct and justified in upholding the imposition of penalty under Section 271(1)(c)(iii) and in holding that the sum of Rs. 20,000 and another sura of Rs. 10,000 shown in Part IV of the return attracted penalty. These two questions are decided in favour of the Revenue and against the assessee.
29. Further, the Tribunal was justified in holding that the addition of Rs. 10,393 did not attract penalty under Section 271(1)(c)(iii). It was, however, not justified in deleting the penalty in inspect of Rs. 4,826 which represented income from her house property. The Tribunal was also not correct in holding that penalty was to be imposed according to law which was in force on April 1, 1966, and not in accordance with the amended provisions of Section 271(1)(c)(iii) which came into force from April 1, 1968. Thus, the first question referred to us at the instance of the Revenue is decided in favour of the assessee but the second question referred at the instance of the Revenue is decided in favour of the Revenue and against the assessee.
30. The references are answered accordingly. There shall be no order as to costs in the circumstances of the case.
31. Let a copy of this judgment be transmitted to the Income-tax Appellate Tribunal in terms of Section 260 of the Income-tax Act, 1961.
Nazir Ahmed, J.
32. I agree with the findings relating to the amounts of Rs. 10,000, Rs. 20,000 and Rs. 4,826 and I also agree with the final conclusion relating to the amount of Rs. 10,393.