Income Tax Appellate Tribunal - Cochin
Geo Sea Foods vs Income-Tax Officer on 22 January, 1991
Equivalent citations: [1991]37ITD233(COCH)
ORDER
P.I. Mohan Singh, Judicial Member
1. This appeal of the assessee is directed against the order of the CIT (Appeals), who has confirmed the penalty of Rs. 2,50,000 levied by the Income-tax Officer under Section 271 (1)(c) for the assessment year 1977-78.
2. The facts of the case which according to the Income-tax Officer prompted him to levy the aforesaid penalty are as under: The assessee is a firm engaged in processing and export of sea foods. For the assessment year 1977-78, it filed a return of income on 24-4-1978 declaring an income of Rs. 3,36,750. The assessment was completed on 30-6-1980 on a total income of Rs. 11,12,590. One of the additions made by the Income-tax Officer is a sum of Rs. 2,99,996 under export commission. The assessee had debited its export commission receipt account by this sum. The claim of the assessee for deduction of this amount was found untenable. The assessee filed an appeal before the CIT (Appeals) and the CIT (Appeals) gave certain reliefs to the assessee. However, he confirmed the above-mentioned addition of Rs. 2,99,996. There was a further appeal to the Income-tax Appellate Tribunal by the assessee. The department had also filed an appeal before the Tribunal and the Tribunal had disposed of both the appeals by its order dated 5-4-1983 in I.T. A. No. 471 (Coch.) 81 and I.T. A. No. 515 (Coch.) 81. The income determined as per the order of the Income-tax Appellate Tribunal is Rs. 6,99,370. This is inclusive of the sum of Rs. 2,99,996 added to the assessee's income as commission receipts.
3. On the aforesaid facts, penalty proceedings under Section 271 (1)(c) were initiated by the Income-tax Officer. He issued a notice to the assessee. The counsel who appeared on behalf of the assessee contended before the Income-tax Officer that though the Appellate Tribunal has sustained an addition of Rs. 2,99,996 towards export commission account, the assessee is taking up the matter in reference to the High Court. He also contended that the taxability of this item, in any case, is not free from doubt and that there is no concealment involved attracting the provisions of Section 27 l(1)(c). After hearing the learned counsel for the assessee, the Income-tax Officer observed that the mere fact that the assessee is taking up the matter in reference does not mean that there is doubt about the taxability of the amount. The Income-tax Officer then elaborated the reasons as to why penalty is imposable in this case. The relevant portion of the Income-tax Officer's order is reproduced below :-
During the accounting year the assessee had received a sum of Rs. 5,09,871 as export commission. But it had admitted only a sum of Rs. 2,10,755 as income under export commission. The assessee had debited the export commission account by a journal entry on 31 -3-1977 by a sum of Rs. 2,99,996 and transferred it to the account of one Hotel Winrace Private Limited, Bangalore, the shareholders of which are the four partners of the assessee-firm. It was stated by the assessee's representative that Hotel Winrace Private Limited were acting as agents on behalf of an Export House and that the transfer of Rs. 2,99,996 represented the commission payable to them in their capacity as agents of the export house. It was also stated that this amount is payable as per agreement dated 31-3-1976 with that company.
It was, however, found that on the same date, on which the export commission account was debited by the above mentioned sum of Rs. 2,99,996 and the Bangalore company was credited, the amount was divided and credited to the accounts of the partners of the assessee-firm in their profit sharing ratio in assessee's books. Further, in the company's account this amount had been credited much later only. The assessee was not able to furnish any details or evidence in respect of the services rendered by the company for earning the commission. It was merely contended that the assessee was able to secure orders from the export house through the good offices of the Bangalore company. But there has been no agreement between the export house and company during the accounting year. The Appellate Tribunal has found in their order that the export house, Greaves International Limited, had denied any understanding with Hotel Winrace Private Limited prior to 1978.
Extracting a portion of the Tribunal order in para 13, the Income-tax Officer has concluded that since the highest fact finding authority had found beyond doubt that no commission was actually payable by the assessee to the Bangalore company and since the assessee's claim is not a genuine one, there is a clear case of concealment of income. He, therefore, levied a penalty of Rs. 2,50,000 under Section 271(1)(c) of the Income-tax Act, 1961.
4. As against this order of the Income-tax Officer, the assessee went up in appeal before the CIT (Appeals), before whom the learned counsel for the assessee contended that the assessee firm received certain commission from Greaves International Ltd., but the amount of Rs. 2,99,996 so received was actually received on behalf of Hotel Winrace Pvt. Ltd., Bangalore, in which all the partners of the assessee-firm were shareholders. He further stated that the commission so received on account of the company was transferred on the last day of the previous year by a Journal entry to the account of Hotel Winrace Pvt. Ltd., Bangalore. It was also stated that since the four partners of the firm were the four shareholders of the company with equal shareholding, the amount was actually divided among the four partners of the assessee-firm and credited to their accounts as the firm did not have any direct transaction with the company and any account with the company. It was also contended by the learned counsel that the Income-tax Officer had disallowed the commission on the ground that the payment itself was bogus and the commission was actually earned by the assessee-firm and no one else; whereas the CIT (Appeals) has confirmed the addition only on the ground that it was a payment coming within the mischief of Section 40(b) of the Income-tax Act, 1961 and in respect of such an addition there cannot be any penalty under Section 271 (1 )(c). It was further contended that the Tribunal which has confirmed the stand of the CIT (Appeals) has also allowed a reference to the High Court about the very addition under Section 40(b) and the order and the approach of the Tribunal has made it very clear that the addition was only a technical addition under Section 40(b) with reference to which no penalty should lie. After hearing the learned counsel for the assessee, the CIT (Appeals) confirmed the order of the Income-tax Officer for the reasons stated by him in his order. As against this order of the CIT (Appeals), the assessee is in appeal before us.
5. The learned counsel for the assessee reiterated the contentions made before the CIT (Appeals). After elaborating the facts of the case, again he stressed the point that since the shareholders of the company, Hotel Winrace Pvt. Ltd., are the four partners of the assessee-firm and since there is no account of M/s. Geo Sea Foods, Cochin, i.e., the assessee-firm in the books of Hotel Winrace Pvt. Ltd. and since there is no account of Hotel Winrace in the books of the assessee-firm, the commission amount was credited in the account of the four partners of the assessee-firm, which is, in fact, a payment to Hotel Winrace Pvt. Ltd., Bangalore. He contended that the payment is genuine. The whole misunderstanding, according to the counsel, has arisen in the mind of the Income-tax Officer since the agreement was signed by K.G. Felix in the capacity of Managing Director of the Company, Hotel Winrace Pvt. Ltd., and K.G. Lawrence as the managing partner of the assessee-firm, both being the partners of the assessee-firm. He further contended that the Income-tax Officer has made an addition of Rs. 2,99,996 on the ground that the commission payable to Hotel Winrace Pvt. Ltd., is not a genuine liability; whereas the CIT(Appeals) disallowed this amount entirely on a different ground viz., that it is a payment by the assessee-firm to its partners and, therefore, the payment is disallowable under Section 40(b) of the Act. Relying upon the decision Calcutta High Court in the case of CIT v. Ananda Bazar Patrika (P.)Ltd. [1979] 116 ITR 416, at p. 424, he contended that since the penalty was not emanated from the satisfaction of the Income-tax Officer, no penalty is exigible in this case. He also relied upon the decision of the Allahabad High Court in the case of CIT v. Shadiram Balmukand [1972] 84 ITR 183 for the aforesaid proposition. He further relied upon the decision of Allahabad Bench 'A' of the Tribunal in the case of G.W. Lawrie & Co. v. ITO [1983] 4ITD 273 (TM), for the proposition that there is no bar for the commission being paid by the assessee-firm to its partners.
6. The learned departmental representative, on the other hand, contended before us that this is a clear case of concealment. According to him, the finding of the Income-tax Officer and the CIT (Appeals) is the same, inasmuch as, both have held that no commission was paid to Hotel Winrace Pvt. Ltd., Bangalore. The mere fact that the CIT (Appeals) has invoked the provisions of Section 40(b) will not make his finding different from that of the Income-tax Officer. The falsity of the claim according to the departmental representative stands established by the letter dated 3-3-1978 of Greaves International Ltd., Bombay to the ITO. He contended that the assessee is guilty of furnishing inaccurate particulars of its income and the CIT (Appeals) has rightly confirmed the penalty levied by the Income-tax Officer. The learned departmental representative further contended that the assessee is also caught within the Explanation to Section 271(1)(c). He relied upon the commentary contained at page 4759 of Sampath Iyengar's Law of Income-tax, Seventh Edition, Volume 5 to show that the ratio laid down by the Supreme Court in the case of CIT v. Anwar AH, reported in 76 ITR 696 is no more a good law.
We have considered the facts and circumstances of the case, the material on record and the arguments advanced by both the parties. In this case, we are not called upon to decide the question whether the payment of commission of Rs. 99,996 made to the company, Hotel Winrace Pvt. Ltd., Bangalore, is genuine or bogus. We are only called upon to decide the issue whether there is concealment in this case and whether the ratio laid down in the cases relied upon the assessee would apply to the facts of this case. For this purpose, it would be very material to examine the finding of the Income-tax Officer and the reasons recorded by him in arriving at the finding. The relevant portion is extracted from the assessment order and is reproduced below :
If the company, Hotel Winrace had actually been acting as an agent of another person, there is no reason why the commission due to them should have been paid to the assessee firm by the principal. Moreover, the alleged agreement does not mention anything about the principal and the same has been executed by two of the partners of the firm, one on behalf of the firm itself and the other on behalf of the Company. In addition to all these, the manner in which the entries have been passed in the books of account maintained by the assessee, the apportionment and crediting of the entire amount to the current account of the partners in the profit sharing ratio, the delay in passing the corresponding entry in the accounts of the company and the other connected circumstances clearly prove that the sum of Rs. 2,99,996.37 alleged to be the commission payable to Hotel Winrace Private Ltd., is not a genuine liability .... In view of these facts and circumstances, the assessee's commission receipts during the year will be increased by an amount of Rs. 2,99,996.37 and this calls for an addition of Rs. 2,99,996.
Now we will proceed to examine the finding arrived at by the CIT (Appeals), and the reasons given by him in arriving at that finding. This is found in para 5 of the CIT (Appeals) 's order in the quantum appeal, which is at pages 20 & 21 of the paper book filed by the assessee. The relevant portion extracted from para 5 of the CIT (Appeals) order is reproduced below :
In this case though the amount is said to have been paid to a limited company, the Income-tax Officers' finding is that this commission has been ultimately divided by the four partners of the firm themselves. It is not as if the amount has become the income of the limited company. Therefore, apparently, the contract cannot be said to have been that of the limited company.
Further, Shri Felix who was the Managing Director of the limited company, is claimed to be the person who has direct contact with the export houses. Shri Felix is a partner of the assessee-firm. When a firm is carrying on business and one of the partners has any special contact or capability which is likely to contribute to the income earning capacity of the firm, it is open to the firm to claim that such partner should be suitably remunerated. But under Section 40(b), in computing the income chargeable under the head 'Profits and gains of business or profession' in the case of any firm, any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm cannot be allowed as a deduction. In the instant case, the commission has in fact been paid to the partners of the firm. The disallowance is, in the circumstances, confirmed.
Now if we examine the reasons and the findings arrived at by both the income-tax Officer and the CIT(Appeals) it is seen that the Income-tax Officer has, mainly on the ground that the commission has been paid by the principal viz., Greaves International Ltd., to the assessee-firm, held that a sum of Rs. 2,99,996 being commission payable to Hotel Winrace Pvt. Ltd. is not a genuine liability and, therefore, added the same to the income of the assessee. The CIT (Appeals), on the other hand, held that this being a payment by the firm to its partners, it is to be disallowed under Section 40(6) of the Income-tax Act. The aforesaid finding of the CIT(Appeals) has been confirmed by the Income-tax Appellate Tribunal. Their Lordships of the Calcutta High Court have held in the case relied upon by the assessee in Ananda Bazar Patrika (P.) Ltd.'s case (supra) that when the original basis of initiation of the penalty proceedings is altered or modified by the appellate authority, the authority initiating the penalty proceedings has no jurisdiction thereafter to proceed on the basis of the findings of the appellate authority. Therefore, when the Appellate Assistant Commissioner modified the original assessment and held that a certain sum was not concealed income of the assessee from "other sources" as held by the Income-tax Officer, but was concealed business income and also enhanced the business income of the assessee on other evidence, it was no longer open to the ITO to imposepenalty on the assessee on the basis of the findings of the Appellate Assistant Commissioner. On the basis of the ratio laid down in the aforesaid case, the penalty should omanate from the satisfaction of the Income-tax Officer. Since in this case the penalty. as not emanated from the satisfaction of the Income-tax Officer, inasmuch as, the findings and the reasons given by the CIT(Appeals) and the Tribunal are different from the finding and the reasons given by the Income-tax Officer, the ratio laid down in the aforesaid case squarely applies to the facts of this case and penalty is not exigible. We will now see whether the assessee has furnished inaccurate particulars of income in this case. The assessee's stand right from the beginning is that a sum of Rs. 2,99,996, being commission, was paid to Hotel Winrace Pvt. Ltd., Bangalore. The same stand was taken by the assessee right up to the Income tax Appellate Tribunal and not the matter is taken on reference to the High Court. The CIT(Appeals) only found some discrepancy in the stand taken by the assessee and it is also seen that the CIT(Appeals) himself has taken a different stand to that of the Income-tax Officer, inasmuch as, he has held that since the payment of commission is made by the firm to the partners it is disallowable under Section 40(b).
This, in our opinion, will not amount to furnishing inaccurate particulars of income. We will now examine whether Explanation to Section 271(1)(c) would apply to the facts of this case. It is the contention of the departmental representative that since the explanation offered by the assessee is found to be false by the Income-tax Officer, the Income-tax Officer has rightly levied the penalty. As pointed opt earlier, the stand of the assessee right from the beginning is that the commission amount has been paid to Hotel Winrace Pvt. Ltd. The Income-tax Officer disbelieved the assessee mainly on the ground that the amount has been paid by Greaves International to the assessee-firm, the manner in which the entries have been passed in the books of account maintained by the assessee, the apportionment and crediting of the entire amount to the current account of the partners in the profit sharing ratio, and also the delay in passing the corresponding entry in the accounts of the company. This finding of the Income-tax Officer, as pointed out earlier, has not been agreed to by the CIT (Appeals) and the CIT (Appeals) has held that since this is a payment by the firm to the partners it is disallowable under Section 40(6). Confirming the order of the CIT(Appeals), the Tribunal did not accept the reasons given by the Income-tax Officer in discounting the agreement, which observation we find in para 13 of the Tribunal in the quantum appeal. From this it would be very clear that when different stands have been taken by different authorities and, therefore, the explanation given by the assessee cannot be said to be false. We are, therefore, of the opinion that the Explanation 1 (A) to Section 271 (1 )(c) would not apply to the facts of this case, as it is merely a rejection of the bona fide explanaion offered by the assessee. We further held that since we have cancelled the penalty that, the assessee has concealed the particulars of its income has not emanated from the satisfaction of the Income-tax Officer in the assessment proceedings, the question of applying Explanation 1(A) does not arise in this case. We accordingly cancel the penalty levied by the Income-tax Officer and confirmed by the CIT(Appeals).
The appeal filed by the assessee is allowed. Per Shri A. Satyanarayana (Accountant Member)
9. I have carefully gone through the order of my learned brother. My brother has deleted the penalty by holding that "since in this case penalty has not emanated from the satisfaction of the Income-tax Officer, inasmuch as, the findings and the reasons given by the CIT(A) and the Tribunal are different from the findings and the reasons given by the ITO, the ratio laid down in Anand Bazar Patrika (P.) Ltd.'s case (supra) squarely applies to the facts of this case and penalty is not exigible." He also held that "the Explanation 1(A) to Section 271(1)(c) would not apply to the facts of this case, as it is merely a rejection of the bona fide explanation offered by the assessee.' I am unable to agree with the above findings of my learned brother.
10. In the decision of the Calcutta High Court in Anand Bazar Patrika (P.) Ltd.' s case (supra) an amount of Rs. 1,63,000 was added to the taxable income by the ITO under the head "other sources". On appeal,, the AAC held that business income of Rs. 6,92,771 had not been accounted for in the books of the assessee. He further held that the said sum of Rs. 1,63,000 added as income from undisclosed sources was a part of such unaccounted business income. The AAC enhanced the assessment by Rs. 5,29,771. Assessee's further appeal to the Tribunal being dismissed for default, this assessment became final. Penalty proceedings under Section 28 of the Indian Income-tax Act, 1922 were initiated by the ITO in respect of the said sum of Rs. 1,63,000 included by him under the head 'other sources'. In the said proceedings the assessee contended that after the AAC's order, the said undisclosed sources and the enhancement by the AAC was not the subject matter of the penalty proceedings. The penalty proceedings were, therefore, not maintainable. The ITO rejected the contention of the assessee and passed an order levying a penalty of Rs. 2,70,000. He took into consideration the assessment as enhanced by the AAC and proceeded on the basis that the income concealed was Rs. 6,92,771. The Tribunal held that the levy of penalty in respect of the alleged understatement of business income by Rs. 6,92,771 was bad in law and accordingly allowed the appeal of the assessee. Before the High Court the following questions were referred :
(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the AAC, who heard the assessment appeal had acted in excess of his jurisdiction in enhancing the total income by Rs. 5,29,771 on the ground that the business income, though not the subject-matter of appeal before him, had been under assessed to the extent of Rs. 6,92,771 and that for this reason the ITO's order of penalty with respect to such enhancement was bad in law ?
(2) If the answer to the first question is in the negative, then whether the Tribunal was right in holding that the ITO could not initiate or levy penalty in respect of the enhancement made by the AAC ?
From the above it would be seen that the point at issue there was whether the ITO's order of penalty with reference to the enhancement of income by the AAC was bad in law. This is manifest from the second question as reframed (See Ananda Bazar Patrika (P.) Ltd. 's case (supra) at page 421 by the High Court as under :
Whether the Tribunal was right in holding that the ITO could not initiate or levy penalty in respect of enhancement made by the AAC?
The High Court declined to answer question No. 1. Their Lordships answered question No. 2 (as reframed) in the affirmative and in favour of the assessee. So the said decision is only to the effect that it will not be competent for the ITO for the purpose of penalty to take into account any additions or enhancements that have been made to the assessment on appeal.
11. In the present case the ITO in his assessment order dated 30-6-1980 referred to Rs. 2,99,996 and held that the transfer by debiting export commission account and crediting the account of Hotel Winrace Pvt. Ltd. and subsequent debiting of the said hotel account and crediting of the accounts of the 4 partners (who happened to be the 4 shareholders in the hotel) was "a clever device adopted deliberately in order to reduce its real income". He further held that "the assessee did not furnish the details of the alleged commission payments originally and but for his diligent examination of the accounts a sum of Rs. 2,99,996 would have escaped the attention of the department." Thus this was the basis for the ITO to initiate penalty proceeding, during the course of the assessment proceeding itself, under Section 271(1)(c) by issuing penalty notice as per Section 274 read with Section 271(1)(c) of the Income-tax Act, 1961. In the order under Section 271(1)(c) the ITO had stated that "the assessee was not able to furnish any details or evidence in respect of the services rendered by the company for earning the commission". He also stated that "this was a clear case of concealment of income by furnishing inaccurate particulars of real income." The impugned amount of Rs. 2,99,996 was not received by the assessee on a particular date but on several dates as can be seen from the copy of the ledger account of export commission in the assessee's books. When I asked the assessee's counsel at the time of hearing of the appeal to file the covering letters, if any, received from Greaves International Ltd. when they have sent/paid the export commission, he expressed his inability and only asserted that the payments were made in cash. The penalty levied by the ITO of Rs. 2,50,000 was with reference to the concealment of income of Rs. 2,99,996 by the assessee. In this case, there was no addition or enhancement of income by any of the appellate authorities. So the question of levying of penalty by the ITO with reference to the enhanced income fixed by the appellate authority does not arise. The reasons adopted by the ITO for making an addition of Rs. 2,99,996 might have been modified by the CIT(A). But the basis, namely, the addition of Rs. 2,99,996 made by the ITO remained the same. The satisfaction that the assessee had concealed income by furnishing inaccurate particulars or real income has emanated from the ITO only. In these circumstances, I hold that the ratio of the decision of the Calcutta High Court in Ananda Bazar Patrika (P.} Ltd.'s case (supra) is not at all applicable to the facts of the present case.
12. Added to this, Explanation 1 to Section 271(1)(c), newly introduced with effect from 1-4-1976 by the Taxation Laws (Amendment) Act, 1975 clearly applies here. The CIT(A) in the impugned order dated 31-5-1985 held that "having regard to the facts and circumstances of the case, the appellant's claim of payment of commission1-by the firm to the company was false." The new Explanation 1 to Section 271(1)(c) provides that where in respect of facts material to the computation of the total income of the assessee, he furnishes no explanation or he cannot substantiate the explanation offered by him, or explanation offered by him is found to be false, either by the ITO or the AAC/CIT( A), the relevant income shall be deemed to be his concealed income. It is not a question of rejection of the bona fide explanation offered by the assessee as held by my learned brother. During the assessment proceedings, the assessee pointed out before the ITO that "M/s. Hotel Winrace were acting as agents on behalf of an export house and that the transfer of Rs. 2,99,996 represented the commission payable to them in their capacity as agents." In the Agreement dated 31-3-1976 between the assessee-firm and Hotel Winrace there was no mention of any particular Export House by name on whose behalf the Hotel Winrace had undertaken to act as an agent. In a later agreement dated 25-5-1977 between the assessee-firm and Hotel Winrace, the name of M/s Greaves International Ltd. was mentioned as Export House and the Hotel was mentioned as their Agent. The export commission was received by the assessee in the relevant accounting year from the following :'-
(a) Industrial Cables (P.) Ltd.
(b) Bombay Wire Ropes
(c) Amco Batteries
(d) Greaves International
(e) Usha Martin Black
(f) Simac Group
(g) Young India The amount of Rs. 2,99,996 had been received from Greaves International. As rightly pointed out by the ITO, "if the company Hotel Winrace had actually been acting as an Agent of another person, there is no tenson why the commission due to them should have been paid to the assessee firm by the Principal". Export commission from Greaves International was received on several dates as can be seen from the account copy placed in the file. The ITO mentioned in his assessment order that Hotel Winrace was not appointed to act as agent on behalf of Greaves International earlier to March 1978. The Tribunal also found that M/s. Greaves International Ltd. had denied an understanding with Hotel Winrace Ltd. prior to March 1978. The ITO in his penalty order stated that the assessee was not able to furnish any details or evidence in respect of the services rendered by the Hotel Winrace (P.) Ltd. for earning the commission. Even before us also, the assessee had not brought in any material in support of his plea that the transfer was for the services rendered by the Hotel as an Agent of the Export House. In these circumstances, I uphold the finding of the CIT(A) that the claim of payment of commission by the assessee to the Hotel Winrace was false. So in my view Explanation 1 to Section 271(1)(c) squarely applies to this case. In view of what is stated above I confirm the orders of the lower authorities and dismiss the appeal.
REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT As there is difference of opinion between the Members, the points of difference are referred to the President for the decision of a Third Member Points of Difference
1. Whether, on the facts and in the circumstances of the case, the penalty is exigible in this case ?
2. Whether, on the facts and in the circumstances of the case, the Explanation 1 to Section 271(1)(c) newly introduced with effect from 1-4-1976 is applicable to the facts of this case ?
THIRD MEMBER ORDER This case has been referred under Section 255(4) of the Income-tax Act, 1961, on a difference of opinion between the Members who heard the appeal.
2. The admitted facts are as follows: The assessee is a firm engaged in the processing and export of sea foods. For the assessment year 1977-78, corresponding to the previous year ended 31-3-1977, the assessee filed a return declaring a total income of Rs. 3,36,750. In computing that income the assessee had claimed deduction of Rs. 2,99,996 out of the commission received by the assessee at Rs. 5,09,872. The said sum of Rs. 2,99,996 had been credited to the current account of four partners of a firm in equal shares, since they happened to be shareholders of Hotel Winrace Private Limited, which was the company to which, according to the assessee, the commission was due under an agreement dated 31-3-1966. The Income-tax Officer noted that the corresponding entry crediting the commission in the accounts of the assessee had been made on 31-3-1977 dividing the amount and crediting it to the four shareholders equally. The Income-tax Officer further noted that M/s. Greaves International Ltd., Bombay, from which the assessee had received the commission, has stated in its letter dated 3-3-1978 that it has appointed Hotel Winrace Pvt. Ltd., as its agent and, therefore, there was no reason why commission should have been paid by the assessee-firm. According to the Income-tax Officer, the agreement executed by two of the partners of the firm, one on behalf of the firm itself and the other on behalf of the company, and the apportionment and crediting of the amount in the books of the assessee firm itself to the credit of the partners indicated that it was a clear device to reduce the firm's income and he accordingly added back this amount. On appeal, the CIT(Appeals) was of the view that even though the commission was paid to a limited company it had been ultimately divided among the four partners of the firm and hence it should be considered to be a payment to the partners and disallowed the same under Section 40(6) of the IT Act. This was confirmed by the order of the Tribunal dated 5-4-1983 in ITA Nos. 471 (Coch)/81 and 515 (Coch)/81. The Tribunal observed that "the main prop to the claim of the assessee is the agreement dated 31-3-1976. The reasons given by the Income-tax Officer to discount this agreement may not be accepted but the other material brought in by the Income-tax Officer confirms the conclusion of the CIT(Appeals). M/s. Greaves International Ltd., has denied an understanding with Hotel Winrace Ltd., prior to March 1978. The impugned amount though credited to the account of Hotel Winrace Ltd., has been immediately transferred in the assessee's books to the partner's accounts. Even though the partners are the shareholders in the company, the funds of the company cannot be transferred in this manner to the shareholders without an authority from a person competent to act in this behalf. In the circumstances, the inference of the CIT (Appeals) that the arrangement in this year was made by partner K.G. Felix and not by Hotel Winrace Ltd., is justified. We would uphold the order of the CIT(Appeals) in this regard.
3. Arising from the above order of the Tribunal, the following questions were referred in R.A. No. 192 (Coch)/1982 :-
(1) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in their finding that payment of commission of Rs. 2,99,996 by the applicant to the company Hotel Winrace Pvt. is not an allowable expenditure in the hands of the applicant?
(2) Whether on the facts and in the circumstances of the case there was sufficient material to enable the Tribunal to agree with the finding of the Commissioner of Income-tax (Appeals) that the payment in question is a payment made under Section 40(b) of the IT Act the same having not been considered as such in the allocation of the profit of the firm to the partners in the assessment?
The High Court by order dated 2-8-1989 in ITR No. 412 of 1985 answered the questions in the affirmative by observing, -
The Appellate Tribunal in paragraph 13of its order has affirmed the said reasoning and conclusion of the CIT. We are of the view, that the concurrent finding, entered by the CIT and the Tribunal, that the payment in question, is a payment under Section 40(b) of the Income-tax Act, is justified in law.
In the meanwhile, by order dated 14-10-1983, the Income-tax Officer imposed penalty of Rs. 2,50,000 under Section 271(1)(c)of the Income-tax Act, 1961,on the ground that the Appellate Tribunal had confirmed the addition of Rs. 2,99,996. On appeal, the CIT(Appeals) by his order dated 31-5-1985 confirmed the imposition of penalty, on the ground that the assessee's claim of payment of commission by the firm to the company was false and the consequent addition of the amount on the ground that it was really a payment to the partners thereby forming a part of the assessee's own total income had prevented the assessee from getting away with the reduced tax demand.
4. The assessee appealed further. The learned Judicial Member held that the addition had been upheld on appeal on a ground different from that on which it had been made in the assessment order and in view of the decision of the Calcutta High Court in the case of Ananda Bazar Patrika P. Ltd. (supra) the Income-tax Officer had no jurisdiction to proceed on the basis of the modified finding and further since the disallowance was made only under Section 40(6) of the IT Act, there is no question of any concealment. He also held that applying the Explanation to Section 271(1)(c) the claim of the assessee cannot be said to be false and, therefore, there could not be any deemed concealment. On the other hand, the learned Accountant Member held that the proceedings were validly initiated even on the findings of the appellate order and further under the Explanation 1 to Section 27 l(1)(c) the claim of the assessee having been found to be false, the assessee must be deemed to have concealed its income. Consequently, the following points of difference has been referred under Section 255(4) of the Income-tax Act, 1961 :-
1. Whether, on the facts and in the circumstances of the case, the penalty is exigible in this case ?
2. Whether, on the facts and in the circumstances of the case, the Explanation 1 to Section 271(1 )(c) newly introduced with effect from 1-4-1976 is applicable to the facts of this case?
5. Before me it was contended on behalf of the assessee that the claim of the assessee was supported by adequate material and merely because it was rejected there could not be any concealment. It was further argued that under the Explanation 1(A) the assessee could be deemed to have concealed income only if there is a finding by the Assessing Officer or by the Appellate Authority in the quantum proceedings that the claim was false, which was not the case here. It was submitted that the present case fell under the Explanation 1(B) where there could be no deemed concealment even where the assessee fails to substantiate a bona fide claim. It was submitted that in the appellate proceedings the addition was only by way of disallowance under Section 40(b) which being a matter of dispute could not be considered to be a basis for any penalty under Section 271(1)(c) of the I.T. Act.
6. On the other hand, it was contended on behalf of the Revenue that the assessee had introduced a company as a conduit to pay commission to its own partners which would have been otherwise disallowed under Section 40(b). Thus, it should be considered that the Explanation 1(A) was attracted. It was submitted that, in the circumstances, the penalty proceedings having been validly initiated it should be confirmed on a finding that the assessee had deemed to have concealed the particulars of such income. In reply, it was pointed out on behalf of the assessee that the company had been assessed to income-tax including the commission income as has been recorded in para. 7 of the order of the CIT(Appeals) dated 31-5-1985.
7. On a careful consideration of the rival submissions, lam of the opinion, that this is not a case in which penalty could be imposed under Section 271(1)(c) of the Income-tax Act, 1961. The assessee had claimed that under an agreement dated 31-3-1976, commission had to be paid to Hotel Winrace Pvt. Ltd. It so happened that the partners of the firm are also shareholders of the company and the commission paid by the assessee was credited to the accounts of the partners of the assessee firm in equal shares. It is not in dispute that the said income has been taken to the credit of the Hotel Winrace Pvt. Ltd., in its account and distributed to the shareholders. In fact, it is admitted that the assessee had included this income in its total income and has also been assessed thereon. It may be that because of income and loss from other heads the tax paid by the company on this commission is much less than what would have been paid had the commission been given directly to the partners and disallowed under Section 40(b) Yet the fact remains that the existence of the company, the agreement and the liability to pay the amount to the company have not been proved to be false even though doubts have been thrown by indicating that the agreement has been signed by two partners, one on behalf of the firm and the other on behalf of the company and the amount has been paid through the accounts of the partners. It is in this background that the Appellate Tribunal found in the quantum appeal that the payment should be regarded as an indirect payment to the partners attracting disallowance under Section 40(b). On a narration of the above facts it was clear that there was no furnishing of any inaccurate particulars of income and the point at issue was only an inference that could be drawn on the disputed facts as to whether the payment could betaken to be to that of an independent entity, viz., the company or an indirect payment to the partners of the assessee-firm. Moreover, these observations had been disputed by the assessee throughout and had been taken up to the High Court on a reference. It has been held by the Calcutta High Court in the case of Burmah-Shell Oil Storage &Distributing Co. of India Ltd. v. ITO [1978] 112ITR 592 that there could be no concealment in a case where on admitted facts the assessee disputes the liability to tax on legal contentions. It has been held in that case that the Explanation to Section 271(1)(c) could not also apply because when legal contentions are bona fide raised whether ultimately accepted or rejected will not generally be an act of fraud or gross or wilful negligence.
8. Yet, since the application of the Explanation has been specifically referred to by the Members, the second question requires to be considered. The learned Accountant Member proceeded to apply the Explanation l(A)as if a finding in the penalty order that the assessee was not able to furnish evidence to support the claim for payment of commission attracted that Explanation. The Explanations 1(A) and (B) state -
Explanation 1: Where in respect of any facts material to the computation of the total income of any person under this Act,-
(A) such person fails to offer an explanation or offers an explanation which is found by the Assessing Officer or the Deputy Commissioner (Appeals) or the Commissioner (Appeals) to be false, or (B) such person offers an explanation which he is not able to substantiate and fails to prove that such explanation is bona fide and that all the facts relating to the same and material to the computation of his total income have been disclosed by him, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of Clause (c) of this sub-section, be deemed or represent the income in respect of which particulars have been concealed.
Clause (A) refers specifically to the finding by the Assessing Officer or the CIT (Appeals) and not to a finding in the penalty proceedings. In the present case, in the assessment order, and in the appellate orders thereon, there is no finding that either the company was sham or that the assessee had not paid out the money. It is on the admitted position that the amount had been actually paid that the question whether it should be considered to have been paid to the company or to the partners attracting the provisions of Section 40(6) was considered. Even though the Income-tax Officer had mentioned that the payment may not be considered as genuine, his finding had been replaced by the finding of the CIT(Appeals) and the Tribunal that there was a payment which, however, was disallowable under Section 40(b) of the IT Act. Infact, the penalty order itself is based only on the finding of the Tribunal and that that finding does not attract the provisions of Explanation (1A) to Section 271(1)(c).
9. The learned Judicial Member proceeded on the basis as if this very modification of the finding by the appellate authority cuts at the jurisdiction of the Income-tax Officer since it had not emanated from the satisfaction of the Income-tax Officer. The learned Accountant Member, however, pointed out that the decision of the Calcutta High Court in the case of Ananda Bazar Patrika (P.) Ltd. {supra) referred only to additions and enhancements made to the assessment on appeal and would not cut at the jurisdiction of the Income-tax Officer. Though this issue has not been referred as a point of difference I may in passing note that the penalty proceedings were initiated by the Income-tax Officer on the basis of the Tribunal's finding by recording his satisfaction with respect to that finding as to whether the assessee had concealed its income, and it cannot be said that the proceedings were not properly initiated. All that was required to be considered is whether having initiated the proceedings validly there was material on record to justify the imposition of penalty. Either on the ground that the assessee had concealed its income or on the ground that the assessee must be deemed to have concealed its income. Hence I have discussed the merits of the appeal on the assumption, agreeing with learned Accountant Member, that the penalty proceedings have been properly initiated.
10.1 am left with the Explanation 1(B) which provides that where the assessee offers an explanation which is yet to be substantiated and fails to prove that such explanation is bona fide, then the amount added or disallowed may be deemed to represent the concealed income. In the present case, the explanation of the assessee was that the commission was paid to the company whose shareholders were also the partners of the assessee firm. There is nothing on record to show that the explanation offered by the assessee was not bona fide. It was only a legal inference whether such payment could be considered to be an indirect payment to the partners attracting the provisions of Section 40(6) of the IT Act. To my mind the provisions of Explanation 1(A) were also not attracted, so as to deem an addition made under Section 40(6) to be the concealed income. In the circumstances I am to conclude that the assessee had neither concealed nor could be deemed to have concealed any income so as to warrant imposition of penalty under Section 271 (1 )(c) of the Act. My answers to the two questions posed are in the negative and in favour of the assessee.
11. In the result, the penalty imposed is cancelled.
12. The matter may now be placed before the Bench which originally heard the case, for passing an order according to the opinion of the majority of the Members who have heard the case including those who first heard it.