Patna High Court
Commissioner Of Income-Tax vs Standard Mercantile Co. on 9 July, 1986
Equivalent citations: [1987]166ITR39(PATNA)
JUDGMENT Uday Sinha, J.
1. The question referred to us in these references under Section 256(1) of the Income-tax Act, 1961, is :
"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the provisions of Section 271(1)(c) read with the Explanation to the Income-tax Act, 1961, were not attracted in this case as the charge of concealment was not established by the Department notwithstanding the fact that the existence of clandestine business was admitted ?"
2. In these references, we are concerned with the assessment years 1963-64 and 1965-66. Proceedings under Section 271(1)(c) of the Act having been initiated, the Appellate Assistant Commissioner imposed a penalty of Rs. 1,14,425 for concealment of income in the assessment year 1963-64 and Rs. 2,50,000 for the assessment year 1965-66. The Appellate Tribunal, on appeal, set aside the order of the Appellate Assistant Commissioner holding that the charge of concealment against the assessee had not been established. Hence, the present references to us at the instance of the Revenue.
3. The assessee is an unregistered firm. It derived during the assessment years income from business in iron, steel sales, pig iron goods, iron pipe ridges, aluminium goods, sand and tank sales. It filed a return for the assessment year 1963-64 showing a total income of Rs. 2,53,703 (This sum included a sum of Rs. 1,00,000). The business premises of the assessee had been earlier raided by the officers of the Sales Tax Department. The officers seized the documents, books and records, etc., which showed that clandestine business was being carried on by the assessee. From the documents seized, the sales tax authorities came to the conclusion that the assessee had been carrying on clandestine business. Subsequently, when the return was filed under the Income-tax Act, the assessee declared that the returned sum of Rs. 2,53,703 (during the assessment year 1963-64) and the sum of Rs. 1,56,301 (during the assessment year 1965-66) included sums of Rs. 1,00,000 which constituted the clandestine business income of the assessee. Thus, the assessee himself explicitly conceded indulging in clandestine business. It will be a moot point to be considered whether income can be said to have been concealed, if the assessee confesses having indulged in clandestine business. It may be mentioned that the assessee, for the assessment years in question, did not produce the books of account which had been seized by the Sales Tax Department and later returned to Basudeo Agrawal, the managing partner. The assessee got them back from the sales tax authorities. The explanation doled out by the assessee for the non-production of the books of account was that after Basudeo Agrawal, managing partner of the firm, received the books, he was bringing them in a taxi and that they were stolen from the taxi in transit from' the Sales Tax Department to his residence. This plea of the assessee was the subject-matter of consideration by this court in CIT v. Standard Mercantile Co. [1986] 157 ITR 139 (Tax Cases Nos. 57 to 60 of 1976 disposed of on April 1, 1985), which related to the cancellation of registration of the partnership firm. The plea of the assessee fell flat on the Revenue. The finding of fact recorded by the Tribunal in this behalf was against the assessee, but the order of cancellation of registration was set aside by the Tribunal for the same reasons. The finding of fact in this behalf in the assessment proceeding as well went against the assessee. On the basis of the assessment, discrepancy of more than 20% having been found between the assessed income and the returned income, proceeding for levy of penalty under Section 271(1)(c) of the Income-tax Act was initiated. The penalty imposed upon the assessee has been cancelled and set aside by the Tribunal. Hence, the present references.
4. The order of the Tribunal is annexure-C to the statement of the case. The matters relating to the two assessment years 1963-64 and 1965-66 with which we are concerned in these references have been dealt with by the Tribunal at paragraphs Nos. 6 to 8 and 14 to 17.
5. The question is whether the Explanation to Section 271(1)(c) was attracted to the facts of this case. The assessee had returned an income of Rs. 2,53,703. The assessment was made at Rs. 3,87,103. On the face of these, therefore, the Explanation to Section 271(1)(c) would obviously be attracted as the returned income was less than 80% of the assessed sum. It appears, however, that, on appeal against the order of the Income-tax Officer, the assessed sum was reduced by Rs. 65,729. Besides this sum, depreciation was also allowed. On this basis, it was submitted before the Tribunal that the assessee having declared income to the tune of rupees one lakh from clandestine business and Rs. 65,729 (leaving aside reduction on account of depreciation) having been struck down, the discrepancy between the returned and the assessed income would be much less than 20%. The sum of rupees one lakh being the income from clandestine business had been declared by the assessee by estimate. No books of account of the clandestine business was produced. The Income-tax Officer did not accept the declaration of income of one lakh from clandestine business by estimate but increased it to Rs. 1,47,000. The Tribunal knocked off the addition of Rs. 47,000. The assessee had claimed that the sum of rupees one lakh included profit on notional sale also. This claim was not accepted by the Tribunal which added a sum of Rs. 16,000 as profit on notional sales. The Revenue had also added a sum of Rs. 33,193 as estimated profits. The stand of the assessee before the Tribunal as well as before us was that these were additions by estimate and would, therefore, not attract the wrath of penal proceedings. On those facts, the Tribunal held that the charge of concealment had not been established. In its view, since the additions of Rs. 16,000 and Rs. 33,193 had been effected on estimate, the charge of concealment could not be established. The Explanation to Section 271(1)(c), therefore, would not touch the question of levy of penalty.
6. Before the Tribunal, it had been urged on behalf of the assessee that there was nothing to indicate that the assessee had not made a bona fide estimate of its profits from clandestine business. The plea of bona fides lies ill in the mouth of the assessee. The existence of the books of account having been firmly established and the failure of the assessee to produce them after having received them from the sales tax authorities clearly shows the mala fides of the assessee. If the existence of the books of account was in doubt, the failure to produce books of account may not have established the assessee's mala fides. The conduct of the assessee in not producing the books of account in respect of the clandestine business clearly showed his intention to conceal the true income. The submission urged on behalf of the Revenue that there was concealment of income appears to be plausible. But that, however, does not improve matters, as in the matter of levy in terms of Section 271(1)(c) of the Income-tax Act, 1961, two questions have to be answered. The first is the fact of concealment and the other is the quantum of concealment. Even if it is held in the present case that there had been concealment by the assessee, that will answer only the first question. The second question would still remain unanswered as to what should be the penalty to be levied. The penalty to be levied has a certain ratio with the extent of concealment. This will have to be ascertained with the aid of the Explanation to Section 271(1)(c) of the Act. The Explanation would, therefore, be attracted.
7. Coming to the question of quantum of penalty, I find that two items were taken as having been concealed by the assessee. The first was an item of Rs. 16,000 and the other was in respect of Rs. 33,193. These two sums had been added to the income of the assessee in the assessment matter. At the time when the Tribunal was in seisin of the revision in the penalty matter, it was found that the Tribunal had set aside the order adding Rs. 16,000 as income of the assessee. The order of the Tribunal in the quantum assessment is not on the record of these references, but that order was in the High Court in CIT v. Standard Mercantile Co. [1985] 153 ITR 105 (Pat) (Taxation Cases Nos. 102 to 104 of 1975), which had been disposed of by this court on July 12, 1984. A perusal of the order of the Tribunal in the quantum assessment matter at paragraph 10 shows that the Tribunal held as follows :
"We hold that we have considered this aspect also while upholding the addition in the trading account and in view of that there is no justification for making a separate addition of Rs. 16,000 by way of notional sales profit."
8. In the face of the above finding, the sum of Rs. 16,000 cannot be the subject-matter of levy of penalty. The Tribunal in clear terms rejected the stand of the Revenue that this sum of Rs. 16,000 was not part of the declared income of Rs. 1,00,000 from clandestine business. Since the said sum of Rs. 16,000 has not been held to be the income of the assessee during the assessment year 1963-64, that cannot be the subject-matter of penalty. To that extent, it must be held that the Tribunal was justified in setting aside the order levying penalty on the basis of addition of Rs. 16,000.
9. The position in regard to the other sum of Rs. 33,193 is substantially different. This addition was upheld by the Tribunal in the quantum assessment. At paragraph 17 of the order of the Tribunal in the quantum assessment matter, the Tribunal held as follows :
" This, therefore, gives us an indication about the extent of profit made by the assessee and we, therefore, uphold the estimate of profit at 8% and confirm the addition of Rs. 33,193."
10. This addition having been upheld, the first question that arises is whether the Explanation to Section 271(1)(c) has any bearing in the matter of levy of penalty. The assessee had filed a return of Rs. 2,53,703. The assessed sum was originally Rs. 3,87,103. Out of the assessed sum, Rs. 47,510 and Rs. 16,000 were knocked off in the final assessment. The assessed sum thus finally came to Rs. 3,23,593. The difference between the assessed sum and the returned sum thus was less than 20%. In that situation, the Explanation was not attracted. The Explanation not having been available to the Revenue, the question is whether it had been proved by the Department that the assessee had concealed income.
11. The Explanation to Section 271(1)(c) is only a rule of evidence. That is not a substantive law. Concealment may be established even if the difference between the assessed sum and the returned sum is less than 20%. In a given situation, if the difference between the assessed sum and the returned sum is less than 20%, it is possible to conceive of the Revenue having established that the assessee had concealed his true income. In such a situation, even if the Explanation has no application, penalty may be levied in accordance with the law prevailing prior to the introduction of the Explanation. In the instant case, the Explanation has to be put aside.
12. Let us then consider if the Revenue has succeeded in establishing that the assessee had concealed income. In this case, it is found that the assessee had done clandestine business. That is his own confession. So he is a self-confessed unreliable person. The assessee has, however, acted in a very shrewd manner by declaring that the income from clandestine business was of the extent of rupees one lakh in the assessment year 1963-64. Learned counsel for the assessee contended that the assessee may have been a dishonest person before the sales tax authorities, but he had redeemed himself by declaring in the return rupees one lakh as income from clandestine business. This submission could have been appreciated, if the assessee intended to make a clean breast of the whole affair. There was no intention of making a clean breast. This is evident from the fact that the books seized by the Sales Tax Department were not produced before the Income-tax Authorities even when called upon to do so. He took refuge under a false plea that they had been stolen in transit from sales tax office to his residence. The assessee's statement cannot be taken at its face value. In that background, the addition of Rs. 33,000 odd as income from regular business, though on estimate, must be held to be concealed income. In the background of the entire facts, I have not the least doubt that the assessee would be liable to pay penalty in respect of the addition of Rs. 33,193. That was the concealed income of the assessee.
13. Learned counsel for the assessee contended that the income from regular business having been enhanced on estimate, there was no case for levy of penalty. I regret I am unable to find substance in this submission. I am unable to concede as a broad proposition that whenever assessment is done on estimate, penalty can never be imposed for concealment of income. There may be cases where penalty may not be levied, if income assessable to tax had been raised on estimate. But the bald and wide proposition enunciated on behalf of the assessee is certainly not acceptable to me. I am in complete agreement with the law laid down by the Division Bench decision of the Madras High Court in A. K. Bashu Sahib v. CIT [1977] 108 ITR 736, where their Lordships 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 underestimate, an inference of concealment of income could certainly be drawn. The facts in the present case clearly show that the assessee had deliberately underestimated his income in the two years under appeal."
14. In the present case as well considering the history of the assessee, I am of the view that there had been deliberate concealment of income by the assessee. The Tribunal, in my view, was, therefore, not correct in setting aside the order of penalty in regard to the year 1963-64 with reference to the sum of Rs. 33,193.
15. We now come to assessment year 1965-66. The addition in this year was to the tune of Rs. 93,919. The sum returned was Rs. 1,56,301. The sum assessed was Rs. 4,64,623. It is not necessary to go into the jugglery of figures. Suffice it to say that Rs. 93,919 was the sum concealed by the assessee. In this behalf, Mr. Rameshwar Prasad, learned counsel for the assessee, submitted that after the disposal of the quantum appeal, the assessment was the subject matter of settlement proceeding and the matter was settled. After settlement, the question of penalty does not arise. These facts have been stated before us on affidavit. In these references, it is not possible for this court to apply itself to new facts stated before us by the assessee. Since facts have been stated before us on affidavit, the only appropriate course would be to remand the question of penalty in respect of assessment year 1965-66 to the Tribunal for ascertaining the final quantum assessment and then to consider the question of levy of penalty We, therefore, refuse to answer the question referred to us in regard to assessment year 1965-66. That matter is remanded to the Tribunal for considering the question of levy of penalty in the background of final quantum assessment.
16. The references are thus answered in favour of the Revenue in respect of assessment year 1963-64 and against the assessee. In respect of assessment year 1965-66, the matter is remanded to the Tribunal for reconsideration. Since the assessee had concealed income during the year 1963-64, the references are answered with costs of Rs. 250 (Rupees two hundred and fifty) payable by the assessee.
17. 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.
Ashwini Kumar Sinha, J.
18. I agree.