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Petitioner: COMMISSIONER OF INCOME-TAX, MADRAS VS Respondent: Mesas JAYASHANKAR TRADERS, JUDGMENT
Court Name: Madras High Court Judge(s): E. Padmanabhan, M. V. Balasubramanian Title:COMMISSIONER OF INCOME-TAX, MADRAS vs Mesas JAYASHANKAR TRADERS,
JUDGMENT
Reported As: 1985 PTD 808 Result: Questions answered in affirmative Judgment JUDGMENT ' PADMANABRAN, J.-The Income-tax Appellate Tribunal has referred the following questions for the opinion of this Court under section 256(2) of the Income-tax Act, 1961 : "(1) Whether, on the facts and in the circumstances of the case, and having regard to the Explanation under section 271(1) (c) of the Income-tax Act, 1961, the Appellate Tribunal was right in cancelling the penalty levied for the assessment year 1965-66? (2) Whether, on the facts and in the circumstances of the case, and having regard to the Explanation under section 271 (1) (c) of the Income-tax Act, 1961, the Appellate Tribunal was right in cancelling the penalty levied for the assessment year 1966-67? (3) Whether, on the facts and in the circumstances of the case, and having regard to the Explanation to section 271(1) (c) of the Income-tax Act, 1961, the Appellate Tribunal was right in cancelling the penalty levied for the assessment year 1968-69 ?" ' The assessm ent years covered by the three tax cases are 1965-66, 1966-67 and 1968-69. The assessee, Messrs Jayashankar Traders, is a partnership firm carrying on business in machinery, stores, looms, etc. On 19-10-1963 an agreement was entered into between Messrs Ranee Mills and one S. R. M. S. Narayanan Chettiar. Under the said agreement, certain properties including some machinery and 312 looms were to be sold by Ranee Mils to Narayanan Chettiar's nominee or nominees, for a sum of Rs, 12,01,000. On 16-11-1963 the said Narayanan Chettiar requested Messrs Ranee Mills to sell some of the machineries set out in the list attached to the letter to the assessee or its nominee or nominees, for a sum of Rs, 4,55,000. 312 looms are admittedly included in the said list. As a result of this requisition by Narayanan Chettiar Messrs Ranee Mills sold the looms to the
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assessee. However, delivery of the property sold was taken on behalf of the assessee by Narayanan Chettiar himself. While so, the assessee filed returns for the years 1965-66 disclosing a loss of Rs, 19,884. For the year 1966-67, the assessee returned an income of Rs, 27,870 and for the year 1968-69 a sum of Rs, 22,960. The I. T. 0. Held that the assessee had sold certain looms and omitted to account for the profits derived by the sale of looms. The I. T. 0., therefore, included a sum of Rs, 1,30,814, Rs, 49,589 and Rs, 27,575 as admitted profits derived by the sale of looms for the assessment years 1965-66, 1966-67 and 1968-69. Accordingly, he determined the total income for the assessment years 1965-66 at Rt. 1,36,814, for the assessment year 196S-67 at Rs 27.869 and for the assessment year 1968-69 at Rs, 75,550. The Income-tax Officer also initiated penalty proceedings against the assessee for the three assessment years on the ground that he had concealed the income. At the instance of the assessee the appellate authority reduced the income for the assessment years 1965-66 and 1966-67 to Rs, 1,24,250 and Rs, 25,091 respectively. As the matter fell under the proviso to section 271 (I) of the Income-tax Act, 1961, the I. T. 0. Referred the case to the Inspecting Assistant Commissioner. 2. Before the Inspecting Assistant Commissioner the assessee contended that it had not sold any looms to third parties, that it had acted only as an intermediary and the looms were sold by Ranee Mills to various parties nominated by the assessee. The assessee also contended that the moment the I. T. 0. Pointed out that the profits derived by the assessee on the sale of looms should be included in the returns, it filed a revised return on 30-5-1970 disclosing an income of Rs, 87,980 for the assessm ent year 1965-66. Consequently, in the submission of the assessee, there was no concealment of income. Yet another contention that was urged by the assessee before the Inspecting Assistant Commissioner was that even assuming that it had become the owner of the looms in question and had sold them it was under the bona fide impression that the profits arising from the sale of the looms could be assessed only when all the looms had been sold. In the circumstances, it could not be said that the assessee had concealed any income. The Inspecting Assistant Commissioner did not accept the contentions urged by the assessee. By his orders, dated 26-10-1972, 19-2-1973 and 12-2-1974, he levied a penalty of Rs, 15,000, Rs, 2,464 and Rs, 52,590 for the assessm ent years 1965-66, 1966-67 and 1968-69 under section 271 (1) (c) of the Act. The assessee then carried the matter in appeal to the Income-tax Appellate Tribunal. The Tribunal by its order, dated 30-8-1975 set aside the orders passed by the Inspecting Assistant Commissioner and cancelled the levy of penalties. The Tribunal found that the assessee was under the bona fide impression that it had not necome owner of the looms in question and that it was only an intermediary and that it had to account for the profit by the sale of looms as an intermediary only when all the looms were sold. In this view, the Tribunal came to the conclusion that the assessee could not be said to have concealed income and thst no levy of penalty could be made against the assessee It is in these circumstances the questions of law already set forth have been referred for our opinion by the Income-tax Appellate Tribunal at the instance of the Revenue. 3. Mrs. Nalini Chidambaram, the learned Junior Standing Counsel, raised the following contentions. The assessee had admitted the non-disclosure of the profits derived from the sale of the looms by tiling a revised return on 30-5-1970 disclosing the said income for the assessment year 1966-67. That would itself show that the assessee had concealed the income. Further, there is no basis at all for the stand of the assessee that it had acted only as an intermediary in the sale of the looms. Messrs Ranee Mills had entered into an agreement with Narayanan Chettiar for the sale of looms and certain machinery to his nominee or nominees. Pursuant to the said agreement, Narayanan Chettiar had called upon Ranee Mills to sell the looms to the assessee or its nominee or nominees.
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It is admitted that Narayanan Chettiar had taken delivery of the looms from Messrs Ranee Mills. Consequently, there is clear evidence, according the learned Junior Standing Counsel, that the assessee was not acting as an intermediary only. The learned Junior Standing Counsel further argued that the plea of the assessee that it was under the bona fide impression that the profits on the sale of the looms need be accounted for only when all the looms had been sold could not be sustained in view of the pronouncement of the Supreme Court on the question. The learned Junior Standing Counsel also laid stress upon the fact that since the case fell within the explanation to section 271 (1) (c) of the Act, the burden of proof was on the assessee to show that it had not concealed the income deliberately or fraudulently. 4. Mr. K. Srinivasan, the learned counsel for the assessee, urged that the finding given in an assessm ent proceeding could not automatically be adopted as a finding to levy a penalty in the penalty proceedings. In the penalty proceedings the taxing authority is bound to consider the matter afresh in the light of the materials available before it. The mere falsity of an explanation given by an assessee will be insufficient to sustain an order of penalty unless there is, in addition, cogent materials or evidence from which the necessary conclusion attracting penalty could be drawn. Mr. Srinivasan, emphasised upon the fact tbat the Tribunal had factually found in this case that the assessee was under the impression that it had not become the owner of all the looms in question, that it was only an intermediary and that it had to account for the profit obtained by it by the sale of such looms as an intermediary only when all the looms had been sold. In the circumstances, the submission of Mr. Srinivasan was that, when on taking into consideration the broad features of a given case, the Tribunal had come to a conclusion that no penalty was exigible,-no question of law could be said to arise out of the Tribunal's order and therefore, the questions of law referred for our opinion had to be answered only in the affirmative. The learned counsel also pleaded that no question of concealment at all would arise in this case as even before the I. T. 0. Had initiated any proceeding, the assessee had filed a revised return disclosing the profits derived from the sale of the looms. 5. No doubt, there is a solid obligation on the part of the assessee to file a correct return. The assessee is not expected to act in a careless and light-hearted manner in filing his return. Deliberate and concious lapses on the part of the assessee in filing a correct return in the first instance have to be viewed seriously. However the question whether an assessee has, in a given case, bona fide discharged his obligations in filing his returns, as provided for under the Act, has to be considered by taking into account all the relevant circumstances and events that happened between the filing th original return and completion of the assessment. If the cumulative effect A of All the facts and circumstances of the case between the filing of the original return and the completion of the assessm ent disclose that the failure to return the correct income was not due to any gross or wilful negligence on th part of the assessee, then the latter cannot be penalised, unless the revenu is able to establish by evidence that there has been a concealment of income. These principles can be spelt out from the following decisions of Courts. 6. In C. I. T. v. Ramdas Phar Macy (1) the assessee omitted to disclose a sum of Rs, 28,618 in the original return. However, before the assessment was completed the assessee filed a revised return making a true disclosure of the said income also. The I. T. 0. Initiated penalty proceedings under section 28 (1)(c) of the Income-tax Act, 1922, for alleged concealment of income and furnishing false particulars. Before this Court on a reference under section 66(1) of the 1922 Act it was contended on behalf of the assessee that penalty could be levied only if the I. T. 0. Had acted upon the false return and completed the assessment and that inasmuch as a fresh return had been filed by the assessee, the penalty proceedings could not be invoked under section
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28(1) (c) of the 1922 Act with reference to the omission or concealment in the original return. The assesseb in this context relied upon the decision of the Supreme Court in C. I. T. v. Raman Chettiar (2). On the other Land, an equally extreme contention was raised on behalf of the revenue that the filing of a second return was of no consequence at all while considering the liability of the assessee under section 28(1)(c) of the 1922 Act. Ramanujam, J. Speaking for Bench observed as follows : "We are not in a position to accept the view of the learned counsel for the assessee that the decision of the Supreme Court in Commissioner of Income-tax v. Raman Chettiar (1965) 55 1 T R 630 : A 1 R 1965 SC 1031 had changed the entire legal position enunciated in the decisions set out above that the revised return should be voluntary to avoid penalty under section 28(1) (c) and that the filing of a revised return under section 22 (3) will not expiate the contumacious conduct, if any, on the part of the assessee in not having disclosed a true income in the original return. We are, at the same time, not willing to accept the contention put forward on behalf of the revenue that the filing of the second return is of no consequence at all, while considering the liability of the assessee under section 28 (1)(c) of the Act. As expressed by this Court in Sivagaminatha Moopanar & Sons V. Commissioner of Income-tax (1964) 52 I T R 591, it is not possible to construe the original return alone in isolation without reference to the {{FOOT NOTE}} (1) (1970) 77! T R 276 (Mad.) (2) (1965) 55 I T R 630 : Al R 1965 SC 1031 {{FOOT NOTE}} assessee's conduct subsequent to the filing of the original return. We are of the view that all the facts and circumstances commencing with the filing of the original return and ending with the assessm ent may be taken as relevant for considering the assestee's liability for penalty under section 28(1) (c)." ' The above decision was followed by the Gujarat High Court in D. V. Patel & Co. v. C. I. T. (1). In that case, the assessee filed an original return on 29th June, 1964. Thereafter, it filed a revised return by adding certain admissible expenses on 13th September, 1965. The Income-tax Officer passed an order of assessm ent on 24th July, 1968. In this situation, the question arose whether the assessee was liable for penalty, The learned Judges of the Gujarat High Court, after extracting the relevant passage from the judgment of this Court in C. I. T. v. Ramdas Pharmacy (2), observed as follows :- "In that state of evidence, therefore. It is difficult for us to appreciate how the Tribunal has brushed aside the filing of revised return as of no consequence. It is no doubt true, as held by the Madras High Court in C. I. T. v. Ramdas Pharmacy (1970) 77 I T R 276, that it was not possible to construe the original return in isolation without reference to the assessee's conduct subsequent to the filing of the original return and that all the facts and circumstances commencing with the filing of the original return and ending with the assessment may be taken as relevant for considering the assessee's liability for penalty under section 28(1) (c).........We think it appropriate to decline to answer the question on the ground that the Tribunal has failed to consider and decide the question whether the revised.Return was filed by the assessee of his own volition before the concealment was detected in the course of the proceedings and what was his entire conduct from the filing of his orginal return to the completion of the assessment proceedings including the filing of the revised return, and it also failed to determine on preponderance of probabilities that the burden cast on the assessee is discharged or not. 7. In C. I. T. v. J. K. A. Subramania Chettiar (3) Ismail, J. (as he then was) sitting with Sethuraman, J, had to consider the question of penalty. There, for the assessment year 1963-64 the assessee filed a return of income on March 16, 1964 disclosing a total income of Rs, 27,566. This included a business income of Rs, 21,655. Thereafter, the assessee filed a second return of income for the same year in which he disclosed a total income of Rs, 75,044 and that included a business income
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of Rs, 69,143. He also filed a petition under section 271 (4-A) of the Act. The assessment was completed on 31st December, 1968, Thereaftir, the I. T. 0. Initiated proceedings under section 271(1) (c) of the Act. The Tribunal cancelled the penalty on the ground that the assessee had filed a revised return even before he had started investigation into the bogus nature of the Hundi transactions in the course of the earlier assessment year and consequently there was no concealment of income.. The Tribunal relied upon the decision in C. I. T. v. Ramdas Pharmacy (4) Ismail J. (as he then was) speaking for the Bench held that the assessee had intentionally and deliberately concealed income in the first return as well as in the second return and that consequently he could not escape the liability to penalty under section 271(1)(c) of the Act. The learned Judge took the {{FOOT NOTE}} (1) (1975) 100 I T R 524 . (2) (1970) 77 I T R 276 (3) (1977) 110 IT R 602: 1978 Tax L R 380 (Mad.) (4) (1970) 77 I T R 276 (Mad.) {{FOOT NOTE}} view that the assessee furnished a second return even before an investigation was started by the Income-tax Department could not be of assistance to him as the case did not fall within the scope of section 135 of the Act. The learned Judge further held that the question whether the assessee furnished the particulars before any detection was made by the department or not might be relevant only when the Commissioner was considering the question as to whether the minimum penalty imposable under section 271 should be waived or reduced on an application by the assessee under section 271 (4-A) of the Act. Notwithstanding these observations, we are of the opinion that the above decision does not run counter to the ratio in C. I. T. v. Ramdas Pharmacy. After extracting a passage from page .89 of that judgment, which we have already extracted, the learned Judge observed as follows :- "We are of the opinion that the above observation has to be understood against the background of the facts of that case. As a matter of fact, all the facts, and circumstances commencing with the filing of the original return and ending with the assessment may be taken as relevant for considering whether the assessee had concealed particulars of income or furnished inaccurate particulars of income, as contemplated by section 28(1) (c) of the 1922 Act and only when there is a finding that the assessee had concealed particulars of income or deliberately furnished inaccurate particulars of income in the original return, the question as to his liability to penalty will arise." 8. The decision of this Court in C. I. T. v. Ramdas Pharmacy has been followed by a Bench of the Delhi High Court in a recent case in Qammar-uddin & Sons V. C. I. T. (1). The assessee firm filed a return without enclosing the profit and loss account and the same was filed subsequently. On a scrutiny of the profit and loss account, the I. T. 0. Found the profits to be Rs, 83,790 as against Rs, 35,000 which 'had been returned. Accordingly, the assessee filed a revised return at the instance of the 1. T. 0. Showing an income of Rs, 83 780. The assessment was completed accordingly. Thereafter, penalty proceedings were initiated resulting in an imposition of penalty under section 271 (1) (c) of the Act. It was contended on behalf of the assessee that though the figure of Rs, 35,000 returned by the assessee in the first instance was an incorrect figure and no explanation could be offered for the same, in view of the fact that the assessee had filed a revised return before the assessment was completed no penalty could be levied, Ranganathan, J. In his judgment observed as follows : "We should not be understood as minimising the importance of filing a correct return. The obligation of filing a return should be discharged scrupulously and sincerely. But at the same time before an assessee is mulcted with penalty, all the circumstances and developmerits till the assessm ent is completed should be taken into account and if the collective effect of the situation
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is to show that the failure to return the correct income was not on account of gross or wilful neglect, the assessee should not be penalised." ' Khanna, J. By his separate judgment agreed that the assessee was not liable to any penalty. 9. In this case, the Tribunal has found that the assessee was under the impression that it had not become the owner of all the looms in question, that it was only an intermediary and that it had to account for the profits {{FOOT NOTE}} ,(1) (1981) 129 I T R 703 {{FOOT NOTE}} obtained by it by the sale of such looms as an intermediary when all the looms had been sold and that consequently they were unable to hold that the assessee concealed income derived by it by the sale of such looms in the returns filed by it for the three assessment years under consideration. In this context, the Tribunal also took into account the fact that even before the Sales Tax Officer, Cannanore, who was dealing with assessment years 1964-65 and 1965-66, the assessee had taken the stand that it hid not sold the looms, though the contention was not accepted by the assessing officer and on appeal by the assessee the Appellate Assistant Commissioner had directed the Sales Tax Officer to consider the matter de novo. The Tribunal had also taken note of the fact that the assessee had filed a revised return when the I. T. 0. Pointed out that the profits derived by the assessee on the sale of the looms should be included. When the entire facts and circumstances of the case are taken into account in the light of the findings of fact rendered by the Tribunal, we are of the view that the Tribunal approached the question from the correct standpoint and rightly found that the assessee was not liable to penalty under section 271(1) (c) of the Act. It will be useful to refer in this connection to the decision of the Patna High Court in C. I. T. v. P. A. Patel (1) in which the ratio is stated in the following terms : "The finding that the failure to disclose the entire income or to furnish full particulars of the income was due to a bona fide belief of the assessee not attributable to any gross or wilful negligence, that the income omitted to be included was not his income which had to be included in his return precludes a finding that he had deliberately concealed that income or furnished inaccurate particulars of his income as a result of fraud or gross or wilful neglect." 10. Further, it is now settled law that proceedings under section 271(1) (c) of the Act are penal in character. The gravanmen of the offence is that the assessee has consciously concealed the particulars of his income or deliberately furnished inaccurate particulars. The burden of proof of the charge of concealment is on the revenue, before penalty can be imposed the entirety of circumstinces must reasonably point to the conclusion that the disputed amount represented income and that the assessee had consciously concealed the particulars of his income or had deliberately furnished, inaccurate particulars. The mere falsity af explanation given by the assessee without cogent and positive evidence on the side of the revenue would not render the assessee liable to penalty, Grover, J. In C. I. T. v. Anwar All (2) with reference to section 28(1) (c) of the 1922 Act has observed as follows : "But one of the principal objects in enacting section 28 is to provide a deterrent against recurrence of default on the part of the assessee. The section is penal in the sense that its consequences are intended to be an effective deterrent which will put a stop to practices which the legislature considers to be against the public interest. It is significant thatinC. A. Abraham's case (1961)41 1 TR 425 :AIR-1961 SC609 this Court was not called upon to determine whether penalty proceedings were penal or of quasi-penal nature and the observations made with regard to penalty being an additional tax were made in a different context and for a different purpose. It appears to have been taken as settled by now in the sales tax law that an order imposing penalty is the result of quasi- criminal proceedings (Hindustan Steel Ltd. v.
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{{FOOT NOTE}} (1) (1981) 127 I T R 390 (2) (1970) 761 T R 696 : A! R 1970 SC 1782 {{FOOT NOTE}} ' State of Orissa (1970) 25 ST C 211 AIR 1970 SC 253. In England also it has never been doubted that such proceedings are penal in character : Fattoriti (Thomas) (Lancashire) Ltd. v. Inland Revenue Commissioners (1942) 1 All E R 619. As has been rightly observed by Chagla, C. J. In Commissioner of Income-tax v. Gokuldas Harivallabhadas (1958) 34 1 T R 98 : AIR 1959 Born 96 the gist of the offence under section 28(1)(c) is that the assessee has concealed the paiticulars of his income or deliberately furnished inaccurate particulars of such income and, therefore, the department must establish that the receipt of the amount in dispute constitutes income of the assessee. If there is no evidence on the record except the explanation given by the assessee, which explanation has been found to be false, it does not follow that the receipt constitutes his taxable income." 11. Vaidialingam, J. Speaking for the Court in C. I. T. v. Khoday Eswarsa & Sons (1) observed thus (para. 19) : "Penalty proceedings being penal in character, the department must establish that the receipt of the account in dispute constitutes income of the assessee. Apart from the falsity of the explanation given by the assessee, the department must have before it before levying penalty cogent material or evidence from which it could be inferred that the assessee has consciously concealed the particulars of his income or had deliberately furnished inaccurate particulars in respect of the same and that the disputed amount is a revenue receipt. No, doubt, the original assessment proceedings for computing the tax may be a good item of evidence in the penalty proceedings;…
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