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Petitioner: MANSUKHLAL & BROS. VS Respondent: COMMISSIONER OF INCOME-TAX, BOMBAY CITY IIHonorable Justice TAMBER. J. Kolah,R. J. Joshi
1966 P T D 135
1966 P T D 135
[Bombay (India)]
Before Y. S. Tambe and V. S. Desai, JJ
MANSUKHLAL & BROS.
versus
COMMISSIONER OF INCOME‑TAX, BOMBAY CITY II
Income‑tax Reference No. 3 of 1962, decided on 24th February 1965.
Penalty‑Concealment of income‑Maximum penalty‑Method of computation‑"Income as returned", meaning of‑Quantum of concealment, how far material‑Indian Income‑tax Act, 1922, S. 28(1)(c).
The maximum penalty that could be imposed under section 28(1)(c) of the Income‑tax Act, 1922, for concealment of particulars or furnishing inaccurate particulars is one and a half times the amount of income‑tax and super‑tax which would have been avoided if the income as returned by such person had been accepted as the correct income. The words "income as returned by such person" mean income as stated by such person in his return and do not mean income computed or assessed by the Income‑tax Authorities minus the income added on the ground of concealment. The maximum penalty does not depend on the amount of concealed income.
The assessee showed an income of Rs. 45,904. The Income tax Authorities deducted a sum of Rs. 288 as depreciation and added a sum of Rs. 90,000 as income from other sources and a sum of Rs. 24,000 as concealed profits and assessed the total income at Rs. 1,62,135:
Held, that the maximum penalty that could be imposed was one and a half times the amount of tax on the difference between the tax on Rs. 45,904 and the tax on the assessed income of Rs. 1,62,135, even though there was a concealment of Rs. 24,000 only.
[Cases referred to].
STATEMENT OF CASE
By these applications, the assessee requires the Tribunal to refer to the High Court certain questions of law, which are said to arise out of the Tribunal's consolidated order in I. T. As. Nos. 6580, 6606, 6607 and 6608 of 1960‑61. Inasmuch as, in our opinion, a question of law does arise out of the aforesaid order of the Tribunal in I. T. A. No. 6580 only, we hereby draw up a statement of the case and refer it to the High Court of Judicature at Bombay under section 66(1) of the Indiap Income‑tax Act, 1922.
2. The assessee‑firm was dealing in hessian twine, gunny bags, etc., on wholesale basis. In S. Y. 2C03, the Disposal Directorate sold to Laxmichand Govindji, a kariana merchant of Rajkot, 2 lakhs anti‑gas waterproof bags by a delivery order dated May 1947, in the name 'of L. G. Vaidya. The payment of Rs. 1,80,000 for these bags was made by the Bombay firm of Bhivandiwala & Co. on May 16, 1947, on the account of Laxmichand. Half of it, however, was received back by it the next day as from L. G: Vaidya.
3. The assessee under a power of attorney from Laxmichand dated June 12, 1947, sold the above goods from its own godowns during S. Y. 2003 to 2005 and credited the proceeds to the account of Laxmichand. It' is out of these sale proceeds the payment of Rs. 90,000 to Bhiwandiwala & Co., referred to above, was paid. In this account at the end of S. Y. 2005 there Was a credit balance of Rs. 48,373 which was not repaid till S. Y. 2010 and even then it was by cash. On this transaction the assessee showed Rs. 10,000 spread over the three years on the basis of sales in each year as its profit on the basis of a commission of Rs. 5 per 100 units.
4. Laxmichand aforesaid was an assessee who had kept his books of account for the kariana trade he had been carrying on for a long time past. In these books, the above transactions were not recorded. He, however; ‑recorded the above transactions in a separate set of books which had no connecting link with the kariana books. In his return for the S. Y. 2004, as the previous year for the assessment year 1949‑50, he estimated Rs. 1,000 as his own profit from the above transaction. Later on, however, he revised this return declaring Rs. 13,000 as his true profit.
5. On the above facts, the Income‑tax Authorities and the Tribunal held that the transactions only were of the assessee, that there was a profit of Rs. 24,000, Rs. 13,000 and Rs. 12,000 in the three S. Ys. 2003, 2004 and 2005 there from which had accrued to the assessee and which it had concealed from its assessments of the respective assessment years 1948‑49, 1949‑50 and 1950‑51. The Tribunal's finding of concealment in the penalty appeals of these years is based on the above materials and accordingly cannot give rise to any point of law.
6. In the assessment of S. Y. 2003, the previous year for assessment year 1948‑49, in addition to the aforesaid profit of Rs. 24,000, the Income‑tax Officer added also Rs. 90,000, the sum purported to have been paid to Bhiwandiwala & Co. by L. G. Vaidya referred to in paragraph 2 supra as he found that it was only a payment by the assessee out of sources undisclosed. This addition was also upheld by the Tribunal.
7. The final assessment so upheld was Rs. 1,62,135 as against the returned income of Rs. 45,904. The tax sought to be avoided on this difference is Rs. 88,993 and 150 % thereof is Rs. 1,33,489.
8. For the aforesaid year the Income‑tax Officer imposed a penalty of ‑ Rs. 62,000 within the aforesaid maximum exigible under section 28 (1) (c). In appeal, the Appellate Assistant Commissioner reduced it to Rs. 20,000 only writing as follows:
"7. In view of the clear findings of the Bombay. High Court in the case of Gokuldas Harivallabhdas (1958) 34 I T R 98 which have been reaffirmed with greater emphasis by the same High Court in I. T. Reference No. 4 of 1960, Commissioner of Income‑tax v. Shri Prabhakar M. Padia (Unreported) dated 12th April 1960, it is not possible to uphold the finding of the Income‑tax Officer , that this sum of Rs. 90,000 was also to be treated as concealed income for the purposes of imposition of penalty under section 28(1)(c). The Income‑tax Officer has considered this amount also as concealed income and has calculated the quantum of penalty accordingly. If this item is excluded and only the sum of Rs. 24,000 assessable during assessment year 1948‑49 is treated as concealed income, the maximum penalty would come to Rs. 30,000. I find that during the assessment years 1949‑50 and 1950‑51, the Income tax Officer has imposed penalties amounting to equal to the tax evaded. It would, therefore, be fair to sustain a penalty of Rs. 20,000 during assessment year 1948‑49, as against Rs. 62,000 imposed by the Income‑tax Officer."
9. Against the aforesaid reduction the Department appealed to the Tribunal. The Tribunal accepted this appeal and restored the original levy of Rs. 62,000 in paragraph 10 of its order reproduced below:
" . . . . The Income‑tax Officer based his findings of concealment for the assessment year 1948‑49, on two grounds, business profits and unexplained source for Rs. 90,000. We agree with the Appellate Assistant Commissioner on the latter ground that a charge of concealment cannot be sustained. All the same, for this year there is concealment otherwise established of the profits in the above year's return. So long as concealment is thus established, either by one item or more, the quantum requires to be computed under section 28(1)(c) not on the basis of the tax on the items proved to have been concealed, but on the difference between the tax on his income as finally assessed and the tax that would have been avoided if the return had been accepted as true. This is also the decision of the Andhra High Court in the case of Kalidindi Subbaraju Gopalaraju & Co. v. Commissioner of Income‑tax (1955) 28 I T R 162. The Appellate Assistant Commissioner has thus gone wrong on law."
10. From out of the aforesaid facts, the question of law that arises is:
"Whether in computing for purposes of levy of penalty under section 28(1)(c) the amount of income‑tax and super‑tax which would have been avoided if the income as returned had been accepted, such income as returned' includes items of income tax, which, though not actually returned, had been added in the assessment solely on the ground of lack of evidence?"
11. Both the parties agree that all the facts are correctly set out in this statement and that, no material fact has been omitted herein.
R. J. Kolah with Dilip Dwarkadas for the Assessee.
R. J. Joshi and G, N. Joshi for the Commissioner.
JUDGMENT
TAMBE, J.‑This is a reference under section 66(1) of the Indian Income‑tax Act, 1922 (hereinafter called "the Act") at the instance of the assessee. The question that falls for consideration is the construction of section 28 (1)(c) of the Act. We are here concerned with the assessment year 1948‑49, the relevant previous year being S. Y. 2003.
The assessee is a firm dealing in hessian twine. gunny bags, etc., on wholesale basis. In S. Y. 2003, the Disposal Directorate sold to Laxmichand Govindji, a kariana merchant of Rajkot, 2 lakhs anti‑gas water‑proof bags under a delivery order dated May 1947, in the name of L. G. Vaidya (Laxmichand Govindji). The payment of Rs. 1,18,000 for these bags was made by a firm known as Bhivandiwala & Co. on 16th May 1947. The payment was made by the said firm on behalf of Laxmichand. The next day of payment, Bhivandiwala & Co. received a,, sum of Rs. 90,000 from Laxmichand (L. G. Vaidya). The assessee under the power of attorney from the said Laxmichand of date 12th June 1947, sold the aforesaid bags from its (assessee's) own godown during the S. Ys. 2003 to 2005, the corresponding assessment years being 1948‑49, 1949‑50 and 1950‑51. The sale proceeds were credited to the account of Laxmichand. Out of these sale .proceeds, the assessee paid the remaining balance of Rs. 90,000 to Bhivandiwala and Co. in due course of time. At the end of S. Y. 2005, the credit balance of the sale proceeds amounting to Rs. 53,785 was in the books of account of the assessee. The said balance was not repaid by the assessee to Laxmichand till the year 2010 and, even at that time, it is said that the said amount was paid in cash. In respect of these transactions, the assessee showed a profit of Rs. 10,000 for the entire lot of 2 lakhs of bags. The profits were shown as commission at Rs. 5 per 100 units. The said amount of profits, Rs. 10,000, was spread over the relevant three previous years for the assessment years 1948‑49, 1949‑50 and 1950‑51.
Now the books of account of Laxmichand did not disclose any transaction in respect of the sales of these gunny bags nor were there any entries relating thereto. In his return for the assessment year 1949‑50, the relevant previous year being S. Y. 2004, Laxmichand disclosed an income of Rs. 1,000 as estimated profits from this business of sale of bags besides his profits in the kariana business. The. Income‑tax Officer started inquiries. Laxmichand later submitted a revised return declaring Rs. 13,000 as true profits from this business.
In the course of the said inquiries, the Income‑tax Officer also commenced inquiry as regards the balance of Rs. 53,785 in the books of account of the assessee of S. Y. 2005. He examined various witnesses including Laxmichand and Maneklal of Bhivandiwala & Co. and as a result of the inquiries, he came to the conclusion that the transactions relating to gunny bags was really the business of the assessee and not of Laxmichand. He further found that from the said business, the assessee had earned profits amounting to Rs. 24,000 in S. Y. 2003, Rs. 13,000 in S. Y. 2004 and Rs. 12,000 in S. Y. 2005, which the assessee had suppressed in filing its return for the corresponding assessment years 1948‑49, 1949‑50 and 1950‑51. The Income‑tax Officer further found that the amount of Rs. 90,000 said to have been paid by Laxmichand to Bhivandiwala & Co. on 17th May 1947, was in fact paid not by Laxmichand but by the assessee itself from, a source not disclosed by the assessee to the department. He accordingly included this amount. of Rs. 90,000 also in the total income of the assessee for the assessment year 1948‑49. The Income‑tax Officer also issued a notice under sub‑section (3) of section 28 to the assessee, calling upon it to show cause why a penalty should not be imposed upon it for concealing the income in the said three assessment years.
We are here concerned only with the imposition of penalty in the first assessment year 1948‑49. It would, therefore, be sufficient if facts relating to the imposition of penalty for this year are mentioned. Now the income returned by the assessee in this assessment year was Rs. 45,904. The total income assessed by, the Income‑tax Officer amounted to Rs. 1,62,135. The details of the computation of the said income have not been given, in the statement of the case. But it is necessary to know, these details to appreciate the rival contentions which the parties raised before the Tribunal as well as before us. We would, therefore, state the details of computation relating to which there is no dispute between the parties. Now, in the assessment the Income‑tax Officer had disallowed certain expenses claimed by the assessee, adding them back to the returned income. The Income‑tax Officer determined that figure at Rs. 48,423. Deducting Rs. 288 there from as depreciation, the figure arrived at was Rs. 48,135. To this figure were added Rs. 90,000 as income from undisclosed source and Rs. 24,000, concealed profits earned from sale of anti‑gas water‑proof bags, in all, totalling Rs. 1,62,135. In response to the penalty notice issued under section 28(1)(c) of the Act, the assessee appeared. The Income‑tax Officer held that the tax sought to be avoided on the difference between the returned income of Rs. 45,904 and the assessed income of Rs. 1,62,135 amounted to Rs. 88,993 and one and a half times thereof would amount to Rs. 1,33,489. He, however, imposed a penalty of Rs. 62,000.
The assessee appealed against the imposition of the penalty to the Appellate Assistant Commissioner. Before the Appellate Assistant Commissioner, it was urged that there was no concealment of the income. The mere fact that the assessee failed to give proper explanation or that the explanation given by the assessee was not accepted by the Income‑tax Authorities was not sufficient reason or ground for, holding that any income was concealed. Reliance was placed on the decision of this Court in Commissioner of Income‑tax v. Gokuldas Harivallabhdas ((1958) 34 I T R 98). The Appellate Assistant Commissioner upheld the contention of the assessee in respect of the aforesaid amount of Rs. 90,000 only. According to him, the Income‑tax Officer was in error in treating Rs. 90,000 as concealed income for the purposes of imposition of penalty under section 28(1)(c). He, however, affirmed the finding of the Income‑tax Officer in respect of the amount of Rs. 24,000. But according to the Appellate Assistant Commissioner the maximum penalty which could be imposed for concealment of income of Rs. 24,000 would come to Rs. 30,000 only. In these circumstances, he found that the imposition of a penalty of Rs. 20,000 would, in the circumstances, be proper. In this view of the matter, the Appellate Assistant Commissioner reduced the penalty to Rs. 20,000 from Rs. 62,000 for the relevant assessment year 1948‑49. The Department appealed against the reduction. The assessee also appealed against the imposition of penalty for all the three years. According to the assessee, there was no concealment of any income, and, therefore, no penalty could be levied. In the appeal filed by the department, it was contended that on the finding that income amounting to Rs. 24,000 bad been concealed by the assessee from the department, the maximum penalty that could be imposed in law was on the footing that the tax avoided amounted to Rs. 88,993, and the maximum penalty thus amounted to Rs. 1,33,489; the Appellate Assistant Commissioner was in error in holding that the maximum penalty which could be imposed was on the basis of the concealed income only. The Tribunal affirmed the finding of the Appellate Assistant Commissioner that there was no concealment proved relating to the item of Rs. 90,000. The Tribunal, however, did not accept the assessee's contention that there was no concealment in respect of the said income of Rs. 24,000. In the result, the Tribunal affirmed the finding of the Appellate Assistant Commissioner as well as the Income‑tax Officer that the assessee had concealed income to the extent of Rs. 24,000 for the assessment year 1948‑49. As regards the maximum amount of penalty permissible under section 28(1)(c), the Tribunal observed:
"So long as concealment is thus established, either by one item or more, the quantum requires to be computed under section 28(1)(c) not on the basis of the tax on the items proved to have been concealed, but on the difference between the tax on his income as finally assessed and the tax that would have been avoided if the return had been accepted as true."
In support of this view, the Tribunal placed reliance on the decision of the Andhra High Court in Kalidindi Subbaraju Gopalaraju & Co. v. Commissioner of Income‑tax ((1955) 28 I T R 162). In this view of the matter, the Tribunal set aside the order of the Appellate Assistant Commissioner and restored that of the Income‑tax Officer observing that as counsel for the assessee did not argue about the quantum of the penalty, he was restoring the order of the Income‑tax Officer. In the result, the penalty that has been imposed against the assessee for the assessment year 1948‑49 amounts to Rs. 62,000. On an application by the assessee under subsection (1) of section 66, the Tribunal has stated the case referring to us the following question of law:
"Whether in computing for purposes of levy of penalty under section 28(1)(c) the amount of income‑tax and super‑tax which would have been avoided if the income as returned, had been accepted, such `income as returned' includes items of income too, which though not actually returned, had been added in the assessment solely on the ground of lack of evidence?"
The question thus that falls for consideration relates to the construction of section 28(1)(c). Section 28 enumerates certain acts of omission and commission referred to in clauses (a), (b) and (c) of subsection (1) of section 28, which attract imposition of penalty. Now, the acts of commission and omission that attract penalty are, to state briefly, (a) failure to furnish a return without reasonable cause within the time required by the general notice or special notice of section 34; (b) failure to comply with notice under subsection (4) of section 22 and subsection (2) of section 23; and (c) concealing particulars of his income or delibera tely furnishing inaccurate particulars of such income. The material part of section 28(1)(c) is in the following terms:
"28. (1) If the Income‑tax Officer, the Appellate Assistant Commissioner or the Appellate Tribunal, in the course of any proceedings under this Act, is satisfied that any person . . . . . .
(c) has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income,
he or it may direct that such person shall pay by way of penalty . . . . . in addition to any tax payable by him, a sum not exceeding one and a half times the amount of the income‑tax and super‑tax, if any, which would have been avoided if the income as returned by such person bad been accepted as the correct income."
There are four provisos to subsection (1). It is not necessary to reproduce them. Subsection (2) relates to the powers of the Income‑tax Authorities an: the Tribunal in cases where the profits of a registered firm are distributed otherwise than mentioned in the instrument, and subsection (3) provides that no order imposing penalty either under subsection (1) or subsection (2) should be made unless a reasonable opportunity is given to the assessee or the firm to be heard. Subsection (4) provides that no prosecution for an offence under this Act shall be instituted in respect of the same facts on which a penalty has been imposed. Subsection (5) requires the higher authorities to send copies of their orders to the Tribunal. Subsection (6) provides that the Income‑tax Officer shall not impose any penalty under this (that) section without the previous approval of the Inspecting Assistant Commissioner.
Mr. Kolah, learned counsel for the assessee, contends that on a true construction of the aforesaid material clause, the penalty that could be imposed is only one and a half times of the tax payable on the concealed income. Laying emphasis on the word "avoided", Mr. Kolah argues that the maximum penalty has to be calculated only on the basis of tax "avoided", i.e., tax which has been evaded by reason of concealment, and not tax that has escaped for any other reason. An assessee may take a mistaken view of fact or law. He may, bona fide believing, not include certain items of his income. The Income‑tax Authorities may take a different view and they may add that income. These additions do not attract penalty. Concealment may be for a very small amount and yet on the construction put by the Income‑tax Authorities and the Tribunal, the maximum penalty that could be imposed against the assessee could be dispropor tionately heavy to the small amount of concealment. Such is not the intention of the Legislature. On the other hand, .the legislature has provided that the maximum penalty that could be imposed is only one and a half times, of 'the tax that the assessee has tried to evade by reason of the concealment of the income. The additions made by the income‑tax authorities or the Tribunal to the income returned by him constitute part of the "income as returned by the assessee". In the present case, the only amount that has been added on account of concealment is Rs. 24,000. The rest of the additions on the ground of disallowance of certain expenditure and the addition of Rs. 90,000 as income from undisclosed source, are parts of the income returned by the assessee. The maximum. Penalty thus, which could have been imposed in the instant case, was one and a half times the tax on the difference between Rs. 1,62,135 and Rs. 2,33,135 (Rs. 48,135 as computed by the Income‑tax Officer and Rs. 90,000 added as income from undisclosed source).
Mr. Joshi, learned counsel for the Commissioner, on the other hand, contends that section 28(1)(c) provides that if you find an item of concealment of income irrespective of its extent the maximum penalty that could be imposed is one and a half times the difference between the tax on the total income finally assessed and the tax on the income returned, i.e., income shown by the assessee himself in his return, and not an income computed by the Income‑tax Officer. In the instant case, thus, the maximum penalty leviable is one and a half times the amount of tax on the difference between the tax on Rs. 45,904 (returned income) and Rs. 1,62,133 (income as assessed by the Income‑tax Officer). According to Mr. Joshi, the section only provides the maximum penalty. There is no hardship involved on any assessee. The discretion if left to the departmental authorities as well as to the Tribunal to determine the amount of penalty within the maximum limits. The Income‑tax Authorities in, exercise of this discretion would not be imposing a disproportionately high amount as penalty in cases where the concealment is comparatively small. In support of his contention, Mr. Joshi has referred us to three decisions of the Rangoon High Court to which we would in due course advert, and the decision of the Andhra High Court on which reliance has been placed by the Tribunal.
Now, the relevant part of section 28(1)(c) speaks of maximum penalty that could be imposed, and the limit is one and a half times the income‑tax and super‑tax, if any, which would have been avoided if the income as returned by such person had been accepted as the correct income. The construction turns on the true import and meaning of‑ the expression "income as returned" and "income‑tax and super‑tax avoided" in the event of acceptance of income as returned. Now, the expression "income as returned" is well understood in the Income‑tax Act. It means income as shown by the assessee in his return and nothing else. The income as determined by the Income‑tax Officer is termed as the income computed or assessed by the Income‑tax Officer. It is not understood in the Income‑tax Act as income returned. Section 28 has to be read in the context of the provisions of section 23. In fact, as will be seen on the language of section 28 itself, proceedings under section 28 arise when the Income‑tax Authorities or the Tribunal find certain acts of omission or commission on the part of the assessee mentioned in the section discovered in the course of assessment. Section 23 ‑ relates to assessment. Section 22 requires every person whose total income during the previous year exceeds the amount which is not chargeable to income‑tax to file a return of his total income and total world income…
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