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Petitioner: A.M. SHAH & COMPANY VS Respondent: COMMISSIONER OF INCOME-TAX
Court Name: Gauhati High Court Judge(s): A. R. Dave, R. K. Abichandani Title: A.M. SHAH & COMPANY vs COMMISSIONER OF INCOME-TAX Case No.: Income-tax Reference No.185 of 1983 Date of Judgment:1998-08-29 Reported As: 2001 PTD 163 Result: Order accordingly
JUDGMENT
JUDGMENT R.K. ABICHANDANI, J.---The Income-tax Appellate Tribunal, Ahmedabad Bench "A", has referred the following questions for the opinion of this Court under section 256(1) of the Income Tax Act, 1961. Assessm ent year 1970-71: "(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in upholding levy of penalty in respect of additions mentioned hereunder: (a) in respect of addition of Rs.6,396; (b) in respect of addition of Rs.37,535 out of Rs.52,535 being addition restored by the Tribunal though deleted by the Appellate Assistant Commissioner?" Assessm ent years 1971-72: Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in upholding penalty of Rs.1,16,754 under the provisions of section 271(1)(c) of the Act? Assessm ent years 1970-71 and 1971-72: "(1) Whether, on the facts and circumstances of the case, the Tribunal was right in law in upholding the order of the Inspecting Assistant Commissioner imposing penalty on the ground that the assessee has concealed the particulars of income, furnished inaccurate particulars of income within the meaning of section 271(1)(c) of the Act or in the alternative was liable to penalty on the ground that there was gross or wilful neglect on the part of the assessee in not disclosing the correct income within the meaning of Explanation to section 271(1)(c) of the Act? (2) Whether the Tribunal was right in upholding the order of the Inspecting Assistant Commissioner on the ground that the directions issued by the Inspecting Assistant Commissioner to the Income- tax Officer to impose penalty was not fatal to the penalty proceedings for both the years?"
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The assessee is a firm which, at the relevant time, carried on business in purchase and sale of ball bearings, mill stores, etc., on retail basis. For the assessment year 1970-71, the assessee had disclosed the sales of Rs.2,78,426 with gross profit of 23 per cent. The Income-tax Officer subjected the books of account of the assessee to a detailed scrutiny and, as a result, found that there were substantial discrepancies by way of manipulation of stocks, omission of sales, inflation of purchases, making out of bogus bills, etc. He accordingly brought to tax a sum of Rs.1,72,775 by his assessm ent order, dated August 31, 1973, as per the details mentioned in the order. Out of the seven items mentioned and which are reproduced by the Tribunal in its order, we are concerned for the purpose of the present proceedings, with the item of cash purchase without proof, of Rs.9,987, which was at serial No.3 and the item of Rs.37,535, which was at serial No.5, which related to understatement of the closing stock. The Income-tax Officer, by that order, initiated action for imposition of penalty under section 271(1)(c) of the Act and referred the matter to the Inspecting Assistant Commissioner for further imposition of penalty. In appeal, the Appellate Assistant Commissioner by his order, dated February 2, 1974, upheld certain additions including Rs.6,396 out of the addition of Rs.9,987 and deleted other additions including the amount of Rs.37,535, which related to understatement of the closing stock. In the further appeal before, the Tribunal in those quantum proceedings, the Tribunal by its order, dated March 7, 1980, upheld the additions which were sustained by the Appellate Assistant Commissioner and restored the addition of Rs.37,535 of the said item No.5, which was deleted by the Appellate Assistant Commissioner. Over and above this, the Tribunal also made an addition of Rs.15,000 on the basis that since the purchases were not traceable in the closing stock and sales, the natural inference was that the goods have been sold outside the books and since the price at which they were sold was not known, the Tribunal made the addition on account of the realisable profit on these purchases arriving at the estimated figure of Rs.15,000, and thus, while sustaining the addition to the extent of Rs.37,535 with which we are concerned in these proceedings, adding a further sum of Rs.15,000 which admittedly is not the subject-matter of the present proceedings. The Inspecting Assistant Commissioner to whom the matter was referred by the Income-tax Officer, who initiated action for imposition of penalty under section 271(1)(c) of the Act, took up the matter for his consideration for imposition of penalty after the decision of the Tribunal in the quantum proceedings was received. In order to bring to the forefront the basis on which the penalty proceedings were initiated by the Income-tax Officer, we may at this stage refer to the assessm ent order in respect of the said year 1970-71 made by the Income-tax Officer on March 31, 1973, which is at Annexure "D" in the paper book. In this assessment order, the Income-tax Officer has, in detail, noted the discrepancies and referred to the doubtful purchases made from various parties and to the fact that for reasons mentioned in paragraph 3 thereof, the books of account were impounded and the stock was got reconstructed brand-wise with the help of the accountants of the assessee. In respect of the case purchases, while referring to the item of Rs.9,984 relating to 31 cash purchases, it was observed that there were no memos. Or vouchers, no details as to the nature of goods and no receipts for the payment of the same. It was noted that the assessee's only explanation was that the purchases were genuine, but through oversight, the vouchers were not prepared. The Income-tax Officer held that obviously this was not a valid explanation and thus, there was no proof or explanation for such purchases. As regards the additions made on account of the value of the stock not being included in the closing stock, which is relatable to the item of Rs.37,535, the Income-tax Officer first noted the discrepancies in the stock book as stated in paragraph 5 of his order, observing that the scrutiny of the reconstructed stock book revealed that there were many sales for which there was no opening stock or corresponding purchases, the doubtful and cash purchases mostly appeared thereafter
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and after taking out excess sales and adjusting the purchases made thereafter against the sales, it appeared that there remained many items in the stock which were not shown in the closing stock for which there were no purchases. It was observed that a brandwise statement was prepared and checked with the assessee as, per the Annexure to the order. The Income-tax Officer noted that the list of closing stock was at the end of the ledger and observed that discrepancies were brought to the notice of the assessee by letter, dated November 18, 1972, to which a reply was sent on November 28, 1972, stating that the assessee had to sell the goods and prepare the sale bills earlier while the purchase bills were received thereafter. It was observed that the assessee was unable to produce any evidence to show that in fact, he had received goods earlier on approval basis. It was also observed that there were in fact cash purchases without names on a large scale and doubtful purchases from four parties to the extent of Rs.28,774 and Rs.96,148, respectively. The explanation given by the assessee was found to be flimsy and not acceptable. As regards the other explanation regarding the group of brands, it was held that, that was also not acceptable as it was against the entries in the stock book of the assessee itself where brands are mentioned for each purchase and sale with different rates. It was observed that the assessee had with his letter, dated March 29, 1973, given a quantity statement not grouping the brands but grouping several numbers including all the brands of each number together and thus, the assessee himself was not in a position to tally the quantity of a given number grouping several brands thereof. It was held that the explanation of the assessee was false as per the assessee's own quantity statement filed on March 29, 1973. It was, therefore, held that there were sales of Rs.81,731, for which there were no details of acquisition and further that there were items costing Rs.68,087, which should have been shown in the closing stock but had not been shown, as well as items shown in the closing stock costing Rs.11,954, which did not come from any opening stock or purchases. The Income-tax Officer in his conclusions, while referring to the item not shown in the closing stock by the assessee to the tune of Rs.68,067 (clause 9 of Annexure attached with the order) found that the unexplained purchases came to Rs.30,532 (as per clause 11 of the Annexure attached with the order) and this debit was, therefore, added to the total income of the assessee as unproved and as the assessee himself had not shown the same in the closing stock proving that the debit of Rs.30,532 was wrong. The remaining amount of the items which were not shown in the closing stock (as per clause 9 of the Annexure attached with the order), i.e, Rs.37,535 out of the total amount of Rs.68,067 was added to the total income of the assessee as understatement of the closing stock, in view of the Income-tax Officer's finding out that the said amount which was included in the items of Rs.68,067 which should have been shown in the closing stock, was not so shown. The ,question of the item being ascertained at the stage of closing of the stock and not being found there, clearly postulates that there were no sales of such item, because, if sales were already effected, then there would be no question of such item being shown in the closing stock and no need for an observation that the item should have been shown in the closing stock, but was not shown. It is in this context that in the quantum appeal before the Tribunal, it was noted that as regards the verifiable purchase of Rs.37,535, though they were recorded in the books, they were not traceable in the sales or closing stock. It was held that so far as the purchases were not traceable in closing stock and sales, the natural inference was that the purchased goods were sold outside the books. We have narrated above the basis of the initiation of the penalty proceedings reflecting from the order of the Income-tax Officer as regards the item of Rs.37,535, viz., that though purchases were shown, the closing stock did not disclose the value of the goods to the said extent, which means that the sales were also not shown, since the contentions were canvassed in respect of that item overlooking this basis which is reflected from the order of the Income-tax Officer, as we will hereafter deal.
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As regards the assessm ent year 1971-72, the Income-tax Officer had found in his order, dated March 17, 1975, while dealing with the return of income in which the assessee had declared total income of Rs.43,392 that there were serious discrepancies in the stock book, purchases, etc., and that the assessee had not entered all sales and purchases in the books of account. It was further found that in order to reduce the income earned, the assessee had resorted to claim for bogus purchases and non-recording of purchases either in sales or stock. It was also found that to adjust the gross profit and quantity account and to bring in certain undisclosed stocks as excess stocks were shown in regard to certain items. However, the assessee was unable to explain these discrepancies. The Income-tax Officer, therefore, concluded that additions as worked out in the assessm ent order totalling to Rs.1,92,538 were called for. In view of the defects noticed by the Income-tax Officer, he concluded that real profit could not be ascertained from the books. He, therefore, estimated a turnover of Rs.6 lakhs and gross profit at 50 per cent., and made an addition of Rs.2,06,754. The Income-tax Officer had restricted the addition to the higher of the two amounts, viz., the gross profit addition in order to avoid double taxation. The matter was carried in appeal before the Appellate Assistant Commissioner, who reduced the rate of gross profit to 35 per cent. While retaining the estimated turnover and granted the consequential relief. In further appeal, the Tribunal upheld the decision of the Appellate Assistant Commissioner. The Inspecting Assistant Commissioner in his order made under section 271(1)(c) of the Act on September 22, 1980, for the assessme nt year 1970-71, held in respect of the amount of Rs.6,396, being item of cash purchases without proof, that these purchases were bogus and in the nature of inflation and, therefore, the amount represented concealed income of the assessee. As regards understatement of the closing stock amounting to Rs.52,535, it was noticed that it comprised two items, namely, Rs.37,535 being additions made by the Income-tax Officer and sustained by the Tribunal and Rs.15,000 being gross profit estimated by the Tribunal. The Inspecting Assistant Commissioner relying on the order of the Tribunal in the quantum appeal held that levy of penalty on the said amounts was justified. He found that in view of various discrepancies, errors, omissions and manipulations and want of supportive evidence in regard to various items of purchases and/or sales or stock, the assessee's case clearly fell within the mischief of the penal provision. He, therefore, imposed penalty of Rs.75,400 so far as the assessment year 1970-71 was concerned. As regards the assessm ent year 1971-72, the Inspecting Assistant Commissioner came to the conclusion that the assessee's case was fully covered by the Explanation to section 271(1)(c) of the Act, in view of the defects mentioned by the Income-tax Officer, which we have noted above. He, therefore, imposed penalty of Rs.1,16,754 on the assessee. Being aggrieved by the penalty orders made in respect of the two assessment years, i.e., 1970-71 and 1971-72, the assessee approached the Tribunal and the Tribunal, after considering the rival submission, held as regards the assessment year 1970-71 that the amount of Rs.6,897 which represented inflation in purchases resulting in reduction of taxable income of the assessee was clearly exigible to penalty. So far as the item of Rs.52,535 was concerned, which included the item of profit element estimated by the Tribunal in the quantum appeal of Rs.15,000 over and above the item of Rs.37,537 of the value of goods restorted by the Tribunal in the quantum appeal, the Tribunal held that the levy of penalty on the sum of Rs.37,537 was justified on the facts of the case and upheld the decision of the Inspecting Assistant Commissioner to that extent. As regards the amount of Rs.15,000 which was added in the quantum appeal by the Tribunal by way of the estimated possible realisation of profit from the sale of the stock which was not disclosed by the assessee and which was inferred to have been sold, it was held that though the addition might be justified in the quantum appeal, the said amount was not exigible to penalty in view of the decision
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of the Supreme Court in D.M. Manasvi v. CIT (1972) 86 ITR 557, and of the Gujarat High Court in case of CIT v. Lakhdhir Lalji (1972) 85 ITR 77. As regards the assessm ent year 1971-72, the Tribunal observed that the Income-tax Officer on detailed enquiries found that there were bogus purchases, the purchases not reflected in sales or closing stock and also cash purchases, and unaccounted for purchases amounting to Rs.1,92,538 and had adopted the course of making addition by estimating the gross profit as also the turnover. It was noted that the addition was not the one made for want of verificatory records but based on specific defects pointed out by the Income-tax Officer. In other words, the gross profit addition which was made in lieu of specific additions noted by the Income-tax Officer was based on specific defects such as discrepancies and manipulations in the account noted in great details by the Income-tax Officer in his order. Relying upon the decision of this Court in the case of CIT v. S.P. Bhatt (1974) 97 ITR 440, the Tribunal, therefore, upheld the decision of the Inspecting Assistant Commissioner for imposing the penalty for the assessment year 1971-72. It was also contended before the Tribunal that the Inspecting Assistant Commissioner himself had not levied the penalty, but had directed the Income-tax Officer to do so and the Tribunal held that though the order was not happily worded, the proceedings were not vitiated and that it really amounted to imposition penalty by the Inspecting Assistant Commissioner. The Tribunal found that the Inspecting Assistant Commissioner who had jurisdiction to levy the penalty, had exercised his jurisdiction to levy that penalty in the course of the proceedings, which were conducted by him. The Tribunal, therefore, partly allowed the appeal in respect of the assessment year 1970-71 and dismissed it in respect of the assessm ent year 1971-72, by its order, dated March 5, 1972, which has led to the aforesaid questions being referred for the opinion of this Court. It has been contended by learned counsel appearing for the assessee that it was not possible having regard to the nature of purchases and sales of the type of goods, i.e., ball bearings, mill stores, etc., which were made by the assessee, to maintain the quantity record. It was argued that the basis for initiation of the penalty in respect of the year 1970-71 was, inter alia, understatement of the closing stock to the extent of Rs.37,535 and because in the quantum appeal the Tribunal had estimated the profit of Rs.15,000, on the footing that the goods must have been sold away, it should follow that the basis that the goods were not shown in the closing stock on which the penalty proceedings were initiated by the Income-tax Officer was changed and the basis now as per the decision of the Tribunal in the quantum appeal was non-disclosure of sale. It was contended that since the basis of levy of penalty had thus undergone a change in the quantum appeal, the penalty could not be sustained because undervaluation of the closing stock and suppression of sales cannot co-exist. Reliance was placed by learned counsel on the decision of this Court in CIT v. Lakhdhire Lalji (1972) 85 ITR 77, in support of his submission. In Lakhdir Lalji's case (1972) 85 ITR 77 (Guj.), the Income-tax Officer had added a sum of Rs.58,000 holding that the assessee had realised it by sale of 1,383 bags of garlic, but concealed the same. Notice to the assessee was issued under section 274 of the Act for levying penalty for concealing of income. On appeal from the assessm ent order, the Appellate Assistant Commissioner held that 1,383 bags of garlic were included in the stock of the assessee and that a sum of Rs.34,000 should be added on the footing undervaluation of the stock and not Rs.58,000. The Inspecting Assistant Commissioner in the penalty proceedings took note of the Appellate Assistant Commissioner's order and levied a penalty of Rs.7,400 on the footing that the assessee had deliberately furnished inaccurate particulars of his income. The Appellate Tribunal held that the order of the Inspecting Assistant Commissioner was without jurisdiction as his jurisdiction was restricted to those items of concealment of income in regard to which the Income-tax Officer was satisfied that there was concealment of income. The High Court held that the penalty proceedings had been commenced against the assessee on a particular footing, viz.; concealment of particulars of income, but the
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final conclusion for levying the penalty was based on a different footing altogether, viz., on the footing of furnishing inaccurate particulars of income. It was held that under these circumstances, it could not be said that the assessee had been given a reasonable opportunity of being heard before the order imposing the penalty was passed. The very basis for the penalty proceedings against the assessee initiated by the Income-tax Officer disappeared when the Appellate Assistant Commissioner held that there was no suppression of income by the assessee. The conclusion of the Tribunal that the Inspecting Assistant Commissioner had no jurisdiction to impose penalty under section 271(1)(c) for concealment of income was, therefore, held to be correct. Learned counsel also read before us the decision of this Court in CIT v. Manu Engineering Works (1980) 122 ITR 306 and K.M. Bhatia (Quarry) v. CIT (1992) 193 ITR 379, in which the ratio of the decision of this Court in Lakhdir Lalji's case (1972) 85 ITR 77, was reiterated. There can obviously be no dispute about a proposition that if the very basis for the penalty proceedings against the assessee initiated by the Income-tax Officer disappeared, then the penalty imposed on a different footing altogether cannot be sustained. As regards the assessm ent year 1971-72, learned counsel for the assessee contended that since the Department had rejected the books of account and made lump sum addition which was reduced in appeal, it was purely a case of estimation attracting no penalty provision. It was contended that the fact that the addition ultimately sustained was much lower than the amount which according to the Income-tax Officer was required to be added to the income itself shows that the finding of bogus purchases were not approved by the appellate authority. It was contended that since the addition was on pure estimate basis and there being no proof of any fraud committed by the assessee, the penalty cannot be sustained. Reliance was placed in support of this contention on the decision of this Court in CIT v. S.P.Bhatt (1974) 97 ITR 440, in which case this Court held that the condition which attracted the applicability of section 271(1)(c) of the Act was that the Income-tax Officer should be satisfied in the course of any proceeding under the Act that any person had concealed the particulars of his income or furnished inaccurate particulars of such income. The Explanation to that provision, which was introduced by the Finance Act, 1964, provides that where the total income returned is less than eighty per cent. Of the total income assessed, the assessee shall, unless he proves that the failure to return the correct income, did not arise from any fraud or any gross or wilful neglect on his part, be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income within the meaning of section 271(1)(c) of the Act. The Explanation creates a legal fiction if the condition of its applicability is satisfied. It was held that the condition is an objective condition, namely, that the total income returned by the assessee should be less than eighty per cent. Of that total income assessed, and the assessee is straightaway brought within the penal provision in section 271(1)(c) of the Act. However, this legal fiction could be displaced if the assessee proves that the failure to return the correct income did not arise due to any fraud or gross or wilful neglect on his part. In that case, the finding reached by the Tribunal was that there was no fraud or gross or wilful neglect on the part of the assessee. It was not the case of the Income-tax Officer that any particular entries in the books of account were false or any particular items of purchase or sale were omitted to be entered in the books of account. The Court came to the conclusion that the failure to return the total assessed income was not on account of any fraud or gross or wilful neglect on the part of the assessee. It was held that where assessm ent was made on the basis of an estimate and there was nothing on record to show that any particular entries in the books of account were false or incorrect or any particular items of purchase or sale were omitted to be entered in the books of account, the assessee must be held to have discharged the onus which rests upon him, that the failure to return the total income assessed was not on account of any fraud or gross or wilful neglect on his part. Learned counsel also read before us the other decisions of this Court in the case of CIT v. Sharadchandra
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Harilal (1992) 197 ITR 315 and CIT v. Subbash Trading Company (1996) 221 ITR 110, which followed the ratio in the case of CIT v. S.P. Bhatt (1974) 97 ITR 440 (Guj.), with which we are in respectful agreement. Learned counsel appearing for the Revenue contended that the basis of initiation of penalty had not undergone any change in respect of the penalty imposed for the assessment year 1970-71. He submitted that even for the assessment year 1971-72, since the…
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