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Petitioner: COMMISSIONER OF INCOME-TAX, GUJARAT VS Respondent: L.H. VORA
Court Name: Gujarat High Court Judge(s): J. M. Shelat, Bhagwati Title: COMMISSIONER OF INCOME-TAX, GUJARAT vs L.H. VORA Case No.: Income-tax Reference No,19 of 1963 Date of Judgment:1964-09-21 Reported As: 1994 PTD 137 Result: Questions answered
JUDGMENT
JUDGMENT ' J.M. SHELAT, C.J.--- This is a reference under section 66(1) of the Income-tax Act, 1922, at the instance of the Commissioner. The reference arises out of imposition of penalties under section 28(1)(c) of the Act for the assessm ent years 1952-53 and 1953-54, the corresponding previous years being the years ending March 31, 1952 and March 31, 1953, respectively. ' The assessee, during the material period, was engaged as an agent and was earning remuneration as such agent and for that purpose had resided at Delhi. For the two assessment years, he filed his returns declaring his income at Rs,6,000 and odd for the assessment year 1952- 53 and Rs,6,768 for the assessm ent year 1953-54. In respect of the assessment year 1952-53, he revised his returns at a subsequent date, declaring his total income for that year at Rs,3,337. It is an admitted fact that he did not maintain any books of accounts in respect of his employment. The returns filed by him were in due course investigated by the Income-tax Officer and in completing the assessm ents, he brought to tax additional amounts of Rs,17,390 and Rs,29,483 for the two years respectively as income from undisclosed sources. The assessment order for the assessment year 1952-53 shows that thought the assessee had filed his returns for that year declaring therein only Rs,3,337 as his total income, it was found by the Income-tax Officer that during that year he had purchased a motor-car for Rs,10,250, a piece of land for Rs,9,330 and had commenced construction of a house upon that piece of land. The construction of the house was commenced in November, 1951, that is to say during the accounting year 1951-52, and was completed some time in April or May, 1952, during the account period of 1952-53. On the discovery by him of the acquisition during the relevant period of these assets, the Income-tax Officer called upon the assessee to furnish information regarding the sources of these expenditures. Thereupon, the assessee made a
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statement in which he explained that he had taken Rs,15,250 from his father, Rs,800 from his wife, Rs,2,000 from his brother, Rs,1,000 as loans from one K.D. Mehta and D. Shukla, and lastly, that Rs,1,500 were his earnings from races and cards and that the rest of the amount required by him in the acquisition of these assets represented withdrawals from his banking accounts. Except for the sum of Rs,2,000 said to have been borrowed by him from his brother, the Income-tax Officer rejected the explanation for the rest of the amounts, holding that the explanation given by the assessee was false and unbelievable and added, as aforesaid, Rs,17,390 in the computation of the total income of the assessee for that year as income from undisclosed sources. For the assessm ent year 1953-54, the assessee had shown his total income at Rs,7,150 and case was that he had, during the relevant account year, worked for two concerns of Bombay, namely, M. Kolman and Paragon Textile Mills. In the returns he had also shown that he had received a sum of Rs,2,000, being bonus earned by him, from Messrs Nanavati & Co. In respect of work done by them during an earlier period. The construction of the house was completed in or about April---May, 1952 and in respect of the cost of that construction and the land, the assessee explained that he had taken Rs,8,000 from his father, Rs,5,000 from his wife and that the rest represented withdrawals from the bank. The Income-tax Officer rejected this explanation, characterising it as unworthy of belief observing that the assessee had been hard put to explain the sources from which he could incur the cost of construction. He also observed that in explaining the sources from which he got these amounts, he had this time given up some of the items totalling to Rs,10,330 whch he had explained earlier when he gave explanation for the previous assessment year and had added a new source, namely, Rs,1,400, being the commission earned by him from Diarvi Trading Co. For whom he had acted as the agent for Saurashtra and Kutch. The Income-tax Officer stated ,that though the assessee showed this sum of Rs,1,400 as available to him for the construction of the house, he had not included that amount in the returns for that year. The Income-tax Officer also found that the assessee had underestimated the building cost to about Rs,23,000 and estimated that cost at Rs,40,000 and taking that figure to be correct and adding Rs,1,400, being the income not disclosed in the returns, held that the total assessable income against the income disclosed by the assessee namely, Rs,9,890, was Rs,40,563. Thus, the Income-tax Officer brought to tax additional amounts of Rs,17,390 and Rs,29,483, as income from undisclosed sources respectively for the two assessment years. In the appeals filed by the assessee before the Appellate Assistant Commissioner, these amounts were reduced to Rs,15,245, and Rs,15,083 respectively. The record shows that the assessee did not file any further appeal from the orders passed by the Appellate Assistant Commissioner and acquiesced in the said amounts. The amount of Rs,15,083 added for the assessment year 1953-54, however, included Rs,2,000 received as bonus from Messrs Nanavati & Co., but since its source was disclosed it could not be said to be income from undisclosed sources and to that extent, the order passed by the Appellate Assistant Commissioner was factually incorrect. ' On the very day that the Income-tax Officer passed his aforesaid orders he initiated penalty proceedings against the assessee under section 28(1)(c) and issued notices, dated April 3, 1957, and February 20, 1958, for the two assessment years respectively. The assessee, in reply to these notices furnished his explanation. On August 25, 1958, the Income-tax Officer after taking into consideration the assessee's explanation, imposed penalties of Rs,2,682 and. Rs,2,855 as penalties in respect of Rs,15,245 and Rs,15,083, they being the amounts held as income from undisclosed sources as finally fixed by the Appellate Assistant Commissioner. An appeal. Was filed against these orders before the Appellate Assistant Commissioner but that was rejected. ' During the course of the penalty proceedings before the Income-tax Officer and the Appellate Assistant Commissioner, the assessee took the stand basing it on the Bombay decision in Commissioner of Income-tax v. Gokuldas Harivallabhdas (1958) 34 ITR 98 that assuming that the explanation furnished by him was either unsatisfactory or even false, the mere falsity of an
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explanation given by him during the course of the assessment proceedings and the finning by the Income-tax Officer that the added amount represented income from undisclosed sources, were not sufficient for the purposes of section 28(1)(c) and that the penalty proceedings being of a penal nature, the burden was on the department to establish that the said amounts were income of the assessee, which burden could be said to have been discharged only if apart from the explanation there was additional material establishing that it was the assessee's income and that such income was either concealed by him or in respect of which he had given false particulars. During the penalty proceedings the assessee tendered his explanation on April 30, 1957, and the stand taken by him in that explanation was mainly two-fold, namely, that he had withdrawn rupees fourteen to fifteen thousand from his banking accounts and in addition he had taken Rs,10,000 from his father. Dealing with this explanation, the Income-tax Officer held that the assessee had, under as many as six heads, made false statements. While accepting the assessee's case that he had taken a sum of Rs,2,000 from his brother, he observed that as regards moneys taken by the assessee from his father, the assessee had shifted his ground in this explanation from the one taken by him earlier during the assessment proceedings in the sense that whereas his case earlier was that he had taken Rs,15,250 in the aggregate from his father, in his explanation in these penalty proceedings he had changed his case and stated that he had only taken Rs,10,000 from his father. Regarding the assessee's allegation that he had withdrawn Rs,10,000 from the Central Bank of India Ltd., Rajkot, which amount was required by him for the construction of the house, the Income-tax Officer found that this part of the explanation also was false because the officer had discovered on an inquiry from the bank that though the assessee had withdrawn this amount from his account he had not utilised the amount so with drawn towards the cost of construction but had instead converted it into a fixed deposit. This was clear from the bank's letter, dated November 29, 1957, in which the bank had informed the Income-tax Officer that a short deposit receipt for Rs,10,000 was issued by the bank in favour of the assessee against withdrawals of the like amount on March 13, 1952. It was clear from his evidence that the amount of Rs,10,000 alleged by the assessee to have been available to him towards the cost of construction was not so available and had in fact not' been used towards the construction. The Income-tax Officer, therefore, observed that "By suggesting that the above withdrawal was used for house construction, the assessee had made a false statement. In fact the assessee never disclosed the fact that he ever made a fixed deposit after withdrawing the money of Rs,10,000. According to the Income-tax Officer though the assessee had alleged that his bank balances were available for expenses towards the construction, the assessee had failed to account as to from which source he had met with his personal expenditure. According to the assessee, his personal expenditure came only to Rs,1,100 per year. That, however, was another false statement made by the assessee, for whereas he had shown such a small amount as Rs,1,100 a year as his personal expenditure, he was paying Rs,1,400 as premium towards his life insurance policy. Considering the style in which the assessee was living, the Income-tax Officer estimated his personal expenditure at nothing short of Rs,6,000 a year and inferred from that fact instead of the bank balances being available to him for the construction of the house, they were depleted in meeting his personal expenditure. The Income-tax Officer also found that the assessee's representation that he had borrowed Rs,1,000 from one K.D. Mehta of Ahmedabad and D. Shukla of New Delhi was also false inasmuch as these names given by the assessee were of non-existent persons. The Income-tax Officer was also of the view that the assessee's representation that he earned about Rs,1,500 from races and card games was also false. The representation made by the assessee that the main purpose of his stay at Delhi was to work for Messrs Abdulla Fidaali & Co. Was not correct and that the work of Messrs Abdulla Fidaali & Co. Had merely intermittently engaged him and yet the assessee had stayed in Delhi for at least six months, indicating that the long stay at Delhi was necessitated by reason of the fact that the assessee was
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also working for other parties or concerns. The finding on this part of the case was that "there is no doubt that the assessee was busy in earning money which he has disclosed and which has really gone into the cost of construction and which the assessee has been running about to prove by various untrue statements. The assessee admittedly had received a sum of Rs,5,000 from Messrs Abdulla Fidaali & Co. By a cheque, dated December 31, 1951. The Income-tax Officer's view, therefore, was that the assessee must have received considerable amounts as remuneration from the different concerns for whom he had worked at Delhi. The conclusion arrived at by him was: It would thus be clear that (i) the assessee met his personal expenses, deliberately stated by him at a very low figure, out of concealed income, (ii) the bank balances were not available to him for house construction as alleged, (iii) the story of loan from the father is patently false and the fact of income from race and rummy is deliberately cooked up. In addition the assessee also invented the names of persons as providing source of income about whose non-existence there is not the least doubt. It is clear from this order that the Income-tax Officer gave two findings, (a) that the assessee had shifted his case and given different explanations with regard to moneys he was said to have taken from his father. In the assessment proceedings his case was that he took Rs,15,250 in the aggregate from his father while in the penalty proceedings he changed that case and stated that he took only Rs,10,000 from his father; (b) that the assessee's case that he worked for Messrs Abdulla Fidaali & Co. Of Bombay only while he was in Delhi was not true and that he had worked for other concerns also and that the amounts which he expended to acquire the car and the land and for the construction work came from income earned while he was in Delhi until about October or November 1951. These two findings were based on the circumstances mentioned above, namely, that the assessee was not in the full employment of Messrs Abdulla Fidaali & Co. But had worked for other parties also and that though his work for M/s. Abdullah Fidaali & Co. Was intermittent, he had been paid Rs,5,000 by that firm alone, that amount, of course, including his expenses. The finding that the amounts which the assessee had expended towards the acquitision of the car, the land and for the construction of a house came from income earned while he was in Delhi, was the result of an inference drawn by the Income-tax Officer from these circumstances which were in addition to and apart from his finding that the explanation of the assessee was false and unbelievable. ' In the penalty proceedings for the assessment year 1953-54, the assessee submitted his explanation on March 26, 1958, and contended that he had neither concealed his income nor had he deliberately furnished incorrect particulars thereof, that the amount of Rs,1,400 added as commission earned by the assessee could not be treated as his income as it was a disputed amount lying with him, that the sum of Rs,2,000 received from Messrs Nanavati & Co. Could not be treated as income from undisclosed sources as the amount had been disclosed by him, that he had clearly shown the sources for the cost of construction incurred by him, and finally that mere rejection of the explanation offered by him would not constitute concealment of income and further that no definite concealment had been found against him by the Income-tax Officer. These grounds were rejected by the Income-tax Officer on the footing that the explanation tendered by the assessee was not true. But apart from the ground of falsity the Income-tax Officer in paragraph 7 of his order relied upon three circumstances, namely, (a) the changing of his case in regard to his having obtained moneys from his father, (b) abandoning of as many as five sources which had been earlier shown as such, and (c) his failure to include the commission amount of Rs,1,400 in his returns. Rejecting the assessee's explanation on the grounds aforesaid, the Income-tax Officer came to the conclusion that the assessee had committed the offence under section 28(1)(c) as in the previous year and imposed a penalty of Rs,2,855 for his assessment year. ' Against the two orders, the assessee filed appeals before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner heard the appeals together and passed a common order,
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dated August 18, 1959, diimissing both the appeals. The assessee's case before Appellate Assistant Commissioner was that the added amounts were considered to be income from undisclosed sources merely on the basis that the Income-tax Officer, had not accepted his explanation, that the Income-tax Officer had failed to establish that the amounts treated as income from undisclosed sources constituted his income and were not receipts which were not his income. The assessee, therefore, contended that his case fell within the purview of the decision in Gokuldas Harivallabhdas ((1958) 34 ITR 98) and that, therefore, the Income-tax Officer was not justified in levying the penalties. The Appellate Assistant Commissioner rejected these contentions, and relying upon a letter written by Abdulla Fidaali & Co. To the effect that the assessee was not their salaried employee and was employed to represent them whenever they found the presence of a representative at Delhi necessary, came to the conclusion that the work done by the assessee at Delhi for that firm was of a minor nature, was not one which was likely to keep him busy for the whole time and yet the assessee had been paid Rs,5,000. He concluded from these facts that such work only could not have kept the assessee at Delhi for a period of about six months, and, therefore, the applicant must have also served other parties and obtained remunerations from them. On this basis he held that "the income which has been considered 'to be his income from undisclosed sources' is actually the income of the appellant which he has earned for rendering services of this type, and as such has to be considered as income in the hands of the appellant'on that account". ' The findings given by the Appellate Assistant Commissioner were that the assessee was giving his services, besides Messrs Abdulla Fidaali & Co., to other parties during his stay in Delhi, that he worked for the said firm only intermittently, that during the time that he was not working for the said firm, he was working for others, that he could not have lived in Delhi in the style he was living unless his expdenditure came to about Rs,6,000 a year, that his income was more than what was shown by him, and lastly, that the amounts which were treated as income from undisclosed sources, were his actual income and which was concealed by him or in respect of which he had deliberately given inaccurate particulars. He, therefore, held that the contention that the Bombay decision applied was not correct, and concluded by stating that: "these amounts are not the amounts where the appellant's explanations have not been accepted, but are ones in regard to which the appellant deliberately suppressed information before the Income-tax Officer and the Appellate Assistant Commissioner, Rajkot, and which were payments received for service rendered. And since these are payments received by him for services rendered as would be clear from the appellant's activities right from 1947-48 onwards, I hold that these payments are the income of the appellant which have been concealed and about which inaccurate particulars have been given deliberately by the appellant both for assessment year 1952-53 as well as 1953-54. I, therefore, consider that the appellant comes within the orbit of section 28(1)(c), and a penalty has correctly been levied on him by both the years on this account, because the facts in this case are different than the one decided by the Bombay High Court and referred to by the appellant." ' Though the Appellate Assistant Commissioner was not correct with regard to the bonus amount of Rs,2,000 his finding with regard to the rest was a positive finding that the case of penalty did not rest merely on the ground that .The explanation of the assessee was false, but that the moneys spent in acquiring the assets represented his income and that income was concealed. ' In a further appeal before the Tribunal, the assessee rested again his case on the Bombay decision and the Tribunal, accepting his contention, allowed his appeal. The Tribunal observed that the two amounts of Rs,15,245 and Rs-15,083 represented a portion of the value of assets acquired by the assessee, the source of which remained unexplained, that the assessee gave a certain explanation with regard to the sources of the sums with which the assets were acquired, that the department might have found the explanation to be unsatisfactory or even false but that would be
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no ground for levying penalty under section 28(1)(c) as long as the decision in Gokuldas Harivallabhdas ((1958) 34 ITR 98), held the field. The Tribunal observed that the taxing authorities had brought out several facts which, if sufficiently substantiated, were not very creditable to the assessee, but wound up its order by stating that that was no reason for holding that the provisions of section 28(1)(c) were attracted in regard to the aforesaid two sums and therefore it was not necessary for it to go into those facts for the disposal of the appeals. It is clear that the Tribunal allowed the appeal on the basis that the only evidence before the taxing authorities was the explanation given by the assessee and which was found by them to be false, and that the ratio in the case of Gokuldas Harivallabhdas ((1958) 34 ITR 98), that if the only evidence before the officer conducting the penalty proceedings consists, of such a false explanation, then the mere falsity of that explanation would not necessarily mean that the receipt in question constituted income of the assessee or that he had been guilty of concealment of such income or of giving false particulars of such income. ' The question that arises is whether the Tribunal misdirected itself in law in applying what it thought was laid down in the case Gokuldas Harivallabhdas ((1958) 34 ITR 98) when, as pointed out earlier, there were additional circumstances according to the taxing authorities, apart from the explanation tendered by the assessee. There is no doubt that the Tribunal' did not consider the question whether there were in fact such additional circumstances and if so, whether they established that the sums held to be income from undisclosed sources constituted the income of the assessee. Before however we proceed to examine this question, it would be necessary to consider the ratio laid down in the case of Gokuldas Harivallabhdas ((1958) 34 ITR 98). The assessee there was assessed to tax on an income of Rs,15,203 which the department held to be income from undisclosed source. A partnership was being carried on by two brothers, Chimanlal and Manilal. Manilal died in Samvat year 2000. In the account year, Samvat year 2003 corresponding to the assessm ent year 1948-49, the assessee-firm was constituted by two partners, Chimanlal and Rasiklal the son of Manilal. Up to Samvat year 2002, the firm carried on business at Nadiad only, but on October 25, 1948, the assessee opened a branch in Bombay and cash credits to the extent of Rs,15,203 appeared in the books of account of the Bombay branch. When the assessee was called upon to explain this entry, his explanation was that his brother, Chimanlal, had sold the ornaments of his first wife and had kept with him the sale proceeds. After his brother died, his widow continued to remain in the house, but she left after about two years and after she left, the amount was divided half and half between the branch of Manilal and Chimanlal's branch. The Income-tax Officer found this explanation to be false and assessed that amount as income from undisclosed source. He also instituted penalty proceedings against the assessee and imposed penalty of Rs,4,000. The Appellate Assistant Commissioner confirmed this order, but when the appeal was heard by the Tribunal, two Members of the Tribunal took the view that the penalty could not be imposed upon the assessee but the third Member gave a dissenting opinion whereupon a reference was made by the Tribunal to the High Court. The High Court affirmed the view of the two Members of the Tribunal, holding that the proceedings under section 28(1)(c) were not justified. The High Court held that penalty proceedings were penal proceedings and whereas assessm ent proceedings under section 23 were taxing. Proceedings, those under section 28 are in the nature of criminal proceedings and that, therefore, the burden of proving that an offence was committed under section 28 was on the department and the department had to show that the added amount was the assessee's income and that that income was concealed or false particulars about it were given by the assessee. The High Court also held that from the mere unsatisfactory nature or even the falsity of the explanation given by the assessee, it would not be possible to conclude that the receipt in question was income, and if the explanation of the assessee was the only evidence, once it was found that it was false it was eliminated and there…
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