Commissioner of Income-tax, Madras v. Khoday & Sons

846 COMMISSIONER OF INCpME 1AX, MADRAS V. ' _MIS._ KHODAY ESWA~A & SONS _'September_ '22, ·197'1 [C. A. VAID!ALINGA¥ AND P. !AGANMOHA\" RtooY~ JJ.] _Income-tax_ _;J.ct_ (Il _of_ 1922), _s._ _2B(-l.)(c)-Levy,of_ _pe11alty-;--Ri!asons_ _.in assesSment_ _proceedings-Weight_ _to' be,_ _attached to._ 1 1 In income-tax. proceedli1gs to_ the tax~ble 'income s.hown <'by the _respondent in its return two items amoitg-Oth~ \Ver& added ton .the .basis th_at there were illicit S'af~S of alcohol anQ that -cer.tain.- sales had not· been properly ·accounted gation Circle, issued notice _'for:\_ Jbereafter, that ... he proposed the Income-t4x Officer, Special Investi- 1 to h;vy a penalty µnder s. 28(1)(r.) of the lnc'ome-tax Act, 1922, as,the respondent bad concealed particulars of its income and 'deliberately ~furni~l'led inaccurate parti-· culars. He rejected the explanation of th~ ass:!ssee and levied a penalty. In the order levying penalty the Incorne-tax Offi~er st:1ted that the reasoi1s for adding_ the disputed amounts in the total income of the assessee had been already discussed in the original order 6f assessment and that there was no need to repeat _them._ The AppelJate Assistant Commissioner in appeal confirmed the penalty. His approach to the case \Vas riot different and was based upon a guess that because there were many contiguous dry areas the ·respondeht would have surtepti~iously sold alcohol: The APpt;:llatc Tribunal considered the circumstances under which the additions came to be made by the ·Department in the assyssment J>roceedings. and the various points which were 'prcsSc'ct hefore it &nd _the_ Appellate Assistant Commissioner on behalf of the assessee, and held that 'though there might be certain Poubtfut transactions it could not be stated that asscssec had made· any deliberate attempt at concealm~nt regarding its pharmaceutical section, and that, though there might be justification for making additions in the original assessment order thos·e additions. by themselves Could not lead to the conclusion that the respondent had concealed its income or that it h3d furnished deliberately inaccurate particulars. On the basis of tho~e findjngs the AppellateL Tribunal set aside the order levying penalty. TheTeafter, the Appellate Tribunal, holding thit the reasons given by it for setting aside the penalty proceedings were all based on findings of fact and that no question o.f law' arose out of those findings, rejected an application by the appellant for re'ferring the question as to whether the 'Appellate Tribunal ·was right in cancelling the oenalty. The appellant then filed an application under s. 66(2)> of the Act but the High Court dismissed it on the same ground. ##### ' DismiSsing the appeal, ##### 'A B ### c ~:: # - D E F G H HELD : The penalty, p'roceetjings being penal: in character the Denart~ent must es~blish that the receipt of the amOU'Q-t iri dtspute constiiutes income of the assessee. Apart from the falsity of any explanation g:iven by the assessee. the J?epartment must have before it, before levying: a penalty, cogenl ln<l:tenal or evidence from ~ [1] hich, it could he inferred that the· asse~see had consciously concealed the· particulars of his income or had dehberat_ely fu~n_ished inaccurate particulars. The original asses~~ !'lent proceeding for computing the tax is evidence in the penalty procced 1~g, b~t the pe~a~ty cannot be levied solely on the basis of the reasons g1ven:.m the original assess{llent order. [853 B-D] A II ### c **D** _**E**_ C.I.T. _v._ KHODAY & SONS _(Vaidialingam,_ _J.)_ 847 **Jn** **the present case, except the reasons given in the original assessment** order for including the disputed items in the total income, the Department **had no othe'f material or evidence** **from which** **it** **could be reasonably** **inferred that the assessee had consciously concealed particulars** **of** **his** **income or had deliberately furnished inaccurate particulars.** **The Appel-** **late** **Tribunal** **made** **a correct** **and** **judicial** **approach** **in** **considering** **the** **question whether the penalty provisions were attracted** **as** **against the res-** **pondent.** **The conclusions drawn** **by** **the Appellate Tribunal** **\Vere** **findings** **of** **fact recorded against the Department.** **Since on those findings** **of** **fact** **no** **question** **of** **law** **arose** **the** **High** **Court** **\\** **[1]** **as** **justified** **in** **rejecd ng** **the** application filed by the appellant under s. 66(2) of the Act. [852 B-E] 853 E-F] _**Conunissioner**_ _**of**_ _**lnco111e-tax West Bengal-I**_ **v.** _**Anwar**_ _**Ali,**_ **[1970]** **76** l.T.R. 696, followed. CIVIL APPELLATE JURISDICTION: Civil Appeal No. 648 of 1967. Appeal by .special leave from the judgment and order dated October 3, 1966 of the Mysore High Court in Civil Petition No. 10 of 1966. _R._ _H._ _Dhebar_ and _J._ _Ramamurthi,_ for the appellant. The respondent did not appear. The Judgment of the Court was delivered by **Vaidialingam,** **J.** This appeal, by special leave, by the Commissioner of Income-tax, Madras, is against the judgment and order dated October 3, 1966 of the High Court otMysore, rejecting th.~ appellant's application filed under s. 66 (2) of the Jncometax Act, 1922 (hereinafter to be referred as the Act) for directing the Income-·tax AppelJate Tribunal, Madras Bench to refer the question of law to the High Court. The question of law, which the appellant wanted to be referred **F** was: "Whether on the facts and in the circumstances of the case the Appelhrte Tribunal was right in cancelling the penalty of Rs. 35,000 levied under section 28 ( 1) ( c) of the Indian Income-tax Act, 1922." **G** **H** Tb~ respondent was a firm carrying on business of manufacturing silk, carbon papers, type-writer ribbons, liquor, spiriturous drugs and chemicals etc. In respect of the assessment year 1955-56, •the respondent had sent a return showing Rs. 51,214 as taxable income. On looking into the accounts and other records, the Income-tax Officer made sevei:al additions to the amount shown in the return and ultimately fixed the total assessable income in the 'sum of Rs. 3,30,474. On ap~al, the amount was reduced and the taxable income was fixed in the sum of Rs. 2,09,575. In the further appeal by the assessee to the Appeliate Tribunal, there 848 SUPREME COURT REPORTS [1972] 1 s.c.R. was no alteration in this figure. Only two items which were added A to the income and which have been accepted by all the authorities required to be nO'ticed. They are : Pharmaceuticals, section-Rs. 77,518.00 Chemicals section-Rs. 9,900.00. Relating to the pharmaceuticals section, it is the view of the Income-tax Officer that some of the sale bills produced by the respondent were found to be forged ones and some of the purchasers of tincture were also fictitious persons. Th~re was no evidence produced by the assessee to show that the Kolae powder, which was very essential for the manufacture of tincture had been purchased by it. Hence the Income-tax Officer drew an inference that the respondent had not really manufactuf"A tincture and that on the other hand the firm must have sold all alcohol i!licitly. lt was on 1this basis that the Income-tax Officer held that the assessee must be considered to have omitted to show the sum of B ### c Rs. 77,588. Similarly, regarding chemical section, the Income0 tax Officer found that the respondent has not accounted for a part of sale of Bthyl Acetate and tha1 on verification it was found that there has been a large deficit of rectified spirit. On this basis the Income-tax Officer drew an inferehce that the firm has' again secreted a large quantity of rectified spirit under the cloak of manufacture of chemicals. On the ground tha't certain sales had not been properly ac:counted for, the sum of Rs. 9,900 was added to E ##### the taxabfo income of the assessee. It was on the above basis that the two items were included in rthe total assessable income of the assessee firm. These reasons given by the Income-tax Officer have been, by and large, accepted by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. The Income-tax Officer, Spe- F cial Investigation Circle A, Bangalore issued a notice under s. 28 ( 1) to the respondent that it has concealed the particulars of its income and deliberately furnished inaccurate particulars in respect of the above amounts added [1] to the. total income and that the Income-tax Officer proposed to levy a penalty under s. 28 (l)(c) of the Act. No doubt, in the notice certain other items, which G had already been added 1o the total income were also referred to. But those items have been deleted from the penalty proceedings by the App·~llate Assistant Commissioner. Therefore, we are only concerned with the two items, referred 'to earlier. The assessee sent a reply stating that it has not concealed the particulars of its income nor has it deliberately furnished inaccu- H rate particulars of such income. The explanation offered by the assessee was not accepted by the Income-tax Officer, and the latter . A B ## c D. E F G H C.I.T. _v._ KHODAY & SONS _(Vaidialingam, J.)_ 849 by his order dated February 15, 1963 imposed a penalty of Rs. 35,000 on the ground that the r.espondent had concealed the particulars of i'ts income. That amount of penalty was levied by the Income-tax Officer on the ground that over and above· the two items .:dating to the Pharmaceuticals and Chemical sections, there has been a concealment of three more items totalling Rs. 32,267. They were: Silk. business; shortage in twisted silk yarn-Rs. 14,545.00 Shortage in Artificial silk Rs. 3,434.00 Carbons; Unaccounted consumption Rs. 14,288.00 It was on this basis that the to'~al penalty was levied. On appeal to the Appellate Assistant Commissioner, the latter, no doubt deleted these 'ihree i~~ms totalling Rs. 32,267 from the penalty proceedings, but confirmed the order of the Income-tax Officer regarding the two other items holding 'that the omission by the assessee to include the said two items amounted to the firm concealing particulars regarding its income und·~r s. 28 (1 )( c) of the Act. The penalty amount levied by the Income-tax Officer was also confirmed. Though the Appellate Assistant Commissioner reduced the quantum of concealment-even assuming 'that there has been a concealment-he did not make any P~duction in the penalty actually levied by the Income-tax Officer. The assessee carried the matter in appeal bdore the Incometax Appellate Tribunal, Madras 13.'!nch. The main grievance made by the assessee was that there has been no independent consi deration by the Income-tax Officer or the Appellate Assistant Commissioner whether even on the basis that •there has bo~en an Omis sion by it to include certain items in its return, such omission came within s. 28 ( 1) ( c) of •the Act, so as to attract the levy of penalty. The assessee also contended that both the Income-tax Officer and the Appellate Assistant Commissioner hav·~ mainly relied on the reasons given in the order of assessment for adding these two items in the total income. According to the assessee there has been no proper exercise of jurisdiction under s. 28 of the Act. The Income-tax Appellate Tribunal by its ord·~r dated November 13, 1964 set aside the order of the Income-tax Officer as confirmed by the Appella•te Assistant Commissioner levying penalty on the respondent. The Commissioner of Income-tax filed an application under s. 66 (1) of the Act, requiring th.e Appellate Tribunal to draw up 850 SUPREME COURT REPORTS [1972] l S.C.R. a statement of <the case and refer the question extracted in the ·~ar­ lier part of the judgment, to be referred to the High Court. The Appellate Tribunal by its order dated June 7, 1965 ro~jected the said application on the ground •that the ri;asons given by it for setting aside the penalty proceedings were all based on findings of fact and that no question of law arose out of those findings. The appellan~ filed an application before the High Court of Mysore, under s. 66(2) for directions being issued to the Appellate Tribunal to state the case and refer the question of Jaw, which the Appellate Tribunal has refused to refer. A Division Bench of the High Court by its order dated October 3, 1966 dismissed -the appellanfs application on,he ground that the finding of the Appellate Tribunal that the Income-tax D.~partment had failed to prove that the assessee had concealed its income or that it had delibi;rately furnished inaccurate par1iculars of its income are ati on facts and that no question of law arises from the order of the Appellate Tribunal. Mr. Dhebar, teamed counsel for the appellant, urged that the order or the High Court is erroneous.,\ccording to him the view of the High Court that the conclusions arrived at by the Appellate Tribunal are all on facts and that no question of law arises, is •?:-roneous. The counsel urged that there has been an omission by the respondent to include in particular two items which are the subject of penalty proceedings and the order of assessment in that regard has become fi:'l'al. Hence it follows that this is a case where the assessee has concealed the particulars of its income or has deliberately furnished inaccurate particulars of its income. Both the Income-tax Office·· as well as the Appellate Tribunal have in the penalty proceedings gone elaborately into this asptct before levying penalty. The approach made by the AppeJlate Tribunal when it set aside the orders levying penalty is not justified in law. ·Therefore, he urged tha:t the High Court should have directed the Appellate Tribu1nal to state a case and refer the question of law as prayed for by the Appellant. The respondent has not entered appearance before us. We have been taken through the e.ntire proceedings leading up to the order levying penalty. We have also gone through the reasons given by the Income-tax Officer for levyi:ng penalty as well as the order of the Appellate Assistant Commissioner confirming the same. We cannot accept the contention of Mr. Dhebar that the Appellate Tribual has summarily interfered with the orders levying penalty. We have gone through the order of the Appeilate Tribunal and we find that it has considered the circumstances under which the additions came to be made by the Department in the assessment proceedings as well as the points that were pressed before it, on behalf of the assessee as well as the Appelate As~istant A B ## c D E F G H A B ### c D E F C.l.T. I'. KHODAY & SONS _(Vaidialingam,_ _J.)_ 851: Commissioner. It is the view of the Appellate Tribunal that the· Department has not established that the, assessee has not manufactu;cd tincture and that il had sold only' alcohol. This conc:usion arrive::l at by the Income-tax Officer in the penalty proc~.::dings is, according to the Appellate Tribunal, purely one of conjecture or surmise. The Appellate Tribunal, no doubt, was ptepared 10 <:cccpt ;he contention of the Department that there wetc a lot of doubtful circumstances. Notwithstanding· these circunbtances the Appeiiate Tribunal is of the view that when admitted,y there me Excise au:horities in the. premises of the respondent, it is very. dift1cuit to hold that those officers would have permitted the assessee 1.0 utilise the alcohol for other purposes. The Appellate Tribunal has also hc:d that even the sale bills produced by the respondent, contain the proper permit numbers given by the Excise autlmrities and th.u the Income-tax Department have not made any inquiries from ;he Excise authorities whether those reievant sales luvc been maclc without their authorisation. The Appe:late Tribuna! has further held that th.~re is no stock discrepancy in Kola Liquidum if the transactions ar-~ considered as a whole for the entire period. Therefore, regarding Pharmaceuticals section the Appellate Tribunal finally held that though ·there may be certain doubtful transactions. it cannO't be stated that th.~ assessee has made any deliberate attempt at concealment. Regarding ·the Chemical section. the Appeliate Tribunal is of the view that though there may be justification for making additions in the original assessm·~nt order to ·the amount shown in the return. those additiom by themselves cannot lead to the cone lusion that the respondent has concealed its income or •that it has furnished deliberately inaccurate particulars. It was on 'the basis of these findings that the Appellate Tribunal has se·~ aside the order ].~vying penalty. One thing that strik·~s us when going through the order of the Income-tax Officer levying penalty and the or<le.r of the Appellate Assistant Commissioner confirming the said levy, is that there is not much of an ind.~pendent discussion regarding the material question that has to be considered, namely, whether the firm has G concealed the particulars of rts income or whether it has deliberately furnished inaccurnte particulars of sucb_ incom~. On the other hand, the Income-tax Officer after refering to the explanation furnished by the assessee to the show cause notice, clearly says that the facts rela._ting to the unaccounted items have been fully discussed already in the relevant assessm~nt orders for the concerned assessH ment year and that the reasons given therein need not be repeated again. Then there is only a very summary disposal of •the plea raised by the respondent that he has not concealed the particulars of his income, nor has it delibertely furnished inaccurate particulars [1972] I S.C.R. 852 SUPREME COURT REPORTS \ <>fits income. The approach made by the Appellate Assistant Commissioner is not far different from that of the Income-tax Officer. In fact the Apt:iellate Assistant Commissioner makes a further guess that in view of the fact that there wern very many dry,areas bordering Mysore, the respondent would have surreptitiously sold alcohol that was supplied to it without using it for the purpose of makmg tincture. It is 1he view of the Appellate Assistant Commissioner that the mere fact that there are Excise authorities 'to control the activities of persons like 1he assess.~e, is of no material consequence. From what we have stated above, it is clear that while there has been no proper approach made by either the Income-tax Officer B wh~n he levied penalty or by the Appellate Assistant Commissioner when he confirmed •the order levying penalty, the Appellate Tribu- C nal, on the o•ther hand, has made a very correct ~nd judicial approach in co.nsidering the question whether the penalty provisions are attracted as against the respondent. After a very fair and full consideration of the ma•terial circumstances, [1] thc Appellate Tribunal has set aside th~ order kvying penalty. As rightly pointed out by the High Court, the conclusions drawn by the Appellate Tribunal are all on findings of fact recorded against •the Department. On those findings of fact, there was no question of law arising for reference being made to th·~ High Court. Under those circum-. stances, the High Court was perfoctly justified in rejec•ting the applica'tion filed by the appellant under s. 66(2) of the Act. D E F G H Before we conclude we may refer to the decision of this Court in _Commissioner_ _of_ _Income-tax West Bengal_ _I,_ _and Another_ v. _Anwar_ _Ali('),_ wherein it has been held that one of the principal objects in enacting s. 28 is to provide a deterrent against recurrence of default on the part of the assesse.~ and th~t s. 28 is penal in the sense that its conseque.nces are intended to be effective deterrent which would put a Stop to the practices which the legislatur.~ considers to b~ against rthe public interest. 11 has been· further held that the Deparcment must establish that the receipt of the amount in dispU'te constitu'tes the income of the assessee and if there is no evidence .on record except the explanation given by the assessee, which exp1anation has been found to be false, it do·~s not follow that the receipt constitutes its taxable income. It has been further held that as the proceedings under s. 28 are of a penal nature and the burden is on th.~ Department •that a particular amoun [1] t is revenue receipt, it is leg_itimat·~ to say that the mere fact that the explanation of the assessee is false, does not necessarily give rise to the inference that the dispu'ted amount represents the income. It has been pointed •out in the said decision that the finding given in the assessment pro ·ceeding for det•~rmining or compu1ing the tax is not conclusive [l970J 761.T.R. 696. A B ## c D E F G #### - ' C.I.T. _v._ KHODAY & SONS _(Vaidialingam,_ _!.)_ 853 though it may be good evidence. ~t has been further held by this Court in the a.bove decision : From the above it is clear that penalty proceedings being penal in character, th<~ Department must establish that the receipt of the amount in dispute constitutes income of the assessee. ApaL1 from the falsity of the explanation given by the assessec, 'the Department must have before it before levying penalty cogent material or evidence from which it could be inferred that tire assessee has consciously concealed the particulars of his income or had deliberately furnished inaccurn,e particulars in respect of the same and that the dispu1ed amount is a revenue receipt. No doubt the original assessment proceedings, for computing the tax may be a good il•~m of evidence in the penalty proceedings; but th.e penalty cannot be levied solely on 'the basis of the reasons given in the original order of assessment. In the caso~ before us we have already pointed out that in the order levying penalty the Income-tax Officer has categ9rically stated that the reasons for adding the dispu'ted amounts in the total income of the assessee have been already discussed in 1he original order <;if assessment and that they need not be repeated again. Tm~ Appellate Assistant Commissioner, we have already pointed out, has made only a guess work. Th<it clearly shows that except the re_asons given in the original assessment order for including the disputed items in the total income, the Department had no other material or evidence from which it could be reasonably inferred that the assessee had consciously concealed ithe particulars of his income or had deliberately furnished inaccurate particulars. For all the reasons given above, it follows that there is no merit in the appeal and it is accordingly dismissed. As the respondent has not appeared, th·~re will be no order as to costs. V.P.S. _Appeal dismissed._ "Before penalty can be imposed the entirety of cir cumstanc~s must reasonably point to the conclusion that the disputed amount represented income and that the assessee J;iad consciously concealed the particulars of his income or had deliberately furnished inaccurate particulars."