The judgment of the court was delivered by :
JAGANMOHAN REDDY C.J. - We had asked the Income-tax Appellate Tribunal under section 66 (2) of the Indian Income-tax Act, 1922, to state a case on the following question, viz. :
'Whether the department could start penal proceedings under section 28 (1) (c) of the Income-tax Act when the computation of the income of the assessee was made under the proviso to section of the assessee was made under the proviso to section 13 of the Act ?'
The parties are agreed that this question as framed does not arise on the facts and in the circumstances as set out in the statement of the case. We have, therefore, in order to bring out the exact scope of the matter upon which our opinion is sought, reframed the following question as arising out of the statement of the case :
'Whether, on the facts and in the circumstances of the case, penal proceedings under section 28 (1) (c) of the Indian Income-tax Act could be validly initiated against the assessee ?'
The assessee is a firm consisting of four partners carrying on business in turmeric, ground-nuts, manures, etc., For the assessment year 1947-48, for which the accounting year ended on March 31, 1947, the Income-tax Officer did not accept the return of the income of Rs. 8,335 and computed the total income as Rs. 1,25,000. On appeal the Appellate Assistant commissioner reduced it to Rs. 1,10,000 while the Appellate Tribunal finally determined the income as Rs. 60,000.
Against this, the assessee did not prefer any proceedings under section 66 of the Act so that assessment has become final. Thereafter, the Income-tax Officer initiated proceedings under section 28 (1) (c) of the said Act and issued a show cause notice on May 2, 1951, asking it to explain why penalty should not be levied on the firm for having concealed the particulars of its income or for deliberately furnishing inaccurate particulars thereof by omitting to disclose turmeric and ground-nut transactions, which resulted in the suppression of its income. The assessee had sent a reply on May 21, 1951, asking the Income-tax Officer for the material defects which led him to conclude that the firm had suppressed its income. It was further submitted that due to inadvertence in the maintenance of accounts, they had relied upon a clerk, who turned against them and supplied unreliable information with a bad intention to put them in trouble. Again, the Income-tax Officer by his notice dated March 13, 1952, called upon the firm to show cause in writing or in person as to why penalty under section 28 should not be levied on it for having concealed the particulars of its income, etc., as detailed in the assessment order. To this, a reply was sent that the entire assessment was based upon mere conjectures and the estimate made was without any basis, and, hence the Income-tax Officer was asked to stay the proceedings till the appeal was decided. After the appeals were disposed were of, the assessee was given a further opportunity of being heard on September 24, 1956. No further evidence was produced but levied. The Income-tax Officer having been satisfied that the assessee had concealed the particulars of his income through manipulation of accounts, held that the case attracted the provisions of section 28 (1) (c) of the said Act. Accordingly, he levied a penalty of Rs. 10,000 on the assessee.
Before the Appellate Assistant Commissioner, it was contended that while fixing the income at Rs. 60,000, the Appellate Tribunal had acted mainly under the proviso to section 13 and as such, no penalty was leviable. It was further urged that, as the Appellate Tribunal was satisfied that the cash credit did not represent the secret profits of the assessee which were kept outside the books, the department was not justified in levying a penalty on the assessee. The Appellate Assistant Commissioner dealt with both these contentions, and confirmed the amount of penalty levied on the assessee.
Before the Appellate Tribunal, it was mainly contended that since in estimating the income of the assessee, recourse was taken to the provision to section 13 of the said Act, no penalty was leviable. It was further submitted that as there were no defects or suspicious features in the accounts, the action of the department in levying a penalty on the assessee was not warranted. The Appellate Tribunal took the view that the findings given in the assessment proceedings could be taken as a guide but they alone cannot stand as reasons for levying a penalty in the penalty proceedings. The Tribunal was influenced by the fact that when the assessee returned an income of Rs. 8,335, the assessee knew that it did not represent the true income. The Tribunal was satisfied that when the assessee took key loans of Rs. 16,000 and Rs. 11,000 on December 6, 1946, and December 10, 1946, respectively, from the Andhra Bank Ltd., by showing the said loans as having been raised on November 15, 1946, and November 16, 1946, when otherwise there would have been cash deficits, the assessee had deliberately manipulated its accounts. For these reasons, the Tribunal confirmed the order of the Appellate Assistant Commissioner. The book results were rejected by the Income-tax Officer and an estimate of income was made under the proviso to section 13 of the Act. The assessee took key loans of Rs. 16,000 and Rs. 11,000 from the Andhra Bank Ltd., on December 6, 1946, and December 10, 1946, respectively, but had shown these loans as having been raised on November 15, 1946, and November 16, 1946, i.e., earlier than when the loans were actually taken. This fact could not be controverted and it is incontrovertible. The income-tax authorities were, therefore, justified in holding that the assessee had manipulated the accounts because on the particular dates when the loans were said to have been taken there would be no cash balance but for these entries. The assessee himself admitted that if the loans were not entered in the books on the dates on which they were taken, there would be deficit cash balance which would fasify the book results. Unfortunately, the assessment orders have not been attached to the statements of the case, and so we cannot take into consideration Mr. Kondaiahs submission that before the assessing authorities, the assessee had admitted that the accounts were not reliable and could not be acted upon. Be that as it may, even the two entries to which we have made a reference would show that the assessing authorities had to estimate the income. On these facts, there could be little doubt that the suppression of income on the part of the assessee was deliberate. Once this fact is established, the question of the application of the proviso to section 13 of the Act becomes irrelevant. This case does not involve the question of applicability of the method of accounting so as to attract section 13 of the said Act. No doubt, before the Income-tax Appellate Tribunal it was stated that the facts and circumstances of the case attract the provisions of section 13 and perhaps that view was accepted by it, but in our view, section 13 has no application to the facts and circumstances of this case.
We have asked Mr. Shankar Rao, the learned advocate for the assessee, to show us what was the method of accounting which was not accepted by the assessing authorities and what was the method of accounting that was applied as a result of which the income was computed at Rs. 60,000 but he was unable to point out or satisfy us on this aspect of the matter. On the other hand, the Tribunal stated that the learned counsel for the assessee conceded that this is one of those cases in which an overall estimate has got to be made without meticulously examining every point in detail. In that view, the Tribunal estimated the income of the assessee for the year in question at Rs. 60,000. This is, therefore, not a case in which the method of accounting adopted by the assessee was in dispute, nor were the accounts accepted as correct. If at all, the statement of the case clearly shows that the method of accounting was not accepted and could not be accepted having regard to the admitted facts as set out above. In the circumstances, the applicability of section 23 (3) of the Act cannot be doubted. If so, the only question before the Tribunal was whether there was a deliberate suppression of income on the part of the assessee. The income-tax authorities have given ample reasons for rejecting the accounts and for holding that there has been a deliberate suppression of the income on the part of the assessee. The statement in the order of the Income-tax Appellate Tribunal that the application of the proviso to section 13 of the Act is not denied, is obviously an error because the whole order proceeded on the basis that the accounts were rejected and that an estimate has to be made of the income. In this view, the argument advanced by Mr. Shankar Rao, at length, that section 13 and its proviso deal only with the method of account, as such accepting the accounts as correct, if an assessment is made by the application of the proviso to section 13 of the Act, the books must be treated as correct and that if the books are treated as correct, there is no question of any suppression much less any deliberate suppression of income nor the provisions of section 28 (1) (c) can be said to be attracted, need not be considered.
Our answer to the question is, therefore, in favour of the department and against the assessee but in the circumstances without costs.