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Additional Commissioner of Income-tax Vs. K.S.M. Wazir Mohd. and Sons - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 708 of 1972
Judge
Reported in[1977]110ITR798(All)
ActsIncome Tax Act, 1961 - Sections 28, 30 to 43 and 271(1)
AppellantAdditional Commissioner of Income-tax
RespondentK.S.M. Wazir Mohd. and Sons
Appellant AdvocateDeokinandan, Adv.
Respondent AdvocateR.K. Gulati, Adv.
Excerpt:
.....is satisfied that any person- (a) has without reasonable cause failed to furnish the return of total income. ..or, (b) has without reasonable cause failed to comply with a notice under sub-section (1) of section 142 or sub-section (2) of section 143, or (c) has concealed the particulars of his income or furnished inaccurate particulars of such income ;he may direct that such person shall pay by way of penalty- (i) in the cases referred to in clause (a)..(ii) in the cases referred to in clause (b)..(iii) in the cases referred to in clause (c)..explanation. of the total income (hereinafter in this explanation referred to as the correct income) as assessed under section 143 or section 144 or section 147 (reduced by the expenditure incurred bona fide by him for the purpose of making or..........appearing for the revenue,contends that, according to the explanation to section 271(1)(c), the totalincome is to be reduced by the expenditure incurred bona fide by theassessee for the purpose of making or earning any income included in thetotal income. the expenditure referred to in the explanation which has tobe taken into consideration is the expenditure of the nature which can beclaimed as a deduction under sections 30 to 43 of the income-tax act. heemphasised that sections 30 to 43 are the sections which specifically provide for deduction of expenses in computing the profits and gains of business or profession. in the instant case the assessee did not claim that anydeduction claimed by it under sections 30 to 43 had been disallowed and assuch no question of reducing the total.....
Judgment:

H.N. Seth, J.

1. The Income-tax Appellate Tribunal, ' B ' Bench, Allahabad, has, at the instance of the Commissioner of Income-tax, made this reference under Section 256(1) of the Income-tax Act, 1961.

2. The assessee in this case is K. S. Wazir Mohd. and Sons, a registered firm, carrying on business of building contractors and the assessment year involved is the year 1965-66.

3. Brief facts as they emerge from the statement of the case read along with the annexures attached thereto are that in the relevant accounting year the assessee derived income from two sets of contract businesses, described as the Kanpur set and the Lucknow set, as also by way of interest on certain fixed deposits in the savings bank. For the purposes of this case, the income derived by way of interest on fixed deposits is not material. In its income-tax return, the assessee showed its total receipts from the two sets of contract businesses as Rs. 12,45,000 resulting in a net profit of Rs. 42,209. The Income-tax Officer proceeded to make the assessment under Section 143(3) of the Income-tax Act. He thought that the amount of profit disclosed by the assessee, which came to slightly more than 3'3% of the total receipts, was very low. Accordingly, he scrutinized the books of the assessee and found that neither the cash book had been written from day to day, nor had the daily balance been struck. Although the assessee had mentioned that it had furnished the particulars of its closing stock in its trading account, yet that had not been done. Subsequently, the assessee estimated its closing stock at Rs. 1,549, but did not disclose the basis for estimating or valuing the same. The expenses claimed by the assessee were mostly unvouched and they had not been debited correctly. Some of the car expenses which should not have been debited in the material account were found debited therein. He, accordingly, found the account books of the assessee to be unreliable and after rejecting them proceeded to make the assessment on the' basis of the material available on the record.

4. In respect of the business relating to the Kanpur set the assessee showed its total receipts as Rs. 6,29,554 which included a sum of Rs. 5,72,621 in respect of two contracts and some miscellaneous receipts, resulting in a net profit amouting to Rs. 27,765, i.e., about 4% of the receipts. In the opinion of the Income-tax Officer, the profit disclosed was too low. The assessee attempted to explain the low rate of profit by stating that ever since the contracts in question had been entered, the price of material and wages had increased. In this connection the Income-tax Officer observed :

' Assessee's condition of accounts, however, as disclosed above is very unsatisfactory. In view of this, however, a net rate of 8% will be applied so as to give an income of Rs. 50,364. The assessee received raw material of Rs. 27,766 on which a not rate of 5% will be applied so as to give an income of Rs. 1,388. Income from this set thus comes to Rs. 51,752 subject to depreciation.'

5. While dealing with the business relating to the Lucknow set, the Income-tax Officer found that the assessee had disclosed its total receipts and net profit as Rs. 6,18,145 and Rs. 14,444. The rate of profit thus came to about 2% which, in his opinion, was absurd. Again, the assessee attempted to explain the low rate of profit by alleging that the contracts in question had been entered into in the year 1962, It was expected that the work under those contracts would be completed within one year. However, the work continued right up to the year 1964 by which time the cost of material and wages had shot up. While dealing with this point of the case the Income-tax Officer observed:

' There is some force in the assessee's contention. Looking, however, to the fact that this remains unproved in the absence of proper account net rate of 8% will be applied on payments of Rs. 6,18,145 so as to give a profit of Rs. 49,452. A net rate of 5% will be applied on raw material received on Rs. 39,400 so as to give a profit of Rs. 1,970. The income from this set comes to Rs. 51,422.'

6. The Income-tax Officer, thereafter, added the income of the assessee from the aforementioned two businesses as also the income derived by it by way of interest on fixed deposits and, after making certain allowances, computed its taxable income as Rs. 97,213. As the income returned by the assessee was below 80% of the assessed income, the Income-tax Officer directed that notice under Section 271(1)(c)/274 of the Income-tax Act be issued to the assessee requiring it to show cause why a penalty for concealing and for furnishing wrong particulars of its income be not imposed upon it. As the minimum penalty imposable exceeded Rs. 1,000, the Income-tax Officer referred the penalty proceedings to the Inspecting Assistant Commissioner. The assessee submitted to the assessment order but it appeared before the Inspecting Assistant Commissioner to contest the penalty notice. It was urged on its behalf that, according to the view expressed by some of the Income-tax Appellate Tribunals, in cases where additions are made on estimate basis, no penalty under Section 27(1)(c) read along with the Explanation thereto, can be imposed. The Inspecting Assistant Commissioner rejected the explanation offered by the assessee and observed;

' Those decisions of the Appellate Tribunal referred to by the learned Attorney have not been accepted by the department and with due respect I must differ from the view of the Tribunal.'

7. Thereafter, he went on to observe that the assessee was a well-known firm of contractors and year after year its accounts were rejected and it had been assessed on estimate basis. The assessee had accepted the earlier assessments and with due diligence it could have referred to those assessments and returned its correct income. Failure to do so meant that the assessee was guilty of gross and wilful neglect and the provision of Section 271(1)(c) read with the Explanation thereto were applicable. In the end he imposed a penalty of Rs. 5,000 on the assessee.

8. The assessee then went up in appeal before the Income-tax Appellate Tribunal, Allahabad. The Tribunal opined that merely because the assessee's books of account were rejected and its income was estimated at an amount higher than that disclosed by him, the case would not fall within the mischief of the Explanation to Section 271(1)(c) of the Act, if the assessee could give an explanation for not returning the correct income and the explanation was found to be plausible or reasonable. In such a case, the onus shifts to the department to establish the fact of concealment by independent evidence. In this case, the assessee's explanation was that it maintained its books of account in the normal course of business and that it could not anticipate that the Income-tax Officer will find them to be defective and estimate the income. In the Tribunal's view this explanation was sufficient to discharge the onus cast upon the assessee by the Explanation to Section 271(1)(c) of the Act. It was not possible to visualise how else the assessee could prove a negative fact as required by the section. The Tribunal further found that there was nothing on the record to indicate that the assessee fraudulently judged its account and knowingly understated its income in the return. The department did not bring on record any material to establish such criminal intention on the part of the assessee. In the circumstances, the Tribunal held that it was not a fit case for levy of penalty under Section 271(1)(c) of the Act. It accordingly allowed the appeal filed by the assessee and cancelled the penalty imposed by the Inspecting Assistant Commissioner.

9. At the instance of the Commissioner of Income-tax, the Income-tax Appellate Tribunal stated the case and has referred the following question of law for the opinion of this court:

' Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee is not liable to penalty under Section 271(1)(c) of the Act read with the Explanation thereto '

10. Relevant portion of Section 271(1) of the Income-tax Act reads thus :

(1) If the Income-tax Officer or the Appellate Assistant Commissioner in the course of any proceedings under this Act, is satisfied that any person-

(a) has without reasonable cause failed to furnish the return of total income........or,

(b) has without reasonable cause failed to comply with a notice under Sub-section (1) of Section 142 or Sub-section (2) of Section 143, or

(c) has concealed the particulars of his income or furnished inaccurate particulars of such income ;

he may direct that such person shall pay by way of penalty-

(i) in the cases referred to in Clause (a)........

(ii) in the cases referred to in Clause (b).........

(iii) in the cases referred to in Clause (c).........

Explanation.--Where the total income returned by any person is less than eighty per cent. of the total income (hereinafter in this Explanation referred to as the correct income) as assessed under Section 143 or Section 144 or Section 147 (reduced by the expenditure incurred bona fide by him for the purpose of making or earning any income included in the total income, but which has been disallowed as deduction), such person 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 for the purposes of Clause (c) of this sub-section.'

11. It is not disputed that, normally, when the department charges an assessee with concealment or furnishing inaccurate particulars of his income under Section 271(1)(c) and wants to proceed to penalize him, it is for the department to indicate the facts and material appearing on the record from which that charge can be made out; but if the case is of the type enumerated in the Explanation it will be deemed that the assessee has concealed or furnished inaccurate particulars of his income unless he proves that failure to return the correct income did not arise from any fraud or gross or wilful neglect on his part.

12. The order passed by the Inspecting Assistant Commissioner in this case clearly indicates that he did not rely upon any definite material, in possession of the department, on the basis of which a positive finding that the assessee had in its return concealed or furnished inaccurate particulars of its income could be recorded. Penalty was imposed as the assessee's returned income was less than 80% of its assessed income and the explanation offered by it to show that the failure to furnish the correct return was not on account of wilful or gross neglect on its part, was not acceptable. Learned counsel for the revenue urged that, in such circumstances, the case squarely fell within the ambit of the Explanation to Section 271(1)(c) and the assessee became liable to penalty in respect of the lapse described in Section 271(1)(c) of the Act. According to him, either the assessee established by positive evidence that failure to return the correct income, i.e., the income ultimately assessed, was not on account of any fraud or wilful neglect on its part or, he would, for purposes of Section 271(1)(c), be deemed to have concealed or furnished wrong particulars of its income. The Tribunal, according to him, was in error when it observed that mere assertion on the part of the assessee that it had maintained its books of account in the normal course of business and that it could not be anticipated that the Income-tax Officer will find them to be defective and estimate the income, was sufficient to discharge the burden cast upon the assessee and that onus shifted to the department which had to establish the fact of concealment by independent evidence. In such cases no question of shifting of burden of proof arises. In the instant case apart from urging that in a case where the assessment had, after rejecting the assessee's books, been made on estimate basis, the provisions of the Explanation to Section 271(1)(c) are not attracted, the assessee did not lead any evidence whatsoever to show that there was no fraud or wilful neglect on its part in returning the incorrect income. Accordingly, the Inspecting Assistant Commissioner was justified in applying the Explanation to Section 271(1)(c) of the Act and in proceeding on the basis that the assessee had, for the purposes of Section 271(1)(c) of the Act, concealed or furnished wrong particulars.

13. The entire chain of argument built up by the learned counsel for the revenue, as also the reasoning adopted by the Inspecting Assistant Commissioner for holding that the assessee had rendered itself liable to penalty under Section 271(1)(c) of the Act, is founded on the Explanation to that subsection. If it is found that the case is not covered by the Explanation, the very basis of the order passed by the Inspecting Assistant Commissioner as also the argument advanced by the learned counsel for the revenue, would disappear. In such circumstances it will not be necessary for us to go into the wider question, viz., whether the explanation of the type offered by the assessee, would be sufficient to discharge the burden cast upon the assessee by the Explanation added to Clause (c) of Section 271(1) of the Act. It appears that the Inspecting Assistant Commissioner was under the impression that the only condition precedent for attracting the Explanation to Section 271(1)(c) is that the returned income by an assessee should be less than 80% of the total income ultimately assessed in proceedings under Section 143 or 144 or 147 of the Income-tax Act. Indeed, this was the only argument advanced before us by the learned counsel for the revenue. However, a bit careful reading of the Explanation would show that such is not the position. Important words used in the Explanation are :

'Where the total income returned by any person is less than eighty per cent. of the total income (hereinafter in the Explanation referred to as the correct income) as assessed under Section 143 or Section 144 or Section 147 (reduced by the expenditure incurred bona fide by him for the purpose of making or earning the income included in the total income but which has been disallowed as deduction).'

It means that in order to attract the Explanation, the fact to be seen is whether the returned income is less than 80% of the total income as assessed after it is reduced by the expenditure bona fide incurred by the assessee, for earning the same, which while making the assessment was, for some reason, disallowed as deduction. The Explanation would be attracted only when such expenditure claimed by the assessee and disallowed by the Income-tax Officer is deducted from the amount of total income ultimately assessed and the returned income is found to be less than 80% of such reduced amount, and not merely when the returned income is found to be less than 80% of the amount ultimately assessed. The material amount for this purpose is not the amount ultimately assessed but the amount assessed as reduced by the expenditure bona fide incurred by the assessee and disallowed by the Income-tax Officer.

14. Sri Deokinandan Agarwal, learned counsel appearing for the revenue,contends that, according to the Explanation to Section 271(1)(c), the totalincome is to be reduced by the expenditure incurred bona fide by theassessee for the purpose of making or earning any income included in thetotal income. The expenditure referred to in the Explanation which has tobe taken into consideration is the expenditure of the nature which can beclaimed as a deduction under Sections 30 to 43 of the Income-tax Act. Heemphasised that Sections 30 to 43 are the sections which specifically provide for deduction of expenses in computing the profits and gains of business or profession. In the instant case the assessee did not claim that anydeduction claimed by it under Sections 30 to 43 had been disallowed and assuch no question of reducing the total income assessed arose. The Inspecting Assistant Commissioner was, therefore, quite justified in applying theExplanation to Section 271(1)(c) of the Act. We are unable to accept thissubmission. While it is true that the Explanation covers within its ambitthe deductions specified in Sections 30 to 43, it does not confine itselfonly to the claim to such deductions.

15. The purpose of Section 271(1)(c) of the Income-tax Act is to penalise an assessee for concealing or furnishing inaccurate particulars of his income. It is now well-settled that under the Income-tax Act what is chargeable to tax under the head ' profits and gains of business ' is not the gross receipts of an assessee but the profits and gains properly so called. The word 'profit' is to be understood in its natural and proper sense. Such profits are to be ascertained on ordinary principles of commercial trading and commercial accounting. Accordingly, notwithstanding that a particular expenditure is not held deductible under Sections 30 to 43 of the Income-tax Act, corresponding to Section 10(2)(xv) of the 1922 Act, a proper trade or commercial expense which has not been specifically prohibited by any other section of the Act, has to be excluded in computing the assessee's taxable profits and gains of business under Section 28 of the 1961 Act or Section 10(1) of the 1922 Act. An assessee furnishes the particulars of its income by stating his business receipts as also the expenditure incurred by him for the purpose of earning that receipt, which in computing his real profits is deductible either under the provisions of Sections 30 to 43 of the 1961 Act or which is allowed as deduction on the ordinary principles of commercial trading and commercial accounting. Viewed in this light, we see no justification for confining the deductions mentioned in the Explanation to Section 271(1)(c) only to such deductions as are claimable and admissible under Sections 30 to 43 of the Income-tax Act. Accordingly, in a case where an assessee after stating its total receipts claims that certain deductions are admissible to him in computing his taxable profits and gains of business either under Section 28 or under Sections 30 to 43 of the Act, the Explanation to Section 271(1)(c) will not be attracted merely because those expenses have been disallowed. If the Inspecting Assistant Commissioner wanted to apply that provision he had further to go into the question and decide whether the expenditure claimed was actually incurred in a bona fide manner.

16. It is significant that in the case before us, the fact that the assessee's total receipts in connection with its business in relation to the Kanpur and the Lucknow sets of business as disclosed by it was Rs. 6,29,554 and Rs. 6,18,145, respectively, has been accepted as correct by the Income-tax Officer. The assessee claimed that the net profit from its Kanpur business was Rs. 27,765. In other words it claimed that Rs. 6,01,789 had been spent by it in connection with that business. The Income-tax Officer by applying a rate of profit of 8%, determined the net profit of that business as Rs. 50,364. In other words, he accepted the assessee's claim for expenses amounting to Rs. 5,79,190 only as against the sum of Rs. 6,01,789 claimed by it, and disallowed the expenses amounting to Rs. 22,599. The Income-tax Officer did not go into the question whether any particular item of expense claimed by the assessee was fictitious or that the same had not been actually spent bona fide for purposes of its business. Merely because it found the books of the assessee to be unreliable and estimated the assessee's income by applying a profit rate of 8%, it does not mean that he either found that the expenses to the extent they were disallowed were either not incurred in fact or, if incurred, they had not been incurred bona fide for purposes of the assessee's business.

17. Similarly, with regard to the assessee's contract business relating to the Lucknow set, it showed net profit of Rs. 14,444 as against the total receipts of Rs. 6,18,145. It follows that it claimed a sum of Rs. 6,03,700, as expenditure incurred by it, in connection with that business. The assessee offered an explanation for the low rate of profit, i.e., for the high rate of expenditure. Though the Income-tax Officer found some force in the explanation yet as he was rejecting the assessee's books, he estimated its total income, by applying the flat rate of 8%, as Rs. 49,459. In other words, he allowed deduction in respect of the expenses claimed to the extent of Rs. 5,68,686 as against Rs. 6,03,700 claimed by the assessee. As explained above, in the circumstances it cannot be said that the Income-tax Officer found that any particular item of expenditure claimed by the assessee was not spent by it bona fide for purposes of earning Rs. 6,18,145.

18. Unless the income-tax authorities went into the question as to which part of the expenditure claimed by the assessee was not incurred bona fide for the purposes of its business, they could not, for purposes of the Explanation to Section 271(1)(c), determine the actual amount by which the assessed amount had to be reduced before comparing the same with the amount of income returned by the assessee. We find that neither the Income-tax Officer nor the Inspecting Assistant Commissioner went into this question. They proceeded on the footing that if the returned income was less than 80% of the assessed income (without reducing the same by the expenditure even if bona fide incurred and claimed by the assessee but disallowed for some reason), the Explanation was attracted. As is evident from the language used in the Explanation, merely because while computing the assessee's income certain expenses have been disallowed, it does not mean that those expenses were either not incurred or, if incurred, they did not represent bona fide expenditure for earning the income in question.

19. We, accordingly, feel that in a case like the present one -where the total receipts of the business as shown by the assessee is accepted by the Income-tax Officer, the provisions contained in the Explanation to Section 271(1)(c) of the Act would jiot get attracted unless the Inspecting Assistant Commissioner further went into the question whether any portion of the amount of expense claimed by the assessee and disallowed, was actually incurred or not, and if incurred whether it was bona fide incurred for purposes of earning the income. It is only after reducing the assessee's income with the expenditure bona fide incurred for earning the same that the Income-tax Officer and the Inspecting Assistant Commissioner could possibly determine whether the returned income was less than 80% of such reduced amount. Since this part of the case was never investigated by the Inspecting Assistant Commissioner, the very basis for the applicability of the Explanation to Section 271(1)(c) of the Act was not there and the very foundation of the penalty order disappears.

20. As the very condition precedent for the applicability of the Explanation to Section 271(1)(c) was not there, no question of requiring the assessee to prove that the failure on its part to return the correct income was not on account of any fraud or wilful or gross neglect on its part arose. The Explanation to Section 271(1)(c) not being applicable to the facts of the case, it was for the department to indicate the material on the record on the basis of which a finding that the assessee was guilty of a lapse of the nature enumerated in Section 271(1)(c), could be recorded. Admittedly, the department has in this case not relied on any such material. The Income-tax Appellate Tribunal was, therefore, justified in holding that the assessee in this case was not liable to penalty under Section 271(1)(c) of the Act.

21. It is, accordingly, wholly unnecessary for us to go into the wider question raised by the learned counsel for the revenue.

22. In the result, we answer the question referred to us in the affirmative and in favour of the assessee. The assessee will be entitled to the costs of this reference which is assessed at Rs. 200.


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