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J.A. Trivedi Brothers Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMadhya Pradesh High Court
Decided On
Case NumberMiscellaneous Civil Case No. 56 of 1982
Judge
Reported in[1986]158ITR705(MP)
ActsIncome Tax Act, 1961 - Sections 145, 145(2) and 271(1)
AppellantJ.A. Trivedi Brothers
RespondentCommissioner of Income-tax
Appellant AdvocateC.J. Thacker, Adv.
Respondent AdvocateB.K. Rawat, Adv.
Cases ReferredHansraj Agrawal v. Addl.
Excerpt:
- - 5. the assessee, not satisfied with these orders of the income-tax officer for the years under consideration, preferred appeals before the appellate assistant commissioner and met with partial success. against this order of the tribunal, these applications were made by the assessee as well as the department before this court. it is only in those circumstances that action could be taken under section 145(2) of the act and the best judgment assessment could be made under section 144 of the income-tax act. 12. on the other hand, learned counsel for the revenue submitted that :(a) once the tribunal came to the conclusion that the agreements with the raising contractors were not genuine, the tribunal was right in rejecting the account books submitted by the assessee and once the account..........144 of the act, a best judgment assessment was made. the tribunal sustained the order of the income-officer on the grounds that:(a) there was no quantitative tally, (b) from the records, it was not clear as to what was the amount paid to one of the sub-contractors who was also not examined by the assessee, (c) payment was made to another sub-contractor on the basis of conversion of truck loads into tonnage, and (d) the contractor was not really a sub-contractor as he did not maintain any records and solely depended upon the payments made by the assessee. 15. on a reference, this court held that the accounts were properly maintained by the assessee and were checked by the governmental authorities and there was no chance of manipulation of accounts. a mining lessee was required to.....
Judgment:

B.M. Lal, J.

1. This is a reference made by the Income-tax Appellate Tribunal in response to an order passed by this court in M.C.C. No. 185 of 1975 on September 30, 1980, directing the Tribunal to make a reference under Section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as ' the Act '), to answer the following questions:

' (a) Whether, on the facts and circumstances of the case, the Tribunal was right in law in applying Section 145(2) of the Act ?

(b) Whether, on the facts and circumstances of the case, the Tribunal was right in law in making further additions of Rs. 25,000, then again Rs. 25,000 and Rs. 30,000?

(c) Whether, on the facts and circumstances of the case, the Tribunal was right in law in saying that the raising contracts did not inspire confidence ?

(d) Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that the raising contractors could not be treated as benamidars ?

(e) Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that Section 271(1)(c) of the Act was not applicable?'

2. This reference arises out of the assessments for the years 1962-63, 1963-64 and 1964-65, the accounting years ending with the calendar years 1961,1962 and 1963. The application under Section 256(2) of the Income-tax Act was filed in this court with reference to the Income-tax Appeals bearing Nos. 416, 417 and 418 (Nagpur) of 1970-71,2265 (Bombay) of 1963-69, 14 (Nagpur) of 1970-71 then 1408 (Nagpur) of 1970-71, 491 (Nag-pur) of 1970-71, 492 (Nagpur) of 1970-71 and 211 (Nagpur) of 1971-72 and by the order, this court disposed of Misc. Civil Cases Nos. 186, 187, 188, 189, 190, 191, 205, 206, 207, 208, 209, 210, 211, 218 and 219 of 1975 and this court directed the Tribunal to make a reference for answering the above-referred questions.

3. The facts stated in this reference are that the assessee is a firm deriving income from raising and sale of manganese and coal. It has secured leases over manganese fields in Madhya Pradesh. The firm was raising coal up to September 14, 1961, but because of disputes which arose amongst the partners of the firm and finding that the raising of the manganese and coal was not very economical, the assessee entered into agreements on July 15, 1961, with Trivedi Trading Corporation and M/s. Trivedi Brothers. According to the terms of the agreements, the assessee agreed to keep a certain percentage for itself and the remaining sale proceeds were to be given to the contractors.

4. During the assessment proceedings, the Income-tax Officer found that the manganese raised through the contractors was costlier than what was done departmentally by the assessee. He further found that the accounts were not properly maintained and accordingly applied Section 145(2) of the Act for completeness of the accounts and made additions to the income of the assessee of Rs. 1,50,000 for the assessment year 1962-63, Rs 1,25.000 for the assessment year 1963-64 and Rs. 2,15,000 for the assessment year 1964-65, respectively, on the ground that there was excessive increase in the cost of raising manganese ore. Further, the Income-tax Officer disallowed certain expenditure incurred by the assessee.

5. The assessee, not satisfied with these orders of the Income-tax Officer for the years under consideration, preferred appeals before the Appellate Assistant Commissioner and met with partial success. The Appellate Assistant Commissioner sustained the additions of Rs. 25,000 for the assessment year 1962-63, Rs. 25,000 for the assessment year 1963-64 and Rs. 55,000 for the assessment year 1964-65, respectively, on account of additions made by the Income-tax Officer for the raising cost of manganese For the assessment year 1962-63, the Appellate Assistant Commissioner confirmed the amount of Rs. 8,409 on account of stores and explosives expenses The Appellate Assistant Commissioner disallowed Rs. 5,000 on the ground of excessive consumption of coal in respect of Ghorwari and Hirdyagarh colliery. He also disallowed Rs. 15,000. The Appellate Assistant Commissioner confirmed the addition of Rs. 3,340 on account of legal expenses treating it as capital expenditure. For the year 1963-64, the only ground was the addition confirmed of Rs. 25,000 by the Appellate Assistant Commissioner.

6. For the assessment year 1964-65, the Appellate Assistant Commissioner confirmed the addition of Rs. 55,000 towards gross profits against the addition of Rs. 2,15,000 by the Income-tax Officer. The Appellate Assistant Commissioner fixed the market value of the capital assets as on January 1, 1954, at Rs. 15,000 and worked out the capital gains at Rs. 1,06,750 and confirmed the additions of Rs. 2,150 out of the total legal expenses claimed at Rs. 3,800.

7. Being aggrieved by the orders of the Appellate Assistant Commissioner, the assessee filed appeals before the Tribunal objecting to the additions sustained by the Appellate Assistant Commissioner.

8. After hearing the submissions of either side, the Tribunal by its order under consideration decided that the Income-tax Officer was justified in invoking Section 145(2) of the Act. It also held that having regard to the circumstances and relations of the witnesses with the assessee, the agreements could not be relied upon. The Tribunal observed that the agreements give an impression that the contractors were merely working for the assessee in the capacity of supervisors and not as contractors. The Tribunal came to the conclusion that the agreements entered into between the assessee and the contractors did not inspire confidence but it also held that the contractors could not be treated as benamidars of the assessee. On these findings, maintaining that the Income-tax Officer was right in invoking the provisions of Section 145(2) of the Act, the Tribunal examined the additions made by the Income-tax Officer and modified by the Appellate Assistant Commissioner and ultimately sustained the additions to the tune of Rs. 50,000 for the assessment year 1962-63, Rs. 50,000 for the assessment year 1963-64 and Rs. 85,000 for the assessment year 1964-65, respectively, for the three assessment years.

9. In respect of the three assessment years, the Inspecting Assistant Commissioner had imposed penalties amounting to Rs. 1,15,000 and Rs. 1,62,000 under Section 271(1)(c) of the Income-tax Act. The Tribunal came to the conclusion that although additions to some extent under Section 145(2) have been maintained, yet this could not be made the basis for levy of penalty and, therefore, the Tribunal cancelled the order in respect of the penalties imposed on the assessee. Against this order of the Tribunal, these applications were made by the assessee as well as the Department before this court.

10. The applications made were Misc. Civil Cases Nos. 186 and 191 by the assessee and the remaining applications were made by the Departments referred to above. After hearing the counsel for the assessee and the Revenue, a direction was issued to the Tribunal to make a reference and, accordingly, the present reference was made by the Tribunal.

11. The learned counsel appearing for the assessee submitted that:

(a) The Tribunal was not right in making the additions and justifying the application of Section 145(2) of the Income-tax Act. According to him, the Tribunal in its order did not consider the question of application of Section 145(2) but merely relied on an earlier order made by the Tribunal and on that basis justified the action taken by the Income-tax Officer under Section 145(2) of the Act. It was argued that action under Section 145(2) of the Act could only be taken if there was material to come to a conclusion that the accounts submitted were not complete and there was no method of accounting. It is only in those circumstances that action could be taken under Section 145(2) of the Act and the best judgment assessment could be made under Section 144 of the Income-tax Act.

(b) It was further submitted by the learned counsel for the assessee that the main thing to justify action under Section 145(2) of the Act was that the agreement with the raising contractors did not inspire confidence, although the Tribunal came to a positive finding that the raising contractors could not be treated as benamidars. It was further contended that merely on suspicion, the Tribunal felt that the raising contractors' agreements were not genuine but there was no material to come to that conclusion.

(c) It was further argued that on this assumption, the Income-tax Officer, the Appellate Assistant Commissioner and also the Tribunal did not accept the accounts submitted by the assessee and applied Section 145(2) of the Act but in the orders passed by the Income-tax Officer, the Appellate Assistant Commissioner or the Tribunal, there was no material to find fault with the accounts submitted by the assessee and, therefore, the action could not be justified under Section 145(2) of the Act.

(d) The learned counsel appearing for the assessee after giving the facts of the case in brief urged that because of the difference of opinion amongst the members in the family and finding that the cost of raising manganese and coal was not very economical, it entered into agreements with other contractors such as Trivedi Brothers and Trivedi Corporation.

(e) The learned counsel stressed that there was no material on record to hold that the contractors were benamidars of the assessee. He further urged that the onus was cast upon the Income-tax Officer to show that the contractors were the benamidars of the assessee. He, therefore, urged that the mere fact that the contractors were relations would not render the agreements as null and void or sham documents. He submitted that no specific defects were pointed out by the income-tax authorities in the account books and, therefore, the book results of the assessee should have been accepted.

12. On the other hand, learned counsel for the Revenue submitted that :

(a) Once the Tribunal came to the conclusion that the agreements with the raising contractors were not genuine, the Tribunal was right in rejecting the account books submitted by the assessee and once the account books were not accepted as correct, action under Section 145(2) of the Act could be taken and where action under Section 145(2) of the Act is taken, the best judgment assessments are, after all, assessments only and the three authorities, viz., the Income-tax Officer, the Appellate Assistant Commissioner and the Tribunal, assessed on estimates and made additions and, therefore, the additions made by the Tribunal ultimately were on estimation on the facts of the case and it could not be said that they are not justified.

(b) The Tribunal cancelled the penalties levied against the assessee holding that Section 271(1)(c) was not attracted as it was not a case of concealment and hereto it was submitted that the Tribunal committed an error as it felt that the accounts were not correct and were not accepted and on estimation in the best judgment assessment, additions were made and the inference that arises is that there was concealment in the returned income and, therefore, the Tribunal was not right in Jaw in rejecting the penalties imposed against the assessee.

13. After hearing the counsel at length appearing for the assessee and the Revenue and perusing the entire records minutely, we have reached the conclusion that this reference must be answered in favour of the assessee for the following reasons :

14. The counsel for the assessee referred to a decision of this court in the case of the assessee himself in R.J. Trivedi (HUF) v. CIT : [1983]144ITR877(MP) , wherein in the case of a sub-contractor in similar circumstances, the books of the assessee who carried on coal mining business and worked two collieries was rejected by the Income-tax Officer under Section 145(2) of the Income-tax Act and by invoking Section 144 of the Act, a best judgment assessment was made. The Tribunal sustained the order of the Income-Officer on the grounds that:

(a) there was no quantitative tally,

(b) from the records, it was not clear as to what was the amount paid to one of the sub-contractors who was also not examined by the assessee,

(c) payment was made to another sub-contractor on the basis of conversion of truck loads into tonnage, and

(d) the contractor was not really a sub-contractor as he did not maintain any records and solely depended upon the payments made by the assessee.

15. On a reference, this court held that the accounts were properly maintained by the assessee and were checked by the governmental authorities and there was no chance of manipulation of accounts. A mining lessee was required to maintain accounts under the Mineral Concessions Rules, 1960, and annual and monthly returns had to be submitted in accordance with the Coal Mines Regulations, 1957. The coal produced were despatched by rail which was itself a check against manipulation. It is further held that a mining lessee is required to maintain accounts under clauses (i) and (j) of rule 27 of the Mineral Concessions Rules, 1960. Annual and monthly returns have also to be submitted in accordance with regulations 4 and 5 of the Coal Mines Regulations, 1957. The returns are to be submitted in Forms II & III. The coal produced in the collieries was despatched by rail. For these reasons, this court held that the Tribunal committed an error of Jaw in sustaining the orders made by the Income-tax Officer under Section 145(2) of the Act and as such it came to the conclusion that the Tribunal was not right in rejecting the accounts of the assessee and on that ground the additions made by the Tribunal were also not sustained.

16. In International Forest Co. v. CIT , their Lordships of the J & K High Court, while considering similar circumstances of the case, held that (headnote):

' Mere fact that lesser out-turn of sawn timber had been shown by the assessee in the accounting year in question as compared to previous years could not be treated as a valid ground for rejecting its accounts and as indicative of any attempt on the part of the assessee to defraud the Income-tax Department. The yield would vary from year to year to a large extent depending on several factors and the yield obtained in one year would not furnish any guidance for estimating the yield for any subsequent year. In the absence of any omission, irregularity or other defect in the method of accounting or positive evidence to show that the accounts did not disclose the whole income of the assessee, the books of account cannot be rejected.'

17. In the instant case also, the income-tax authorities have not reached positively in finding any defect in the method of accounting as maintained by the assessee. Therefore, the books of account as maintained and submitted by the assessee are not liable to be rejected.

18. The agreement with M/s. Trivedi Brothers and M/s. Trivedi Trading Corporation have been entered into by the assessee and according to it, the contractors have operated the mines. The income-tax authorities reached the conclusion that the agreements do not inspire confidence in their minds for the reason that the terms and conditions of the agreements show that the contractors were agents of the assessee. But the Department has failed to point out any material on record to show that the contractors were benamidars of the assessee which, in our opinion, was incumbent upon the Department to show and establish that the contractors were working as benamidars of the assessee. The terms and conditions of the agreements do not show that the contractors could be treated as benamidars of the asses-see. Since the burden was not discharged by the Department against the assessee, it could not be said that the contractors were acting as benamidars of the assessee.

19. In the case in hand, the conclusion of the Department arrived at against the assessee relating to the additions made are arbitrary, having no reasonable nexus to the material on record. The best judgment assessment is based on an element of guess work but the same should not be based on surmises as have been done in the instant case.

20. In CIT v. Anwar Ali : [1970]76ITR696(SC) , their Lordships of the Supreme Court held that in the absence of cogent material evidence, apart from the falsity of the assessee's explanation from which it could be inferred that the assessee had concealed the particulars of his income or had deliberately furnished inaccurate particulars in respect of the sources and that the disputed amount was a revenue receipt, penalty could not be imposed.

21. The proceedings under Section 271(1)(c) of the Act are penal in nature and, therefore, the burden lies on the Department to establish that the assessee has been guilty of concealment, etc., and such findings must be reached on the basis of some material on record. In the instant case, such finding is not based on any material on record and, therefore, the same is not warranted in law to be sustained.

22. It is submitted that on the basis of a best judgment assessment, no inference of concealment could be drawn and in the absence of an inference under Section 271(1)(c) of the Act, penalties could not be imposed, as it was submitted, under Section 271(1)(c), it is to be held that the assessee concealed the particulars of his income or furnished inaccurate particulars and this provision can only be attracted if it is held that it is a deliberate act of the assessee. In the absence of a positive finding about a deliberate act in concealing income or furnishing inaccurate figures of income, action under Section 271(1)(c) could not be initiated.

23. It is now settled law that an order imposing a penalty is the result of a quasi-criminal proceeding and that burden lies on the Revenue to establish that the disputed amount represents income and that the assessee has deliberately and consciously concealed the particulars of his income or has furnished inaccurate accounts. It is for the Revenue to prove those ingredients before penalty could be imposed, but nothing was done in the instant case.

24. On behalf of the Department, it was submitted that the action taken by the Department under Section 145(2) of the .Act was justified and further argued that the Tribunal was not right in cancelling the penalties imposed against the assessee. Much stress was laid on Hansraj Agrawal v. Addl. CIT : [1979]119ITR688(MP) . The facts of that case are distinguishable. In that case, the assessee placed no material to show that the failure to return the correct income did not arise from any fraud or gross or wilful neglect on his part nor was the burden discharged by placing the material on record whereas, in the instant case, the assessee did place the account books which were not accepted by the Department on surmises. Therefore, the facts of the above-referred case are distinguishable and are not applicable in the instant case.

25. Having regard to the order of the Tribunal, it would be seen that on the estimate shown by the assessee relating to the computation, it cannot be said that the assessee had deliberately given a false estimate of income. Therefore, it cannot be said that there was a deliberate effort on the part of the assessee to evade tax as such, and so the assessee is not liable for penalty. On the other hand, the accounts which mere submitted by the assessee are well founded.

26. From the discussion referred to above, our answers to the following questions are as under :

(a) Whether, on the facts and circumstances of the case, the Tribunal was right in law in applying Section 145(2) of the Act ?-No

(b) Whether, on the facts and circumstances, the Tribunal was right in law in making further additions of Rs. 25,000, then again Rs. 25,000 and Rs. 30,000?-No

(c) Whether, on the facts and circumstances of the case, the Tribunal was right in law in saying that the raising contracts did not inspire confidence ?-No

(d) Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that the raising contractors could not be treated as benamidars ?-Yes

(e) Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that Section 271(1)(c) of the Act was not applicable ?-Yes

27. For the aforesaid reasons, our answers to the questions referred to this court are in favour of the assessee. The reference is answered accordingly with costs. Counsel's fee Rs. 750 if certified.


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