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Hansraj Aggarwal Vs. Addl. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMadhya Pradesh High Court
Decided On
Case NumberMisc. Civil Case Nos. 77 of 1973(J) (159 of 1976 (Indore)) and 115 of 1973
Judge
Reported in[1979]119ITR688(MP)
ActsIncome Tax Act, 1961 - Sections 142(1), 142(2A), 143(2), 144 and 271(1); Finance Act, 1968
AppellantHansraj Aggarwal;addl. Commissioner of Income-tax
RespondentAddl. Commissioner of Income-tax;hansraj Aggarwal
Appellant AdvocateK.A. Chitale, Adv.
Respondent AdvocateA.M. Mathur, Adv.
Excerpt:
.....assessee for either of the two years, was without any basis whatsoever and the charge of gross and wilful neglect on the part of the assessee was clearly made out. 11. shri chitale, learned counsel for the assessee, has assailed the finding of the appellate tribunal that the assessee failed to discharge the burden of rebutting the presumption arising under the expln. to section 271(1)(c) of the act, that the failure to return the correct income did not arise from any fraud or gross or wilful neglect on his part, on two grounds, namely :(1) whenever an assessee filed a return on estimated basis, followed by an assessment by the income-tax officer to the best of his judgment under section 144, i. 13. failure to comply with a notice under section 142(1) or section 143(2) or a direction..........in holding that in view of the explanation to section 271(1)(c) a charge of the gross and wilful neglect on the part of the assessee is proved ? 2. whether, on the facts and circumstances, the tribunal was lawfully correct in determining the penalty at 20% of the tax sought to be avoided ' 3. in the second case, i.e., misc. civil case no. 115 of 1973, the appellate tribunal, at the instance of the additional commissioner of income-tax, m. p., bhopal, has similarly referred the following question, said to arise from its aforesajd order, to the court for its opinion, namely :' whether, on the facts and in the circumstances of the case, the tribunal was justified in holding that the amended provision, prescribing the higher quantum of the minimum penalty under section 271(1)(c).....
Judgment:

A.P. Sen, C.J.

1. These two reference applications under Section 256(1) of the I.T. Act, 1961, raise a common question and, therefore, they are disposed of by this common judgment.

2. In the first mentioned case, i.e., Misc. Civil Case No. 77 of 1973, the Income-tax Appellate Tribunal, Indore Bench, Indore, at the instance of the assessee, has referred to the court for its opinion certain questions of law, said to arise from its consolidated order in Income-tax Appeals Nos. 819 and 820 of 1971-72, dated June 15, 1972, pertaining to the assessment years 1966-67 and 1967-68, namely :

'1. Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that in view of the Explanation to Section 271(1)(c) a charge of the gross and wilful neglect on the part of the assessee is proved ?

2. Whether, on the facts and circumstances, the Tribunal was lawfully correct in determining the penalty at 20% of the tax sought to be avoided '

3. In the second case, i.e., Misc. Civil Case No. 115 of 1973, the Appellate Tribunal, at the instance of the Additional Commissioner of Income-tax, M. P., Bhopal, has similarly referred the following question, said to arise from its aforesajd order, to the court for its opinion, namely :

' Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the amended provision, prescribing the higher quantum of the minimum penalty under Section 271(1)(c) equal to the amount of income concealed, which came into effect from April 1, 1968, will be operative retrospectively in respect of the assessment years 1966-67 and 1967-68, on the basis that the return of income of each of these two years had been filed after April 1, 1968 ?'

4. The assessee is a Government contractor. The business of the assessee was supply of railway ballast and sale of coal ash. On April 9, 1968, he filed a return of his income for the assessment years 1966-67 and 1967-68. For the assessment year 1966-67, he showed his income at Rs. 1,914, inclusive of Rs. 250 as income from house property. The business income was derived from the receipts at Rs. 39,819 in the railway ballast account and Rs. 21,945 in the coal ash account. For the assessment year 1967-68, during which the assessee discontinued his business and became a partner in a firm, he estimated his income at Rs. 4,857, comprising of Rs. 3,580 as his share of profit as a partner and Rs. 1,277 as rental income. The assessee failed to comply with several notices served on him, from time to time, to prove his return. The ITO observed that the assessee was not co-operative and, therefore, completed the assessment under Section 144 of the I.T. Act, to the best of his judgment, in each of the two years. Since the assessee had never shown any rental income in his assessment from the year 1956-57 and he was not prepared to divulge the facts as regards the house property, the ITO, by multiplying 20 times the rental income, added Rs. 5,000 as income from undisclosed sources, from out of which the property must have been acquired. He assessed the business income of the assessee at Rs. 12,000 and added to it Rs. 250 as house property income and Rs. 5,000 as undisclosed income, i.e., at Rs. 17,250 for the assessment year 1966-67 and issued penalty notices under Section 271(1)(a), 271(1)(b) and 271(1)(c) of the Act. For the assessment year 1967-68, the ITO again estimated the business income at Rs. 12,000. Since there was increase in the house property income from Rs. 250 to Rs. 1,277, the ITO, for want of any material, reached the conclusion that the assessee must have either made additional construction or acquired a house. Multiplying 20 times the rental income of Rs. 1,277, the total investment from undisclosed sources came to Rs. 20,540. He, therefore, determined the income of the assessee at Rs. 33,817, to the best of his judgment. As earlier, he issued similar penalty notices.

5. On appeal, the A AC of Income-tax, 'A' Range, Indore, affirmed the assessment for the assessment year 1966-67 at Rs. 17,250, but reduced the assessment for the year 1967-68, from Rs. 33,817 to Rs. 19,277. He substantially accepted the contention of the assessee that further investment in the property was of about Rs. 4,000 and considered that the addition warranted for unexplained construction, should be fixed at Rs. 6,000, i.e. income for the assessment year 1967-68 was reduced by Rs. 14,540.

6. On further appeal, the Income-tax Appellate Tribunal, having regard to the fact that the cost of acquisition of the property had been duly accounted for in the books of account produced before it', held that it was not proper to estimate additional income for the assessment years 1966-67and 1967-68. It accordingly directed the deletion of Rs. 5,000 and Rs. 6.000 for the two years in question.

7. In the penalty proceedings, the IAC held that the case was covered by the Explanation to Section 271(1)(c) of the Act. Since the returned income happened to be less than 80% of the income as assessed, the assessee should be deemed to have concealed the particulars of income or furnished inaccurate particulars of such income for the purposes of Clause (c). He came to the conclusion that the assessee did not furnish accurate particulars of his income from business, nor the returns were accompanied by balance-sheet. Further, there was no denying the fact that properly closed and adjusted books of account were never maintained. Such particulars, as were furnished along with the returns could not, therefore, be called as accurate on any logical or rational principle.

8. Inasmuch as the returns for both the years were filed on April 9, 1968, i.e., after the substitution of new Clause (iii) in Section 271(1)(c), by the Finance Act, 1968, w.e.f. April 1, 1968, the IAC held that penalty had to be computed by reference to the amount of income concealed. He, accordingly, imposed a penalty of Rs. 15,400 for the assessment year 1966-67 and Rs. 14,500 for the assessment year 1967-68.

9. In appeal, the Income-tax Appellate Tribunal held that in an ex parte best judgment assessment, some sort of guess work becomes inevitable in making an estimate of income, but looking to the facts and circumstances of the case and the reasonableness of the estimate as also the past history of the assessee, it was clear that the business income disclosed by the assessee for either of the two years, was without any basis whatsoever and the charge of gross and wilful neglect on the part of the assessee was clearly made out. It, accordingly, affirmed the view of the IAC that the assessee was liable for penalty under Section 271(1)(c), read with the Expln. thereto, for each of the two years. It, however, reduced the quantum of penalty to 20 per cent. of the tax sought to be avoided on the hypothesis that the amendment by the Finance Act, 1968, which came into effect from April 1, 1968, was not retrospective in operation.

10. In reaching the conclusion it did, the Tribunal rejected the contention of the assessee that (i) the books of account were not closed and, therefore, it was not possible to make a reasonable estimate of the profits earned ; and (ii) the only source of income in the assessment year 1967-68 was his share of profits from the firm and it was unreasonable to estimate Rs. 2,000, as income from his individual business for a short period of two months. The second contention was based upon the affidavit filed by the assessee before the Tribunal. The Tribunal refused to act upon the affidavit. As regards the so called books of account, they had been produced before the IAC.

11. Shri Chitale, learned counsel for the assessee, has assailed the finding of the Appellate Tribunal that the assessee failed to discharge the burden of rebutting the presumption arising under the Expln. to Section 271(1)(c) of the Act, that the failure to return the correct income did not arise from any fraud or gross or wilful neglect on his part, on two grounds, namely :

' (1) Whenever an assessee filed a return on estimated basis, followed by an assessment by the Income-tax Officer to the best of his judgment under Section 144, i.e., based upon an estimate, then there can be no penalty imposed under Section 271(1)(c).

(2) Even for the applicability of Section 271(1)(c) and the Explanation thereto, the question of burden varies in different situations. Where the Tribunal in the quantum appeal does not indicate any fraud on the part of the assessee, the burden placed on him is very slight.'

12. We are afraid, there is some difficulty in accepting these contentions. To our mind, the first contention is too broadly stated. As to the second, the assessee placed no material to discharge the burden that lay on him.

13. Failure to comply with a notice under Section 142(1) or Section 143(2) or a direction under Section 142(2A), which warrants a best judgment assessment under Section 144, also attracts a penalty under Section 271(1)(c).

14. In CIT v. Kedar Nath Ram Nath : [1977]106ITR172(All) , it was observed (p. 176):

' In appeal, the Income-tax Appellate Tribunal appears to have taken the view that in cases where book results are held by the revenue authorities to be low and not amenable to verification and a best judgment assessment is made after estimating the turnover and profit rate, no inference that the assessee had been guilty of fraud or gross or wilful neglect could be drawn. As in the instant case there was no finding that the assessee had suppressed its sales or purchases and had returned its income on the basis of its account books, mere rejection of accounts and estimation of income at higher figure, could not by itself mean that there was fraud or gross or wilful neglect on the part of the assessee, resulting in concealment or furnishing of inaccurate particulars by the assessee. In its opinion, where accounts have been maintained, and the income returned is based on such account, the assessee would be considered to discharge the onus so far as incorrectness of income returned is concerned and if the department fails to bring on record material or evidence from which any one could reasonably or positively come to a conclusion that the assessee's books were not correct, an order imposing penalty under Section 271(1)(c) cannot be made. Consequence of accepting the views expressed by the Tribunal would be that in a case where a best judgment assessment, in accordance with the provisions of Section 144 of the Income-tax Act, 1961, is made after rejecting the assessee's books, it would not be possible to apply theprovisions of the Explanation to Section 271(1)(c), unless the department is able to bring material on the record from which an inference that the assessee was guilty of fraud or gross or wilful neglect could be drawn. This would mean that prima facie the burden is on the department to show that the assessee was guilty of fraud or wilful neglect.In our opinion, the Tribunal has misconceived the real position. '

15 It was then observed (p. 177) :

' The Explanation very clearly covers a case where best judgment assessment is made under Section 144 of the Income-tax Act and it is found that the income returned by the assessee falls short of 80% of the income so assessed as reduced by bona fide expenditure incurred by the assessee for the purpose of earning any income included in the assessee's total income. The Explanation clearly provides that in such a case unless the assessee proves that failure to return the aggregate income did not arise from any fraud or gross or wilful neglect on his part it will be deemed that he has concealed the particulars of his income. The burden of showing that failure to return the aggregate income correctly did not arise from any fraud or gross or wilful neglect is upon the assessee. Accordingly, in a case where the income returned by the assessee was less than 80% of the income assessed as reduced in the manner specified in the Explanation to Section 271(1)(c) of the Act, law would deem it that the assessee had concealed or furnished inaccurate particulars unless the assessee is able to bring something on record to show that failure on its part to return the correct income was not on account of its fraud, etc. The type of material to be indicated by the assessee for discharging the burden placed upon him will depend upon the facts and circumstances of each case. '

16. That, in our opinion, correctly states the law.

17. It is, however, urged by Shri Chitale for the assessee, on the strength of their Lordships' decisions in CIT v. Anwar Ali : [1970]76ITR696(SC) and CIT v. Khoday Eswarsa and Sons : [1972]83ITR369(SC) , that the penalty proceedings under Section 271(1)(c) are of quasi-judicial nature and, therefore, the department must establish that the receipt of the amount in dispute constituted income of the assessee and if there is no evidence on record for accepting the explanation given by the assessee, which explanation is found to be false, it does not follow that the receipt constitutes his taxable income. There is do doubt that as the proceedings under Section 271(1)(c) are of penal nature, the burden is on the department to show that a particular amount is income of the assessee. The mere fact that the explanation of the assessee is false, does not necessarily give rise to the inference that the disputed amount represents his income.

18. In CIT v. Anwar Ali : [1970]76ITR696(SC) , their Lordships of the Supreme Court have pointed out. that the finding given in the assessmentproceeding for determining or computing the tax is not conclusive though it may be good evidence. It has been further held in the above decision that (p. 701);

' Before penalty can be imposed the entirety of circumstances must reasonably point to the conclusion that the disputed amount represented income and that the assessee had consciously concealed the particulars of his income or had deliberately furnished inaccurate particulars.'

19. These principles were reaffirmed by their Lordships in CIT v. Khoday Eswarsa and Sons : [1972]83ITR369(SC) , stating that a penalty cannot be levied solely on the basis of the reasons given in the order of assessment. There can be no quarrel with this well-settled principle.

20. It is next urged by the learned counsel, placing reliance on CIT v. Sankarsons and Co. : [1972]85ITR627(Ker) , Addl. CIT v. Karnail Singh and CIT v. 5. P. Bhatt : [1974]97ITR440(Guj) , that the condition which attracts the applicability of Section 271(1)(c) of the Act is that the income-tax authority should be satisfied in the course of any proceeding under the Act that any person had concealed the particulars of his income or furnished inaccurate particulars of such income, and all that the Explanation to Section 271(1)(c) provides, by the deeming fiction contained therein, is that where the total income returned is less than 80% of the total income assessed, the assessee 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 and furnished inaccurate particulars of such income, within the meaning of Section 271(1)(c). It is urged on the basis of these authorities that this burden is akin to that in a civil case, where the determination is made on preponderance of probabilities. It is laid down in these cases that it is not necessary that any positive material should be produced by the assessee in order to discharge the burden which rests upon him. The assessee may claim to have discharged the burden by relying on the material which is on record in penalty proceedings, irrespective of whether it is produced by him or by the revenue. We again do not find how these authorities can be of any avail to the assessee.

21. In the present 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 is the burden discharged by the material on record. On the contrary, the material on record in the penalty proceedings can lead to no other inference than the one drawn by the Tribunal. On preponderance of probabilities, there can be no doubt that the assessee deliberately failed to return his correct income. The Tribunal observed that the business income disclosed by the assessee at Rs. 1,664 for theassessment year 1966-67 and at Rs. 3,580 for the assessment year 1967-68 was without any basis whatsoever. That being so, the Tribunal was justified in holding that the charge of gross or wilful neglect on the part of the assessee stands clearly proved. This is essentially a finding of fact based on a consideration of evidence and, in our opinion, no question of law arises out of the order of the Tribunal.

22. Lastly, placing reliance on CIT v. Musaddi Lal Singh : [1977]106ITR672(All) , Addl. CIT v. Horilal Kunj Behari Lal [1917] 106 ITR 720 . CIT v. Babu Ram Ajit Prasad : [1977]106ITR818(All) , CIT v. K.L. Mangal Sain : [1977]107ITR598(All) , CIT v. Nawab and Brothers : [1977]107ITR681(All) and CIT v. Patna Timber Works : [1977]106ITR452(Patna) , learned counsel for the petitioner strenuously contends that there can be no imposition of penalty under Section 271(1)(c), where the assessee files a return on estimate basis, followed by a best judgment assessment. We are afraid the contention cannot be accepted. The decisions relied on by the learned counsel are distinguishable on facts. In all these cases, the assessees filed their returns correctly and honestly. They maintained regular books of account, but the books were not accepted for some defect or another.

23. In CIT v. Musaddi Lal Singh : [1977]106ITR672(All) , the assessee, who was an excise contractor, maintained books of account, including cash book, ledger, journal, excise registers, with complete quantitative stock entries, which were periodically checked by the excise department. The only defect for which the books were not accepted was that the cash sales made by the assessee, in loose bottles, were not verifiable. In those circumstances, the Tribunal held that if the books, as were maintained by the assessee, appeared to have been maintained honestly and it honestly believed that maintenance of such books was sufficient for the ascertainment and estimation of its profits and the assessee filed its return on the basis of such accounts, it could hardly be said that the assessee had been grossly or wilfully negligent in filing its return.

24. Similarly, in Addl. CIT v. Horilal Kunj Behari Lal [1977] 106 ITR 720 , the assessee was a registered firm carrying on business in cloth. It maintained regular books of account. The rate of profit disclosed by the assessee, as per its books of account, was 7% whereas the ITO applied a flat rate at 7.5%. Taking these facts into consideration, the Tribunal held that the assessee could not be held to be guilty of fraud or gross or wilful neglect. In upholding the view of the Tribunal, the High Court observed (p. 724):

' It is true that the Explanation will cover even the cases of estimate or the best judgment assessment but nevertheless a finding has to be recorded that the difference in the income returned and the income assessedis due to the fraud or gross and wilful neglect on the part of the assessee, even though the onus lies upon the assessee.'

25. In the present case, the Tribunal has recorded a clear finding to that effect.

26. So also, in CIT v. Baburam Ajit Prasad : [1977]106ITR818(All) , the ITO rejected the books of account and estimated the assessee's income by applying a flat rate. The Tribunal held that the disallowance of certain expenses was a matter of opinion and it could not, therefore, be said that there was any gross or wilful neglect or fraud on the part of the assessee. Similar are the decisions in CIT v. K. L. Mangal Sain : [1977]107ITR598(All) , CIT v. Nawab and Brothers : [1977]107ITR681(All) and CIT v. Patna Timber Works : [1977]106ITR452(Patna) . In all these cases, the Tribunal held that in a case where the assessee honestly maintained regular accounts but the book version was rejected and the income was estimated by the application of a flat rate to the turnover, no question of penalty under Section 271(1)(c) would arise.

27. In determining the quantum of penalty, the Tribunal, in our view, was clearly wrong in holding that penalty was leviable at 20% of the tax sought to be avoided, on a misconception of fact that Section 271(1)(c), substituted by the Finance Act, 1968, w.e.f. April 1, 1968, was not attracted. It proceeded on the assumption that the quantum of penalty was governed by Clause (iii) as it originally stood. The returns, in this case, for the assessment years 1966-67 and 1967-68 were both filed on April 9, 1968, i.e., after the new Clause (iii) was substituted. In a case falling within Section 271(1)(c), from April 1, 1968, to March 31, 1976, penalty had to be computed under the Act, by reference to the amount of income concealed, and not by reference to the amount of tax avoided, as the law was prior to April 1, 1968.

28. For all these reasons, both the questions must be answered in favour of the CIT and against the assessee. It must, accordingly, be held that the Tribunal was justified in holding that in view of the Expln. to Section 271(1)(c), the charge of gross and wilful neglect on the part of the assessee was proved, but it was clearly wrong in holding that the penalty was leviable at 20% of the tax sought to be avoided. The Commissioner shall have the costs of this reference. Hearing fee Rs. 100.


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