Per Shri K. S. Viswanathan, Accountant Member - We can dispose of the appeal and the cross-objection together. The departmental appeal is against the order of the Commissioner (Appeals) cancelling a penalty under section 271(1) (c) of the Income-tax Act, 1961 (the Act).
2. Briefly, the facts regarding concealment of income are as follows : The assessee is a firm having business in manufacture and sale of jaggery and groundnut oil. The assessee-firm consisted of six partners of which two were minors admitted to the benefits of partnership. The minors between themselves are entitled to 60 per cent of the profits while the other partners together are entitled to 40 per cent.
3. The assessee had filed return showing a net loss of Rs. 63,560.
Before the assessment was taken up, the ITO received information from one Shri Nookaiah Chetty who is none other than the father of the two minors admitted to the benefitis of the partnership. Shri Nookaiah Chetty had stated before the ITO that there were certain fictitious transactions recorded in the books. Certain letters were written to the ITO by Shri V. Venkata Nageswara Rao who was one of the minors admitted to the benefits of partnership giving specific instances of fictitious transactions. These transactions were said to be purchase and sale effected with Shri Nookaiah Chetty, i.e., the minors father himself.
The letters stated that these were really an untrue state of affairs and by this device substantial income was reduced in their accounts. It was also stated that the income reduced was Rs. 23,526.
4. We may mention that owing to difference of opinion among the partners, the partnership was dissolved on 16-12-1975, that is long before the date on which information was given by Shri Nookaiah Chetty and his son regarding the fictitious entries. In facts, certain litigations were pending between the erstwhile partners at that time.
5. The ITO examined the books of account with reference to the information given by Shri Nookaiah Chetty and his son. He found that the transactions referred to in their letter were not reflected in the books of account. They were also not reflected in the stock register.
He found that certain expenses connected with the transactions like jaggery expenses, Kolagarams (sic) were noted in the connected account on the same date on which the fictitious transactions appeared. The examination revealed that the assessee had purchased from Shri Nookaiah Chetty certain quantities of jaggery which had sold back to the same party at less than the purchase price on the same day. Having regard to this fact, that is, purchase and the sale on the same date to the same party, the loss arising out of the transactions amounting to Rs. 23,508 in respect of Shri Nookaiah Chetty and Rs. 1,638 in respect of another firm by name Sambamurty Traders were disallowed in assessment. The appeals were unsuccessful and the Tribunal confirmed the additions.
6. The ITO was of opinion that making entries of fictitious transactions resulting in a loss was with the deliberate intention of concealing its particulars of income. The sale and subsequent buy-backs at higher and lower rates are designed to reduce its normal profits and thereby the tax liability. According to him,. the conduct of the assessee clearly shows that it had full knowledge of the result of the transactions. In those circumstances the additions represented concealed income. He, therefore, imposed a penalty amounting to Rs. 25,146 under section 171(1) (c).
7. The assessee appeals. The Commissioner (Appeals) cancelled the penalty. He pointed out that the law to be applied is what has been explained by the Andhra Pradesh High Court in the case of Addl. CIT v.Burugupalli China Krishnamurthy  121 ITO 326. According to this authority, the onus continues to be on the department to show that there was concealment. After studying the facts, he came to a finding that the initial burden of discharging the onus has been carried out by the assessee He pointed out that all the purchases and sales of the alleged fictitious transactions were duly vouched furnishing full descriptive particulars of the quantity in terms of lumps and kilos and were duly accounted in the day book. Further, he was of opinion that it was not correct to say that every purchase was exactly matched by a corresponding sale, but there were some slight differences. Purchases were in terms of bulk quantity and the sales were of several items of smaller quantities. Though the total of sales and that of purchase of lumps might be identical, the quantity in terms of kilos differed in respect of purchases and sales. He agreed that there was scope for some adverse conjecture being drawn from the position that the value of the total of sales was less than the value of the total purchase from the same party, but this by itself according to him, would not prove concealment. He further pointed out that no sworn statement was recorded from Shri Nookaiah Chetty regarding the impugned transactions.
Further, none of the partners of the assessee-firm were also examined by the ITO. In any event, the evidence establishing the alleged bogus nature of the impugned sales and purchases were not furnished to the assessee for necessary rebuttal. He, therefore, cancelled the penalty.
8. Shri Santhanam, appearing for the department, submitted that on the facts of the case, the onus on the department had been discharged ever applying the principles laid down in Burugupalli China Krishnamurthys case (supra). Shri Swamy, for the assessee, on the other hand, submitted that there is no material other than what was in the assessment for making out a case of concealment. Referring to the Supreme Court decision in the case of CIT v. Koday Eswarsa & Sons  83 ITR 369, he submitted that there was no case at all for concealment. According to him, it was entirely the creation of Shri Nookaiah Chetty who was inimical to the major partners. He then referred to certain statements made by one of the partners Shri Madhava Rao in which the partners had admitted that he entire business was being conducted by Shri Nookaiah Chetty and he was only a figurehead.
9. We have considered the facts of the case. One fundamental aspect of concealment is that the assessee has full enjoyment of certain income but for the purpose of income-tax proceedings, he will not show it as part of his taxable income. These two aspects that the assessee should be in possession of income and that he has not shown that income would only amount to concealment. Both aspects must be established to show concealment. In other words, if there is no material to show that the alleged concealed income was in possession or enjoyment of the assessee, it cannot be said that there is concealment.
10. In this case, the charge made out by the department is that the assessee-firm had concealed the income by putting through certain fictitious transactions. The assessee is said to have purchased and sold from the same party on the same day certain goods resulting in loss for the assessee. We must first of all accept that where on the same day a purchase is effected at a higher rate and sale is immediately effected at a lower rate, thus, resulting in a los, there will be a prima facie case for concealment. But that by itself will not be conclusive. One will have to consider very many other aspects.
11. We have mentioned that one test for concealment is that the assessee must be in possession of the income which he had not disclosed. Now, in this case, on the facts brought on record it is clear that the amount of Rs. 25,146 is not possession of the assessee.
The transactions put through have resulted in the loss for the firm to this extent. If the loss was fictitious, i.e., if the money has not gone out of the assessees coffers, then it would amount to concealment.
Now, at this stage, we may point out that there are three possibilities arising out of such transactions. One is that the transaction is fictitious, i.e., neither goods nor monies had gone out of the assessees hands and there was only loss on paper without any real loss.
The second is collusive. In a collusive case, there would be an outgo of goods and money but it will go to a party who is allaying himself with the assessee for the purpose of giving a veneer of genuineness to the fictitious entries. In such cases also, if there is evidence for collusion, there would be conealment. The third alternative is where the goods and monies had gone out of the assessee to a third party and there was no intention that the third party should give back the amounts so taken out of the books of the firm in some other manner. In such cases, although the loss claimed may not be allowable, it would not amount to concealment.
12. We have now to see which of the three alternatives will fit in with the facts of the case. It is in this connection that the entries in the books of Shri Nookaiah Chetty are relevant. It is not the case that the books of Shri Nookaiah Chetty do not record these transactions.
Therefore, the purchases effected by the assessee would be shown as the sales made by Shri Nookaiah Chetty and also the sales effected by the assessee shown as purchases there. That means the books of Shri Nookaiah Chetty show in reality a receipt of profit of Rs. 23,508 in respect of these transactions from the assessee. As far as this receipt of Rs. 23,508 is concerned, there is nothing fictitious. It is real money which has flown from the assessee to Shri Nookaiah Chetty.
13. There is absolutely no means of making out a case that the transactions between Shri Nookaiah Chetty and the assessee were collusive. The monies received by Shri Nookaiah Chetty have not been shown to have gone back to the assessee. In this connection, we may also mention contain other facts regarding Shri Nookaiah Chetty. We have already mentioned that his two minor sons are entitled to 60 per cent of the profits. The result of these transactions are that Shri Nookaiah Chetty has got 100 per cent of the profits from the assessee-firm in respect of Rs. 23,508 as against the normal entitlement of 60 per cent for his two minor sons.
14. In this connection, we must advert to the role played by Shri Nookaiah Chetty. It is clear from the assessment order than the information regarding the alleged fictitious entries were received only from Shri Nookaiah Chetty and his minor son. They had given very clear and pointed information. Now, such information has been given only after the firm was dissolved, and there was difference of opinion between the partners leading to litigation between them. An information coming from parties who are not in goods terms certainly has an ulterior purpose and an oblique motive. In the course of proceedings before the civil court, Shri Nookaiah Chetty has been examined. In his deposition in O. S. No. 65 of 1976 before the principal subordinate Judge Visakhapatnam on 3-8-1977 Shri Nookaiah Chetty had said as follows : "I look after the whole business (business of P. Visweswara Rao and V.Nageswara Rao firm) .... I used to attend to the preparation of bills, patties, sending telegrams to customers bargaining for goods, etc. I used to do also purchases and sell goods on their behalf." Thus, from the above deposition, it would appear that the business of the assessee-firm was really conducted by Shri Nookaiah Chetty.
Although he was neither a partners nor an employee, he appears to be in charge of it since his minor sons are majority shareholders.
15. We may at this stage refer to a statement given by Shri Nookaiah Chetty on 10-12-1984 before the ITO. This appears to be in connection with certain other collateral proceedings. In those proceedings, he had stated that he assisted the firm in attending to the market purchases and sales. He also stated that the entries regarding the fictitious transactions were made by the clerks and the managing partner Shri Madhava Rao. Thus, there is certain amount of contradictions. We may also refer to the statement given by one of the partners Shri Madhava Rao himself. He was examined on 6-12-1984. In this statement, he stated that Shri Nookaiah Chetty was his brother-in-law and had wide experience in export business. Shri Madhava Raos family though a trading family had no experience in export business. This firm was started with a view to help his brother-in-law as he was having some trouble with his father. That is why he stated, majority of shares were given to his two minor sons. He further stated that although Shri Madhava Rao was styled as the managing partner, he was only a figure-head and all the correspondence, etc., and other relevant records were handled by Shri Nookaiah Chetty.
16. After an appraisal of the above statements, it will be clear that although Shri Nookaiah Chetty had contradicted his earlier statements and had maintained that he had not made the entries in the books of account regarding the fictitious sales in the assessees books, even on the admissions made by him, it is clear that he was looking after the business of the assessee-firm. In his statement dated 10-12-1984 he has admitted that he assisted the firm in attending to the market purchases and sales. The actual entries regarding the impugned transactions were not put through by him. There are accountants for the purpose of making entries in the books of account. But, insofar as the information was given by him and he was the main beneficiary of the alleged fictitious transactions, i.e., he had received from the firm Rs. 23,508, it will be very difficult to say that the assessee, i.e., the assessee-firm had put through these transactions with the intention of concealing its income for the purpose of the Act.
17. It will be seen from the above that none of the three alternatives which we have discussed in para 10 would be applicable to the facts of the case. The transaction is not fictitious insofar as funds have gone out of the assessees coffers to the coffers of Shri Nookaiah Chetty. In a fictitious transaction, the funds will remain with the assessee although the books would shown that it has gone out. The Commissioner has recorded that the transactions are supported by the vouchers-both purchases and sales. It is not denied that Shri Nookaiah Chetty is richer by these transaction. So, it is not fictitious. It is not collusive either. There is no material to show that Shri Nookaiah Chetty after having received these amounts, is in any way obliged to pay the equivalent amount to the assessee. As we have pointed out earlier, it is not the departments case that the books of Shri Nookaiah Chetty do not show these transactions. The books do not show that the firm will be eligible for certain equivalent amounts from Nookaiah Chetty. So, collusion is also ruled out.
18. So, at best only the third alternative could be considered, i.e., although the transactions may be genuine, it was deliberately made out for the assessee to suffer a loss. Now, it is not necessary that every transaction of the assessee should result in profits. It is open for the assessee to sell his goods deliberately at a loss in order to benefit some one else. The Supreme Court has pointed out in the case of CIT v. Calcutta Discount Co. Ltd.  91 ITR 8 as under : "Where a trader transfers his goods to another trader at a price less than the market price, and the transactions is a bona fide one, the taxing authority cannot take into account the market price of those goods, ignoring the real price fetched, to ascertain the profits from the transaction." (p. 8) They had quoted their earlier decision in the case of CIT v. A. Raman & Co.  67 ITR 11 (SC) wherein they had reiterated that the law does not oblige a trader to make maximum profit that he can make out of the trade transactions. Thus, merely because a transaction results in a loss would not by itself show concealment. However, it is well established that in then assessment such losses cannot be allowed as an admissible deduction because such loss was not incurred in the ordinary course of business -please see the Commentary of Kanga and Palkhivala on Law & Practice of Income-tax, Seventh edn. at p. 881. We are not concerned with a claim for loss, but the case of penalty.
19. We must also refer to the part played by Shri Nookaiah Chetty. We have stated earlier that he is the brother-in-law of the adult partners of the assessee-firm. Shri Madhava Rao partner, had stated that the firm itself was started to help Shri Nookaiah Chetty. His two minor sons were given 60 per cent share in profits. Shri Nookaiah Chetty was managing the affairs of the business. The transactions recorded were beneficial to Shri Nookaiah Chetty and for no one else. The firm was dissolved on account of the misunderstanding between Shri Nookaiah Chetty and his brother-in-law. Certain litigations ensued which were pending. It was at this stage that Shri Nookaiah Chetty brought to the notice of the ITO the alleged fictitious transactions. The ITO had no other information other than the information given to him.
Under the circumstances, relying on the evidence of Shri Nookaiah Chetty who had reaped full benefit out the alleged fictitious transactions, it would be very difficult to make out a case against the firm for concealment. The assessee is certainly entitled to the benefit of doubt under these circumstances. We, therefore, hold that this is a case where no penalty is called for. We agree with the Commissioner (Appeal).
20. We have given a finding on facts regarding concealment. But we may also refer to two arguments on law which were parcel before us. The first is that there was no concealment, i.e., the assessee had filed return showing a loss and the ultimate assessment was still a loss only. Therefore, there was no positive income involved. In support of this submission, that there should be positive income before penalty can be levied, reliance was placed on the decision of the Madhya Pradesh High Court in the case of CIT v. Jaora Oil Mill  129 ITR 423. But, we find that as against this decision of the Kerala High Court in the case of CIT v. India Sea Foods  105 ITR 708. Another point raised was regarding the law to be applied. The assessee had filed the return in 1975 when the penalty was quantified with reference to the income concealed. In 1976, the law was amended and the penalty will be based on tax involved in the concealed income. Since there was no tax at all involved in the concealed income, i.e., even after they additions there was only a loss, it was argued following the decision of the Cuttack Bench of the Tribunal in the case of Dr. S. M. Som v.ITO  19 CTR (Trib.) 9 that no penalty could be levied. We find that the Hyderabad Bench has followed the ratio laid down by the Cuttack Bench in that case in some cases. However, we do not offer any opinion on these two contentions raised by the assessee because we have given a finding on facts that there is no concealment.
21. The departmental appeal stands dismissed. Since the cross-objection was withdrawn, it also stands dismissed.