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R. Madhavan Nair Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIncome-tax Reference No. 49 of 1969
Judge
Reported in[1973]87ITR362(Ker)
ActsIncome Tax Act, 1961 - Sections 271(1)
AppellantR. Madhavan Nair
RespondentCommissioner of Income-tax
Appellant Advocate O. Balanarayanan, Adv.
Respondent Advocate P.A. Francis and; P.K. Ravindranatha Menon, Advs.
Excerpt:
.....in the closing stock in the accounts of the assessee. in regard to the valuation of the closing stock the assessee contended that the value that he attributed to the closing stock was perfectly justified in view of the fact that most of the nuts that were in stock at the close of the year were broken ones and of very little value and that in fact he had to sell those nuts at a very low value. when action for imposition of penalty was taken under section 271(1)(c) it was contended that the ingredients that should be satisfied for the application of the section had not been made out. it would be perfectly legitimate to say that the mere fact that the explanation of the assessee is false does not necessarily give rise to the inference that the disputed amount represents income. however,..........goods on an estimate basis. to suit the explanation, the assessee had to recast the entire stock particulars and the valuation as would be seen from the following figures :statement of stock and value as furnished before the income-tax officer. statement of stock and value as furnished before theappellate asst. commissioner. 900 tins @ rs. 50 per tin 115 tins @ rs. 25 1.000 tins @ rs. 25 ' 948 tins @ rs. 21.87 1,000 tins @ rs. 13 ' 1,680 tins @rs.45 1,800 tins @ rs. 12-50 ' 170 tins @ rs. 10 2,000 tins @ rs. 10 ' 54 tins @ rs. 21.87 390 tins @ rs. 7/6 ' 471 bags @ rs. 50 total value rs. 13,379,80,880 lbs. @ rs. 7,740 total ... rs. 1,33,379 it is also significant to note that in the earliest year, the assessee showed separately the quantity and value of raw nuts on hand. it is.....
Judgment:

Govindan Nair, J.

1. This is a reference under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as the Act). The question referred is:

' Whether, on the facts and in the circumstances of the case, the levy of a penalty on the assessee under the provisions of Section 271(1)(c) of the Income-tax Act, 1961, was legal, valid and proper ?'

2. The assessment year was 1960-61 and the corresponding accounting period is the year that ended on March 31, 1960. In the assessment for that year the account books of the assessee were rejected and an estimate was made of his income by taking the gross profit to be 6% of the turnover. Further, the Appellate Assistant Commissioner, on the ground that there had been concealment of income, added a sum of Rs. 25,000 and further sums of Rs. 43,400, Rs. 7,911 and Rs. 11,000. In further appeal before the Appellate Tribunal, the amount of Rs. 11,000 was omitted, but the other additions were sustained. We may mention here that the sum of Rs. 25,000 was the value of 471 bags of raw nuts which the assessee had pledged with the bank with which he had accommodation and treating the value of these nuts as the income of the assessee. The ampunts of 'Rs. 43,400 and Rs. 7,911 represented the difference in the value of dosing stock as valued by the assessee and by the assessing authorities.

3. The Appellate Assistant Commissioner felt that penalty proceedings should be taken against the assessee on the ground that Section 271(1)(c) of the Act had been attracted. Action was, accordingly, taken and the asses-see's contentions were negatived at all stages and by the Appellate Tribunal. The question to be considered is whether the penalty proceedings are justified and the ingredients of the section have been made out to justify the imposition of the penalty.

4. We may read Section 271(1)(c):

'271. (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--.....

(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), in addition to the amount of the tax, if any, payable by him, a sum equal to two per cent. of the tax for every month during which the default continued, but not exceeding in the aggregate fifty per cent. of the tax;

(ii) in the cases referred to in Clause (b), in addition to any tax payable by him, a sum which shall not be less than ten per cent. but which shall not exceed fifty per cent. of the amount of the tax, if any, which would have been avoided if the income returned by such person had been accepted as the correct income;

(iii) in the cases referred to in Clause (c), in addition to any tax payable by him, a sum which shall not be less than twenty per cent. but whichshall not exceed one and a half times the amount of the tax, if any, whichwould have been avoided if the income as returned by such person hadbeen accepted as the correct income.'

5. It is not contended before us that concealment need not be established or that deliberate furnishing of inaccurate particulars thereof need not be established before action is taken under the section. It is, however, urged on behalf of the revenue that the ingredients of the section have been satisfied by the findings entered by the Tribunal. The findings of the Tribunal are contained in paragraphs 19 and 20 of its order, which we may extract in full:

' 19. Having considered all the facts of the case in great detail, we have no hesitation in coming to the conclusion that the assessee had deliberately understated his stock book in respect of quantity and its value shown attracting the penal provisions of the Income-tax Act. We take first the case of 471 bags of raw nuts which came to the notice of the department on its persistent enquiry. The Income-tax Officer noticed the disparity in the closing stock valuation and the loan taken from the bank, He called the assessee to furnish the particulars. The assessee failed to do so. The motive can be easily understood now after what had transpired as a result of the enquiries conducted by the Appellate Assistant Commissioner.

The bank certificate gives details of various grades of kernel pledged with it under key loan. It also stated that the assessee had pledged 471 bags of raw nuts. There was no mention of raw .stock in the statement originally furnished by the assessee before the Income-tax Officer. It was when confronted with the facts as disclosed by the bank certificate, that the assessee came forward with this story of the raw nuts being included in the finished goods on an estimate basis. To suit the explanation, the assessee had to recast the entire stock particulars and the valuation as would be seen from the following figures :

Statement of stock and value as furnished before the Income-tax Officer.

Statement of stock and value as furnished before theAppellate Asst. Commissioner.

900 tins @ Rs. 50 per tin

115 tins @ Rs. 25

1.000 tins @ Rs. 25 '

948 tins @ Rs. 21.87

1,000 tins @ Rs. 13 '

1,680 tins @Rs.45

1,800 tins @ Rs. 12-50 '

170 tins @ Rs. 10

2,000 tins @ Rs. 10 '

54 tins @ Rs. 21.87

390 tins @ Rs. 7/6 '

471 bags @ Rs. 50

Total value Rs. 13,379,80,880 lbs.

@ Rs. 7,740

Total ...

Rs. 1,33,379

It is also significant to note that in the earliest year, the assessee showed separately the quantity and value of raw nuts on hand. It is only in this year when cornered with the omission the assessee had come forward with this trumped up version of the raw nuts being included in the processed stock. We hold that this version to be totally false andthat the assessee concealed the particulars of his income. It has also been conclusively proved that the assessee had deliberately under-valued the stock on hand and with the bank on open loan account. The assessee had placed ridiculous loan of Rs. 7,740 on such a large quantity as 80,880 lbs. The assessee's explanation with reference to subsequent sales had been proved to be wholly without merit by reference to concrete data. This again is a deliberate attempt to bolster up an untenable position. On the whole, we are satisfied that the department had made out the case against the assessee. We hold that the penal provisions were rightly applied to this case. The penalty has been levied before the Appellate Tribunal's order giving a reduction in the quantum was passed and also on the basis of the income as originally returned. Since no penalty was contemplated in the original assessment proceedings, we consider that some relief in the amount of penalty is called for. We would reduce it to Rs. 20,000. We direct the officer to refund the balance amount if already collected.'

6. The Tribunal's order is annexure ' K '. To understand the import of these paragraphs, we may add that the assessee had an explanation regarding the 471 bags of raw nuts, which were admittedly pledged to the bank and for the failure to show 471 bags of raw nuts as raw nuts in the closing stock in the accounts of the assessee. His case was that the 471 bags of raw nuts were also included among the processed nuts which were reflected in the account books of the assessee, and to substantiate this he had filed before the Appellate Assistant Commissioner a statement reconciling the figures in the account books with those furnished by the assessee. The authorities have found it difficult to accept this contention as is seen from the Tribunal's order. In regard to the valuation of the closing stock the assessee contended that the value that he attributed to the closing stock was perfectly justified in view of the fact that most of the nuts that were in stock at the close of the year were broken ones and of very little value and that in fact he had to sell those nuts at a very low value. This contention too had not been accepted. Apart from the rejection of the explanation of the assessee, there was no material whatever available before the authorities to come to the conclusion that the value of the 471 bags of raw nuts with the bank represented the income of the assessee. Nor was there any clear evidence in the case or for that matter any finding that the valuation given by the assessee was a deliberate under-valuation in order to conceal the particular income. The Tribunal in its order used the words ' deliberately undervalued '. But this we do not understand as a finding sufficient to discharge the burden that is cast on the department by Section 271(1)(c). The matter is concluded b the decision of the Supreme Court in Commissioner of Income-tax v. Anwar Al, [1970] 76 I.T.R. 696, 700, 701 (S.C.).

7. That too was a case where the assessee's explanation regarding the sum of Rs. 87,000 which he had admittedly deposited in a bank was rejected, and the amount added as his income in the assessment proceedings. When action for imposition of penalty was taken under Section 271(1)(c) it was contended that the ingredients that should be satisfied for the application of the section had not been made out. This contention was accepted by the Supreme Court and their Lordships came to two conclusions : the first of the conclusions is :

' The section is penal in the sense that its consequences are intended to be an effective deterrent which will put a stop to practices which the legislature considers to be against the public interest.'

8. Having said so, they proceeded to deal with the next question and we shall extract the paragraph dealing with this question :

' The next question is that when proceedings under Section 28 are penal in character what would be the nature of the burden upon the department for establishing that the assessee is liable to payment of penalty. As has been rightly observed by Chagla C. J. in Commissioner of Income-tax v. Gokuldas Harivallabhdas, [1958] 34 I.T.R. 98 (Bom). the gist of the offence under Section 28(1)(c) is that the assessee has concealed the particulars of his income or deliberately furnished inaccurate particulars of such income and therefore, the department must establish that the receipt of the amount in dispute constitutes income of the assessee. If there is no evidence on the record except the explanation given by the assessee, which explanation has been found to be false, it does not follow that the receipt constitutes his taxable income.'

9. Their Lordships proceeded to state :

' Another point is whether a finding given in the assessment proceedings that a particular receipt is income after rejecting the explanation given by the assessee as false would, prirma facie, be sufficient for establishing, in proceedings under Section 28, that the disputed amount was the assessee's income. It must be remembered that the proceedings under Section 28 are of a penal nature and the burden is on the department to prove that a particular amount is a revenue receipt. It would be perfectly legitimate to say that the mere fact that the explanation of the assessee is false does not necessarily give rise to the inference that the disputed amount represents income. It cannot be said that the finding given in the assessment proceedings for determining or computing the tax is conclusive. However, it is good evidence. 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.

In the present case, it was neither suggested before the High Court nor has it been contended before us that, apart from the falsity of the explanation given by the assessee, there was cogent material or evidence 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 same and that the disputed amount was a revenue receipt.'

10. It has not been contended before us that, apart from the rejection of the explanation of the assessee as false, there was any material before the authorities justifying the conclusion that the value of 471 bags of raw nuts pledged with the bank represented the income of the assessee or that the amount representing the difference in the value of the closing stock by the adoption of a higher valuation of the closing stock by the assessing authorities represented the assessee's income. We therefore think that the matter must be governed by the decision of the Supreme Court in Commissioner of Income-tax v. Anwar Ali. This decision has been again referred to with approval by the Supreme Court in a recent pronouncement in Commissioner of Income-tax v. Khoday Eswarsa and Sons. We therefore answer the question in the negative, that is, in favour of the assessee and against the department. We make no order as to costs.

11. A copy of this judgment under the seal of this court and the signature of the Registrar will be sent to the Income-tax Appellate Tribunal, Cochin Bench.


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