1. The assessees are a firm of cotton merchants in Coimbatore. They purchase raw cotton or kappas, gin them, in their factory and sell the out-turn of cotton and cotton seeds. At any given moment of time, their factory and godowns will be filled with stocks of kappas, cotton seeds and cotton in various stages of manufacture. The stocks would be held either loose or in bales, bags and the like. The assessees had overdraft and key-loan facilities with a nationalised bank. The bank used to advance key-loans and open loans, on the security of the assessees' stocks of kappas, lint and cotton seeds. The assessees used to declare to the bank their stock of pledged goods on the basis of which the bank used to advance loans from time to time. The assessees' declarations of stocks were supposed to be verified by the inspecting staff of the bank. But it never was claimed by the bank that their verification was hundred per cent. accurate. It was stated, for instance, that where stocks were held loose and also where work was in progress, the bank's inspecting staff merely accepted without a word the assessee's statement as to the quantity.
2. In the course of proceeding for the assessee's assessments to income-tax for 1959-60 and 1960-61, the ITO got hold of the assessee's applications for key-loans and other secured loans from the bank. He then compared the stocks declared by the assessees to the bank in those statements with the stocks as disclosed by the assessees in their own accounts on crucial days. His examination revealed that the stocks of goods in the accounts fell short of the stocks declared to the bank. The value of the difference between the two amounted to Rs. 94,900 in one year and Rs. 81,845 in the other year. The officer pinned down the assessees to the declarations to the bank and held that they represented their true stocks and not the lesser quantity disclosed in their accounts. He accordingly added Rs. 94,900 and Rs. 81,845 respectively in the assessee's assessments to income-tax for 1959-60 and 1960-61. The AAC of Income-tax, on appeal by the assessee, was prepared to take a somewhat realistic view of the figures of stocks declared by the assessees to the bank to hold that the figures were got up for the express purpose of getting the loan accommodation. He did not think that the assessees could have suppressed stocks worth in for an estimate of his own in the matter. His view was that at best Rs. 50,000 and Rs. 42,000 respectively can alone be regarded as understatement of stocks in the two years. In that view, he sustained the additions made by the ITO in the assessments only to that extent.
3. Meanwhile, on the basis of the assessment orders passed by the ITO, penalty proceedings were started against the assessees on the score that their declarations to the bank of excess stocks clearly discredited their book figures showing a lesser quantity. The IAC, who had charge of the penalty proceedings, took note of the fact that the AAC had reduced the additions made in the assessments to Rs. 50,000 and Rs. 42,000 respectively. Nevertheless, he stuck to the view that to the extent of Rs. 50,000 and Rs. 42,000 at least the assessees must be held to have concealed their income. On this basis the IAC levied penalties under s. 271(1)(c) of the I.T.Act, 1961. The penalties were Rs. 28,000 for one year, and Rs. 15,000 for the other year.
4. The assessee took both the matters in appeal before the Income-tax Appellate Tribunal, that is to say, both the assessments and the penalties. The Tribunal dismissed the assessees' appeal against the assessments, agreeing with the AAC that additions were called for since the assessees declaration to the bank showed stocks in excess of those disclosed in their own books of account. As for the penalties, however, the Tribunal posed the question whether it had been established by the Department that the assessee had concealed their income. The Tribunal answered the question by suggesting that although estimated additions were made in the assessments on the ground that the stock particulars furnished by the assessees in their books were far less than those declared by them to the bank, there was no material to show that the assessees had acquired the value of the stocks so estimated and added in the assessments from out of their own funds, and these funds had really come out of the assessees' income from undisclosed sources. The Tribunal further pointed out that there was no material either to show how these estimated excess stocks were ultimately disposed of by the assessees. According to the Tribunal, in the absence of any evidence that the excess stocks had been sold, they would remain with the assessees as closing stocks, in which event, on the principle of stock valuation 'cost or market, whichever is lower', no profit element could really be attributed to the value even of this suppressed stock. The Tribunal also referred to and relied on the AAC's remarks in the course of which it was pointed out that the assessees, as borrowers from the bank, were likely to have manipulated their stock figures just for the sake of getting loans for the needed amounts.
5. Having regard to these considerations, the Tribunal, held that there was no evidence of actual concealment of income. In this view, the Tribunal canceled the penalties.
6. The Tribunal have now stated a case at the instance of the Income-tax Department, referring the following question of law for our decision :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in canceling the penalty levied under section 271(1)(c) of the Act for the assessment years 1959-60 and 1960-61 ?'
7. Mr. Jayaraman, learned standing counsel for the Department, took a somewhat lofty line in argument. He said that the assessees who had solemnly declared their stocks to a nationalised bank and had obtained loans on the strength of those declarations, cannot be heard to say in their income-tax assessments that no weight should be given to those declarations. Learned counsel stated that the assessees should not be allowed to get away with that kind of double-talk and escape penalty. According to learned counsel, some sanctity must be attached to a verified declaration given by a borrower to a bank, especially when, on the strength of that declaration, he had obtained financial accommodation from the bank. Learned counsel further submitted that in the present case the assessees had declared their stocks before the bank on a solemn declaration by them as to the quality and the quantity of the stocks declared. In the circumstances, it was proper to hold that the declaration by the assessees to the bank disclosed the real state of affairs, and, to the extent that the accounts disclosed a lesser quantum of stocks, the assessees must be held clearly to have suppressed particulars of their income.
8. We quite appreciate the point of view from which learned counsel for the Department has addressed his contentions before us. It is indefensible that any businessman should obtain a benefit or advantage by way of loan facility from a bank on the basis of a declaration of stocks in which the value or quantum of goods is inflated. What, however, prevents us from acting on this principle in the present case is our awareness that we are not hearing any relevant complaint either from the bank or from any other aggrieved party directly affected by the exaggerated statement rendered by the assessees of their stock position. The one and only question which now concerns us in these tad proceedings is which of the two declarations made by the assessees is to be accepted as the true one Their declaration before the bank officials for the purpose of obtaining the loan, or the entries in their accounts showing the stock position from time to time The inquiry thus involves not the application of moral standards, but investigation into matters of fact on which appropriate findings will have to be made by the taxing authorities and by the Tribunal in appeal. At the present stage of reference, the inquiry is much more limited. We only have to see whether the conclusion of the Tribunal, on facts, is based on materials.
9. We have earlier referred to the finding of the AAC which he had rendered in the appeal against the assessments. That finding was to the effect that quite an exaggerated version of the stocks must have been declared by the assessees to the bank with a view to get more overdraft facilities. Indeed, it is precisely this consideration on which the AAC persuaded himself to delete a big slice out of the additions made by the ITO towards suppressed stocks. Apart from this consideration, there is really no evidence to show that the declarations made by the assessees before the bank for the stock particulars reflected the true stock positions, to the last bale. The ITO had called for the remarks of the bank as to the manner and accuracy of verification of the declarations of stock made by the assessees. According to the bank, their inspection staff did, in a manner of speaking, verify the stock cotton, kappas, and other goods which were in the assessee's business premises in bales and in bags; but the bank's inspection staff did not physically verify the stock which was kept loose in the factory and in the godowns of the assessees. It is also stated in the order of assessments that the assessees did not maintain proper stock registers. In these circumstances, the finding of the ITO in the assessment orders in regard to the under-valuation of the stocks could, at best, he regarded only as an estimate. This is proved by the fact that, on appeal, the AAC had reduced the figure of under-valuation of stock by nearly half of that which was estimated by the ITO. It is true that the Tribunal, on further appeal, had sustained the estimate made by the AAC in so far as the additions in the assessments were concerned. But this does not after the fact that what the Tribunal had done was merely to sustain what, at best, was an estimate made by the taxing authorities as to the possible suppressions of stock made by the assessees. It is also significant to note that the Department did not question the reduction on the estimate made by the AAC. We, therefore, agree with the Tribunal's finding that there really is no clinching material on the basis of which it could be said that the assessees had suppressed stocks worth Rs. 50,000 in one year and stocks worth Rs. 42,000 in the other year from their books and from their returns of income.
10. Even on the basis that the assessees' declaration of stocks to the bank must be taken as the basis for working out the suppression of stocks by the assessees, that, at best, could only lead to the conclusion that the assessees had stock on hand which they did not properly disclose in their accounts. In the absence of any materials to show that this excess stock, not brought into the assessees' books, were dispose of at a profit, it would be difficult to say that the stock which remained intact really produced any income.
11. We also agree with the Tribunal's further observation that there was no material on record to show wherefrom the so-called suppressed stock could have come from. If the basis of the assessment was that this suppressed stock should have come from the assessees' income from undisclosed sources, that could only have been on the basis of a presumption which the Department was permitted to raise for purpose of rendering an assessment. But, in the absence of any material to show that this excess estimated stock was acquired by the assesses from out of income which had been kept out of their accounts, it is not possible to hold from a mere estimation of the excess stock that it represented the assessees concealed income.
12. As we earlier observed, therefore, this matter of penalty, in this case, as in others, has got to be examined objectively on the basis of materials and by examining the legitimacy of findings and inferences drawn by the Tribunal on the basis of those materials. There can be no rule of law in matters of this kind, much less precedents, on the basis of which we could decide this case, or any other case on hand, relating to penalty.
13. In the course of arguments before us, a few decided cases were cited. Some of them dealt with the question of levy of penalty in regard to a finding of stock suppression on the assessees' declaration before the bank, which was at variance with the figures entered in the account books of the assessees. In some cases the penalties levied by the departmental authorities were sustained. In some other cases there were opposite decisions. Whatever might be the results of the examination of particular cases, they do not afford any guidance, much less precedents for us to follow. We, therefore, desist from referring to the few cases which were referred to before us in argument.
14. The only view-point which could be urged as one of principle, in matters of this kind, might be that the assessees who obtained loans and other accommodation from banks and financial houses or even from government and quasi-government authorities must really be pinned down to those declarations, especially when their own accounts do not accord with those declarations. This point of view, however, would really involve the taxing authorities as well as this court into reviewing a penalty on an assessee for giving an incorrect or false declaration before the banks or what would be reverse inference to justify the levy of a penalty merely on the basis of a declaration made by the assessee without any supporting material to show the reality of the position bearing on that declaration. If an assessee had rendered a false declaration of stocks before the banks, he would certainly get his deserts in appropriate proceedings in the event of the banks suffering a loss on account of such a declaration. But if, on the contrary, the declaration before the bank is to be regarded as correct, then that can be only done at least for purpose of penalty, on the basis of clear material. Whatever might be the position of taxation law under which an estimated addition can be madeon the basis of a discrepancy between the declarationto the bank and the disclosure in the account books, such a view cannot be the foundation for levy of penalty which, as has been repeatedly laid decided onnwn by the courts, can only be based on clear evidence of concealment made out by the Department.
15. In this case we have referred to the findings of the Tribunal which show that such material is lacking to sustain the penalty. The Tribunal was, therefore, quite justified in canceling the penalty. Our answer to the question of law is, therefore, in the affirmative and against the Department. The assessees will have their costs. Counsel's fee Rs. 500 one set.
16. One factual consideration which is of some minor importance may be added so as to provide a complete picture of the proceedings taken by the taxing authorities and the Tribunal in the matter of penalty. We have earlier observed that the penalties were for the two assessment year 1959-60 and 1960-61. We also pointed out that the additions made by ITO in the two assessments were mainly based on what the ITO regarded as understatement of stocks in the assessees' accounts when judge in the face of the assessees' declaration of stocks to the bank. For the assessment year 1959-60, there was an additional factor which went to make up the total additions made by the ITO to the income returned. That was a cash credit of Rs. 7,000 which was found in the assessees books in the relevant account year. It may be observed that the assessees did not make any grievance of this addition, since they partially offered the amount for assessment, not being able to explain the nature and source of the credit. Quite naturally, therefore, in the appeals against the assessments, this addition of Rs. 7,000 was confirmed without much discussion. When the Tribunal had to deal with the penalty for 1959-60, they had necessarily to take note of the addition made by the ITO in the assessment towards the cash credit of Rs. 7,000. While sustaining the addition of Rs. 7,000 in the assessment, the tribunal, however, thought that the mere addition of Rs. 7000 towards unexplained cash credit cannot justify any penalty for concealment. For coming to this conclusion, they relied on the well-known decision of the Supreme Court in CIT v. Anwar Ali : 76ITR696(SC) .
17. We may observe that in following the Supreme Court's decision and applying it to the particular facts of this case and the way in which the amount of Rs. 7,000 was brought to assessment, the Tribunal had not committed any error of law, for, according to the Supreme Court, the mere fact that an addition is made towards unexplained cash credits cannot, on the strength of such an assessment and without more, justify the levy of penalty on the ground that the amount added in the assessment really represented the concealed income of the assessee. It was this principle which was applied by the Tribunal to the extent that the levy of penalty took note of the addition of Rs. 7,000 towards cash credits.