1. The following questions have been referred for the opinion of this court at the instance of the Revenue under section 256(2) of the Indian Income-tax Act, 1961 (hereinafter referred to as 'the Act').
2. For the assessment year 1964-65 :
'(1) Whether, on the facts and in the circumstances of the case and having regard to the Explanation to section 271(1)(c) of the Income-tax Act, 1961, the Appellate Tribunal was right in cancelling the penalty of Rs. 65,000 imposed under section 271(1)(c) of the Act for the assessment year 1964-65
(2) Whether the Appellate Tribunal had valid material to hold that the assessee had not deliberately furnished inaccurate particulars of his income ?'
3. For the assessment year 1966-67 :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in cancelling the penalty of Rs. 9,595 imposed under section 271(1)(c) of the Income-tax Act, 1961, for the assessment year 1966-67
(2) Whether the Appellate Tribunal had valid material to hold that the assessee had not deliberately furnished inaccurate particulars of his income ?'
4. The circumstances under which the aforesaid questions arise are as under. The assessee is a registered firm. For the assessment year 1964-65, the assessee returned an income of Rs. 66,073 and the accounts in support thereof were produced and scrutinised. The Income-tax Officer noticed that in the accounts there were credits aggregating to Rs. 80,000 in the names of four parties. Interest payment was also claimed to have been made to those four parties. An analysis of the accounts showing the credits and adjustments of interest is as under :
Rs. Rs.1. T. Mari Chettiar19-3-1963 Credit 15,00012-4-1963 Credit 5,00028-8-1963 Interestadjusted 1,020--------- 21,0202. P. Krishnaraju24-2-1963 Credit 14,00024-3-1963 Credit 5,00028-8-1963 Interestadjusted 1,122--------- 20,1223. T. Nagarajan10-3-1963 Credit 16,00010-4-1963 Credit 5,00028-8-1963 Interestadjusted 1,126--------- 22,1264. Vasudev Bathichand31-8-1962 Credit 15,00028-2-1963 Credit 5,00028-8-1963 Interestadjusted 2,100--------- 22,100
5. The Income-tax Officer called upon the assessee to establish the genuineness of the credits. In response to that, the assessee filed copies of accounts on the letter-heads of the first three parties confirming the transactions and in respect of the last, an account copy prepared in the letter-head of the assessee was produced with an endorsement thereon to the effect 'confirmed Bathichand'. A scrutiny of the letters revealed that the letters of Mari Chettiar and Krishnaraju were dated October 18, 1965, and that of Nagarajan was dated October 16, 1965. The letters stated that the creditors were assessees and that they were assessed to income-tax by the Income-tax Officer, Tiruchirapalli. Their income-tax numbers were also given. The letters also purported to furnish the folio number in the account books of the respective parties wherein the transactions with the assessee appeared. The copies of the assessment orders relating to the first three creditors were also filed and therefrom it was seen that the assessees therein did not maintain any accounts whatever. They claimed to be hawkers and all the assessments were made on October 11, 1965, after estimating their income. The Income-tax Officer caused a further probe into the genuineness of these transactions by issuing summons. The address of the first three creditors was given as 89, Melapudur Road, Trichy-1, while that of the last creditor, though originally given as Door No. 3, Seeranga Pillai Street, Dadagapatti, Salem, was subsequently given as No. 89, Melapudur Road, Trichy. The summons issued by registered post on January 21, 1966, by the Income-tax Officer was served on the first three creditors on February 4, 1966, and all of them, by their letters dated February 7, 1966, prayed for time till April, 1966, as according to them, they were going out of station in connection with their business. The Income-tax Officer considered that there was something highly suspicious in that identical letters had been written by all the three creditors, and he, therefore, caused the issue of fresh summons on February 10, 1966, posting the matter for hearing on February 25, 1966. All the registered letters containing the summons were returned unserved with the endorsement 'not available'. The assessee was informed about this and the assessee explained that the creditors might have gone out on routine business tours. Thereupon, one Velayutham, the person in charge of the premises bearing Door No. 89, Melapudur Road, where the creditors were supposed to be carrying business was enquired and he stated that that premises had been let out by him to one Subramaniam who carried on maligai business and that nobody else was in the premises. The Income-tax Officer caused local enquiries also to be made and found that no cloth shop run by the creditors ever existed in the premises at No. 89, Melapudur Road, Trichy. Enquiries were also made from the Postal Department and that revealed that the summons sent earlier by the Income-tax Officer on January 21, 1966, were delivered to the three creditors only on their being identified by the owner of the premises, Velayutham. Velayutham had stated that he had known one Mr. Doraiswamy of M/s. N. C. Rajagopal & Co. who had informed him that if registered letters were received addressed to Door No. 89, Melapudur Road, Trichy, Doraiswamy was to be contacted, that he accordingly contacted him and subsequently the three parties were produced and on identification by him, they took delivery of the registered letters sent by the Income-tax Officer, that at the time when similar registered letters sent on February 10, 1966, were received, he passed on the information to Doraiswamy, but the parties did not turn up and these letters were returned undelivered. On a consideration of all these aspects, the Income-tax Officer was of the view that the assessee produced fabricated copies of the accounts, that the credits have been falsely introduced in the books of accounts in the names of the three bogus creditors, that the assessee had created false evidence in support of the false returns and had also committed an offence punishable under sections 192 and 193 of the IPC. The Income-tax Officer also referred to the reply of the assessee dated March, 21, 1969, in response to the letter of the Income-tax Officer dated February 20, 1969, and stated that no discharged promissory notes or stamped receipts for repayment of the debts alleged to have been issued by the creditors were produced and the books of account maintained by the assessee and produced before the Sales Tax Department earlier had not been made available for inspection by the Income-tax Officer despite service of notice under section 142(1) of the Act. The Income-tax Officer, therefore, concluded that the assessee was intentionally withholding the production of the account books. Under these circumstances, the Income-tax Officer assessed Rs. 80,000 being the amount of credit in the names of the four persons mentioned earlier as the income of the assessee from undisclosed sources and the interest payments were also disallowed. Separate action under sections 271(1)(a) and 271(1)(c) was also directed to be taken.
6. On appeal by the assessee, the Appellate Assistant Commissioner examined all the materials and held that the assessee had fabricated evidence, that the credits were also fabricated and under those circumstances, the addition of those amounts and the interest after rejecting the accounts produced by the assessee were in order. In that view, the appeal was dismissed.
7. In respect of the assessment year 1966-67, the assessee claimed that the interest paid on the borrowings from the above mentioned creditors totalling to Rs. 9,590 should be allowed. Since in the earlier assessment for the assessment year 1964-65, the credits in the names of the aforesaid parties were held to be fabricated, the Income-tax Officer disallowed the interest payments. Even in respect of this assessment year, the Income-tax Officer directed initiation of action under sections 271(1)(a) and 271(1)(c) of the Act. Aggrieved by this, the assessee preferred an appeal to the Appellate Assistant Commissioner contending that the interest payments ought not to have been disallowed. That was not accepted by the Appellate Assistant Commissioner who upheld the disallowance of the interest payment totalling to Rs. 9,590.
8. Meanwhile, the Inspecting Assistant Commissioner initiated penalty proceedings under section 271(1)(c) of the Act. In response to the show-cause notice, the assessee submitted that two of the creditors had admitted the transactions, that evidence in the form of promissory notes, etc., had been produced and, therefore, no case for penalty had been made out. It was also urged that as the Revenue had not established that the credits represented concealed income of the assessee, penalty cannot be levied and that the assessee by producing the promissory notes, receipts, confirmatory letters, etc., had discharged the onus cast on the assessee by the Explanation to section 271(1)(c) of the Act. On a consideration of all the materials including the statements of Velayutham and Nagarajan (one of the alleged creditors), the Inspecting Assistant Commissioner found that the assessee had not discharged the burden of proving that there was no fraud or wilful negligence on his part, but that on the contrary, the facts definitely established fabrication of the evidence by the assessee in its favour. In this view, the Inspecting Assistant Commissioner levied a penalty of Rs. 65,000. Regarding assessment year 1966-67, the Inspecting Assistant Commissioner on a consideration of the extensive investigation made, found that the assessee had furnished inaccurate particulars of income by claiming fictitious credits and that there was concealment attracting the levy of penalty. In that view, penalty in a sum of Rs. 9,595 was levied.
9. Aggrieved by the orders levying penalty, the assessee took the matter on appeal before the Tribunal. Before the Tribunal, it was accepted by the Revenue that as a result of settlement proceedings, the credit in the name of Vasudev Bathichand, one of the creditors, was agreed to be treated as a genuine credit. The Tribunal, therefore, proceeded to consider the question whether the levy of penalty under section 271(1)(c) of the Act was proper and justified. In doing so, the Tribunal proceeded on the footing that the assessee had not stated that the other three credits represented its own funds or income, that the evidence showed that the three creditors in fact existed and had filed even returns of income and were assessed, that the folio in the accounts relating to the transactions with the assessee had been given by them in the confirmatory letters, that the fact that no business was carried on at No. 89, Melapudur Road, Trichy, would not militate against the plea of the assessee that those persons were in existence, that it does not follow that the creditors were not capable of advancing funds to the assessee, that though the three creditors might have adopted dubious methods for receiving the letters addressed to them, it would not follow that it was at the instance of or with the connivance of the assessee, that though the assessment of the credits and disallowance of interest would be proper, it is not possible to hold that for purposes of penalty, it has been established that the credits were fictitious or that the claim for the allowance of interest was fictitious or there was any gross or wilful negligence or fraud on the part of the assessee in not having shown the aforesaid amounts as its income in the returns. In that view, the Tribunal deleted the levy of penalty. The Revenue has, therefore, come up before this court in these references on the questions set out earlier.
10. The learned counsel for the Revenue strenuously contended that having regard to the facts and circumstances of the case and the fabrication of the accounts and the other materials by the assessee, the assessee had rendered itself liable for levy of penalty, under section 271(1)(c) of the Act, in that the assessee had concealed particulars of income and produced account books and other materials false to its knowledge and had furnished inaccurate particulars. In addition, reliance was placed on the Explanation to section 271(1)(c) which was in force during the assessment years in question to contend that the presumption that the assessee had concealed particulars of income or furnished inaccurate particulars had not been in any manner rebutted by the assessee and, therefore, the deletion of penalty by the Tribunal is not in order. On the other hand, the learned counsel for the assessee submitted that one out of the four creditors had been accepted by the Revenue as a genuine creditor and that regarding the other three, materials in the shape of letters of confirmation, discharged promissory notes, receipts and the assessment orders had all been placed before the authorities and that would be sufficient to shift the onus to the Department and inasmuch as a preponderance of probabilities sufficient to establish a negative fact had been placed, that would suffice to tilt the onus back to the Revenue and the Revenue not having established by materials that the income was concealed or inaccurate particulars had been furnished, the levy of penalty was not in order. Reliance was placed in this connection on several decisions stated to be in support of this. The further contention of the learned counsel for the assessee was that the Explanation to section 271(1)(c) was not invoked at all before the authorities below, and, therefore, the Revenue cannot be permitted to place reliance on that, as pointed out in CIT v. A. C. Paul : 142ITR811(Mad) . In reply, the learned counsel for the Revenue submitted that the Explanation to section 271(1)(c) of the Act is only in the nature of a presumption which is built or erected into evidence of knowledge, not peremptory, but subject to explanation and, therefore, the Explanation can be invoked. Attention in this connection was drawn to Krishna, In re : AIR1954Mad993 . It was pointed out that the Explanation in fact had been invoked in this case, as was been from the very stand taken by the assessee in the proceedings before the Inspecting Assistant Commissioner, where the assessee has stated that the onus cast on the assessee by the Explanation had been discharged. Reliance, therefore, on the dicision in CIT v. A. C. Paul : 142ITR811(Mad) , according to the learned counsel for the Revenue, is of no avail.
11. We have carefully considered these rival submissions. We may at the outset point out that we are not disposed to look at the propriety of the order of the Tribunal deleting penalty merely from the point of view of presumption, onus, etc., supported by case law but totally divorced from the factual backdrop. In the course of the assessment proceedings, the Income-tax Officer has very clearly and categorically found on a consideration of all the materials and other related aspects that the credits have been falsely introduced in the account books of the assessee, that the creditors did not have any ostensible means of livelihood and that the device was only a plan to defraud the Revenue. Indeed, the Income-tax Officer has even gone to the extent of saying that offences punishable under sections 192 and 193, of the Indian Penal Code, have been committed by the assessee. In other words the evidence for the initiation of penalty proceedings had been piled thick in that order against the assessee. We are aware that for purposes of penalty proceedings, the assessment order is not conclusive evidence though it may be good evidence. Even so, on the facts and in the circumstances to which we would refer presently, it is manifest that the conclusion of the Tribunal is in the teeth of the materials and cannot be arrived at by any authority well instructed in law.
12. On the materials available, the following inferences and conclusions, in our view, are irresistible :
(1) The furnishing of the trade names of the creditors initially was after inventing those names and only subsequently the names of the non-existent creditors were given.
(2) Two out of three creditors have not been established to be in existence or even traceable at the so-called place of business.
(3) No business was established to have been carried on by any of the creditors at the place mentioned by the assessee.
(4) There are no accounts with the so-called creditors containing the pages mentioned in the confirmatory letter where the transactions with the assessee are stated to have been entered.
(5) The three creditors have not been established to have been in a position to advance amounts to the assessee in 1963, as two of them have made themselves scarce and the only other creditor, Nagarajan, had not said anything about having advanced any amount to the assessee in 1963.
(6) All the assessment orders on the returns filed on behalf of the creditors have been obtained on the same day i.e., October 11, 1965, a few days prior to the passing of the confirmatory letters on October 16, 1965, and October 18, 1965.
(7) The communications sent by the Income-tax Department were delivered to three of the creditors not in the usual course, but by interception and special arrangement and in its absence, the letters had been returned undelivered.
(8) The withholding of the books of account by the assessee even after issue of a notice under section 142(1) of the Act, which had been produced before the Commercial Tax Authorities was intentional and if they had been made available, they would not have reflected the advances made by the alleged creditors.
13. In the light of the aforesaid conclusions and inferences flowing from the materials, we are unable either to agree with or uphold the conclusion arrived at by the Tribunal that section 271(1)(c) of the Act is not attracted, though the assessment of the credits and disallowance of interest by the Income-tax Officer is quite in order. Such books of account and other materials relied on by the assessee had been found to be fabricated. The existence of two of the creditors had not been made out. The capacity of the creditors to have advanced monies to the assessee has not been established. The filing of the returns of income and the assessments thereon have been got up to pass confirmatory letters in the names of fictitious creditors. In fact, one of the creditors, Nagarajan, had admitted that the confirmatory letter was given to the assessee as they wanted it in a printed letter-head and the letter-head was printed at Salem. The confirmatory letters are stated to contain a reference to the page number of the accounts of the creditors where the assessee's transactions can be found. In relation to one of the creditors, Nagarajan, he frankly confessed that only a note book was maintained and that had not been preserved and that he was keeping the amounts in cash. The assessment orders, no doubt, describe these creditors as hawkers, but as pointed out earlier, there is no doubt that the so-called creditors have been caught hold of for the purpose of making it appear that they had assessable income. Even assuming so, the assessment orders do not establish the capacity of these creditors to advance the amounts claimed by them to have been so done. We are unable to share the view of the Tribunal that the mere fact that no regular business was carried on at No. 89, Melapudur Road, Trichy, would not militate against the plea of the assessee that those persons who were in existence and advanced amounts to the assessee were not people without means. As pointed out earlier, there is no knowing as to who or where two of the creditors were and the only other creditor who had given a statement has not said anything with reference to his having advanced any amount to the assessee. The letters of confirmation are doubtful and found to be so by the Income-tax Officer and the Inspecting Assistant Commissioner. Though the learned counsel for the assessee stated that the discharged promissory notes had been produced and some receipts had also been made available, it is seen from the proceedings of the Income-tax Officer that though such a claim was made by the assessee in its letter dated March 21, 1969, in response to a letter dated February 20, 1969, issued by the Income-tax department, no discharged promissory notes or stamped receipts stated to have been issued by the creditors had been made available and the so called creditors could not even be contacted through post. This was so only because they were not in existence. Even for receiving letters, elaborate arrangements had been made as disclosed by the records and that would mean that these creditors are not persons ordinarily living and carrying on business but had been brought on the occasion to receive the letters. The Tribunal had commented upon the non-examination of Doraiswamy of N. C. Rajagopal & Co. It was for the assessee to have examined him if it had wanted but it had not done so and for the omission on its part, we do not see how the Revenue can be penalised. The cumulative effect of all these circumstances and materials available and the inferences and conclusions flowing therefrom make it clear that tile creditors were all bogus, that the assessee had manipulated the confirmatory letters and also procured assessment orders to make it appear that the amounts had been advanced by those creditors. These were adopted by the assessee only with a view to conceal real income by making it appear as if the creditors had advanced those moneys and they had been entered in its books of account. In this case, the accounts, confirmatory letters, etc., have all been found to be fabricated. That would mean that those materials on the basis of which the return was filed showing the cash credits were false to the knowledge of the assessee. It was on the basis of those false materials the assessee had returned the particulars income which were subsequently found to be incorrect and inaccurate. Therefore, looked at from any point of view, we are satisfied that section 271(1)(c) the Act is attracted.
14. We now proceed to consider the applicability of the Explanation. With reference to the assessment year 1964-65, it is seen from the very explanation offered by the assessee as reflected in the order of the Inspecting Assistant Commissioner of Income-tax that the assessee had taken up the position that the onus cast on it by the Explanation had been discharged by the production of promissory notes, receipts and confirmatory letters. This is, therefore, a case where the Explanation to section 271(1)(c) of the Act had been invoked and understood by the assessee to have been so invoked and also attempted to be answered by the assessee. To such a situation, we are of the view that the decision in CIT v. A. C. Paul : 142ITR811(Mad) is inapplicable, as that dealt with a case where the explanation had not been invoked at all. In this case, the return was filed by the assessee on the basis of the account books, the entries in which and the other material in support whereof had all been found to be fabricated by the assessing authority. It is also not in dispute that the income returned by the assessee is than 80% of the total income as assessed. Under the Explanation, therefore, a presumption is raised that the assessee had concealed particulars of his income or furnished inaccurate particulars of such income. Such a presumption would be rebutted only in the event of the assessee establishing that the failure to return the correct income as assessed did not arise from any fraud or gross or wilful negligence on its part. If the assessee maintains accounts which are false or incorrect and on the basis of such false or incorrect accounts, it returns an income which is not found to be the correct income, it would clearly a case of wilful negligence. In this case, the additional circumstance is also there in that the accounts and other supporting materials have been found to be fabricated. The failure, therefore, to return the correct income is attributable to the fraud perpetrated by the assessee in that he had got up the entries in the accounts and other materials in support of a claim that the creditors had advanced moneys to it. In the circumstances of this case, we are of the view that the Explanation to section 271(1)(c) of the Act will stand attracted. Earlier, it had been noticed that it had been found that the books of account and other materials have all been fabricated by the assessee. The assessee had also not made available the discharged promissory notes or the receipts for the payment of the amounts by the assessee to the creditors. There is no reference to these either in the order of the Inspecting Assistant Commissioner or the Tribunal. The assessment orders also do not in any manner enable the assessee to establish that there was no fraud or gross or wilful neglect on its part. Being a negative fact, it would suffice if the assessee establishes it by preponderance of probabilities. But in this case, the presumptive probative value of the Explanation has not been in any manner shaken by the assessee. In short, we are of the view that on the materials, the assessee had not attempted even to dislodge the presumption and under those circumstances, the Tribunal was in error in not giving effect to the Explanation Therefore, as regards the assessment year 1964-65, we have to hold that the Tribunal was in error in cancelling the penalty without any materials therefor and without reference to the Explanation to section 271(1)(c) of the Act. We also hold that there were no materials on the basis of which it could be hold that the assessee had not deliberately furnished inaccurate particulars of its income. We, therefore, answer questions Nos. 1 and 2 for the assessment year 1964-65 in the negative and in favour of the Revenue.
15. Regarding the assessment year 1966-67, it does not appear that the Explanation had been invoked by the Revenue in the course of the proceedings for levy of penalty. However, we had found earlier that there has been concealment and furnishing of inaccurate particulars of income by resorting to bogus credit entries in the account books. That would suffice to attract s. 271(1)(c) of the Act without any need to invoke the Explanation. For that year also, the Tribunal was not in order in cancelling the penalty without any materials. We, therefore, answer questions Nos. 1 and 2 for the assessment year 1966-67 in the negative and in favour of the Revenue. Inasmuch as before the Tribunal one of the creditors had been accepted to be a genuine creditor, effect will be given to such recognition in the course of the penalty proceedings. The Revenue will be entitled to recover the costs of this reference. Counsel's fee Rs. 500 (one set).