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Commissioner of Income-tax, Tamil Nadu-iv Vs. Imperial Automobiles - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 816 of 1977 (Reference No. 554 of 1977)
Judge
Reported in(1982)31CTR(Mad)32; [1983]141ITR60(Mad)
ActsIncome Tax Act, 1961 - Sections 68 and 271(1)
AppellantCommissioner of Income-tax, Tamil Nadu-iv
Respondentimperial Automobiles
Appellant AdvocateA.N. Rangaswami and ;Nalini Chidambaram, Advs.
Respondent AdvocateS.V. Subramaniam, Adv.
Excerpt:
.....opinion not satisfactory then assessing authority is at liberty to treat cash credit as taxable income of assessee - by merely rejecting assessee's explanation and treating cash credit as income in assessment department cannot levy penalty on assessee on score that credit entry amounts to concealment of income - held, tribunal right in canceling penalty as not based on any evidence of concealment - question referred to court answered in favour of assessee. - - cases in the books have held, chief amongst which is the well-known decision of the supreme court in anwar ali's case [1970]76itr696(sc) ,that what applies to assessment of cash credits does not apply to penalty proceedings taken in the wake of the assessment. apart from this curious aspect, it would be seen that this..........was no positive material with the department to show that the amount in question was really the firm's income. the case, therefore, comes under the anwar ali rule. the tribunal was quite right in cancelling the penalty as not based on any evidence of concealment, not even on any evidence that the credit represented the assessee's income. 7. mr. rangaswami then argued that the rule in anwar ali [1970] 76 itr 796 , cannot be applied after the introduction, in s. 271(1)(c) of the act, of the explanation by the finance act, 1964. we do not think so. the explanation has not the effect of altering the substantive law on the subject of penalty for concealment. it only introduced a special rule of evidence applicable to cases coming within a particular penalty bracket. the rule of evidence.....
Judgment:

Balasubrahmanyan, J.

1. This reference concerns the correctness of a decision by the Income-tax Appellate Tribunal cancelling a penalty levied in this case under s. 271(1)(c) of the I.T. Act, 1961. The question of law we are asked to consider is in the following terms :

Whether, on the facts and in the circumstances of the case and having regard to the Explanation to s. 271(1)(c) of the Income-tax Act, 1961, the Appellate Tribunal was right in law in cancelling the penalty of Rs. 9,200 levied under section 271(1)(c) of the Act for the assessment year 1968-69 ?'

2. The assessee is a firm of three partners. The firm carries on business in automatic spare parts. The firm filed a return for the assessment year 1968-69 disclosing an income of Rs. 26,740. In the course of the examination of the firm's books of account the ITO found that there were credit entries on various dated amounting in all to Rs. 8,000 in the name of one Sundari Bai. She is the wife of a partner in the assessee-firm. The account in her name not only showed the credits as borrowings of the firm, but also carried an entry crediting interest to her in the sum of Rs. 1,200. When the assessee was questioned about the nature and source of these credits entries, it was represented by the assessee that they were moneys advanced by that lady to the assessee-firm. The ITO required proof for the genuineness of the credit entries. The assessee filed with the officer an affidavit sworn to by Sundari Bai. Subsequently, the officer issued summons to that lady for appearing before him to be cross-examined on the contents of her affidavit. The summons, however, was returned unserved by the postal authorities. No being able to examine Sundari Bai, the ITO apparently thought he must reject her affidavit. Having done so, the officer added the sum of Rs. 9,200 representing the credits in Sundari Bai's account as the assessee-firm's taxable income. The assessee, for some reason or other, did not appeal against the assessment made in this manner.

3. Side by side with that assessment, the ITO initiated penalty proceedings against the assessee under s. 271(1)(c) of the I.T. Act, 1961, treating the credits of Rs. 9,200 in Sundari Bai's account as representing suppression of the income by the assessee. The IAC who initiated the penalty proceedings levied a penalty of Rs. 9,200 on the assessee. He rejected the assessee's explanation that the credits represented advances made by Sundari Bai. He held that the genuineness of the credits had not been properly proved, since Sundari Bai had not presented herself for cross-examination on her affidavit.

4. The assessee appealed against this penalty order ; the Tribunal allowed the appeal and cancelled the penalty. They observed that this was merely a case of rejection, by the taxing authorities, of the explanation offered by the assessee as to the nature and source of the credits. The Tribunal referred to Sundari Bai's affidavit which was in support of the assessee's explanation and observed that the contends of her affidavit cannot be rejected out of hand merely because she was not available for cross-examination. The Tribunal held that on the facts on record there was no evidence of concealment of income on the part of the assessee. Before the Tribunal, the Department had invoked the Explanation to s. 271(1)(c) to sustain the penalty. The Tribunal, however, held that the Explanation did not apply. The Tribunal's view was that when the assessee's case was that the amount in question represented a third party's money advanced to the firm and that was supported by evidence, there can be no question of any fraud or wilful neglect on the part of the assessee in excluding that amount from the return of income. On this basis the Tribunal ruled out the applicability of the Explanation to s. 271(1)(c) of the Act.

5. Before us, Mr. Rangaswami, the Department's learned standing counsel, submitted that the Tribunal was in error in thinking that the assessee had offered an acceptable explanation of the credits by merely filing an affidavit from the so-called creditor and stopping short with that. Learned counsel commented that the deponent was not produced for cross-examination. Learned counsel submitted that in these events the assessee's explanation was rightly rejected by the Department not only for the purposes of assessment, but also for purposes of penalty.

6. We do not accept this argument as tenable. We think it desirable to reiterate the correct legal position in matters of this kind. Where an assessee offers an explanation as to the nature and source of a cash credit entry in his accounts and that explanation is, in the assessing officer's opinion, not satisfactory, then the assessing authority is at liberty to treat the cash credit as the taxable income of the assessee. This has been the view of our income-tax law for a pretty long time. The principle has been blessed by the courts in innumerable decisions down the years. This doctrine was translated in statutory terms for the first time in 1961, and incorporated in s. 68 of the I.T. Act, 1961. But this is only so far as the assessment part of the proceeding goes. Cases in the books have held, chief amongst which is the well-known decision of the Supreme Court in Anwar Ali's case : [1970]76ITR696(SC) , that what applies to assessment of cash credits does not apply to penalty proceedings taken in the wake of the assessment. Court rulings have settled the position that by merely rejecting the assessee's explanation concerning a cash credit and treating the cash credit as income in the assessment, the Department cannot levy penalty on the assessee on the score that the credit entry amounts to concealment of so much income. The Supreme Court and other courts have expressed the view that there must be some more material with the Department, and that material must establish that the cash credit entry really is a mode of concealment and that what is sought to be concealed is the income of the assessee taxable in his hands as such. Courts have held that the onus is on the Department to establish concealment even in a case where the assessing officer has rejected the assessee's explanation as to the nature and source of the cash credit. In the present case, the assessee-firm adduced affidavit evidence to prove the genuineness of the credits in question. The ITO held the affidavit as insufficient proof and rejected the assessee's stand. Apart from rejecting the assessee's explanation, there was no positive material with the Department to show that the amount in question was really the firm's income. The case, therefore, comes under the Anwar Ali rule. The Tribunal was quite right in cancelling the penalty as not based on any evidence of concealment, not even on any evidence that the credit represented the assessee's income.

7. Mr. Rangaswami then argued that the rule in Anwar Ali [1970] 76 ITR 796 , cannot be applied after the introduction, in s. 271(1)(c) of the Act, of the Explanation by the Finance Act, 1964. We do not think so. The Explanation has not the effect of altering the substantive law on the subject of penalty for concealment. It only introduced a special rule of evidence applicable to cases coming within a particular penalty bracket. The rule of evidence laid down by the Explanation might be regarded as an inversion of the initial burden of proof from the Department to the assessee under the rebuttable presumption. According to the Explanation in cases where an assessee's returned income is less than 80 per cent. of the income as ultimately assessed, he will be presumed to have concealed particulars of his income unless he establishes that the hiatus between his return and his assessment was not due to fraud or wilful neglect in the filing of the return. It is clear that this inverted burden of proof does not apply to cases where the gap between the returned income and the assessed income of less than 20 per cent. It is further clear that even in cases where the Explanation initially applies because the returned income is less than 80 per cent. of the assessed income, if the assessee established that this gap is not due to any fraud or wilful neglect on his part he would have established the initial burden laid on him by the Explanation and rebutted the presumption of concealment, and then the ball would be in the Department's court, as it were, and the onus would be on the Revenue to establish by cogent material that the assessee had concealed his income. Thus, Anwar Ali's case : [1970]76ITR696(SC) would govern the penalty proceedings even in such a case where the Explanation might be invoked. To start with, we do not, therefore, accept Mr. Rangaswami's thesis that Anwar Ali has become out of date after the Explanation introduced by the Finance Act, 1964. We may refer to a recent Bench decision of this court in Addl. CIT v. V. Kanakammal : [1979]118ITR94(Mad) , which has applied the law on the same lines as we have adopted in this case.

8. The Explanation to s. 271(1)(c), on which Mr. Ranagaswami has relied in this case, has given way to a battery of four new Explanations which have been introduced by the Taxation Laws (Amendment) Act, 1975. Since application to the penalty proceedings in the instant case which relate to the assessment year 1968-69. We have held that the Anwar Ali decision : [1970]76ITR696(SC) , had not been abrogated by the rule of evidence enacted in the Explanation to s. 271(1)(c) introduced by the Finance Act, 1964. But the position may have to be considered in the context of Expln. I to s. 271(1)(c) which has come into the statute with effect from April 1, 1976, in cases governed by it. This new Explanation is to the effect that where in respect of any fact material for purposes of his assessment an assessee offers an explanation which is found by the ITO or the AAC to be false or where the assessee is unable to substantiate his explanation, then the amount added back in his assessment shall be deemed to represent his concealed income. Incidentally, it is a matter for comment that although the Appellate Tribunal may have accepted an assessee's explanation of an item in his assessment as satisfactory and may have deleted the addition in an appeal against his assessment, that may not avail the assessee in proceedings in which penalty might be imposed on him with reference to the same item. Such are the terms of this Expln. I. Apart from this curious aspect, it would be seen that this Explanation considerably reduces, if not altogether removes, the Department's onus to prove concealment in assessments based on unexplained cash credits, unexplained investments and the like. Closer examination of Expln. I in juxtaposition to the language of s. 68, for instance, might possibly reveal a vestige of burden left for the Department to discharge even in such cases. Section 68, for instance, might enable the assessing officer to treat the cash credit as income if, in his opinion, the assessee's explanation is not satisfactory. But Expln. I to 271(1)(c) would require that the assessee's explanation must be fond by the ITO to be false. However, by and large, the doctrine of Anwar Ali : [1970]76ITR696(SC) , might well be regarded as having been eroded by Expln. I. The penalty under s. 271(1)(c) thus tends to become almost automatic, after Expln. I.

9. So far, however, as the present case is concerned, the Tribunal has found that there was no fraud or wilful neglect on the assessee's part when he excluded the credits in Sundari Bai's account from his return of income. It follows, therefore, that the Tribunal was right in holding that the Explanation, which governed s. 271(1)(c) at the material time, could not be relied on by the Department to invoke the presumption against the assessee. With the result that the Anwar Ali approach made by the Tribunal has to be upheld as the proper one in this case.

10. Mr. Rangaswami, in the course of his argument, sought to make some point out of Sundari Bai not being available for cross-examination on her affidavit. We do not think there is much to comment about this aspect of the case. The record does not show that she evaded service of the subpoena. All that is said is that the summons was returned unserved by the postal authorities. We cannot put anything against this lady for her not volunteering to give oral evidence. She was the wife of a partner of the firm, but she was entitled to expect a subpoena for her examination. We cannot also accept the suggestion that the credit being in the name of the partner's wife is conclusive evidence of the amount representing the firm's concealed income. It might be the income of the wife ; or it might be the income of the firm. Of these possibilities, excluding other possibilities, whose income it is must be definitely known. Before penalty can be levied on the firm, it must be found on a preponderance of probabilities that the credit represents the firm's income. of such evidence the Tribunal found none in this case. Nor do we find any ourselves.

11. Mr. Rangaswami mentioned that the firm did not challenge the assessment of the cash credits by preferring an appeal against the assessment. In our opinion, this is not a circumstances from which any adverse inference can be drawn against the assessee. Forbearance to file an appeal might be motivated by many considerations. It will not unerringly indicate that the assessee thereby admits that the credits represent his income.

12. Having regard to all these consideration, we answer the question referred to us in the affirmative and against the Department. The assessee will have its cost. Counsel fee, Rs. 500.


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