1. As both the references are Connected, they are dealt with together.
2. T.C. No. 114 of 1967 relates to the assessment proceedings under the Income-tax Act for the year 1961-62 and T.C. No. 115 of 1967 relates to the penalty proceedings in respect of the same year.
3. The assessee is a registered firm carrying on business in the manufacture and sale of handloom goods with its head office in Madurai. It has weaving centres at Palayamkottah and other places for the manufacture of handloom goods. In the previous year ending on 16th August, 1960, corresponding to the assessment year 1961-62, it returned an income of Rs. 73,519. The said return showed a total turnover of Rs. 12,47,047 and the gross profit at Rs. 1,27,176. The gross profit returned worked out to 9.4 per cent. as against the gross profit rate of 10.8 per cent. in the previous year. The assessee had maintained a thari register to record the issue of yarn and art silk to weavers. The signature of the weavers to whom they had been issued had not been obtained. The assessee had also shown purchase of handloom goods to the extent of Rs, 52,070 on August 16, 1960, the last day of the accounting year representing the value of 3,700 pieces, made up of 1,320 pieces of five yards and 2,380 pieces of 6 yards. These purchases were not supported by any independent vouchers but only by the vouchers prepared by the assessee itself. These purchases were shown as credit purchases from 31 weavers all belonging to Tirunelveli District. There were no such purchases from these persons in the earlier years. The total purchases of handloom cloth up to the week preceding the close of the accounting year was only Rs. 15,717. No payment has been made to the said 31 weavers either in the accounting year or in the following year. The stock book maintained by the assessee also showed that on February 29, 1960, the sales were in excess of the stock on hand. The Income-tax Officer, in the, course of the assessment proceedings, called upon the assessee to produce for his examination the weavers from whom the 3,700 pieces of handloom goods are said to have been purchased. The assessee stated that the weavers could not be traced as they had given wrong and false addresses, and that in order to buy peace with the department it was prepared to subject itself to assessment on Rs. 52,070 being the value of 3,700 pieces, provided that the said sum is spread over equally over a period of four years from 1958-59. The Income-tax Officer, however, rejected his claim for spreading over and added a sum of Rs. 52,070 to the income returned by the assessee in the assessment year.
4. The assessee appealed to the Appellate Assistant Commissioner. In the course of the hearing of the appeal, a statement showing the total quantity manufactured and the yarn and art silk used in such manufacture in the previous year for the assessment year 1961-62 and for the immediately preceding year was filed. It was found therefrom that as against 6.4 yards of cloth manufactured for one Ib. of yarn in the preceding year, the yardage in the year 1961-62 was only 5.9 and that the shortage at this rate worked out to 40,000 yards of cloth. The Appellate Assistant Commissioner felt that the addition of Rs. 52,070 could be sustained on two grounds. One is based on the shortage of 40,000 yards of cloth in the production leading to the inference that the purchases debited might represent the assessee's own manufactured goods. The other ground is that the alleged credit purchases were not really so but only cash purchases made on the bought-notes themselves, the cash having come from undisclosed profits. He referred to four circumstances as supporting that conclusion : (1) the inability of the assessee to produce the weavers for examination, (2) the opening of ledger folio in the year and in the following year looked suspicious, (3) the improbability of the weavers waiting for two years to realise the value of the goods alleged to have been supplied by them, and (4) the absence of any receipts for actual payment to the said weavers who are alleged to have been paid.
5. The assessee took the matter farther in appeal to the Appellate Tribunal which upheld the decision of the Appellate Assistant Commissioner. According to the Tribunal the assessee had failed to reconcile its gale and closing stock, that the assessee had not established that it had in fact made credit purchase of 3,700 units of cloth from 31 weavers and that the various circumstances pointed out by the Appellate Assistant Commissioner clearly led to the inference that the assessee did not purchase anything from the said weavers. The Tribunal also took note of the reaction of the assessee to the suggestion of the Income-tax Officer for camping at Tirunelveli to examine the weavers on oath and the assessee's willingness to have the sum of Rs. 52,070 assessed as its income. On the question as to whether there was any shortfall in the production as pointed out by the Appellate Assistant Commissioner, the Tribunal found from the statement filed by the assessee that it had manufactured 4,78,295 yards of cloth as against the consumption of yarn and art-silk amounting to 80,400 Ibs., thus giving a yardage of 5.9 yards per Ib. as compared to 6'4 yards per Ib. in the earlier year. The quantity of 3,700 pieces of handloom goods alleged to have been purchased from the weavers is made up as under:
' 2,380 units of six yards ... 16,600 yards1,320 units of five yards ... 6,600 '
6. If the said quantity is added to the assessee's own admitted manufacture of 4,78,295 the total yardage wilt come to 5,02,555 yards and the consumption of yarn and art silk would be 6.2 yards per'lb. which is very near to the yardage of 6.4 yards per Ib. shown in the immediately preceding year. The Tribunal, therefore, inferred that 3,700 pieces should have come from the assessee's own manufacture but the assessee had shown them as credit purchases in the names of various weavers. The Tribunal also rejected the contention of the assessee that if 3,700 pieces are taken as having been manufactured by the assessee itself, the gross profit would work out to more than 11 per cent, which is unusual in a manufacturing concern such as the assessee's on the ground that the measure of gross profit rate is not an infallible test. In that view the Tribunal sustained the addition. Aggrieved against the decision of the Tribunal the assessee has sought a reference and the following question has been referred to this court for decision in T.C. No. 114 of 1967.
' Whether, on the facts and circumstances of the case, the addition of Rs. 52,070 to the assessee's income for the assessment year 1961-62 was supported by material?'
7. After making the addition as aforesaid, the Income-tax Officer initiated proceedings under Section 271(1)(c) of the Income-tax Act, 1961, and a penalty of Rs. 40,000 was levied by the concerned Inspecting Assistant Commissioner, after holding that the assessee has deliberately concealed income, This penalty order was challenged by filing an appeal to the Tribunal but without success. At the instance of the assessee the following question has been referred to us in relation to that penalty order in T.C. No. 115 of 1967.
'Whether, on the facts and circumstances of the case, the levy of penalty of Rs. 40,000 under Section 271(1)(c) of the Income-tax Act, 1961, on the assessee-firm for the assessment year 1961-62 is valid in law '
8. So far as the addition of a sum of Rs. 52,070 to the assessee's income which has been sustained by the Tribunal is concerned, we are of the view that the order of the Tribunal cannot be taken exception to. It has given consistent and tenable reasons as to why the addition is called for. Mr. K. Srinivasan, learned counsel for the assessee, contends that the Appellate Assistant Commissioner as well as the Tribunal have sought to sustain the addition on a ground different from the one given by the Income-tax Officer, and that on the facts and circumstances of this case there is no basis for making the addition to the income returned by the assessee. But we see no substance in this contention. Admittedly, the accounts relating to the business of the assessee are defective in that: (1) there is no quantitative tally for the goods produced and the yarn and art silk utilised for the manufacture; (2) the issue of yarn to the weavers is not supported by the signatures of the weavers concerned in the thari register and the signature book maintained for cash payments does not indicate the details of the quantities issued; (3) the credit purchases said to have been made on the last day of the accounting year were quite abnormal and improbable; (4) the recording of the credit purchases revealed certain suspicious features in that the entries relating to those weavers who supplied cloth were entered in the middle of the ledger page; and (5) the entries relating to the purchase of 3,700 pieces have been interpolated. Further, the assessee was not able to produce the weavers from whom the goods are alleged to have been purchased when the Income-tax Officer proposed to examine them and had statedthat they could not be traced as they had given wrong addresses, but later the same weavers are said to have been traced and paid the amounts due to them. It is also admitted that the assessee had not made any purchase of cloth from these weavers either in the earlier or subsequent years. It is also difficult to believe that all the 31 weavers waited for payment till after 2 years. The payment to these 31 weavers have not been proved by the production of the receipts. Therefore, from these facts the conclusion is inescapable that there was in fact no purchase of cloth from the 31 weavers as alleged by the assessee and the alleged purchase value could only represent his undisclosed income. Both the Appellate Assistant Commissioner as well as the Tribunal have found that the assessee itself would have produced 3,700 pieces but would have shown them as purchases from outside. This inference they have drawn from the circumstances that the yardage per Ib. shown by the assessee is considerably low in the assessment year as compared with the yardage per Ib. as furnished in the previous year. We cannot say that the said inference is not justified in the circumstances. We are of the view that there was abundant material before the Tribunal to sustain the addition of Rs. 52,070 to the income returned by the assessee. We, therefore, answer the question referred in T.C. No. 114 of 1967 in the affirmative and against the assessee.
9. So far as the penalty order is concerned, Mr. K. Srinivasan vehemently contends that the same cannot be sustained in law. It is submitted that apart from the materials available before the department at the stage of the assessment proceedings, there is no further material to enable the department to find that there is deliberate concealment of income by the assessee, that the findings rendered by the authorities at the assessment stage are not conclusive, and that no penalty order could be levied only on the basis of the orders in the course of the assessment proceedings. Reference has been made to the following decisions in support of his contention. Commissioner of Income-tax v. Gokuldas Harivallabhdas, : 34ITR98(Bom) was a case where the account books of the assessee-firm contained certain credit entries in favour of four persons, namely, one of the two partners and three sons of the other partner. The Income-tax Officer found the explanation of the assessee regarding those entries to be false and assessed the amount as income from undisclosed sources. He also initiated penalty proceedings under Section 28(1)(c) of the Indian Income-tax Act, 1922, and imposed a penalty. The question was whether the penalty order could be sustained. The Tribunal had held that there is no evidence to prove deliberate concealment of income so as to invoke Section 28(1)(c). The Bombay High Court held that the question whether the assessee had committed an offence under Section 28(1)(c) was a question of fact for the Tribunal to decide, that though it was open to the department, where the explanation of the assessee is found to be false, to treat the receipts appearing in the account books of the assessee, as income, it is not possible to infer from the falsity of the assessee's explanation that the receipt necessarily constituted an income of the assessee, that the proceedings under Section 28(1)(c) being in the nature of penal proceedings the onus is on the revenue to prove that the assessee was guilty of the offence of deliberate non-disclosure and that apart from the rejection of the explanation of the assessee there was no evidence on record to lead to the inference that the cash entries represented income. Chagla C.J., speaking for the Bench, said :
' It has often been said that each proceeding under the Income-tax Act is a self-contained proceeding and the findings in one proceeding do not become binding in respect of other proceedings. Now, it is difficult to understand why this well known principle should be departed from in penalty proceedings. If anything, if the principle is not well established so far as the assessment proceedings are concerned, then it should be established so far as penalty proceedings also are concerned. The assessment proceedings are taxing proceedings; the penalty proceedings are criminal proceedings in their very nature, and a decision given in an assessment proceeding cannot possibly be binding upon the authority who tries the assessee for an offence.'
10. The learned Chief Justice referred with approval to the decision of the Allahabad High Court in Dwarka Prasad Sheokaran Das v. Commissioner ofIncome-tax, : 24ITR410(All) holding that although the findings in the assessment proceedings may constitute a material on which the Income-tax Officer may act, inany penalty proceedings they do not constitute res judicata. In Commissioner of Income-tax v. Anwar Ali, : 76ITR696(SC) , the Supreme Court considered the scopeof Section 28(1)(c) and expressed the view that the gist of the offence under Section 28(1)(c) is that the assessee has concealed the particulars of hisincome or deliberately furnished inaccurate particulars of such income,that the burden is on the department to establish that the receipt of theamount in dispute constitutes income of the assessee, and if there is noevidence on record except the explanation given by the assessee, whichexplanation has been found to be false, it does not follow that the receiptconstitutes his taxable income and that the findings given in the assessment proceedings for determining or computing the tax are not conclusiveand that before penalty could be imposed the entirety of the circumstancesmust reasonably point to the conclusion that the disputed amount represented the income and that the assessee had consciously concealed theparticulars of his income or had deliberately furnished inaccurate particulars.
11. In Commissioner of Income-tax v. Khoday Eswarsa and Sons, : 83ITR369(SC) , the Supreme Court has again reiterated that penalty proceedings being penal in character, the revenue must establish that the receipt of the amount in dispute constituted income of the assessee, that apart from the falsity of the explanation given by the assessee the department must have before it cogent material or evidence from which it could be inferred that the assessee has consciously concealed the particulars of his income or has deliberately furnished inaccurate particulars in respect of the same and that though the original assessment proceedings for computing the tax may be a good item of evidence in the penalty proceedings, penalty cannot be levied solely on the basis of the reasons given in the order of assessment. It is true, the observations in the above decisions are to the effect that from the mere fact that the explanation of the assessee was found to be false in the assessment proceedings, it would not follow that the ingredients necessary for levying a penalty are established and that for the levy of penalty there should be material to establish that the assessee had consciously concealed the particulars of his income or had deliberately furnished inaccurate particulars of the same.
12. The question in this case is whether the penalty has been levied only on the basis of the rejection of the explanation given by the assessee as regards the purchase of 3,700 pieces of cloth from 31 weavers. On the facts set out above we find that the inference drawn by the Tribunal that the assessee has consciously concealed the particulars of its income is based not merely upon the falsity of the explanation given by the assessee but on other materials gathered from the assessee's own accounts. It is abundantly clear from the order of the Tribunal that there was positive and definite material to indicate that the 3,700 pieces of cloth should have been manufactured by the assessee and that the same has been shown as having been purchased from outside with a view to disguise the profits therefrom. The present case is not a case of inference from the mere falsity of the explanation given by the assessee, but is a case where there are clear and definite material to show that a device has been created by the assessee for the purpose of concealing its income.
13. The learned counsel for the assessee would further contend that there is no fresh material apart from the material produced in the course of the assessment proceedings, and the conclusion of the Tribunal that there is a deliberate concealment of income has been reached only on the materials produced at the earlier stage. We are not able to accept the assessee's contention that in all cases there should be fresh material in the penalty proceedings and that the Tribunal cannot act on the material produced at the assessment stage. Let us take for instance a case where all the available materials had been produced at the stage o! the assessment and the authorities, including the Tribunal, had considered the materials at that stage. There cannot be any tenable reason as to why the authorities cannot analyse the same evidence and materials produced earlier in the course of the penalty proceeding and base their findings thereon. It may be that the findings given by the authorities on certain material at the assessment stage may not be conclusive, but still the material constitutes a good and relevant evidence. This has been pointed out by the Supreme Court in Commissioner of Income-tax v. Anwar Ali and the same has been reiterated in Commissioner of Income-tax v. Khoday Eswarsa & Sons. It is not as if the materials adduced at the assessment stage ceased to be any the less evidence at the stage of the penalty proceedings. It is true, a penalty order cannot be solely based on the reasons given in the original order of assessment. The authorities are expected to consider afresh all the materials available, either produced at the assessment stage or later in the penalty proceedings, without merely proceeding on the basis of the findings given earlier at the stage of assessment and if those materials reasonably point to the conclusion that the disputed amount represented income and that the assessee had deliberately concealed particulars of the same, the levy of penalty can be justified. In this case the Tribunal has not based its decision upholding the penalty order merely on the basis of the rejection of the assessee's explanation regarding alleged credit purchases of 3,700 pieces of cloth. The decision of the Tribunal is based on a consideration of the other circumstances which showed that 3,700 pieces of cloth should have been produced by the assessee itself. The Tribunal also referred to the fact that the assessee itself did not want an examination of the weavers from whom the goods are alleged to have been purchased and agreed for the inclusion of the amount. Though the assessee wanted the amount to be spread over for a period of four years, still the conduct of the assessee in not facing an enquiry as proposed by the Income-tax Officer showed that there should have been in fact suppression of the income. The conclusion that the assessee itself should have produced 3,700 pieces of cloth is based on concrete and positive materials. We, therefore, answer the question in T.C. No. 115 of 1967 in the affirmative and against the assessee. The revenue will be entitled to its costs from the assessee in both the cases. Counsel's fee Rs. 250 in each case.