Allahabad H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the credit of amount of Rs. 2,45,000 under ‘Disclosure Capital Account’ in place of various loan amounts in its books of account at a later year amounted to an admission of concealed income on the part of the assessee, as envisaged under the provisions of s. 271(1)(c) of the IT Act, 1961 ?

High Court Of Allahabad

Biland Ram Hargan Dass vs. CIT

Sections 256(2), 271(1)(c), Expln. 1(B)

Asst. Year 1978-79

V.K. Mehrotra & R.R. Misra, JJ.

IT Appln. No. 5 of 1986

10th September, 1987

Counsel Appeared

Rakesh Kumar Agarwal, for the Assessee : Bharatji Agrawal, for the Revenue

R.R. MISRA, J.:

By means of this application under s. 256(2) of the IT Act, 1961 (hereinafter referred to as ” the Act “), the assessee has assailed the order dated August 22, 1985, passed by the Tribunal rejecting the reference application of the assessee.

During the asst. yr. 1978-79, the assessee carried on cloth business. During the said year, the assessee was a registered firm. It had filed return showing an income of Rs. 66,787 on July 28, 1978. The revised return was filed by the assessee on September 28, 1979, showing an income of Rs. 2,18,810, thereby including an extra income of Rs. 1,52,02782. This extra income was surrendered by the assessee under the head ” Other sources “. The circumstances leading to the filing of the revised return was in consequence of a search conducted in the business premises of the assessee on October 25, 1978, i.e., after the filing of the original return. Among the papers seized during the search was a diary in which were noted sales to various parties to the extent of Rs. 1,52,027.82. The total income of the assessee was ultimately determined at Rs. 2,59,315 up to the stage of the Tribunal. The ITO, however, initiated penalty proceedings under s. 271(1)(c) of the Act and ultimately levied a penalty of Rs. 1,04,000 under the said provision. He held that it was only when the search and seizure operations were conducted and the ITO found that the assessee had done considerable business outside the books and he called upon the assessee by an order-sheet entry dated August 7, 1979, to explain the nature of entries in the seized papers that the assessee confronted with that situation, was forced to file a revised return. He also held that it cannot be said that the revised return was filed on account of any bona fide inadvertence or omission in the original return.Ultimately, the finding recorded by the ITO, therefore, was that the assessee had concealed the particulars of income. The CIT (Appeals) also confirmed the penalty order passed by the ITO under s. 271(1)(c) and dismissed the appeal filed by the assessee. On further appeal, the Tribunal has also dismissed the appeal of the assessee, vide its order dated February 13, 1984. Thereupon, the assessee filed a miscellaneous application before the Tribunal under s. 256(2) of the Act which was also rejected by the Tribunal, vide its order dated September 10, 1984. Thereafter, the assessee filed a reference application before the Tribunal under s. 256(1) of the Act which was also rejected by the Tribunal by the impugned order dated August 22, 1985.

We have heard learned counsel for the assessee. The first submission made on behalf of the assessee is that on the facts of this case, the question involved was the construction of the letter dated September 28, 1979, which was filed by the assessee along with the revised return and as such a question of law arises in the case. For this submission, learned counsel for the assessee relied upon a decision of the Calcutta High Court in the case of Bhagwanji Bhawanbhai & Co. vs. CIT (1983) 141 ITR 640. In this case, the Tribunal had referred the following question of law to the High Court (at p. 642):

Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the credit of amount of Rs. 2,45,000 under ‘Disclosure Capital Account’ in place of various loan amounts in its books of account at a later year amounted to an admission of concealed income on the part of the assessee, as envisaged under the provisions of s. 271(1)(c) of the IT Act, 1961 ? “

The Calcutta High Court has distinguished the case by a decision of the Supreme Court in the case of CIT vs. Ashoka Marketing Ltd. 1976 CTR (SC) 217 : (1976) 103 ITR 543 on the ground that in that case the question was regarding the truth of the existence of an agreement and the question of interpretation of the agreement was not involved. The High Court found that the question before it really was as to whether on a proper interpretation of the disclosure petition, the assessee could be brought within the mischief of s. 271 (1)(c) of the Act and that was the question referred by the Tribunal to the High Court for its opinion. We have considered the said decision of the Calcutta High Court. In our opinion, the ratio of the said case is not applicable to the present case for a number of reasons. Firstly, the assessment year involved in the said case was 1957-58. Till then, the Explanation to s. 271(1)(c) of the Act was not in existence at all. We shall presently refer to it as it has made a material difference in the matter of considerations which arise for the levy of penalty as well as regarding the burden of proof.

The relevant Explanation to s. 27 l(1)(c) of the Act as was in force on the date of the filing of the return in the year 1978 stood as follows : “Explanation 1.—Where in respect of any facts material to the computation of the total income of any person under this Act,— (A) such person fails to offer an explanation or offers an explanation which is found by the ITO or the AAC or the CIT (Appeals) to be false, or (B) such person offers an explanation which he is not able to substantiate, then, the amount added or disallowed in computing the total income of such person as a result thereof shall, for the purposes of cl. (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed : Provided that nothing contained in this Explanation shall apply to a case referred to in cl. (B) in respect of any amount added or disallowed as a result of the rejection of any explanation offered by such person, if such explanation is bona fide and all the facts relating to the same and material to the computation of his total income have been disclosed by him. “

In the present case, cl. (B) of Explanation I is applicable. The Tribunal has held that the explanation offered by the assessee was not bona fide. It has also confirmed the view of the ITO that it could not be said that the original return was revised by the assessee due to bona fide inadvertence or omission. It has further held that the surrender of the income made in the revised return was not voluntary but was a result of detection made by the ITO. In view of the aforesaid findings of fact recorded by the Tribunal, it is clear that by virtue of cl. (B) of the said Explanation, the aforesaid amount of Rs. 1,52,027 added to the total income of the assessee represented the concealed income of the assessee.

As regards the question of interpretation of the covering letter dated September 28, 1979, filed along with the revised return, the Tribunal has proceeded to examine and ultimately held as under : ” ………… We have, therefore, to examine the facts attending on the surrender in the present case. It is pertinent to notice that as per serial No.9 of the list of the seized papers, a diary was found from the possession of the assessee which contained 39 written papers wherein also transactions to various parties to the extent of Rs. 1,52,027 .82 relating to the asst. yr. 1978-79 in question were recorded. The order-sheet entry dated August 7, 1979/September 7, 1979, before the ITO shows that inspection of all the seized records had been taken by the assessee and extracts wherever recorded has also been obtained. The ITO required the assessee to explain…… (ii) the investment in income of unaccounted sales of Rs. 1,52,027 found noted in rough sheets found in the search. Thereafter, no explanation was given by the assessee and the assessee came forward with the revised return along with which there was a covering letter dated September 28, 1979……… No doubt, in this letter, it is mentioned that some discussion took place with the ITO but it cannot be said that on account of the discussion, the surrender of, the extra income of Rs. 1,52,027.82 was an induced surrender and not a voluntary disclosure. The mere fact that the assessee said that the revised return was being filed showing an extra income of Rs. 1,52,027.82 under the head ” Other sources ” only to purchase peace and to close litigation would not be conclusive as it was an admission made by the assessee in its own favour. The assessee stated in that letter that it was not possible to furnish documentary evidence enabling it to work out the correct profit in respect of the said sales or the nature and source of the quantum of the said investment therein. The failure to furnish documentary evidence cannot be due to one reason only …….. “

9. Thereafter, in reply to another entry in the order-sheet dated October 25, 1979, which was subsequent to the filing of the revised return, the assessee was required to furnish the basis of Rs. 1,52,027. The assessee replied to the same by his letter dated October 31, 1979. In paras 2 and 3 of this letter, it was stated that the assessee had also carried on business outside the books of account and had made sales of Rs. 1,52,072.82 and that since it had no purchase invoices for the said sales, the entire sale proceeds of Rs. 1,52,027.82 were shown as its investment and income from the said business in the revised return. The Tribunal, therefore, concluded that in view of the entirety of these circumstances, the amount of Rs. 1,52,027 was assessed and that in the view of the Tribunal, the facts established that the details and facts were kept back by the assessee deliberately. It has also recorded a finding of fact as follows: ” ….In fact, the facts and the circumstances show that the revised return was filed in a vain bid to escape penalty under s. 271 (1)(c) by making averments in the covering letter dated September 28, 1979, in its own favour to the effect that it was with a view to purchase peace and to close litigation, as it was not possible to furnish documentary evidence. “

10. The Tribunal further held that surrender of the extra income was not made by the assessee on the condition that no penalty shall be levied and that the surrender was also not made at the instance of the ITO and was not voluntary.

11. In view of the above distinguishable features of this case and the fact that while recording its findings, the Tribunal has taken into account other materials including the two order-sheet entries and reply letters dated September 28, 1979, and October 31, 1979, and after disbelieving the theory of the assessee contained in the letter dated September 28, 1979, and on a consideration of the totality of all the facts and circumstances of the case, when it held that the surrender of income in question was neither voluntary nor bona fide, the question of interpretation of the letter dated September 28, 1979, of the assessee has, on the facts of the case as well as under the law, lost its importance. In our opinion, therefore, no assistance can be derived by learned counsel for the assessee now either from the aforesaid decision of the Calcutta High Court or from the argument made by him regarding interpretation of the letter dated September 28, 1979, as the same does not survive on the facts of this case.

12. Learned counsel for the assessee next contended that there is a divergence of judicial opinion in the cases of CIT vs. Mansa Ram and Sons 1975 CTR (All) 163 : (1977) 106 ITR 307 (All), Addl. CIT vs. Kishan Singh Chand 1975 CTR (All) 43 : (1977) 106 ITR 534 (All) and Addl. CIT vs. Radhey Shyam (1980) 123 ITR 125 (All).

13. In the case of Mansa Ram & Sons (supra), we find that the assessment year involved in this case was 1951-52, i.e., long before the insertion of the Explanation to s. 271 (1)(c) of the Act. In the said case, it was held that where surrender was induced by the Department not to levy penalty, no penalty ought to have been levied. In that case, the amount was surrendered as desired by the ITO. The Court held that since the ITO had induced the assessee to surrender the cash deposit to avoid penalty, the surrender was made. At page 312 of the Income-tax Reports, it is made clear that in that case the question of the Explanation to s. 271(1)(c) as it existed even in the year 1964 was not invoked and was also not allowed to be invoked by the High Court. The said decision is clearly distinguishable. In our case, the Tribunal has recorded findings to the contrary to the effect that the surrender was neither voluntary nor was it induced by the ITO. On the other hand, because of the existence of the materials found concealed as a result of survey and scrutiny made thereof by the ITO when the assessee was pinpointed, the assessee was forced to surrender the amount in question. Thus this decision is of no help to learned counsel for the assessee.

14. Coming to the case of Kishan Singh Chand (supra), we find that here also the assessment year involved was 1967-68 and the question was as to whether, in a case where higher rate of profit was applied and the assessee had agreed to the applicability of the said higher rate of profit on the basis of specific agreement with the ITO not to levy penalty, the penalty levied was justified. It was on the basis of the aforesaid agreement of the ITO with the assessee that the Tribunal as well as the High Court held that the said agreement of being assessed at a higher flat rate did not amount to evasion or concealment. The High Court also found that the case of Kishan Singh Chand (supra) was of a nature similar to that of Mansa Ram & Sons (supra) and that the Explanation to s. 271(1) (c) of the Act was not applicable. In our opinion, therefore, no assistance can be derived by learned counsel for the assessee from the aforesaid two decisions in the cases of Mansa Ram & Sons (supra) and Kishan Singh Chand (supra) cited by him.

Now coming to the case of Addl. CIT vs. Radhey Shyam (supra) we find that the question referred in that case was as to whether after the assessee voluntarily filed a revised return, penalty is imposable on the basis that the assessee had furnished inadequate particulars of income in the original return. At page 127 of 123 ITR, it has been stated that the question that arose in that case was as to whether the filing of the revised return under sub-s. (5) of s. 139 of the Act was justified? The finding recorded by the Tribunal was that the assessee deliberately omitted the particulars of income and had made wrong statements in the original return and, therefore, the view taken by the Court was that the benefit of s. 139(5) of the Act cannot be claimed by a person who had made a statement knowing it to be false. In that case, the Tribunal had also held that, if an assessee deliberately omitted a particular or particulars of income or made wrong statements in the original return, the revised return cannot be availed of by the assessee as provided under s. 139(5) of the Act. We do not see how, on the findings recorded in the case of Radhey Shyam (supra), this case runs counter to the earlier two decisions of this Court cited by learned counsel for the assessee. In the case of Radhey Shyam (supra), the Tribunal had recorded a finding that non- disclosure was due to gross or wilful negligence on the part of the assessee. There is no mention in the said decision regarding the applicability of the Explanation to s. 271(1)(c) of the Act. In these circumstances, we are of the view that there is no conflict between the aforesaid decisions of this Court as suggested by learned counsel for the assessee. A feeble attempt has been made by learned counsel for the assessee to show that the onus has been wrongly placed by the Tribunal on the assessee. This argument has no force inasmuch as it overlooks the findings of fact recorded by the Tribunal under the proviso to cl. (B) of Explanation I in question. Having regard to the said findings that the explanation offered by the assessee was not bona fide and that material relating to the computation of total income was deliberately not disclosed by the assessee in the original return, we find that the case of the assessee is, on the facts of this case, caught under the fiction of cl. (B) of Explanation I aforesaid. On the finding of fact that the assessee had concealed the aforesaid income of Rs. 1,52,027, the Tribunal was right in law in confirming the penalty order in question.

In view of the foregoing discussion, we are, therefore, of the opinion that no question of law arises out of the appellate order of the Tribunal and that it was justified in rejecting the reference application of the assessee.

18. In the result, the application of the assessee is rejected with costs which we assess at Rs. 125.

[Citation : 171 ITR 390]

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