Calcutta H.C : The imposition of penalty under s. 271(1)(c) of the IT Act, 1961, on the assessee-firm was not justified

B.K. Bagchi, for the Revenue : K.L. Bajoria, for the Assessee

AJIT.K. SENGUPTA J. :

At the instance of the CIT of Income-tax, West Bengal, Calcutta, the following question of law has been referred to this Court under s. 256(2) of the IT Act, 1961, for the asst. yr. 1963-64 :

“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the imposition of penalty under s. 271(1)(c) of the IT Act, 1961, on the assessee-firm was not justified ?”

Shortly stated, the facts are that the assessee is a partnership firm. For the year under reference, initially it returned an income of Rs. 29,901. Later on, in the revised return, the income disclosed was Rs. 32,608. The ITO completed the assessment of the assessee on a total income of Rs. 1,13,339. The difference was mainly due to the addition of bogus loans of Rs. 58,000 as “income from undisclosed sources” and disallowance of interest thereon of Rs. 13,850. Those loans stood in the books of the assessee in the names of certain persons. The partners of the assesseefirm filed disclosure petitions with the CIT under s. 271(4A) of the Act wherein the said loans were accepted by the partners as their own concealed income. The said disclosure petitions were rejected by the CIT.

The ITO, prior to the completion of the assessment proceedings, initiated penalty proceedings against the assessee under s. 271(1)(c) of the Act. Those penalty proceedings came to be completed by the IAC. He came to the conclusion that in view of the fact that the partners of the assessee-firm had admitted the said loans of Rs. 58,000 to be bogus and since the admission of the partners was virtually an admission by the assessee-firm, the assessee had concealed its income to the extent of Rs. 58,000. He, accordingly, levied a penalty of Rs. 32,000 under s. 271(1) (c) of the Act. Aggrieved by the said order of the IAC, the assessee brought the matter by way of appeal before the Tribunal. As the assessee failed to appear before the Tribunal at the time of hearing of the appeal, the same was heard ex parte on merits. The Tribunal went through the records and heard the Departmental Representative, who submitted that the partners of the firm made disclosure petitions admitting the loans as their own concealed income and so, on facts, the IAC was justified in treating the said sum of Rs. 58,000 as the concealed income of the assesseefirm and in imposing the impugned penalty. The Tribunal also noticed that the assessee’s case in the grounds of appeal was that it did not admit the loans as its concealed income. Only the partners of the assessee-firm had admitted that the loans really belonged to them. As far as the assessee was concerned, the case of the assessee was that the loans were genuine as the same belonged to the partners, even if the loans did not belong to the partners in whose names the loans appeared in the books of account of the assessee. On these facts, it was for the Department to prove that the addition made by the ITO represented the income of the assessee and that it concealed the same or furnished inaccurate particulars thereof. Reliance was placed, in this connection, on the decision of the Supreme Court in the case of Anwar Ali (1970) 76 ITR 696(SC).

4. The Tribunal gave consideration to the above arguments and accepted the stand taken by the assessee with the following observations : “. . . Though the loans appeared in the names of several persons in the account books of the assessee, the assessee did not admit that those loans were its income. The partners made disclosure petitions admitting that they had introduced these loans out of their own money in the names of various creditors as appearing in the account books of the assessee. Thus, so far as the assessee is concerned, its case was that the loans were genuine which had been introduced by the partners out of their own money. As there was no admission of the concealed nature of the income by the assessee, it was for the Department to establish that the loans on account of which the addition had been made were the income of the assessee and that the assessee had concealed the same or had given inaccurate particulars in respect of the same. The ratio in the case of Anwar Ali (supra) applies to the facts of the present case. The Department failed to discharge that onus and no penalty is exigible. ” Having regard to the facts and circumstances of this case, we are unable to accept the reasoning of the Tribunal. The concept of partnership is that a firm is not an entity or a person in law but only a compendious mode of designating persons who have agreed to carry on business in partnership. But, for the purpose of income-tax, a firm is a distinct and separate entity from the persons who compose it. But, the business of the firm must be carried on by the partners. In the course of such business activity of the firm, if the partners of the firm have made certain admissions regarding the loans appearing in the books of the firm, it cannot be said that such admission will not bind the partnership firm and that the partners will be treated separately. The Tribunal has taken too legalistic view in holding that thereis no admission by the partnership. One has to look into the actual state of affairs. What is apparent is not real. The reality of the situation is that the partners introduced concealed income in the form of cash credits from third parties in the books of the firm. The firm had shown such cash credits in the books of account to be genuine loans and claimed interest allegedly payable to the alleged creditors, but, in fact, to its partners, as deduction which was allowed. In such a case, the knowledge of the partners, who carry on the business, that the loans are not genuine can be imputed to the firm. It is not only the loan which has been claimed to be fictitiously introduced by the partners in the names of third parties in the firm itself but they have also claimed interest as having been paid on the said loan and the benefit of that interest was obtained by the firm itself because the firm asked for deduction of interest allegedly paid on such cash credits in its own assessment. Accordingly, it cannot be said that the firm did not conceal any particulars of its income, having regard to the principles laid down by this Court in the case of CIT vs. Rajaram Pannalal and Bros.(1980) 19 CTR (Cal) 35 : (1981) 127 ITR 679(Cal).

5. For the reasons aforesaid, we have to answer the question in this reference in the negative and in favour of Revenue. Mr. K. L. Bajoria, learned counsel appearing for the assessee, however, has drawn our attention to a subsequent fact. It appears that the assessee-firm moved a settlement petition before the Settlement Commission and the penalty payable for the assessment year in question has been settled. In that view of the matter, the Tribunal, in disposing of the case under s. 260 of the IT Act, 1961, shall take into account the settlement arrived at before the Settlement Commission.

There will be no order as to costs.

K. M. YUSUF J.

I agree.

[Citation : 179 ITR 478]