High Court Of Gujarat
Sarabhai Chemicals (P) Ltd. vs. CIT
Sections 5, 215, 271(1)(c), Expln. 1, 273(2)(a)
Asst. Year 1979-80, 1980-81
R.K. Abichandani & K.A. Puj, JJ.
IT Ref. Nos. 56 of 1986, 75 of 1987, 58 of 1993 & 220 of 1995
6th February, 2002
Counsel Appeared
K.C. Patel with R.K. Patel, M.K. Patel & B.D. Karia, for the Assessee : B.B. Naik, for the Revenue
JUDGMENT
R.K. ABICHANDANI, J. :
All these four references have been argued at length together and they concern the same assessee and therefore, they are disposed of by this common judgment.
2. In IT Ref. No. 56 of 1986 (which emanates from the quantum proceedings in respect of the asst. yrs. 1979-80 and 1980-81), the Income-tax Appellate Tribunal (Tribunal), Ahmedabad Bench, Ahmedabad, has referred the following questions for the opinion of this Court : “For the asst. yrs. 1979-90 at the instance of the assessee :
(1) Whether, on facts and in the circumstances of the case, the Tribunal was right in law in holding that the interest of Rs,. 66,29,236 being the amount of interest as determined by the ITO on a notional basis from 1st July, 1977 to 30th June, 1978, was liable to tax on accrual basis for asst. yrs. 1979-80 ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the interest accrued from day-to- day as a result of supplementary agreement and as such, the same was eligible to tax as income for asst. yrs .1979-80 ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that giving up of interest on the ground of commercial expediency was not justified as no direct or indirect benefit had accrued to the assessee ? For the asst. yr. 1980-81 at the instance of the Revenue :
(1) Whether, the Tribunal has not erred in law and on facts in holding that no income could be said to be accrued to the assessee as the interest would start accruing from 1st July, 1979, i.e., after the end of the accounting year ?
(2) Whether, the finding of the Tribunal that the interest could not be said to be accrued to the assessee during the accounting period in question and hence, question of relinquishment of any right does not arise is correct in law ?”
2.1. In IT Ref. No. 75 of 1987 (which also relates to the asst. yrs. 1979-80 pertaining to levy of interest under s. 215 of the Act), the Tribunal has referred the following question : “Whether the Tribunal has not erred in law and on facts in holding that charging of interest under s. 215 of the IT Act, 1961, in the instant case was not justified ?”
2.2. In IT Ref. No. 220 of 1995 filed at the instance of the assessee, the Tribunal has, in respect of the asst. yr. 1979-80, referred the following question of law in respect of the penalty levied under s. 273(2)(a) of the Act : “Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in confirming the penalty of Rs. 4 lakhs levied under s. 273(2)(a) of the Act ?”
2.3. In IT Ref. No. 58 of 1993 [which also relates to the asst. yr. 1979-80 and is in respect of the penalty imposed under s. 271(1)(c) of the Act], the Tribunal has referred the following question of law : “Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in confirming the penalty of Rs. 55,00,000 levied under s. 271(1)(c) of the Act ?”
3. IT Ref. Nos. 56 of 1986 (at the instance of the assessee as well as the Revenue) and 75 of 1987 (at the instance of the Revenue) arise out of the same judgment of the Tribunal rendered on 15th Feb., 1985, in ITA Nos. 1137 and 1138/Ahd/1984, by which the Tribunal had partly allowed the assessee’s appeal and held in respect of the asst. yrs. 1979-80 that levy of interest under s. 215 of the said Act was not justified, while upholding the decision of the lower authorities in regard to the asst. yr. 1979-80 to the effect that there was accrual of interest income which was rightly brought to tax on accrual basis by them. As regards the asst. yr. 1980-81, the Tribunal held that, under the revised agreement reflected from the resolution dt. 30th June, 1979, no interest was payable on the outstanding amount, because, as a result of the resolution dt. 30th June, 1979, no income could be said to have accrued to the assessee as the interest was to start accruing from 1st July, 1979, i.e., after the accounting year relevant to the asst. yr. 1980-81 and the assessee’s appeal was, therefore, allowed in respect of the asst. yrs. 1980-
81.
3.1. The assessee—Sarabhai Chemicals (P) Ltd. [now known as Sarabhai Holdings (P) Ltd.] had filed its return on 26th June, 1979, declaring a total income of Rs. 772 under the head of business income for the asst. yrs. 1979-80, and for the asst. yr. 1980-81, it had filed return on 27th Sept., 1980, declaring a loss of Rs. 17,345. The assessee was following mercantile system of accounting at the relevant time. In response to the notice under s. 143(2) of the Act, the assessee had submitted that, w.e.f. 28th Feb., 1977, the industrial undertaking of Sarabhai Chemicals and business activity of Sarabhai Common Services Division which was a unit of Sarabhai Chemicals were transferred by it to its subsidiary Elscope (P) Ltd. which in turn, after four months, transferred them to Ambalal Sarabhai Enterprises Ltd., which was the subsidiary of Elscope (P) Ltd. The said agreement was made on 28th Feb., 1977, which was amended by the supplemental agreement dt. 4th March, 1977, and a deed of assignment came to be executed on 28th June, 1977. The assessee effected the transfer of the industrial undertaking and business of Sarabhai Chemicals Division and Sarabhai Common Services Division to Elscope (P) Ltd. as a going concern. On inquiry, the assessee informed the ITO as recorded in the draft order, that during the year, the assessee had not received any interest from Elscope (P) Ltd., to whom its undertaking was transferred on 28th Feb., 1977. From the agreement of transfer, the ITO noticed the terms of payment of purchase consideration to the assessee and the fact that, as per those terms, a sum of Rs. 2 crore was to be paid as and when demanded by the company, and it was to carry simple interest at the rate equal to the rate of interest which the company paid to its bankers in the ordinary course of business, and that the sum of Rs. 4,54,18,760.89 p. which was also a part of deferred purchase consideration, payable in eight equal annual instalments on 1st October of every year beginning from 1st Oct., 1979, and was to carry interest at 11 per cent per annum on the said sum or the amount remaining outstanding from time to time. The ITO noted that the assessee was accordingly entitled to interest at the rate stipulated in the said agreement in respect of these amounts. On noticing that, in respect of one of these amounts, the assessee had shown interest as received or receivable, the assessee was, inter alia, asked to show-cause as to why interest on accrual basis be not taxed on amounts due from Elscope (P) Ltd. as outstanding purchase consideration. Against the suggestion to tax the income from interest on accrual basis, the assessee sent its objections as per letter dt. 16th Sept., 1981, pointing out that no interest was in fact charged or chargeable in these accounting years in view of the revised mode of payment agreed to between the parties as it was to be now charged only w.e.f. 1st July, 1979. The assessee filed excerpts from the minutes of the meeting of the Board of Directors, which was held on 30th June, 1978, in support of his explanation. Thereafter, the assessee filed a further letter on 21st Jan., 1982, explaining as to why the interest should not be taxed on accrual basis in the hands of the assessee, and contending that there were exceptions to the general rule. It was urged that the interest cannot be taxed on a hypothetical basis, because, the assessee did not actually receive any interest.
3.2. The ITO was of the view that, in assessee’s case, there was a written contract which was sought to be modified by the resolution dt. 30th June, 1978, by which date the interest for the whole year had already accrued to the assessee. It was observed that it was not the case of the assessee that the vendee company had gone into liquidation or had no assets from which the recovery could be effected. The ITO further held that the assessee had relinquished the interest without any commercial consideration and since the two companies were closely related, it was a case of collusion to evade tax liabilities and, therefore, interest on accrual basis was taxable in the hands of the assessee. The ITO accordingly made a draft order computing the total income of the assessee at Rs. 66,29,236 on the count of accrual of interest on the deferred consideration and also ordered to charge interest under s. 217 of the Act as well as issued notices for default under s. 273 and s. 271(1)(c) of the Act.
3.3. The IAC, to whom this draft order was forwarded, issued directions under s. 144B(4) of the Act, after taking into consideration the objections raised by the assessee against the draft order, holding that the ITO was justified in coming to the conclusion that interest would be chargeable on accrual basis, and that the resolution dt. 30th June, 1978, passed by the Board of Directors on the last day of previous year not to charge such interest from a retrospective date was nothing but a device to deprive the Revenue of its dues which legitimately accrued to it. The final assessment order in respect of the asst. yrs. 1979-80 was thereafter made and the interest income as discussed in the draft assessment order as well as in the IAC’s direction under s. 144B(4) was added to the tune of Rs. 66,29,236 and it was ordered to charge interest under s. 215 of the said Act and notices were ordered to be issued for the default under ss. 273(2)(a) and 271 (1)(c) of the Act. The assessee preferred an appeal before the CIT(A), Baroda, who, by his order dt. 29th Feb., 1984, upheld the said addition of interest income, holding that interest was receivable by the assessee under the agreement dt. 4th March, 1977, and the deed of assignment dt. 28th June, 1977, and was, therefore, rightly brought to tax in the assessee’s hands. The CIT(A) elaborately considered the terms of the supplemental agreement as well as the deed of assignment and held that, for more than fifteen months from 4th March, 1977, to 15th June, 1978, the stipulations for payment of interest incorporated in the said documents held the field unchallenged and undiluted, and that, it was on 15th June, 1978, that the buyer company made a proposal for amendment (in the stipulations) and the assessee ungrudgingly agreed to forgo the interest which exceeded Rs. 120 lakhs for two years. The CIT(A) considered the contentions raised by the assessee to the effect that it had agreed to this concession, firstly due to the business expediency and secondly, since the vendee company had offered to furnish security and found that there was nothing said on behalf of the company as to what was the so-called business expediency, and that original agreements were silent on the aspect of security and did not envisage that security would not be furnished. The appellate authority found that the vendee Elscope (P) Ltd. was a wholly owned subsidiary of the assessee and that the facts, figures and circumstances, mentioned in para 13 of the order, highlighted the facts that the transaction could not be regarded as entered into any normal course and at arms length. It was observed that the business consideration put forth by the assessee was not actually specified beyond saying that the unsecured loans were offered to be secured. The appellate authority held that the talk regarding purchase price was merely an eye-wash and that it was obvious from the assessee’s letter dt. 6th Jan., 1984, that the vendee far from offering securities for paying money in cash to the assessee merely furnished secured bonds of Ambalal Sarabhai Enterprises Ltd. to whom it had transferred the undertaking purchased from the assessee. These bonds carried interest of 11 per cent and were redeemable in 1991 or subject to some conditions in 1987. It was observed that they were mortgageable but since they carried interest at 11 per cent only and were not redeemable before 1987, the market price quoted was about two-third of the face value. Thus, in the process, the assessee-company had accepted the assets worth two-third of the market price. As per the original agreement, the instalments would have started in October, 1979 and ended in October,
1986, against which, as per the revised terms of the resolution dt. 30th June, 1978, the instalments would have started falling due from 1987 only. It was observed that, apart from postponement by about eight years, it is obvious that there was no security worth the name actually given by Elscope (P) Ltd. for making payments in cash and what was actually given was bonds whose market price was two-third of the face value. All these concessions were given to Elscope (P) Ltd. just like that and ‘for no real consideration. In this background, the CIT(A) applying doctrine of lifting the veil of corporate personality, found that the assessee was the sole shareholder of the vendee Elscope (P) Ltd., and that the transaction should be viewed in that perspective. The CIT(A) observed that, taking totality of the connected transactions together, it could not be said that there was no loss caused to the Revenue. He, however, held that the real relevant consideration was of accrual of interest to the assessee. As regards the levy of interest under s. 215 of the Act, the CIT(A) held that the assesseecompany had neither filed any estimate, nor paid any advance tax. As per the assessee’s letter dt. 26th March, 1983, it was an admitted fact that the ITO had issued a notice under s. 210 of the Act calling upon the assessee to pay advance tax on the basis of regular assessment completed for asst. yr. 1976-77 and thereafter, the notice was revised under s. 210, but the assessee filed the estimate of advance tax in Form No. 29 showing income of advance tax payable as ‘Nil’. Rejecting the contention that provision of s. 215 of the Act did not apply since the assessee had not paid any advance tax, the CIT(A) held that, in pursuance of the ‘Nil’ estimate, the advance tax paid by the assessee was also ‘Nil’ and that situation was obviously different from a case in which estimate is not filed at all, which would be covered by s. 217 of the Act for levy of corresponding interest. It was observed that, to say that the assessee would have been covered by s. 215, if it had paid Re. 1 advance tax on the basis of estimate, but is not covered by that section, because, the advance tax paid is ‘Nil’ in pursuance of the ‘Nil’ estimate filed would lead to absurdity. He relied on the decision of the Bombay High Court in Bombay Burma Trading Corpn. Ltd. vs. CIT (1983) 32 CTR (Bom) 306 : (1984) 145 ITR 793 (Bom) : TC 56R.608 in which it was held that the case having ‘Nil’ income from salary chargeable under the Act would be covered by dictate of the law that salary income chargeable was less than Rs. 7,500. Reliance was also placed on the decision of the Madras High Court in Addl. CIT vs. Brakes India Ltd. (1979) 118 ITR 820 (Mad) : TC 18R.362 in this regard and the contention of the assessee that ‘Nil’ estimate of advance tax rules out applicability of s. 215, was rejected. It was observed that levy of interest under s. 215 of the Act was almost automatic unless and until the assessee was able to show that his ‘Nil’ estimate at the time of filing was the correct estimate. The CIT(A) also observed that the element of consciousness for wrong estimate is needed for levy of penalty under s. 273 and not for levy of interest under s 215. It was also observed that the element of reasonable belief for quantum of income does not come into play in s. 215 with that much force as it does in s. 217(1A). It was, therefore, held that the decision of the Gujarat High Court in CIT vs. Bharat Machinery & Hardware Mart (1982) 136 ITR 875 (Guj) : TC 43R.589 could not assist the assessee on the question of interest chargeable under s. 215 of the Act. The appellate authority observed that the interest income exceeding Rs. 60 lakhs was attempted to be taken out of the taxation net, and that, this was a fit case for levy of interest under s. 215 of the Act. It was further observed that, in regard to quantum, no calculation mistake was brought to the notice by applicability of r. 40 of the Rules made under the Act.
The assessee preferred an appeal against the decision of the CIT(A) before the Tribunal. The Tribunal rejected the contention that no interest accrued for the accounting year 1st July, 1977, to 30th June, 1978, on the basis of the resolution dt. 30th June, 1978, by which the mode of payment incorporated in the original agreement stood revised. It also rejected the contention that, in view of the modification in the original agreement as amended by the supplemental agreement dt. 4th March, 1977, the interest which was recoverable stood waived. Construing the provisions of the agreement and deed of assignment which has a bearing on the obligation on the part of the vendee Elscope (P) Ltd. to pay interest on the deferred consideration, the Tribunal in para 17 of its order held :
“In the instant case, the income from interest on unpaid purchase price was a vested right created under the supplemental agreement, as a consequence the income from interest could be said to be accrued or arisen to the assessee during the relevant accounting year. In this connection, it is pertinent to note that while the supplemental agreement forms part of the original agreement, there is no indication in the resolution to suggest that the revised mode of payment was effective from any date prior to 30th June, 1978. Therefore, this is not a case where the income though given up during the year could not be said to accrue as was the case in managing agency commission, the determination of which was based on accrual of profits. The accrual of interest commenced from the beginning of the accounting year as the interest accrues from day-to-day.”
5.1. Considering the alternative contention of the assessee that if the interest had accrued, that income should be excluded from chargeability on the ground of commercial expediency, the Tribunal held that there was no material for reaching to a conclusion that the income from interest was given up on the ground of commercial expediency. The only ground that was placed before the Tribunal was that the unpaid purchase price which was unsecured had become secured under the revised mode of payment. The Tribunal held that this aspect did not carry the matter anywhere. The vendee Elscope (P) Ltd. was a subsidiary of the assessee and its entire shareholding was owned and controlled by the assessee. The security which was offered in terms of secured debentures of Ambalal Sarabhai Enterprises Ltd. to whom the undertaking was transferred by Elscope (P) Ltd. was again a subsidiary of Elscope (P) Ltd. Therefore, the offering of secured debentures to cover the unpaid purchase price would not give some added commercial benefit to the assessee which otherwise was secured in view of its position as the sole shareholder of its fully owned subsidiary and also vis-a-vis Ambalal Sarabhai Enterprises Ltd. which was a fully owned subsidiary of Elscope (P) Ltd. The Tribunal observed that when substantial portion of its income which had accrued was sought to be given up by the assessee, there ought to be some corresponding benefit matching giving up of such income, but there was nothing to indicate in this matter that the benefit accruing to the assessee was such as would outweigh the right which it was giving up. It was finally held that the inevitable conclusion which can be reached so far as the asst. yrs. 1979-80, was concerned, was that there was accrual of interest as a result of the supplement agreement and that the interest amount was rightly brought to tax on accrual basis.
As regards the ground on which the interest charged under s. 215 was challenged, the Tribunal in para 23 of its judgment observing that, though it had rejected the assessee’s claim that on the basis of resolution dt. 30th June, 1978, it had modified its original arrangement and, therefore, there was no accrual of income and hence, no liability to advance tax was rejected by it, “it cannot be said that the assessee could predicate the said assessment based on estimate of notional income from interest. The question of determining accrual of income is a highly complex issue and the fact that a decision is reached against the assessee cannot be determinative of its liability to pay advance tax which arises in accordance with the statutory date fixed in the Act.” Relying upon the decision of this Court in CIT vs. Bharat Machinery & Hardware Mart (supra), the Tribunal held that levy of interest under s. 215 of the Act, on the facts of the case, was not justified for the asst. yrs. 1979-80. The assessee’s appeal was accordingly partly allowed on the question of interest under s. 215 of the Act. IT Ref. No. 75 of 1987 arises from that part of the order of the Tribunal passed in respect of the asst. yr. 1979-80 by which the assessee’s appeal was partly allowed and interest added under s. 215 of the Act deleted.
For the reasons which were given by the CIT(A) in the appellate order dt. 29th Feb., 1984, for confirming the addition of Rs. 66,29,236 as interest accrued for the asst. yr. 1979-80, the CIT(A) confirmed the addition of Rs. 55,67,750 on the same count for the asst. yr. 1980-81 by his order, dt. 29th Feb., 1984. The levy of interest under s. 215 was also confirmed in respect of the said assessment year.
In appeal, the Tribunal held in para 20 of the order that there was a material distinction between the facts that obtained in the earlier year, i.e., asst. yr. 1979-80 and in the asst. yr. 1980-81. It observed that the material difference was caused by the assessee’s resolution dt. 30th June, 1978, under which the original agreement stood modified. It was held that, as a result of the said resolution, no income could be said to have accrued to the assessee as the interest was to start accruing from 1st July, 1979, i.e. after the end of the accounting year from 1st July, 1978, to 30th June, 1979. Moreover, since there was no accrual of income at all, there could arise no question of relinquishment of any right to receive the income. It was held that the reduction of the tax liability was a consequence of the modified arrangement, as per which, the income did not accrue during the said accounting period relevant to the asst. yrs. 1980-81. It was, therefore, held that the inclusion of the amount of interest for asst. yr. 1980-81 was not justified. The addition was, therefore, deleted and the assessee’s appeal was allowed by the Tribunal for the asst. yrs. 1980-81, giving rise to the two questions raised at the instance of the Revenue in Ref. No. 56 of 1986.
As noted above, notice was issued under s. 273(2)(a) and also under s. 271(1)(c) of the Act in respect of the asst. yr. 1979-80. In the penalty order made under s. 273(2)(a) of the Act, on 9th Aug., 1988, the Asstt. CIT came to a finding that the assessee had committed a default by filing ‘Nil’ estimate of advance tax payable by it, which it had reason to believe to be untrue and imposed penalty of Rs. 4 lakhs under s. 273(2)(a) of the Act against the maximum penalty of Rs. 50,89,815 leviable for the default. A notice under s. 210 was served on the assessee on 17th Oct., 1978, requiring payment of advance tax of Rs. 1,00,22,757. By a subsequent notice under s. 210 of the Act served on the assessee on 8th Oct., 1978, the assessee was required to pay advance tax of Rs. 1,28,74,172. In response to these notices, the assessee filed an estimate showing ‘Nil’ amount of advance tax payable on 14th Dec., 1978.
8.1. In response to the show-cause notice issued under s. 274 r/w s. 273(2)(a) of the Act, the assessee contended that it had made an honest and fair estimate of the total income, and that it believed that the amount in question was not includible in its total income as no income was received by the assessee. The said authority agreed with the observation of CIT(A), Baroda, in which it was observed that interest income exceeding Rs. 60 lakhs was attempted to be taken out of the taxation net and that fact would not impart reasonableness to the estimates of advance tax. It was held that the assessee had committed a default by filing ‘Nil’ estimate of advance tax payable by it which it had reason to believe to be untrue, which default was liable to be punished under s. 273(1)(a) of the Act.
8.2. The CIT(A), by the order dt. 15th March, 1989, made in the appeal of the assessee against the said order imposing penalty under s. 273(2)(a) of the Act, held that, while filing the ‘Nil’ estimate of advance tax on 14th Dec., 1978, the assessee had full knowledge of interest income of Rs. 66,29,236, which had already accrued and also knew that it could not forgo the income that had already accrued by passing a resolution on a subsequent date. The order of penalty was, therefore, confirmed.
8.3. The assessee appealed against the order of the CIT(A) confirming the penalty under s. 273(2) (a) of the Act before the Tribunal and the Tribunal, concluding that interest was payable to the assessee from 1st March, 1977, by Elscope (P) Ltd. in pursuance of the agreements and the deed of assignment, and observing that the case of Packart (P) Ltd. in which penalty imposed under s. 273(2)(a) of the Act was deleted, stood on a different footing, because, in that case, the amount of addition on account of accrual of interest in the quantum proceedings was set aside and the matter was restored back to the ITO and was pending, held that the ‘Nil’ estimate filed by the assessee on 14th Dec., 1978, was, prima facie, untrue within the knowledge of the assessee and that the penalty was, therefore, rightly levied under s. 273(2)(a) of the Act by the authorities below.
9. After the notice under s. 271(1)(c) was issued as noted above, in respect of the asst. yrs. 197980, the assessee was given an opportunity of being heard before finalising the penalty proceedings by the Asstt. CIT vide letter dt. 26th Nov., 1987, referred to in para 19 of the order and the assessee, by its letter dt. 9th March, 1988, furnished its reply relying on its earlier replies dt. 29th Oct., 1982, 26th June, 1984, and 30th Aug., 1985. The Asstt. CIT, by his order dt. 9th Aug., 1988, held that the facts of the case and the subsequent acts of the assessee as analyzed by the ITO in the assessment order, the CIT(A) and the Tribunal in the appellate orders, would go to establish that there was gross and wilful attempt on the part of the assessee to evade tax on interest income that had accrued to it on the deferred sale consideration payable on its undertakings being transferred as per the original agreement. It was held that the waiver of interest was not done by the assessee on account of any commercial expediency as alleged, but only to benefit its own group of companies. It was further held that the action of waiver of interest by the assesseecompany amply goes to show that it had wilfully made an attempt not to bring to tax the interest income receivable by it under the agreements and that the transaction involved in this case could be reasonably termed as a colourable device to evade tax on its legitimate income, by dubious methods. It was further observed that, by accepting the proposal of Elscope (P) Ltd. for modifying the agreement dt. 28th Feb., 1977, to waive interest upto the period ending on 30th June, 1979, the assessee had deprived the Revenue of its legitimate tax on the interest income that had accrued as per the original agreement. The assessee did not disclose the said income to the Department nor did it furnish all the relevant particulars of that income and it was only when the Department could lay its hands on this “dubious method of transaction”, that the facts came to light. The Asstt. CIT concluded that Expln. 1 of s. 271(1)(c) of the said Act was, therefore, clearly attracted in this case, and that the assessee had failed to offer any bona fide and satisfactory explanation in the matter, holding that the assessee had not disclosed fully and truly all the material facts necessary for its assessment and had concealed the particulars of its income from interest (of Rs. 66,29,236), which had accrued on the deferred sale considerations in respect of the said transfer. Penalty of Rs. 55 lakhs was thus imposed on the assessee under s. 271(1)(c) of the Act.
9.1. The assessee appealed against the aforesaid penalty order and the CIT(A), Baroda, by his order dt. 8th Jan., 1990, dismissed the appeal, holding that no justifiable explanation in support of its claim that the income of interest had not accrued during the said accounting year, was given by the assessee, and that the assessee’s case fell within the ambit of Expln. 1 to s. 271(1)(c) of the Act. It was observed that the supplemental agreement indicated that interest was considered as payable. It was observed that the agreements subsequent to the resolutions dt. 25th Feb., 1977, and 3rd March, 1977, indicated that interest was considered as payable and that it was only at the fag end of the year that it was agreed to be charged from 1st July, 1979. It was further observed that the agreements confirming the charging of interest at the rates specified and from specific dates were more binding on the parties than these earlier resolutions which were now tried to be relied upon by the assessee. The subsequent agreements had the effect of overruling intention recorded in the resolution dt. 25th Feb., 1977. The CIT(A) also held that if there were no commercial considerations justifying postponement/waiver of interest in a normal business transaction, interest should have been charged on the balance amount due and receivable from the day from which the transfer was made effective. The change which was brought about by the resolution dt. 30th June, 1978, by which it was agreed to charge interest from 1st July, 1979, was not part by any commercial consideration and that by resorting to a scheme, the assessee had omitted to include the accrued interest in its total income and thereby furnished inaccurate particulars of his total income.
9.2. The order of the CIT(A), confirming the penalty imposed on the assessee, came to be challenged by the assessee before the Tribunal and the Tribunal, by its order dt. 5th Dec., 1991, dismissed the appeal, holding that the assessee had concealed the particulars of its interest income to the tune of Rs. 66,29,236 and that Asstt. CIT had rightly levied penalty of Rs. 55 lakhs under s. 271(1)(c) which was in turn, rightly confirmed by the CIT(A). The Tribunal observed that the assessee had failed to substantiate the explanations submitted in the penalty proceedings and had also failed to disclose all the material facts relating to the aforesaid items of addition in the return of income and the statements accompanying the said return. The Tribunal noted that, nowhere in the return of income or in the statements accompanying the said return, the fact about the passage of the resolution dt. 30th June, 1978, was mentioned. The assessee was fully conscious of the fact at the time of closing of the accounting year that if such interest income would be accounted for, it would be liable to a huge tax liability of more than Rs.
45 lakhs and, therefore, the resolution dt. 30th June, 1978, was passed with a view to nullify the accrual of interest income, which had really accrued on the basis of the agreement. It was also held that Elscope (P) Ltd. did not take any steps at all to furnish any security pursuant to the said mutual agreement made in terms of resolution dt. 30th June, 1978, in which it was mentioned that the security should be furnished to the satisfaction of the assessee in respect of unpaid purchase price. Referring to the additional evidence in form of the earlier resolutions dt. 25th Feb., 1977, and 3rd March, 1977, the Tribunal observed that they did not in any manner support the contention of the assessee about non-accrual of the income upto 30th June, 1978, by virtue of these resolutions, but they, on the contrary, destroyed the reliability and veracity of the submissions made in the quantum proceedings. It was also held that the rights of the contracting party were governed by the terms of the agreement and the contract executed between them and the period resolutions dt. 28th Feb., 1977, and 3rd March, 1977, could not override the specific terms of the contract.
9.3. In respect of the resolution dt. 25th Feb., 1977, after perusing the original minute book, the Tribunal in para 8.3 of its judgment observed that, the crucial 3 to 4 lines of the clause (reproduced in that paragraph) including the date with effect from which the interest was to be charged was admittedly subjected to rewriting after erasing the crucial lines. It appears that this rewriting has weighed with the Tribunal while holding against the assessee and observing that the assessee’s stand that it had forgotten to bring to the notice of its representative in the quantum proceedings this earlier resolution could not be accepted as a reasonable or valid explanation.
10. In context of the reference having bearing on the quantum proceedings (Ref. No. 56 of 1986), the learned counsel for the assessee contended that, in view of the resolution dt. 30th June, 1978, passed by the assessee, accepting the proposal of the vendee Elscope (P) Ltd. contained in their letter dt. 15th June, 1978, which both documents were produced during the course of assessment proceedings, there was no accrual of interest to the assessee on the amount of deferred consideration till 30th June, 1979. It was argued that, under the original agreement dt. 28th Feb., 1977, as modified by the supplemental agreement dt. 4th March, 1977, as also in the deed of assignment dt. 28th June, 1977, though interest was to be paid on the amount of deferred consideration, no date on the amount of deferred consideration, no date was mentioned for accrual of such interest and, therefore, it should be held that interest was to be paid only from the date on which the instalments were to fall due and were not paid. It was further argued that, before the end of the accounting year 1978-79 (i.e., from 1st July, 1977, to
30th June, 1978), it was open for the assessee to agree to modification of the terms of mode of payment and substitute the original stipulation regarding payment of interest by fixing the time from which the interest would accrue and accordingly, by such modification, the date of accrual of interest was fixed as 1st July, 1979, under the resolution dt. 30th June, 1978. The learned counsel submitted that there was no challenge against the genuineness of the resolution dt. 30th June, 1978, at any stage of the proceedings uptill now and once that resolution is held to be genuine, it should be given its full play and it should be held that no interest accrued till 30th June, 1979, by virtue of this resolution, even if it were to accrue under the mode of payment earlier stipulated in the deed of assignment. It was further argued that, in the event the Court comes to the conclusion that the interest income did accrue during the said accounting year from 1st July, 1977 to 30th June, 1978, it should be held that the income so accrued on mercantile basis of accounting was given up by the assessee for valid consideration which was commercial expediency. The assessee wanted to reorganise its business and this fact was recorded even in the agreements and deed of assignment and it is not as if the agreement were made as a device to evade taxes. The assessee wanted to put more capital in the hands of its subsidiary Elscope (P) Ltd., and there were further transactions between Elscope (P) Ltd. and its own subsidiary, and all these transactions were genuine and in reality, entered into as per the scheme of reorganisation. It was submitted that, under the original agreement and deed of assignment, there was no mention about any security being furnished in respect of the outstanding amount payable by Elscope (P) Ltd. to assessee, while in the proposal dt. 15th June, 1978, sent by Elscope (P) Ltd. to the assessee, there was a clear offer of giving security in respect of the deferred consideration which was required to be paid by Elscope (P) Ltd. to the assessee. Since the proposal was coupled with this offer, the assessee, with a view to get its dues secured, shifted the date of accrual of interest on the deferred consideration to 1st July, 1979, by accepting the proposal of Elscope (P) Ltd. and passing the said resolution dt. 30th June, 1978.
10.1. As regards the penalty proceedings from which the IT Ref. No. 58 of 1993 arises, the learned counsel for the assessee argued that there was no concealment of material particulars during the assessment proceedings and the assessee had disclosed the relevant particulars, which had a bearing on the computation of the income including the income said to have accrued by way of interest on the deferred payment in connection with the said asst. yr. 1979-80. It was submitted that the assessee bona fide believed in his explanation given in the assessment proceedings to the effect that no interest had accrued on the basis of the resolution dt. 30th June, 1978, and that fact was supported by additional evidence adduced during the penalty proceedings along with the reply dt. 9th March, 1988. It was submitted that the resolution dt. 25th Feb., 1977, clearly recorded the fact that the interest was payable on the deferred consideration from 1st July, 1978, and merely because there was rewriting in some portion of that resolution, it could not be inferred that it was not a genuine resolution. He pointed out from the circular resolution dt. 3rd March, 1977, in the same minute book, that this date of 1st July, 1978, was also mentioned there without any erasion. In other words, from the contemporaneous record, it can be seen that the rewriting in the resolution dt. 25th Feb., 1977, in the minute book was not an attempt to change the date of accrual of interest to 1st July, 1978. It was also mentioned in the corresponding resolution of Elscope (P) Ltd. The learned counsel further argued that since the assessee bona fide believed that the explanation offered by it was correct, the presumption under Expln. I did not arise in the case of the assessee. It was contended that admittedly it was nobody’s case that false explanation was given by the assessee; but, the case against the assessee was that he had not been able to substantiate his explanation during the assessment proceedings which fell under sub-cl. ‘B’ of Expln. I and which in turn attracted the provisions of the proviso under which it could be shown that the belief of the assessee was bona fide, in which event, the Explanation would not apply and no presumption could be raised. It was also argued that all the material particulars having bearing on computation of the assessee’s income that is said to have accrued by way of interest on deferred payment were furnished during the proceedings in form of agreements, deed of assignment, notes in the balance sheet showing the transaction, reference to the transaction in context of ‘Nil’ capital gains, etc. and it is on the basis of the material which was already adduced that the Department came to the conclusion that interest had accrued for the asst. yrs. 1979-80.
10.2. As regards the reference arising from the order imposing penalty under s. 273(2)(a) of the said Act which is the subject-matter of Ref. No. 220 of 1995, it was argued that when ‘Nil’ estimate was filed by the assessee in response to the notice under s. 210 of the said Act, it had no reason to believe that estimate to be untrue, because, on the date when the estimate was filed, resolution dt. 30th June, 1978, accepting the proposal of the vendee to substitute the mode of payment of the deferred consideration amount by shifting the date of accrual of interest to 1st July, 1979, was already in existence. It was argued that the requisite mental element that the estimate was untrue was absent in assessee’s case and, therefore, no penalty could have been levied under s. 273(2)(a) of the Act. In context of the IT Ref. No. 75 of 1987, the learned counsel for the assessee contended that the Tribunal had rightly set aside the order directing recovery of interest under s. 215 of the said Act on the ground that the question of accrual of interest was a complex one and that the assessee could not predict assessment based on estimate of national income from interest. It was also argued in this context that s. 215 of the said Act was attracted only in cases where the assessee had paid a sum of advance tax under s. 209A or s. 212 of the Act and, therefore, when ‘Nil’ advance tax was paid, the provisions could not be invoked for the purpose of levying interest.
In support of his above contentions, the learned counsel for the assessee relied upon the following decisions : (a) Decision in case of CIT vs. Motor Credit Co. (P) Ltd. (1980) 127 ITR 572 (Mad) : TC 1R.172 was cited for the proposition that if no income has materialised, there can be no liability to tax on a hypothetical income and it is not the hypothetical accrual of income based on the mercantile system of accounting followed by the assessee that has to be taken into account, but what should be considered is whether the income has really materialised or resulted to the assessee. The question whether real income has materialised to the assessee has to be considered with reference to commercial and business realities of the situation in which the assessee has been placed and not with reference to his system of accounting. (b) Decision in case of Sreelekha Banerjee vs. CIT (1963) 49 ITR 112 (SC) : TC 42R.1145 was cited for the proposition that if the explanation shows that the receipt was not of an income nature, the Department cannot act unreasonably and reject that explanation to hold that it was income. It was also held by the Supreme Court that if, however, the explanation is unconvincing and one which deserves to be rejected, the Department can reject it and draw the inference that the amount represents income either from the sources already disclosed by the assessee or from some undisclosed sources. (c) Decision in case of H.M. Kashiparekh & Co. Ltd. vs. CIT (1960) 39 ITR 706 (Bom) : TC 39R.791 was cited for the proposition that it was the real income of the assessee-company for the accounting year that was liable to tax and that the real income could not be arrived at without taking into account the amount forgone by the assessee. The principle of real income is not to be so subordinated as to amount virtually to a negation of it when a surrender or concession or rebate, in respect of managing agency commission, is made, agreed to or given on grounds of commercial expediency, simply because it takes place some time after the close of an accounting year. The Court held that, in examining any transaction and situation of this nature, the Court would have more regard to the reality and speciality of the situation rather than the purely theoretical or doctrinaire aspect to it. (d) Decision in case of CIT vs. Calcutta Discount Co. Ltd. 1973 CTR (SC) 425 : (1973) 91 ITR 8 (SC) : TC 39R.929 was cited for the proposition that an assessee can so arrange his affairs as to minimize his tax burden. It was held that, where a trader transfers his goods to another trader at a price less than the market price, and the transaction is a bona fide one, the taxing authority cannot take into account the market price of those goods, ignoring the real price fetched, to ascertain the profit from the transaction. It was held that, if the assessee had arranged its affairs as to reduce its tax liability by starting a subsidiary company and transferring its shares to that subsidiary company and thus, foregoing part of its own profits and at the same time, enabling its subsidiary to earn some profits, such a course is not impermissible under law. (e) Decision in case of CIT vs. Shoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC) : TC 39R.737 was cited for the proposition that though the IT Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in bookkeeping, an entry is made about ‘hypothetical income’, which does not materialize. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. (f) Decision in case of V.D.M. RM. M. RM. Muthiah Chettiar vs. CIT (1969) 74 ITR 183 (SC) : TC 51R.1095 was referred to point out that the Supreme Court held that since there was no clause which required disclosure of the income of any person other than the income of the assessee, which was liable to be included in his total income in the prescribed form of return, and the assessee was not required under s. 22(5) of the IT Act, 1922, in making a return to disclose that any income was received by his wife or minor child admitted to the benefits of partnership in a firm of which he was a partner, reassessment proceedings cannot be commenced under s. 34(1)(a) of that Act against the assessee for failing or omitting to disclose that income. This judgment was rendered by a Bench of three-Judges of the Supreme Court and was considered in a later judgment of the two- Judge Bench of the Supreme Court in CIT vs. Smt. P.K. Kochammu Amma Peroke (1980) 19 CTR (SC) 196 : (1980) 125 ITR 624 (SC) : TC 50R.241, in which, while stating that “with the greatest respect to the learned Judges who decided this case, we do not think, for reasons already discussed, that this decision laws down the correct law on the subject………….”, it was observed that the said decision was binding upon the Bench as it was a three-Judge Bench decision. (g) Decision of the Punjab High Court (which was later on reversed by the Supreme Court) in case of Shiv Prakash Janakraj & Co. (P) Ltd. vs. CIT 1978 CTR (P&H) 102 : (1978) 112 ITR 872 (P&H) : TC 39R.775 was cited for the proposition that where no interest had actually been paid to the assessee- company, nor had it made any debit entries in its account books and no date was fixed in the agreement of loan regarding the payment of interest, it cannot be said that the income from interest had actually accrued to the assessee even if the assessee-company had adopted the mercantile system of accounting. Reliance on this decision of the Punjab High Court has been placed with a view to argue that this judgment was rendered on 27th Sept., 1977, during the accounting year of the assessee, and that it should constitute a bona fide belief on the legal aspect of the matter when the assessee had put forth the explanation that, on the strength of the resolution of 30th June, 1978, interest could not be said to have accrued since the accrual date was shifted thereunder to 1st July, 1979. (g-1) The above decision was reversed by the Supreme Court in CIT vs. Shiv Prakash Janak Raj & Co. (1996) 136 CTR (SC) 421 : (1996) 222 ITR 583 (SC) : TC S39.3523 in which the Supreme Court in terms held that the concept of real income cannot be employed so as to defeat the provisions of the Act and the Rules. Where the provisions of the Act and the Rules apply, it is only those provisions which must be applied and followed. There is no room nor would it be permissible for the Court to import the concept of real income so as to whittle down, qualify or defeat the provisions of the Act and the Rules. Here, we may also refer to the decision of the Supreme Court in State Bank of Travancore vs. CIT (1986) 50 CTR (SC) 290 : (1986) 158 ITR 102 (SC) : TC 39R.795 in which the Supreme Court held that the concept of reality of the income and the actuality of the situation are relevant factors which go to the making up of the accrual of income but once accrual takes place and income accrues, the same cannot be defeated by any theory of real income. The concept of real income cannot be so used as to make accrued income non-income simply because after the event of accrual, the assessee neither decides to treat it as a bad debt nor claims deduction under s. 36(2) of the Act, but still enters the same with a diminished hope of recovery in the suspense account. Extension of the concept of real income to this field to negate accrual after the amount had become payable is contrary to the postulates of the Act. It was also held that where interest has accrued and the assessee has debited the account of the debtor, the difficulty of recovery would not make its accrual non-accrual. (h) A decision of this Court in Banyan & Berry vs. CIT (1996) 131 CTR (Guj) 127 : (1996) 222 ITR 831 (Guj) : TC S42.3632 was cited to point out that it was held therein that the factum of transfer of the business as a going concern excepting the retention of right to the pending claim, could not be termed a colourable device. It was held that there was no basis for the Tribunal to hold that the dissolution of the firm after transfer of the business was a mere device and not a genuine act of parties. The High Court referring to the decision of the Supreme Court in McDowell vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC) held that, “The Court nowhere said that every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected in future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of legitimacy or genuineness of the act……….”. It was held that, “The facts and circumstances which led to McDowell’s decision leave us in no doubt that the principle enunciated in the above case has not affected the freedom of the citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection, within the framework of law, unless the same fall in the category of colourable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity.” (i) The decision in CWT vs. Arvind Narottam (1988) 72 CTR (SC) 94 : (1988) 173 ITR 479 (SC) : TC 67R.460 was cited for the proposition that where the true effect on the construction of the deeds is clear appeal to discourage tax avoidance is not a relevant consideration. (j) The decision of the Supreme Court in CIT vs. Asiatic Textiles Ltd., 1973 CTR (SC) 463 : (1972) 82 ITR 816 (SC) : TC 24R.736 was referred to in order to point out that, in the matter of declaring dividend, the reasonableness or unreasonableness of the amount distributed as dividends is judged by business considerations, such as the previous losses, the present profits, the availability of surplus money and the reasonable requirements of the future and similar others. The ITO must take an overall picture of the financial position of the business. He should put himself in the position of a prudent businessman or the director of a company and deal with the problem with a sympathetic and objective approach. (k) In CIT vs. Birla Gwalior (P) Ltd. 1973 CTR (SC) 349 : (1973) 89 ITR 266 (SC) : TC 39R.754, in context of the commission given up by the respondent, it was held that such commission which is given up could not be considered to be its real income of the managing agency. This decision was rendered in the context where the managing agency commission which could have been ascertained only after the managed company had made up its accounts and the respondent had given up the commission even before the managed company made up its accounts, and no date had been fixed in the agreement for payment of the commission and it was held that mere fact that the respondent was maintaining its accounts on the mercantile system did not lead to the conclusion that the commission had accrued to it by the end of the relevant accounting year. It will be noticed that the accrual of the managing agency would have taken place only at the end of the accounting year when the profit was ascertained. (l) The decision of the Supreme Court in E.D. Sassoon & Co. vs. CIT (1954) 26 ITR 27 (SC) : TC 39R.313 was cited for the proposition that, if the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later, on its being ascertained. The basic conception is that he must have acquired a right to receive the income, and that there must be a debt owed to him by somebody. Unless and until there is created in favour of the assessee a debt due by somebody, it cannot be said that he has acquired a right to receive the income or that income has accrued to him. (m) The decision of this Court in CIT vs. Bharat Machinery & Hardware Mart (supra) was cited to point out that, in a matter where the difference between the returned income and the assessed income had arisen due to the addition made by the ITO by an estimate of the gross profits under the proviso to s. 145(1), no interest could be charged under s. 217(1A) for failure of the assessee to file an estimate under s. 212(3A). The Court observed that : “In a given set of facts, an assessee may be expected to anticipate on his own even in regard to the estimate which the ITO might make in exercise of the powers under the proviso to s. 145(1) of the Act in the light of past experience.” Confining the ratio to the facts of the case, the Court observed that : “There may be innumerable situations such as the one illustrated by us in which the assessee may be required to make an estimate as enjoined by s. 212(3A). We do not propose to undertake the exercise of anticipating and enumerating them exhaustively. Suffice it to say the present case does not fall under that category.” (m-1) In this context, reference may be made to the decision of the Supreme Court in Central Provinces Manganese Ore Co. Ltd. vs. CIT (1986) 58 CTR (SC) 112 : (1986) 160 ITR 961 (SC) : TC 43R.242, in which, in context of the provision of s. 215 of the Act, approving the decision of the Gujarat High Court in Bhikhoobhai N. Shah vs. CIT 1978 CTR (Guj) 172 : (1978) 114 ITR 197 (Guj) : TC 6R.687, it was held that, interest is levied under sub-s. (8) of s. 139 and under s. 215, because, by reason of the omission or default mentioned in the relevant provision, the Revenue is deprived of the benefit of the tax for the period during which it had remained unpaid. The very period for which interest is levied under the relevant provision points to the nature of the levy and the levy of interest is part of the process of assessment. Where the ITO considers that there is a case for levying interest under sub-s. (8) of s. 139 or under s. 215, what he does in practice, is to make an order levying such interest after completing the assessment of the assessee’s total income and the tax payable by him. In cases where the jurisdictional fact attracting the levy cannot be disputed, for example, where the return has been furnished under s. 139 with delay, it will be a question merely of satisfying the relevant authority that there are circumstances calling for a reduction or waiver of the interest. (m-2) In CIT vs. Gordhanbhai Jethabhai (1993) 114 CTR (Guj) 196 : (1994) 205 ITR 279 (Guj) : TC S6.836, this Court applying the decision in Central Provinces Manganese Ore Co. Ltd. (supra) held that the history of s. 215 and the way it has worked and also the case law clearly indicate that interest becomes payable by the assessee as a result of operation of law and it is not made dependent upon the discretion of the ITO. The discretion which is conferred upon the ITO is not with respect to determination of payability of interest but with respect to reduction or waiver of interest payable by the assessee. While deciding whether interest under s. 215(1) is payable by the assessee or not, what the ITO has to consider is whether the required conditions are satisfied or not, and he would be under no obligation to consider whether interest should be reduced or waived, which question would arise only after payment of interest is determined.
(n) The decision of the Patna High Court in CIT vs. Lal Babu (1980) 15 CTR (Pat) 173 : (1980) 122 ITR 1006 (Pat) : TC 50R.249 was relied upon for the proposition that the provisions contained in s. 271(1)(c) of the Act apply only to concealment of “his income”, they do not speak of concealment of such incomes as are includible by a fiction of law in “his income”. The High Court upheld the decision of the Tribunal in holding that there was no obligation on the assessee to include in his return of income, the income arising to his wife and minor sons which were includible in his income in terms of s. 64 of the Act and the failure of the assessee to do so did not attract the penal provisions of s. 271(1)(c) of the Act against him. (o) The decision of the Supreme Court in CIT vs. Anwar Ali (1970) 76 ITR 696 (SC) : TC 50R.276 was cited for the proposition that if there is no evidence on the record except the explanation given by the assessee, which explanation has been found to be false, it does not follow that the receipt constitutes his taxable income. It would be perfectly legitimate to say that the mere fact that the explanation of the assessee is false does not necessarily give rise to the inference that the disputed amount represents his income. It was held that it cannot be said that the finding given in the assessment proceedings for determining or computing the tax is conclusive. However, it is good evidence. Before penalty can be imposed, the entirety of circumstances must reasonably point to the conclusion that the disputed amount represented income and that the assessee had consciously concealed the particulars of his income or had deliberately furnished inaccurate particulars. The decision in CIT vs. Khoday Eswarsa & Sons 1972 CTR (SC) 295 : (1972) 83 ITR 369 (SC) : TC 50R.283 in which Anwar Ali’s case (supra) was followed, was cited to point out that it was held therein that the penalty proceedings being penal in character, the Department must establish that the receipt of the amount in dispute constitutes income of the assessee. (o-1) We may note here that, in CIT vs. Jeevan Lal Shah (1994) 117 CTR (SC) 130 : (1994) 205 ITR 244 (SC) : TC 50R.973, the Supreme Court held that, even after the amendment of 1964, penalty proceedings continue to be penal proceedings, and that where the Explanation has made a difference is while deciding that question the presumption created by it has to be applied, which has the effect of shifting the burden of proof. It was held that the rule regarding burden of proof enunciated in CIT vs. Anwar Ali (supra) is no longer valid. Whether it is a case of undisclosed or unexplained cash deposit or any other concealment the standard is the same. The principle enunciated in Anwar Ali’s case that mere rejection of the explanation of the assessee is not sufficient for levying penalty no longer holds good and it is no longer necessary that the Department must go further and establish that there was conscious concealment of particulars of income or a deliberate failure to furnish accurate particulars. It was held that the cases to which the Explanation is attracted have to be decided in the light of the law enunciated in the cases of CIT vs. Mussadilal Ram Bharose (1987) 60 CTR (SC) 34 : (1987) 165 ITR 14 (SC) : TC 50R.474 and CIT vs. K.R. Sadayappan (1990) 86 CTR (SC) 120 : (1990) 185 ITR 49 (SC) : TC 50R.795. (o-2) In B.A. Balasubramaniam & Bros Co. vs. CIT (1999) 157
CTR (SC) 556 : (1999) 236 ITR 977 (SC), the Supreme Court held that after the incorporation of the Explanation in s. 271(1)(c) of the IT Act, 1961, the view which had been taken earlier in CIT vs. Anwar Ali (supra), no longer holds the field and it is for the assessee to prove that there had been no concealment of income where the income shown in the return is less than eighty per cent of the assessed income. (p) The decision of this Court in Smt. Ramalaxmi Jivraj vs. CWT (1982) 138 ITR 731 (Guj) : TC 66R.767, which was rendered in context of the provisions of ss. 14 and 18 of the WT Act, 1957, was cited for the proposition that the penalty was leviable under s. 18(1)(a) of the WT Act only if it is established that the assessee has, without reasonable cause, failed to furnish the return which he or she was required to furnish in response to a notice given under sub-s. (2) of s. 14, and that if the assessee’s net wealth was not taxable, it would be open to the assessee to contend that the failure to furnish a return could not be said to be without reasonable cause. (q) The decision of the Supreme Court in CIT vs. A. Raman & Co. (1968) 67 ITR 11 (SC) : TC 51R.423 was referred to for the proposition that avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. A taxpayer may resort to a device to divert the income before it accrues or arises to him. Effectiveness of the device depends not upon considerations of morality, but on the operation of the IT Act. Legislative injunction in taxing statutes may not, except on peril of penalty, be violated, but it may lawfully be circumvented. (q-1) Reliance on this decision of the Supreme Court is wholly misconceived, because the above observations were disapproved in McDowell & Co. Ltd. vs. CTO (supra). (r) The decision of the Andhra Pradesh High Court in CIT vs. Sri Venkateswara Timber Depot (1998) 147 CTR (AP) 333 : (1998) 230 ITR 675 (AP) which was in context of the provisions of s. 271(1), Expln. 1 sub-cl. (B), was cited for the proposition that, if no finding that the assessee had not been able to substantiate the explanation could be recorded, the amount added or disallowed in computing the total income cannot be deemed to represent the income in respect of which particulars have been concealed for purpose of cl. (c) of sub-s. (1) of s. 271. In such a situation, there is no need to look to the requirements of the proviso to the Explanation. (s) The decision of this Court in K.M. Bhatia vs. (1991) 99 CTR (Guj) 10 : (1992) 193 ITR 379 (Guj) : TC 50R.298 was cited to point out that, when inconsistent approach was adopted by the Tribunal in rejecting the explanation, the levy of penalty was not valid. In that case, the Tribunal had adopted inconsistent and incongruous stand in upholding the penalty in respect of the year 1971-72 and the same explanation which was given by the assessee, namely, mistake of the accounts clerk which was put forth at the earliest point of time was accepted by the Tribunal for the year 1972-73 and an inconsistent approach was adopted by the Tribunal in respect of that very explanation for the year 1971-72. (t) The decision of this Court in CIT vs. S.P. Bhatt (1974) 97 ITR 440 (Guj) : TC 50R.885 was cited for pointing out that it was held therein that the burden of proof under Explanation to s. 271(1)(c) is akin to that in a civil case where the determination is made upon preponderance of probabilities, and that it was not necessary that any positive material should be produced by the assessee in order to discharge the burden that rests upon him. (u) The decision of the Supreme Court in CIT vs. Mussadilal Ram Bharose (supra) was referred to for the observations made therein that, the Explanation to s. 271(1)(c) of the IT Act, 1961 shifts the burden to the assessee to show that the difference was not owing to fraud or gross or wilful neglect on his part, and that this onus is rebuttable. In the said decision, it was also observed that the burden placed upon the assessee is not discharged by any fantastic explanation. Nor is it the law that any and every explanation by the assessee must be accepted. It must be an explanation acceptable to the fact-finding body. The ratio of Musaddilal’s case (supra) was followed in Jeevan Lal Shah’s case (supra) and B.A. Balsubramaniam’s case (supra).(v) The decision of this Court in
[Citation : 257 ITR 355]
