Decided on August 16,1994



Per Bandyopadhyay, AM - The appeal has been filed by the assessee against the order of the CIT [Appeals] confirming the levy of penalty of Rs. 3,47,110 under the provisions of section 271(1) (c) of the Income-tax Act, 1961. - (1.)
(2.) The assessee, which is a firm, filed its return of income for this year on 27-8-1990 declaring a total income of Rs. 48,361. The assessment was, however, completed on 31-1-1991 under section 143(3) at the total income of Rs. 8,48,361. In the assessment, the following two additions were made : judgement_7309_tlit0_19940.htm 3. The business of the assessee is to run a cinema theatre named "Prasanna Theatre". In appeal before the CIT (Appeals), the first addition was reduced to Rs. 6 lakhs whereas the second addition as above was reduced to Rs. 85,000. The Assessing Officer initiated penalty proceedings under section 271(1) (c) for concealment of income and furnishing of inaccurate particulars. In the impugned penalty order, he discussed in detail the various contentions of the assessee against levy of penalty and negatived the same. Finally, he held that the assessee was guilty of concealing its particulars of income to the extent of Rs. 6,85,000 as above. The Assessing Officer thus levied a penalty of Rs. 3,47,110 at the minimal level. 4. The assessee preferred an appeal before the CIT (Appeals). He discussed the detailed facts of the case and also the various contentions raised by the assessee before him. Finally, he agreed with the Assessing Officer that the assessee had, in fact, concealed its particulars of income and in that view, upheld the penalty. 5. Before us, the assessee has raised a legal issue that the imposition of penalty under section 271(1) (e), by resorting to the provisions of Explanation I to the said section without giving notice that the Explanation was sought to be applied, is illegal. It is stated that as a result of the above action on the part of the Assessing Officer, the assessee had no opportunity to meet the case of the Department. Reliance has been placed in this regard on the decision of the Bombay High Court in the case of CIT v. P.M. Shah [1993] 203 ITR 792 in support of the above claim of the assessee. 6. The learned Departmental Representative, on the other hand, has placed reliance on the following decisions of different High Courts and also of the ITAT, Bangalore Bench, to argue that Explanation to section 271(1) (c) can be resorted to at any stage and it is not required to give any prior notice to the assessee to resort to such Explanation : (i) CIT v. Rajeshwar Singh [1986] 162 ITR 173 (Punj. & Har.), (ii) CIT v. Drapco Electric Corpn. [1980] 122 ITR 341 (Guj.), (iii) Kantilal Manilal v. CIT [1981] 130 ITR 411 (Guj.), (iv) Mandli Hanumanthappa Setty v. First ITO [1989] 30 ITD 480. 7. We find that the Bombay High Court actually held in the case of P.M. Shah (supra) that the Tribunal had held that there was no concealment of income by the assessee, the very basis for issue of notice disappeared and, hence, the IAC could not have proceeded to levy the penalty under the Explanation to section 271(1) (c) in the absence of any initiation of penalty proceedings under the Explanation to section 271(1) (c). It was furthermore stated that in penalty proceedings, the provisions of the Statute must be strictly construed and. Therefore, the levy of penalty under the Explanation was held to be not sustainable. 8. The Bombay High Court actually discussed in the abovementioned case that the Explanation made a considerable difference to what was contained in section 271(f) (c). Furthermore, the Explanation creates a legal fiction in certain circumstances to the effect that the assessee shall be deemed to have concealed the particulars of his income or furnished inaccurate particulars of his income in the circumstances set out in the Explanation and that but for such legal fiction, it could never have been said that there was any concealment or furnishing of inaccurate particulars of income, simply because the returned income was less than 80 per cent of the assessed income. In that view, the Bombay High came to the finding as stated above. 8.1 On the other hand, it is found that the Gujarat High Court made a detailed discussion of the matter in its judgment in the case of Drapco Electric Corpn. (supra). The Gujarat High Court held as follows : "It is a principle of law in respect of all rebuttable presumptions that ordinarily such presumptions fall within the realm of the rule of evidence. If fact A is inherently relevant in proving the existence of fact B and to any rational mind it would bear a probative or persuasive value in the matter of proving the existence of fact B, then a rule prescribing either a rebuttable presumption or an irrebuttable presumption in behalf would be a rule of evidence. On the other hand, if fact A is inherently not relevant in proving the existence of fact B or has no probative value in that behalf and yet a rule is made prescribing a rebuttable or an irrebuttable presumption in that connection, that rule would be a rule of substantive law and not a rule of evidence. Therefore, in dealing with the question as to whether a given rule prescribing a conclusive presumption is a rule of evidence or not, we cannot adopt the view that all rules prescribing irrebuttable presumptions are rules of substantive law. One can answer the question only after examining the rule and its impact on the proof of facts A and B. The Explanation to section 271 (1) (c) consists of two parts. The first part sets out the facts which, if proved, give rise to a rebuttable presumption. It provides, that, in order to raise the presumption, the case must be one where the total income returned by any person is less than eighty per cent of the total income as assessed under section 143 or section 144 or section 147 (reduced by the expenditure incurred bona fide by him for the purpose of making or earning any income included in the total income but which has been disallowed as a deduction). If these facts are shown to exist, a presumption would be raised that such person has concealed the particulars of his income or furnished inaccurate particulars of such income. This presumption would, of course, be a rebuttable presumption and it would be open to such person to establish that despite there being a difference of more than twenty per cent between the income returned and the income assessed (such difference having been arrived at in the manner indicated in the first part of the Explanation), the failure to return the correct income did not arise from any fraud or gross or wilful neglect on his part. It is only if he fails to discharge the burden of displacing the presumption in the manner aforesaid on the basis of preponderance of probabilities by leading evidence or by relying on the material which is already on record that the penalty under section 271(1) (c) for concealment of income would be attracted." 8.2 Finally the Gujarat High Court held that since Explanation enacts a mere rule of evidence, it is competent to the authority which imposed the penalty to invoke its aid in reaching the final conclusion on the question of concealment, although the ITO might not have resorted to it at the stage when he made the reference to the authority. 8.3. The abovementioned decision of the Gujarat High Court was followed further in the case of Kantilal Manilal also decided by the same High Court. It was held therein that merely because the Explanation has not been referred to in the show-cause notices, there is no legal bar against invoking the Explanation during the course of the penalty proceedings. 8.4 The Punjab & Haryana High Court also followed the same line in its judgment in the case of Rajeshwar Singh. 8.5 Similar decision was also taken by the ITAT, Bangalore Bench in the case of Mandli Hanumanthappa Setty. 9. It is thus found that as against the abovementioned decision of the Bombay High Court as cited by the assessee, two different High Courts as well as this Bench of the ITAT have already taken the view that the Explanation to section 271(1) (c) can be resorted to at any stage of the proceedings and that it is not necessary to make a mention of the same in the show-cause notice issued by the Assessing Officer. This is the position with regard to the Explanation which existed during the period from 1-4-1964 to 31-3-1976. In that Explanation, there was a presumption of concealment if the difference between the returned and the assessed income (after making certain adjustments in respect of expenses disallowed) was more than 20 per cent of the assessed income. The Bombay High Court, therefore considered the Explanation to be having a substantive existence apart from the provisions relating to imposition of penalty on concealment as such, and held that inasmuch as the Explanation itself provided for penalisation of the assessee apart from the proof of concealment, a specific mention of the said Explanation is required in the showcase notice. In the instant case, however, the provisions of Explanation 1, introduced with effect from 1-4-1976 are in question. This Explanation is not of the nature of the earlier Explanation and merely goes to explain the offence of concealment or of furnishing of inaccurate particulars of income without affording an independent basis for constituting such offence. We are, therefore, of the view that not only in consideration of the abovementioned judgments of the Gujarat and Punjab & Haryana High Courts it can be held that Explanation 1 to section 271(1) (c) can be resorted to at any stage of the proceedings and a specific mention of the said fact in the show-cause notice is not necessary but also the strength of the argument of the Bombay High Court would not apply to the case of the present Explanation 1 to section 271(1) (c). In view of all these matters, we are not inclined to entertain the objection of the assessee in this regard. 10. It has alternatively been claimed by the assessee that even if the Explanation be invoked, the assessees case would not fall under clause (B) of Explanation 1 to section 271(1) (c) since the assessees explanation is bona fide and all the facts relating to the same and material to the computation of its total income have been disclosed by it. It has further more been contended that the inability to substantiate the explanation is attributable to a bona fide cause viz. the death of the senior partner incharge of the affairs of the firm under whose supervision the repair and maintenance work for the relevant year had been carried out. The assessee relies on the decision of the Allahabad High Court in the case of CIT v. Devi Dayal Aluminium Industries (P.) Ltd. [1988] 171 ITR 683 in support of the aforesaid submission. The assessee had furthermore placed reliance on a decision of the Delhi High Court in the case of CIT v. Mediratta Engg. Corpn. [1981] 132 ITR 327 also in support of its contention that penalty under section 271(1) (c) is not leviable in the instant case. 11. In this connection, it is necessary for us to refer to the order dated 3-8-1984 in ITA No. 986 (Bang.) /1992 relating to the quantum appeal of the assessee for this year. The addition of Rs. 6 lakhs towards expenses claimed under theatre maintenance and of Rs. 85,000 out of expenses relating to maintenance of the motor car were contested therein. The facts of the case have been thoroughly discussed in the said order of ours. The following findings with regard to the maintenance of the accounts of the assessee and claims of the expenses under consideration have however been arrived at in the said appellate order : "... The Bills produced were duplicate and written in ink which contained some internal disturbing evidence. One bill (No. 624), dated 28-3-1990, for Rs. 7,000 did not tally with the original maintained by M/s. Jameel Pasha & Co. That was a bill in favour of M/s. Chacko Associates. It appears one of the partners tried to correct the name by striking off the earlier one to writ the name of Prasanna Enterprises" (Para 10) "With regard to other carbon copies of vouchers they did not dovetail with the accounts of M/s. Jameel Pasha & Co. ** ** ** All these go to show that the assessee had managed to procure bills of purchases made by some other third party to support its claim in the assessment." (para 11) "The observations made by the ACIT in regard to purchases made from M/s. Jameel Pasha & Co., had been put to the assessee and its explanation had been sought. No explanation worth mentioning had been offered." (para 12) "... It is clear that painting had been done in the first seven months of the year. If that is the case, it should have been inside the auditorium. Then, the need to purchase heavy quantity of cement, steel, etc., in the last month of the accounting year is rendered doubtful for painting could only be after the repair...." (para 13) "Another claim was that marble linings had been provided. No purchase of marble for the lining was declared. As mentioned earlier, even sand had not been purchased commensurate with the steel and cement purchased. It was stated that sand had been purchased in advance and this had been rightly rejected by the authorities below : ** ** ** From the very nature of things it appears to us clearly that expenditure had been inflated out of proportion and the reason is not far to seek. Considering all facts and circumstances of the case, we have no hesitation in holding that the case pretended by the assessee is not acceptable at all. We have examined the entire record and we have doubts that in each one of the alleged purchases the assessee had liked the expenses...." (para 15) 12. Although ultimately the Tribunal, in its abovementioned order, has reduced the disallowance out of the expenses claimed towards wages and upkeep of the theatre hall to Rs. 2,75,720 only in place of the figure of Rs. 6 lakhs as sustained by the CIT (Appeals), yet the quotations above from the Tribunals order would clearly convince any one that the Tribunal has come to the factual finding of inflation having taken place in the expenses claimed by the assessee. In the case of alleged purchases from M/s. Jameel Pasha & Co., the Tribunal also found that no explanation worth mentioning had been offered. We are, therefore, of the opinion that this is no simply a case of rejection of the explanation offered by the assessee or simple disallowance of the expenses claimed by it. On the other hand, the assessee has not been able to come up with any explanation with regard to some of the expenses, claimed as discussed above. With regard to certain other expenses, the explanation offered by the assessee has not been substantiated. Looking to the facts of the case and taking into consideration the findings of the Tribunal as above, it cannot also be said that the explanation submitted by the assessee is bona fide and furthermore that all the facts relating to the same and material to the computation of the total income of the assessee have been disclosed. The Tribunal has already given sufficient margin in respect of allowability of the expenses. Whatever expenses have ultimately been considered by the Tribunal to be disallowable are on account of inflation of the expenses resorted to by the assessee as found out by the Tribunal. The decision of the Allahabad High Court in the case of Devi Dayal Aluminium Industries (P.) Ltd. (supra) would not, therefore, apply to the present case inasmuch as this is a clear case of explanation offered by the assessee not being bona fide. 12.1 In the case of Mediratta Engg. Corpn. (supra), the Delhi High Court held penalty to be not leviable mainly on consideration of the fact that the ratio of Nickel consumption, alloy position and gross profit compared favourably with those in earlier years. So far as the present case is house, concerned, the Tribunal, even after taking into consideration expenses under the same head for the immediately preceding year and even allowing a margin of 10 per cent thereupon, considered the balance claim of expenses to be completely un-substantiated. We are, therefore, of the view that in respect of the said balance portion, the disallowance in respect of which has ultimately been sustained by the Tribunal, the assessee has to be said to have committed the offence of concealing its income and/or furnishing inaccurate particulars of its income. Penalty under section 271(1) (c) would, therefore, be leviable on the same. 13. So far as the expenses relating to motor car are, however, concerned, although the Tribunal has not ultimately accepted the contention of the assessee and has sustained the addition of Rs. 75,000, the main ground for doing so is however absence of supporting vouchers/receipts relating to the expenses. As regards purchase of diesel, the assessee has come up with a plausible explanation that diesel was used in the generator required to be maintained for the purpose of the hall, although the expenses relating to purchase of the same had been claimed under the head "Maintenance of motor Car". Regarding the other point raised by the Department about vouchers evidencing purchase of petrol, the explanation offered by the assessee, the petrol was used in the cars privately belonging to the partners of the assessee also seems to be having some basis, although full relief could not be granted to the assessee on that ground. In any case, we are of the view that so far as the sustenance of expenses relating to maintenance of motor car is concerned, rejection of explanation of the assessee which may be having some basis cannot be considered to be god ground for levy of penalty under section 271(1) (c). We are, therefore, not in a position to consider the disallowance out of expenses relating to maintenance of motor car to constitute concealment of income on the part of the assessee. 14. On the other hand, however, as had been discussed above, the final sustenance of disallowance of Rs. 2,75,720 out of theatre hall upkeep expenses must be considered to constitute the offence of concealment of income. We are, therefore, of the opinion that penalty under section 271(1) (c) is required to be levied on this amount. Finally although we uphold the leviability of penalty under section 271(1) (c) in this case on principle, at the same time again, we order, in partial modification of the orders of lower authorities that penalty be ultimately computed in respect of the abovementioned amount of Rs. 2,75,720 in place of the amount of Rs. 6,85,000 as considered in the penalty order, and by treating the tax on the said amount to be the tax sought to be evaded. Levy of penalty at the minimal is also being upheld by us. 15. In the result, the appeal filed by the assessee is partially allowed to the abovementioned extent.;

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