T. V. Rajagopala Rao, President - (1.) THIS is a concealment penalty appeal filed by the assessee and it relates to asst. yr. 1989-90. The facts of the case and the circumstances under which the penalty is levied are the following.
(2.) The assessee is a private specific trust and is the sole proprietor of M/s. R.R. International. The business carried on by the trust is that of exports of electronic goods, mostly battery chargers to USSR. The export is arranged through M/s. Siemens India Ltd. for which the assessee is paying commission to Siemens @ 8.5 per cent on the sales margin. The assessment year in question is 1989-90 for which the previous year ends by 31st March, 1989. The assessee has got its factory premises at Baska in Gujarat. It leased out the factory along with the premises to M/s. R.I.R. Ltd. under the lease agreement dt. 1st April, 1988. The consideration for the lease agreement is the interest-free deposit of Rs. 20 lakhs and a compensation of Rs. 9 lakhs only from the RIR Ltd. The assessee took upon its responsibility of recovering of outstanding amount to it from M/s. RIR Ltd. As a result, Mr. J. E. Ruttonsha's account as well as of M/s. R. S. Digitronics (P) Ltd. went into debit. In the assessment year in question, the assessee was found to have paid interest to the bank on packing credit at 9 per cent and Asstt. CIT who was the AO, had enquired the assessee as to why the corresponding interest payment should not be disallowed. In response to this query, the assessee filed a revised return on 11th March, 1991, reducing the loss by Rs. 1,84,634. After the return was revised, the total loss as well as the revised return remained only at Rs. 2,58,024 and it was accepted by Asstt. CIT, Cir 27(1), Bombay, by his assessment order dt. 23rd March, 1991, under s. 143(3). While completing the assessment, the AO initiated penalty proceedings under s. 271(1)(c). While submitting the revised return, in the accompanied letter, dt. 11th March, 1991, it was stated on behalf of the assessee that the loss is reduced to avoid litigation and notional interest on debit balance has been offered for taxation. After the issue of penalty notice, the assessee offered his explanation vide his letter dt. 31st May, 1991, and received in the AO's office on 25th June, 1991. In the said explanation, it is contended firstly, that there is no addition made to the income returned since they have suo motu revised the return by their letter, dt. 11th March, 1991 wherein they have offered for tax notional interest on debit balance of Mr. J. E. Ruttonsha and M/s. Digitronics (P) Ltd. In the said letter, they had already stated that in order to avoid litigation they would like to offer notional interest on the said debit balance. Since there was a loss and by offering notional interest, there was no tax liability, they thought, if fit to offer notional interest thereby reducing the loss and the only purpose behind that move is to avoid litigation. The question of concealment does not arise since all facts are disclosed and there is no concealment as such. The AO found in the penalty order during the course of assessment proceedings that the capital balance of the assessee is on debit side, various loans and advances are made without charging any interest whereas interest had been paid on loan borrowings and as a result the interest-bearing loans taken are not utilised for the purpose of business. Under the circumstances, by means of order-sheet noting dt. 20th December, 1990, the assessee was given an opportunity to explain why interest should not be disallowed. There was no explanation offered by the assessee and knowing fully well that the intended disallowance of interest is quite in order, the assessee revised its return by reducing the loss by Rs. 1,84,634. The very fact that the assessee had filed revised return reducing the loss shows, noted the AO in his penalty order, the inaccurate particulars of income was filed for the year. The explanation given by the assessee is of routine nature and the assessee also failed to substantiate the expenditure and establish that the explanation given is bona fide. Therefore the AO felt that levy of penalty is justified under s. 271(1)(c) r/w Expln. 1. He held that the explanation offered by the assessee is not adequate, justifiable or acceptable. He, therefore, levied a minimum penalty of Rs. 96,930 by his penalty order dt. 24th September, 1991, passed under s. 271(1)(c) this penalty was confirmed by CIT(A) XIV.
(3.) I have heard Shri Atul Jasani, learned counsel for the assessee and Shri Rajkumar, learned Departmental Representative for the Department. The contentions put forward on behalf of the assessee before CIT(A) were put before me. All the facts are placed before the AO and no part of income was concealed. It is not a case of the Revenue that the assessee charged the interest from Mr. J. E. Ruttansha and after realisation of the interest, the said interest was not shown in the books of account of the assessee. Further in the original assessment, loss accrued was Rs. 4,42,072 and even after the revised return was filed, it was accepted that the suppressed loss of assessee remained at Rs. 2,58,094. When the returned figure as well as assessed figure remained only as losses Expln. (4) to s. 271(1)(c) does not apply. There is a plethora of case law in favour of the proposition now being put forward by assessee that in such a case, penalty cannot be levied under s. 271(1)(c). The case of the Revenue was that the notional interest which was chargeable on the advances made to M/s. Ruttansha Services M/s. R.L. Electrical and M/s. R.I.R. Ltd. as well as M/s. R.S. Digitronics (P) Ltd. was not charged by the assessee but at the same time it had been paying interest on the borrowed amount by it and therefore, interest payable entitled for deduction is liable to be reduced under s. 36(1)(iii) of the IT Act. It is further contended that there is no nexus of any sort established between borrowed amount on the one hand and the interest-free advance made to the companies and persons mentioned above unless and until the said nexus which is most important to be proved is not established the disallowance under s. 36(1)(iii) cannot be sustained. Further, no sort of detection of any concealed income was found out by the AO, on the other hand the assessee itself voluntarily filed the revised return on its own in order to purchase peace with the Department and therefore, in such an event, the penalty under s. 271(1)(c) is not leviable. In support of these contentions, the assessee filed a paper book containing 57 pages, 7th item in the paper-book is only case law. Items 1 to 6 in the paper-book are only the relevant papers which were filed before the lower authorities. At pp. 1 to 7, balance sheet of the assessee was furnished. The opening balance in the beginning of the year was plus income of Rs. 11,33,726.40 out of which the deductions made during the course of the year was Rs. 10,09,921.10, thus reducing the capital balance to Rs. 1,23,805.30. The loss sustained in the year is Rs. 6,09,309.77. Thus, at the close of the year, the capital account turned out to be a loss but not at the beginning of the year. Therefore, unless the AO was able to connect specific borrowing made from the bank or other creditors of the assessee to interest-free loans given by the assessee, there is no scope to hold that the borrowings were not utilised for the purpose of business, but was diverted to advance interest-free loans. The computation of income originally prepared was shown at p. 3. The revised return was filed along with covering letter dt. 11th March 1991. It is clearly stated in the covering letter that the assessee would like to offer the notional interest worked out on debt balance of Mr. J. E. Ruttansha and R.S. Digitronics (P) Ltd. and added to the income. The assessee had paid interest to the bank on packing credit and therefore in order to avoid litigation, the assessee would like to offer notional interest on debit balance of Mr. J. E. Ruttansha and R.S. Digitronics. In the result, Rs. 1,84,630 is being disallowed from the interest and thus to that extent, the loss would be allowed. Mr. J. E. Ruttansha has taken over certain responsibility of the amount due from certain parties and therefore, there was debit balance in his account. Similarly, amount of R.S. Digitronics is in dispute. However, the assessee would like to avoid litigation and therefore, revised its return of income by not claiming the portion of interest of Rs. 1,84,630 on debit balance as aforesaid above. The revised return was held on 11th March, 1991 whereas assessment was made of 23rd March, 1991 in which it is significant to note that the revised return was accepted. The AO did not find that any portion of the borrowed account was not disclosed for the purpose of business of the assessee. The learned counsel for the assessee relied upon the following case law. (i) Shahibag Enterprises vs. ITO (1994) 49 TTJ (Ahd) 554 : (1994) 50 ITD 113 (Ahd) This appears to be on all fours with the facts of the present case and therefore, I feel it appropriate to give precedence to it and consider the ratio of the decision. From the fact enumerated, it was found that for asst. yrs. 1979-80, 1980-81 and 1981-82, the assessee had paid interest on certain loans taken by it for the business purposes and claimed deduction thereof. The AO made disallowance/addition of proportionate interest for each of the assessment years in respect of certain interest-free loans given by the assessee to its subsidiary companies and others. However, the AO did not establish any nexus between the interest-bearing loans taken by the assessee and the interest-free loans given by it. The Tribunal held that there was no finding by the AO that the loans obtained by the assessee-company from various parties for which interest was paid were not utilised for the purpose of business. It was an admitted fact that the assessee-company was to receive huge and substantial amounts from its subsidiary companies as well as from others in each of the three years and did not charge any interest from those parties for the loans and advances given by it. However, the AO had not established by cogent evidence that the borrowed funds was utilised, diverted or given away to its subsidiary companies and other parties. There was no nexus established by the AO between the loans obtained and loans given to its subsidiary companies and others. This vital fact had been ignored and lost sight of by the first appellate authority in deciding the controversy before him. In the absence of any finding or evidence, the disallowance of proportionate interest by the AO could not be upheld. It was not the case of the AO, in that case, that the assessee-company had charged interest or earned income from its subsidiary companies and others but had not accounted for it in its accounts. The AO could not fix notional interest as accrued and due to the assessee in respect of receivables nor in the facts and circumstances of the case could the AO disallow proportionate interest. The learned Bench held that a person can be subject to tax in respect of real income but not in respect of hypothetical income, that is to say, income which ought to have been earned but which the assessee had failed to earn. I fully agree with the ratio of the decision. (ii) The next decision cited was Mutual Plastics vs. ITO (1989) 35 TTJ (Bom) 467. In the facts of that case, the assessee did not disclose correct value of the closing stock insofar as the value of Rs. 8,000 kgs. of raw material costing Rs. 1,10,000 is concerned. It had been omitted from the closing stock. While costing the trading and P&L a/c because of the above there was enhancement of the loss declared by the assessee to that extent. The assessee at the earlier opportunity during the course of assessment proceedings for the year under consideration admitted the fact of occurring a mistake and submitted an explanation by a letter in regard thereto. That case was also a penalty case under s. 271(1)(c). When the matter ultimately came before the Tribunal, the learned Bench held that the word 'conceal' means to hide or keep secret. It necessarily requires knowledge on the part of the assessee of the real income when giving the particulars of income. The very word 'conceal implies existence of guilty intention. In the facts of that case, the assessee had suffered a huge loss of more than Rs. 20 lakhs during the relevant accounting year and after addition of the value of the closing stock and other disallowance, the assessment was completed at a loss of Rs. 16,80,157. In the subsequent year, the assessee had suffered heavy loss and the assessment was made under s. 144 at nil income. The question was whether the facts would justify imposition of penalty under s. 271(1)(c) for concealing stock to an extent of Rs. 1,10,000. The Tribunal took the view that the aforesaid mistake had not resulted in any loss to the Revenue either in the year under consideration or in the subsequent year. Further, soon after the mistake was discovered, the assessee fairly admitted the same according to its letter and this conduct signifies no guilty intention in understating the value of closing stock and the Tribunal concluded that where the assessment is completed at huge loss and there are no prospects of any profit in near future it cannot be said that the mistake (which resulted in an increase in loss) was committed with a guilty mind and as such penalty under s. 271(1)(c) cannot be imposed. (iii) Another decision cited was Star Galvanizers vs. Asstt. CIT (1990) 38 TTJ (Bom) 12. In that case, it is held that in cases of loss assessments even after the addition of concealed income, no penalty can be levied. (iv) Another decision to the same effect is Ahmedabad Bench decision in the case of Panchratna Hotels (P) Ltd. vs. Dy. CIT (1993) 47 TTJ (Ahd) 282. In the facts of that case certain amounts standing in the names of directors of the company in whose name certain credits were credited in the books of account of the firm were taken as unproved cash credits and the amounts were added to the returned income. However, even after adding these amounts, finally assessed amount remained as a loss. The point which arose for consideration was whether penalty cannot be levied even by reference to Expln. (4) to s. 271(1)(c). The conclusion reached by the Hon'ble Tribunal was the penalty cannot be levied even by invoking Expln. (4). A plethora of case law was cited in support of that proposition : (i) CIT vs. Jaora Oils Mills (1981) 129 ITR 423 (MP), (ii) CIT vs. C. R. Niranjan (1991) 187 ITR 280 (Mad), (iii) CIT vs. Prithipal Singh & Co. (1990) 183 ITR 69 (P&H), and (iv) Indo-Gulf Fertilizers & Chemicals Corpn. Ltd. vs. Union of India & Anr. (1992) 195 ITR 485 (All). It is significant that against this judgment the matter was carried to Gujarat High Court which was turned down in ITA 45 & 46 of 1994 on the file of Gujarat High Court. Against the decision of the Gujarat High Court the matter was sought to be taken to the Supreme Court for which a special leave petition was filed in SLP (Civil) 1111-1112 of 1995. However, their Lordship Shri B. P. Jeevan Reddy and Mrs. Sujatha V. Manohar refused to give reference by their order dt. 9th January, 1995 and this fact can be known by referring to p. No. 60, statute portion of (1995) 212 ITR. (v) Another decision is also cited Dy. CIT vs. Continental Engineering Industries (P) Ltd. (1994) 50 TTJ (Ahd) 209. In that case also it is held that penalty under s. 271(1)(c) cannot be levied where the assessment finally results in a loss notwithstanding Expln. (4) to s. 271(1)(c). (vi) They also relied upon Sir Shadilal Sugar & General Mills Ltd. vs. CIT (1987) 168 ITR 705 (SC). The AO gave a notice calling upon the assessee in state as to why such items of debit shown should not be taken as income. The assessee agreed to the addition to maintain good relations. The question was with the Revenue's contention, there was no concealment is liable to be disturbed. When this matter came up before the Hon'ble Supreme Court, it was held as follows : "From the assessee agreeing to additions to the income does not follow that the amount agreed to be added was concealed income. There may be 101 reasons for such admissions, i.e. when the assessee realises the true position it does not dispute certain disallowances has that does not obsolve the Revenue from proving the mens rea of quasi-criminal offence.";